8-K 1 doc1.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): August 2, 2004 CHINA WORLD TRADE CORPORATION ----------------------------- (Exact Name of Registrant as Specified in Charter) Nevada ------ (State or Other Jurisdiction of Incorporation) 000-26119 --------- (Commission File Number) 87-0629754 ---------- (I.R.S. Employer Identification No.) 4th Floor, Goldlion Digital Network Center 138 Tiyu Road East, Tianhe Guangzhou, The PRC 510620 ----------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) 011-8620-3878-0286 ------------------ (Registrant's Telephone Number, Including Area Code) This Current Report on Form 8-K is filed by China World Trade Corporation, a Nevada corporation (the "Registrant"), in connection with the matters described herein. ITEM 1. CHANGES IN CONTROL OF REGISTRANT. Not Applicable. ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. On August 2, 2004, the Registrant consummated a closing of the transactions contemplated by the Equity Transfer Agreement, dated April 20, 2004 (the "Agreement"), as amended by a Supplementary Agreement to Share Exchange Agreement, dated June 1, 2004 (the Agreement, as amended, being referred to herein as the "Amended Agreement"). Pursuant to the Amended Agreement, a wholly owned subsidiary of the Registrant, General Business Network (Guangzhou) Co., Ltd., a limited liability company organized under the laws of the Peoples' Republic of China ("General Business Network" or the "Transferee"), acquired 51% of the capital stock of Guangdong New Generation Commercial Management Limited, a limited liability company organized and existing under the laws of the Peoples' Republic of China ("New Generation") from Guangdong Huahao Industries Group Co., Ltd., a limited liability company organized and existing under the laws of the Peoples' Republic of China ("Huahao"), Huang Zehua, a citizen and resident of the Peoples' Republic of China ("Huang"), and Suo Hongxia, a citizen and resident of the Peoples' Republic of China ("Suo")(Huahao, Huang and Suo being referred to herein as the "Transferors"), for a purchase price of US$10,232,000. Of this purchase price, approximately US$1,241,000 in cash was paid on the date of closing (with the payment of approximately US$1,500,000 in cash to be deferred until September 30, 2004), and the remainder of the purchase price was paid in the form of approximately US$7,487,000 in market value of restricted shares of the Registrant. Such shares, amounting to 4,081,238 shares of common stock of the Registrant, were delivered to the Transferors at the closing. In addition, Huahao signed a Loan Arrangement Agreement with New Generation pursuant to which it agreed to make US$2,741,000 available to New Generation according to a loan schedule as part of the consideration for the transaction. Pursuant to the Amended Agreement, Huahao and/or its affiliate had earlier agreed to transfer to New Generation or a designee its percentage ownership interests in the following companies: (i) Guangzhou Huahao Insurance Agency Limited; (ii) Guangzhou Xinyou Foreign Enterprise Services Co., Ltd.; (iii) Beijing Xueqinsong Travel Consulting Co., Ltd.; (iv) Guangdong World Trade Link Information Services Co., Ltd.; (v) Zhengzhou Shaolin Tourism Development Co., Ltd.; (vi) Hainan Xinkaili Airline Sevices Co., Ltd.; and (vii) Beijing Xidake Airline Booking Office. As of the closing date, Huahao had transferred its interest in Guangzhou Huahao Insurance Agency Limited, the largest of the seven companies, to New Generation. In addition, an affiliate of Huahao has agreed to transfer 51% of its indirect 40% holding of the capital stock of Guangdong World Trade Link Information Services Co., Ltd. to a wholly owned subsidiary of the Registrant by no later than September 30, 2004. The Registrant currently is the indirect owner of 60% of the capital stock of Guangdong World Trade Link Information Services Co., Ltd., which is a recently organized corporation with minimal assets. Finally, Huahao agreed to make additional transfers of its interests in the five remaining companies by no later than September 30, 2004. The Transferors and Transferee signed a letter of mutual agreement with respect to the schedule for these transfers, which amends the conditions of closing set forth in the Amended Agreement. A copy of the Equity Transfer Agreement, dated April 20, 2004, and the Supplementary Agreement to Share Exchange Agreement, dated June 1, 2004, are attached as Exhibits 10.1 and 10.2 hereto, respectively. The purpose of this Current Report on Form 8-K is to report the closing under the Amended Agreement and to provide the financial statements of New Generation and Guangzhou Huahao Insurance Agency Limited as required by Item 7(a) of Form 8-K and the proforma consolidated financial information required by Item 7(b) of Form 8-K, which financial statements and information were excluded from the Current Report on Form 8-K filed on July 15, 2004 in reliance on Items 7(a)(4) and 7(b)(2), respectively, of Form 8-K. ITEM 7. FINANCIAL STATEMENTS, PROFORMA FINANCIAL INFORMATION AND EXHIBITS. ITEM 7(A) - FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED The following financial statements of Guangdong New Generation Commercial Management Limited, a limited liability company organized and existing under the laws of the Peoples' Republic of China, are set forth below: (i)the consolidated balance sheets, (ii) the statements of operations, (iii) the consolidated statements of stockholders' equity, (iv) the consolidated statements of cash flows, in each case for the years ended December 31, 2003 and December 31, 2002, and the three months ended March 31, 2004, and (v) the consolidated notes to the financial statements for such period. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Owners of GUANGDONG NEW GENERATION COMMERCIAL MANAGEMENT LIMITED We have audited the accompanying consolidated balance sheets of Guangdong New Generation Commercial Management Limited as of March 31, 2004, December 31, 2003 and December 31, 2002 and the related statements of operations, owners' equity and cash flows for the three-month period ended March 31, 2004 and for each of the two years ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Guangdong New Generation Commercial Management Limited as of March 31, 2004, December 31, 2003 and December 31, 2002 and the results of its operations and cash flows for the three-month period ended March 31, 2004 and for each of the two years ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. /s/ Moores Rowland Mazars Chartered Accountants Certified Public Accountants Hong Kong Date: August 12, 2004
GUANGDONG NEW GENERATION COMMERCIAL MANAGEMENT LIMITED BALANCE SHEETS --------------- AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- NOTE US$ US$ US$ ASSETS CURRENT ASSETS Cash and cash equivalents 2,312,366 216,151 994,312 Trade and other receivables 6 1,829,302 963,540 297,799 Other investments 7 12,067 12,067 14,480 ---------- ---------- ---------- TOTAL CURRENT ASSETS 4,153,735 1,191,758 1,306,591 Property, plant and equipment, net 8 119,429 99,883 136,741 ---------- ---------- ---------- TOTAL ASSETS 4,273,164 1,291,641 1,443,332 ========== ========== ========== LIABILITIES AND OWNERS' EQUITY CURRENT LIABILITIES Trade and other payables 9 6,003,374 3,255,508 3,105,387 Tax payables 1,123,445 1,081,082 507,732 Short-term bank loans 10 1,206,695 1,206,695 724,017 ---------- ---------- ---------- TOTAL LIABILITIES 8,333,514 5,543,285 4,337,136 ---------- ---------- ---------- COMMITMENTS AND CONTINGENCIES 12&17 OWNERS' DEFICIT Paid-in capital 14 603,347 603,347 603,347 Due from a related party 11(b) (4,785,937) (4,425,262) (3,196,285) Statutory reserves 15 301,674 301,674 231,674 Accumulated surplus (deficit) (179,434) (731,403) (532,540) ---------- ---------- ---------- TOTAL OWNERS' DEFICIT (4,060,350) (4,251,644) (2,893,804) ---------- ---------- ---------- TOTAL LIABILITIES AND OWNERS' DEFICIT 4,273,164 1,291,641 1,443,332 ========== ========== ========== The financial statements should be read in conjunction with the accompanying notes.
GUANGDONG NEW GENERATION COMMERCIAL MANAGEMENT LIMITED STATEMENTS OF OPERATIONS -------------------------- THREE-MONTH PERIOD ENDED Year ended December 31, --------------- ------------------------ MARCH 31, 2004 2003 2002 --------------- ---------- ---------- NOTE US$ US$ US$ OPERATING REVENUES 1,702,463 1,975,098 1,652,756 Operating costs and expenses (956,869) (899,503) (1,140,012) Selling, general and administrative expenses (134,490) (572,878) (406,732) --------------- ---------- ---------- INCOME FROM OPERATIONS 611,104 502,717 106,012 NON-OPERATING INCOME (EXPENSES) Other income 1,958 17,119 12,664 Interest expenses (18,647) (75,251) (79,270) --------------- ---------- ---------- INCOME BEFORE INCOME TAXES 594,415 444,585 39,406 Provision for income taxes 5 (42,446) (573,448) (351,792) --------------- ---------- ---------- NET INCOME (LOSS) 551,969 (128,863) (312,386) =============== ========== ========== The financial statements should be read in conjunction with the accompanying notes.
GUANGDONG NEW GENERATION COMMERCIAL MANAGEMENT LIMITED STATEMENTS OF CASH FLOWS --------------------------- THREE-MONTH PERIOD ENDED Year ended December 31, --------------- ------------------------ MARCH 31, 2004 2003 2002 --------------- ---------- ---------- US$ US$ US$ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) 551,969 (128,863) (312,386) Adjustments to reconcile net profit to net cash operating activities: Provision for income taxes 42,446 573,448 351,792 Depreciation 9,759 38,137 37,386 Changes in working capital: Trade and other receivables (880,350) (668,304) 72,402 Trade and other payables 2,747,866 150,121 1,567,010 Income taxes paid (83) (98) (6,060) --------------- ---------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,471,607 (35,559) 1,710,144 --------------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Advances to related parties (346,087) (1,226,414) (911,146) Acquisition of property, plant and equipment - (1,279) - Acquisition of other investments (29,305) (12,067) (10,359) Disposal of other investments - 14,480 (14,480) --------------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (375,392) (1,225,280) (935,985) --------------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Inception of bank loan - 1,206,695 1,206,695 Repayment of bank loan - (724,017) (1,086,025) --------------- ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES - 482,678 120,670 --------------- ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 2,096,215 (778,161) 894,829 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR/PERIOD 216,151 994,312 99,483 --------------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR/PERIOD 2,312,366 216,151 994,312 =============== ========== ========== ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 2,312,366 216,151 994,312 =============== ========== ========== The financial statements should be read in conjunction with the accompanying notes.
GUANGDONG NEW GENERATION COMMERCIAL MANAGEMENT LIMITED STATEMENTS OF OWNERS' EQUITY ------------------------------- PAID IN Due from a STATUTORY ACCUMULATED CAPITAL related party RESERVES SURPLUS (DEFICIT) --------------- ------------- --------- ----------------- US$ US$ US$ US$ Balance as of December 31, 2001 603,347 (2,448,021) 73,223 (61,703) Net loss - - - (312,386) Net advances to a related party - (748,264) - - Transfer to statutory reserves - - 158,451 (158,451) --------------- ------------- --------- ----------------- Balance as of December 31, 2002 603,347 (3,196,285) 231,674 (532,540) Net income - - - (128,863) Net advances to a related party - (1,228,977) - - Transfer to statutory reserves - - 70,000 (70,000) --------------- ------------- --------- ----------------- Balance as of December 31, 2003 603,347 (4,425,212) 301,674 (731,403) Net income - - - 551,969 Net advances to a related party - (360,675) - - Transfer to statutory reserves - - - - --------------- ------------- --------- ----------------- BALANCE AS OF MARCH 31, 2004 603,347 (4,785,937) 301,674 (179,434) =============== ============= ========= ================= The financial statements should be read in conjunction with the accompanying notes.
1. ORGANIZATION AND NATURE OF BUSINESS The Company was incorporated under the laws of the People's Republic of China ("PRC") on April 3, 1998 as Guangdong New Generation Commercial Management Limited with an operating period from April 3, 1998 to April 28, 2006. Since incorporation, the Company has been engaged in providing air ticketing agency services in the Guangdong Province in the PRC. Although the Company has net profit of US$551,969 for the three-month period ended March 31, 2004, it experienced net loss of US$128,863 and US$312,386 for the year ended December 31, 2003 and 2002 respectively. Besides, it has an owners' deficit of US$4,060,350, US$4,251,644 and US$2,893,804 as of March 31, 2004, December 31, 2003 and December 31, 2002. In consideration of the owners' deficit as of March 31, 2004 in the amount of US$4,060,350, according to the Equity Transfer Agreement entered into between Guangdong Huahao Industries Holdings Limited and China World Trade Corporation in April 2004, the shareholders and management of the Company are obligated and committed to inject additional assets into the Company. In addition, the Company expects to generate over US$2 million net profit for the year ended December 31, 2004. Management believes that the above measures will alleviate the amount of owners' deficit significantly by the end of year 2004. However, there can be no assurance that the Company will be successful with its efforts to attain the plans as mentioned above and its inability to do so could adversely impact the Company's business, financial position and prospects. 2. BASIS OF PRESENTATION The financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("USGAAP"). 3. RECENTLY ISSUED ACCOUNTING STANDARDS There are no new accounting pronouncements for which adoption is expected to have a material effect on the Company's financial statements. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF ACCOUNTING The financial statements are prepared in accordance with generally accepted accounting principles in the United States. The measurement basis used in the preparation of the financial statements is historical cost. Cost in relation to assets represents the cash paid or the fair value of the assets, as appropriate. (B) REVENUE RECOGNITION The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No.: 101, "Revenue Recognition in Financial Statements" and Emerging Issues Task Force 99-19: "Reporting Revenue Gross as a principal versus Net as an Agent", when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured. The Company receives commissions from travel suppliers for air-ticketing services through the Company's transaction and service platform under various services agreements with related and unrelated parties. Commissions from air-ticketing services rendered are recognized after air tickets are issued and delivered to customers. Contracts with certain travel suppliers contain incentive commissions typically subject to achieving specific performance targets and such incentive commissions are recognized when they are reasonably assured that the Company is entitled to such incentive commissions. The Company presents revenues from such transactions on a net basis in the statements of operations as the Company does not assume any inventory risks and generally has no obligations for cancelled airline ticket reservations. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (C) REVENUE RECOGNITION (CONTINUED) For information purposes, the commission income of the Company was derived from air-ticketing services with total value as follows:
THREE-MONTH PERIOD ENDED Year ended December 31, --------------- ------------------------ MARCH 31, 2004 2003 2002 --------------- ---------- ---------- US$ US$ US$ VALUE OF AIR-TICKET FARE 23,345,480 62,324,122 44,300,137 =============== ========== ==========
(C) STATEMENT OF CASH FLOWS Cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent only when it has a maturity of three months or less from its acquisition date. (D) TRANSLATION OF FOREIGN CURRENCY The Company considers Renminbi as its functional currency as the Company's business activities are based in Renminbi. However, the Company has chosen the United States dollar as its reporting currency. Transactions in currencies other than functional currency during the year are translated into the functional currency at the applicable rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in currencies other than functional currency are translated into functional currency at the applicable rates of exchange in effect at the balance sheet date. Exchange gains and losses are dealt with in the statement of operation. For translation of financial statements into the reporting currency, assets and liabilities are translated at the exchange rate at the balance sheet date, equity accounts are translated at historical exchange rates, and revenues expenses, gains and losses are translated at the weighted average rates of exchange prevailing during the period. Translation adjustments resulting from this process are recorded in accumulated other comprehensive income (loss) within stockholders' equity. (E) CONCENTRATION OF CREDIT RISK The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. (F) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation and impairment loss. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Major costs incurred in restoring assets to their normal working conditions are charged to the income statement. Improvements are capitalised and depreciated over their expected useful lives. The gain or loss arising from the retirement or disposal of property, plant and equipment is determined as the difference between the estimated net sales proceeds and the carrying amount of the assets and is recognized as income or expense in the statements of operations. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (F) PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Depreciation is provided to write off the cost of property, plant and equipment, over their estimated useful lives from the date on which they become fully operational and after taking into account of their estimated residual values, using the straight-line method, at 14% to 50% per annum. The Company recognizes an impairment loss on property, plant and equipment when evidence, such as the sum of expected future cash flows (undiscounted and without interest charges), indicates that future operations will not produce sufficient revenue to cover the related future costs, including depreciation, and when the carrying amount of asset cannot be realized through sale. Measurement of the impairment loss is based on the fair value of the assets. (G) OPERATING LEASES Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals payable under operating leases are recognized as expense on the straight-line basis over the lease terms. The Company leases certain premises under non-cancellable operating leases. Rental expenses under operating leases were US$21,138, US$61,854 and US$137,937 for the three-month period ended March 31, 2004 and each of the two years ended December 31, 2003. (H) RELATED PARTIES Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (I) USE OF ESTIMATES The preparation of the financial statements in conformity with USGAAP requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reported periods. Actual amounts could differ from those estimates. Estimates are used for, but not limited to, the accounting for certain items such as allowance for doubtful accounts, depreciation, taxes and contingencies. (J) ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful accounts will change. Throughout the periods presented, no provision for doubtful accounts has been made by the Company as the Company has not experienced any collectibility problem over its trade accounts receivable. 5. INCOME TAXES The Company is subject to PRC Enterprise Income Taxes ("EIT") on an entity basis on income arising in or derived from the PRC. The applicable EIT rate is 3% on the net revenues generated during the three-month period ended March 31, 2004. During the years ended December 31, 2003 and 2002, the applicable EIT rate was 33% of net income during the year. 6. TRADE AND OTHER RECEIVABLES
AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- NOTE US$ US$ US$ Trade receivables 1,144,170 442,955 - Deposits and other receivables 664,406 485,271 259,922 Due from related parties 11(b) 20,726 35,314 37,877 ---------- ---------- ---------- 1,829,302 963,540 297,799
7. OTHER INVESTMENTS The balance represents "available-for-sale" mutual funds made up of debt and equity securities. As at the balance sheet date, as the cost approximated to the fair value, no gain or loss was recognized. 8. PROPERTY, PLANT AND EQUIPMENT, NET
AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- US$ US$ US$ Motor vehicles 63,316 63,316 63,316 Furniture, fixtures and equipment 201,361 172,056 170,777 Less: Accumulated depreciation (145,248) (135,489) (97,352) ---------- ---------- ---------- Net book value 119,429 99,883 136,741
9. TRADE AND OTHER PAYABLES
AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- NOTE US$ US$ US$ Trade payables 4,052,587 1,519,648 1,714,901 Accrued charges and other payables 1,370,414 1,054,552 605,032 Due to related parties 11(c) 580,373 681,308 785,454 ---------- ---------- ---------- 6,003,374 3,255,508 3,105,387
10. SHORT-TERM BANK LOANS Guangdong Hauhao Industries Holdings Limited, Guangzhou XZR International Travel Services Limited, Chen Ze Liang and a third party, Guangzhou Yinda Guarantee Service Company Limited provided corporate and personal guarantee to the bank against the bank loans granted to the Company. Please refer to Note 11 to these financial statements for details of relationship of these guarantors with the Company. 11. RELATED PARTY TRANSACTIONS (a) Names and relationship of related parties Existing relationships with the Company ----------------------------------- Guangdong Hauhao Insurance Agency Limited A company in which a director of the Company has a beneficial interest Guangdong Hauhao Industries Holdings Limited A company in which a director of the Company has a beneficial interest Guangzhou XZR International Travel Serivces Limited A company in which a director of the Company has a beneficial interest Guangzhou Easy Boarding Business Services Limited A company in which a director of the Company has a beneficial interest Guangzhou SRX Travel Service Limited A company in which a director of the Company has a beneficial interest Guangzhou Xinledai Travel Agency Services Company Limited A company in which a director of the Company has a beneficial interest Chen Ze Liang A shareholder and a director of the Company (b) Due from related parties
AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- US$ US$ US$ Guangdong Hauhao Industries Holdings Limited 4,785,937 4,425,262 3,196,285 ========== ========== ========== Guangzhou XZR International Travel Services Limited - 11,761 37,877 Guangdong Easy Boarding Business Services Limited 18,221 - - Guangzhou SRX Travel Service Limited 2,505 23,553 - ---------- ---------- ---------- 20,726 35,314 37,877 ========== ========== ==========
The amounts due from related parties represent unsecured advances which are interest-free and repayable on demand. 11. RELATED PARTY TRANSACTIONS (CONTINUED) (c) Due to related parties
AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- US$ US$ US$ Guandong Xinledai Travel Agency Services Company Limited - - 615,673 Guangdong Easy Boarding Business Services Limited - 80,759 120,669 Guangdong Hauhao Insurance Agency Limited 580,373 600,549 49,112 ---------- ---------- ---------- 580,373 681,308 785,454
The amount due to related parties represent unsecured advances which are interest-free and repayable on demand. 12. OPERATING LEASE COMMITMENTS The Company has total outstanding commitments not provided for under non-cancellable operating leases, which are payables as follows:
AS OF MARCH 31, 2004 ---------- US$ Year ending December 31 2004 42,142 2005 46,914 2006 3,185 ---------- 92,241
13. RETIREMENT PLAN As stipulated by PRC regulations, the Group maintains a defined contribution retirement plan for all of its employees who are residents of PRC. All retired employees of the Group are entitled to an annual pension equal to their basic annual salary upon retirement. The Group contributed to a state sponsored retirement plan at a certain percentage of the gross salary of its employees and has no further obligations for the actual pension payments or post-retirement benefits beyond the annual contributions. The state sponsored retirement plan is responsible for the entire pension obligations payable to all employees. The pension expense for the three-month period ended March 31, 2004 and each of the two years ended December 31, 2003 was US$1,747, US$6,607 and US$6,442 respectively. 14. PAID-IN CAPITAL On April 3, 1998, the Company was incorporated in the PRC with registered capital of RMB500,000, which is approximately equivalent to US$60,335. The said amount has been fully paid up upon its incorporation. On February 10, 1999 and May 6, 1999, the registered capital was increased to RMB1,500,000 and RMB5,000,000, which is approximately equivalent to US$181,004 and US$603,347 respectively, by additional cash contributed by the owner. 15. STATUTORY RESERVES Statutory reserves of the Company include the statutory common reserve fund and the statutory common welfare fund. Pursuant to regulations in the PRC, the Company sets aside 10% of its profit after tax for the statutory common reserve fund (except when the fund has reached 50% of the Company's registered capital) and 5% of its profit after tax for the statutory common welfare fund. The statutory common reserve fund can be used for the following purposes: - to make good losses in previous years; or - to convert into capital, provided such conversion is approved by a resolution at an owners' general meeting and the balance of the statutory common reserve fund does not fall below 25% of the registered capital. The statutory common welfare fund, which is to be used for the welfare of the staff and workers of the Company, is of a capital nature. 16. POST BALANCE SHEET EVENT On April 1, 2004, the registered capital of the Company has been increased by RMB10,000,000 to RMB15,000,000, which is approximately equivalent to US$1,810,042. The said amount had been satisfied by cash contributed by the owners. Pursuant to an agreement entered into between the owners of the Company and a subsidiary of China World Trade Corporation in April 2004, all of their interests in the Company are to be transferred to a subsidiary of China World Trade Corporation. China World Trade Corporation is a public company listed on the National Association of Securities Dealers Automated Quotations Over-the -Counter Bulletin Board. 17. CONTINGENCIES The Company has made full tax provision in accordance with relevant laws and regulations in the PRC. However, for PRC tax reporting purpose, the Company only recognizes revenue on a business tax invoices basis instead of when services are provided. Accordingly, the company faces surcharge and penalty, additional to the original amount of taxes payable, ranging from 50% to 500% of the original amount of taxes payable. The Company has already provided for the surcharge and penalty of 50% of the taxes payable in the financial statements. Although the exact amount of penalty cannot be estimated with any reasonable degree of certainty, the board of directors considers it is unlikely that any tax penalty in excess of the amounts provided will be imposed. The following financial statements of Guangdong Hauhao Insurance Agency Limited, a limited liability company organized and existing under the laws of the Peoples' Republic of China, are set forth below: (i) the consolidated balance sheets, (ii) the statements of operations, (iii) the consolidated statements of stockholders' equity, (iv) the consolidated statements of cash flows, in each case for the years ended December 31, 2002 and December 31, 2003, and the three months ended March 31, 2004, and (v) the consolidated notes to the financial statements for such period. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Owners of GUANGDONG HAUHAO INSURANCE AGENCY LIMITED We have audited the accompanying consolidated balance sheets of Guangdong Hauhao Insurance Agency Limited as of March 31, 2004, December 31, 2003 and December 31, 2002 and the related statements of operations, owners' equity and cash flows for the three-month period ended March 31, 2004 and for each of the year/period in the two years period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Guangdong Hauhao Insurance Agency Limited as of March 31, 2004, December 31, 2003 and December 31, 2002 and the results of its operations and cash flows for the three-month period ended March 31, 2004 and for each of the year/period in the two years period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. /s/ Moores Rowland Mazars Chartered Accountants Certified Public Accountants Hong Kong Date: August 12, 2004 GUANGDONG HAUHAO INSURANCE AGENCY LIMITED BALANCE SHEETS ---------------
AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- NOTE US$ US$ US$ ASSETS CURRENT ASSETS Cash and cash equivalents 21,406 25,736 38,982 Other receivables 6 581,878 604,166 49,876 Prepayments 845 - 3,620 ---------- ---------- ---------- TOTAL CURRENT ASSETS 604,129 629,902 92,478 Property, plant and equipment, net 7 8,766 8,148 8,932 ---------- ---------- ---------- TOTAL ASSETS 612,895 638,050 101,410 ========== ========== ========== LIABILITIES AND OWNERS' EQUITY CURRENT LIABILITIES Trade and other payables 8 31,962 27,808 143,225 Tax payables 4,573 4,988 368 ---------- ---------- ---------- TOTAL LIABILITIES 36,535 32,796 143,593 ---------- ---------- ---------- COMMITMENTS AND CONTINGENCIES 10 OWNERS' EQUITY Paid-in capital 12 1,206,695 1,206,695 1,206,695 Due from a related party 9(c) (1,362,989) (1,245,070) (1,238,941) Statutory reserves 13 110,872 97,601 - Accumulated surplus (deficit) 621,782 546,028 (9,937) ---------- ---------- ---------- TOTAL OWNERS' EQUITY 576,360 605,254 (42,183) ---------- ---------- ---------- TOTAL LIABILITIES AND OWNERS' EQUITY 612,895 638,050 101,410 ========== ========== ========== The financial statements should be read in conjunction with the accompanying notes.
GUANGDONG HAUHAO INSURANCE AGENCY LIMITED STATEMENTS OF OPERATIONS -------------------------- Period from January 15, 2002 THREE-MONTH (date of PERIOD ENDED Year ended incorporation) to MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- NOTE US$ US$ US$ OPERATING REVENUES 163,543 929,916 255,052 Operating costs and expenses (9,724) (61,364) (53,716) Selling, general and administrative expenses (60,282) (189,106) (206,872) ---------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS 93,537 679,446 (5,536) NON-OPERATING INCOME Other income 61 99 409 ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 93,598 679,545 (5,127) Provision for income taxes 5 (4,573) (25,979) (4,810) ---------- ---------- ---------- NET INCOME (LOSS) 89,025 653,566 (9,937) ========== ========== ========== The financial statements should be read in conjunction with the accompanying notes.
GUANGDONG HAUHAO INSURANCE AGENCY LIMITED STATEMENTS OF CASH FLOWS --------------------------- Period from January 15, 2002 THREE-MONTH (date of PERIOD ENDED Year ended incorporation) to MARCH 31, December 31, December 31, 2004 2003 2002 --------------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) 89,025 653,566 (9,937) Adjustments to reconcile net profit (loss) to net cash used in operating activities: Provision for income taxes 4,573 25,979 4,810 Depreciation 1,059 2,378 933 Changes in working capital: Other receivables 2,112 (2,853) (764) Prepayments (845) 3,620 (3,620) Trade and other payables 4,154 (115,417) 143,225 Income taxes paid (4,988) (21,359) (4,442) --------------- ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES 95,090 545,914 130,205 --------------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Advances to related parties (97,743) (557,566) (1,288,053) Acquisition of property, plant and equipment (1,677) (1,594) (9,865) --------------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (99,420) (559,160) (1,297,918) --------------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital contribution from owners - - 1,206,695 --------------- ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES - - 1,206,695 --------------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,330) (13,246) 38,982 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD/YEAR 25,736 38,982 - --------------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD/YEAR 21,406 25,736 38,982 =============== ========== ========== ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 21,406 25,736 38,982 =============== ========== ========== The financial statements should be read in conjunction with the accompanying notes.
GUANGDONG HAUHAO INSURANCE AGENCY LIMITED STATEMENTS OF OWNERS' EQUITY ------------------------------- PAID IN Due from a STATUTORY ACCUMULATED CAPITAL related party RESERVES SURPLUS (DEFICIT) --------------- ------------- --------- ----------------- US$ US$ US$ US$ Capital paid in upon incorporation on January 15, 2002 1,206,695 - - - Net advances to a related party - (1,238,941) - - Net loss - - - (9,937) --------------- ------------- --------- ----------------- Balance as of December 31, 2002 1,206,695 (1,238,941) - (9,937) Net income - - - 653,566 Net advances to a related party - (6,129) - - Transfer to statutory reserves - - 97,601 (97,601) --------------- ------------- --------- ----------------- Balance as of December 31, 2003 1,206,695 (1,245,070) 97,601 546,028 Net income - - - 89,025 Net advances to a related party - (117,919) - - Transfer to statutory reserves - - 13,271 (13,271) --------------- ------------- --------- ----------------- BALANCE AS OF MARCH 31, 2004 1,206,695 (1,362,989) 110,872 621,782 =============== ============= ========= ================= The financial statements should be read in conjunction with the accompanying notes.
1. ORGANIZATION AND NATURE OF BUSINESS The Company was incorporated under the laws of the People's Republic of China ("PRC") on January 15, 2002 with an operating period from January 15, 2002 to January 15, 2005. Pursuant to the regulation of insurance agency business in the PRC, renewal of business license shall be applied for prior to sixty days of the expiry date of the business license. Management shall arrange for renewal of its business license in accordance with the regulation. Since incorporation, the Company has been engaged in providing insurance agency services in the Guangdong Province in the PRC. 2. BASIS OF PRESENTATION The financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("USGAAP"). 3. RECENTLY ISSUED ACCOUNTING STANDARDS There are no new accounting pronouncements for which adoption is expected to have a material effect on the Company's financial statements. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF ACCOUNTING The financial statements are prepared in accordance with generally accepted accounting principles in the United States. The measurement basis used in the preparation of the financial statements is historical cost. Cost in relation to assets represents the cash paid or the fair value of the assets, as appropriate. (B) REVENUE RECOGNITION The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin No.: 101, "Revenue Recognition in Financial Statements" and Emerging Issues Task Force 99-19: "Reporting Revenue Gross as a principal versus Net as an Agent", when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectibility is reasonably assured. The Company receives commissions from insurance companies for insurance agency services provided. Commissions from insurance agency services rendered are recognized upon provision of such services. The Company presents revenues from such transactions on a net basis in the statements of operations and comprehensive income (loss) as the Company does not assume any inventory risks and generally has no obligations for cancelled insurance policies. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (B) REVENUE RECOGNITION (CONT'D) For information purposes, the commission income of the Company was derived from insurance policies with total premium income as follows:
THREE-MONTH PERIOD ENDED Year ended December 31, --------------- ------------------------ MARCH 31, 2004 2003 2002 --------------- ---------- ---------- US$ US$ US$ PREMIUM INCOME OF INSURANCE POLICIES 1,345,381 36,725,635 2,119,703 --------------- ---------- ----------
(C) STATEMENT OF CASH FLOWS Cash equivalents are defined as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. An investment normally qualifies as a cash equivalent only when it has a maturity of three months or less from its acquisition date. (D) TRANSLATION OF FOREIGN CURRENCY The Company considers Renminbi as its functional currency as the Company's business activities are based in Renminbi. However, the Company has chosen the United States dollar as its reporting currency. Transactions in currencies other than functional currency during the year are translated into the functional currency at the applicable rates of exchange prevailing at the time of the transactions. Monetary assets and liabilities denominated in currencies other than functional currency are translated into functional currency at the applicable rates of exchange in effect at the balance sheet date. Exchange gains and losses are dealt with in the statement of operation. For translation of financial statements into the reporting currency, assets and liabilities are translated at the exchange rate at the balance sheet date, equity accounts are translated at historical exchange rates, and revenues expenses, gains and losses are translated at the weighted average rates of exchange prevailing during the period. Translation adjustments resulting from this process are recorded in accumulated other comprehensive income (loss) within stockholders' equity. (E) CONCENTRATION OF CREDIT RISK The Company has no significant off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The business activities and accounts receivable are principally with insurance companies in the PRC. Management believes that no significant credit risk exists as credit losses, when realized, have been within the range of management's expectations. (F) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation. The cost of an item of property, plant and equipment comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Major costs incurred in restoring assets to their normal working conditions are charged to the income statement. Improvements are capitalised and depreciated over their expected useful lives. 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (F) PROPERTY, PLANT AND EQUIPMENT (CONT'D) The gain or loss arising from the retirement or disposal of property, plant and equipment is determined as the difference between the estimated net sales proceeds and the carrying amount of the assets and is recognized as income or expense in the statements of operations. Depreciation is provided to write off the cost of property, plant and equipment, over their estimated useful lives from the date on which they become fully operational and after taking into account of their estimated residual values, using the straight-line method, at 20% per annum. The Company recognizes an impairment loss on property, plant and equipment when evidence, such as the sum of expected future cash flows (undiscounted and without interest charges), indicates that future operations will not produce sufficient revenue to cover the related future costs, including depreciation, and when the carrying amount of asset cannot be realized through sale. Measurement of the impairment loss is based on the fair value of the assets. (G) OPERATING LEASES Leases where substantially all the rewards and risks of ownership of assets remain with the leasing company are accounted for as operating leases. Rentals payable under operating leases are recognized as expense on the straight-line basis over the lease terms. The Company leases certain premises under non-cancellable operating leases. Rental expenses under operating leases were US$18,100, US$72,402 and US$60,335 for the three-month period ended March 31, 2004 and each of the year/period ended December 31, 2003. (H) RELATED PARTIES Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (I) USE OF ESTIMATES The preparation of the financial statements in conformity with USGAAP requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reported periods. Actual amounts could differ from those estimates. Estimates are used for, but not limited to, the accounting for certain items such as allowance for doubtful accounts, depreciation, taxes and contingencies. (J) ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful account will change. Accounts receivable are presented net of allowances for doubtful accounts of US$-, US$- and US$109,018 for the three-month period ended March 31, 2004 and each of the years of the two year period ended December 31, 2003 respectively. 5. INCOME TAXES The Company is subject to PRC Enterprise Income Tax ("EIT") on an entity basis on income arising in or derived from the PRC. The applicable EIT tax rate is 8% on the net revenues generated during the year. 6. OTHER RECEIVABLES
AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- NOTE US$ US$ US$ Other receivables 1,505 3,617 764 Due from related parties 9(c) 580,373 600,549 49,112 ---------- ---------- ---------- 581,878 604,166 49,876
7. PROPERTY, PLANT AND EQUIPMENT, NET
AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- US$ US$ US$ Furniture, fixtures and equipment 13,136 11,459 9,865 Less: Accumulated depreciation (4,370) (3,311) (933) ---------- ---------- ---------- Net book value 8,766 8,148 8,932
8. TRADE AND OTHER PAYABLES
AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- US$ US$ US$ Accrued charges 19,772 13,218 55,164 Other payables 12,190 14,590 88,061 ---------- ---------- ---------- 31,962 27,808 143,225
9. RELATED PARTY TRANSACTIONS (a) Names and relationship of related parties Existing relationships with the Company ----------------------------------- Guangdong New Generation Commercial Management Limited A company in which a director of the Company has a beneficial interest Guangdong Hauhao Industries Holdings Limited A company in which a director of the Company has a beneficial interest (b) Summary of related party transactions
PERIOD ENDED Year ended December 31, --------------- ------------------------ MARCH 31, 2004 2003 2002 --------------- ---------- ---------- US$ US$ US$ Rent expenses to ------------------ Guangdong Huahao Industries Holdings Limited 18,100 72,402 60,335 --------------- ---------- ----------
(c) Due from related parties
AS OF As of As of MARCH 31, December 31, December 31, 2004 2003 2002 ---------- ---------- ---------- US$ US$ US$ Guangdong New Generation Commercial Management Limited 580,373 600,549 49,112 ========== ========== ========== Guangdong Hauhao Industries Holdings Limited 1,362,989 1,245,070 1,238,941 ========== ========== ==========
The amounts due from related parties represent unsecured advances which are interest-free and repayable on demand. 10. OPERATING LEASE COMMITMENTS The Company has total outstanding commitments not provided for under non-cancellable operating leases, which are payables as follows:
AS OF MARCH 31, 2004 ---------- US$ Year ending December 31 2004 54,303 2005 72,402 ---------- 90,503
11. RETIREMENT PLAN As stipulated by PRC regulations, the Group maintains a defined contribution retirement plan for all of its employees who are residents of PRC. All retired employees of the Group are entitled to an annual pension equal to their basic annual salary upon retirement. The Group contributed to a state sponsored retirement plan at a certain percentage of the gross salary of its employees and has no further obligations for the actual pension payments or post-retirement benefits beyond the annual contributions. The state sponsored retirement plan is responsible for the entire pension obligations payable to all employees. The pension expense for the three-month period ended March 31, 2004 and each of the year/period ended December 31, 2003 was US$598, US$3,092 and US$1,650 respectively. 12. PAID-IN CAPITAL On January 15, 2002, the Company was incorporated in the PRC with registered capital of RMB10,000,000, which is approximately equivalent to US$1,206,695. The said amount has been fully paid up upon its incorporation. 13. STATUTORY RESERVES Statutory reserves of the Company include the statutory common reserve fund and the statutory common welfare fund. Pursuant to regulations in the PRC, the Company sets aside 10% of its profit after tax for the statutory common reserve fund (except when the fund has reached 50% of the Company's registered capital) and 5% of its profit after tax for the statutory common welfare fund. The statutory common reserve fund can be used for the following purposes: - to make good losses in previous years; or - to convert into capital, provided such conversion is approved by a resolution at a owners' general meeting and the balance of the statutory common reserve fund does not fall below 25% of the registered capital. The statutory common welfare fund, which is to be used for the welfare of the staff and workers of the Company, is of a capital nature. ITEM 7(b) - PROFORMA FINANCIAL STATEMENTS The following proforma financial statements of China World Trade Corporation and (i) Guangdong New Generation Commercial Management Limited and (ii) Guangdong Hauhao Insurance Agency Limited (hereinafter the "Constituent Companies") are also set forth below: Consolidated (Unaudited) Condensed ProForma Balance Sheet of the Constituent Companies as at March 31, 2004, and Consolidated (Unaudited) Condensed ProForma Statement of Operations for the years ended March 31, 2004 and 2003. PROFORMA FINANCIAL STATEMENTS The following unaudited pro forma condensed consolidated balance sheet as of March 31, 2004 and the unaudited pro forma condensed consolidated statements of operations for the three-month period ended March 31, 2004 and for the year ended September 30, 2003 are based on the historical financial statements of China World Trade Corporation (the "Company"), Guangdong New Generation Commercial Management Limited ("GNGCM") and Guangdong Hauhao Insurance Agency Limited ("GHIAL") after giving effect to the acquisition of GNGCM and GHIAL by the Company ("Acquisition") using the purchase method of accounting and the assumptions and adjustments described in the accounting notes to the unaudited pro forma condensed consolidated financial statements. The Acquisition was completed on [August 2, 2004]. The unaudited pro forma condensed consolidated balance sheet of the Company, GNGCM and GHIAL as of March 31, 2004 is presented to give effect to the Acquisition as if it had occurred on March 31, 2004. The unaudited pro forma condensed consolidated statements of operations of the Company, GNGCM and GHIAL for the three-month period ended Mach 31, 2004 and for the year ended September 30, 2003 are presented as if the Acquisition had taken place on October 1, 2002. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes contained in the Company's Form 10-KSB for the year ended September 30, 2003 filed on January 13, 2004, the Company's Form-10QSB quarterly report for the three-month period ended March 31, 2004 filed on May 14, 2004 and the audited financial statements of GNGCM and GHIAL for the year ended December 31, 2003 and for the three-month period ended March 31, 2004 prepared in accordance with the accounting principles generally accepted in the United States of America ("USGAAP"). The unaudited pro forma condensed consolidated financial statements are not intended to be representative or indicative of the consolidated results of operations or financial condition of the Company that would have been reported had the Acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of the Company.
CHINA WORLD TRADE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2004 ------------------------ PRO FORMA Pro forma CONSOLIDATED GNGCM GHIAL The Company adjustments BALANCE ----------- ----------- ----------- ----------- ----------- US$ US$ US$ US$ US$ ASSETS CURRENT ASSETS Cash and cash equivalents 2,312,366 21,406 827,792 (2,745,000) (a) 2,916,564 2,500,000 (b) Trade receivable 1,144,170 - 18,015 1,162,185 Other receivable - 581,878 24,847 606,725 Due from related parties 20,736 - 115,525 136,251 Rental and other deposits 664,406 - 338,732 1,003,138 Prepayments - 845 87,989 88,834 Inventories - - 50,682 50,682 Short term investment 12,067 - - 12,067 ----------- ----------- ----------- ----------- TOTAL CURRENT ASSTS 4,153,735 604,129 1,463,582 5,976,446 Intangible asset - - 1,680,000 1,680,000 Goodwill - - 30,000 14,139,499 (c) 14,169,499 Property, plant and equipment, net 119,429 8,766 3,041,713 3,169,908 Investment in a subsidiary - - - 10,232,000 (a) - (10,232,000) (c) ----------- ----------- ----------- ----------- TOTAL ASSETS 4,273,164 612,895 6,215,295 24,995,853 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade payables 4,052,587 - 19,671 4,072,258 Accrued charges 1,370,414 - 95,428 1,465,842 Other payables - 31,962 107,755 139,717 Tax payables 1,123,445 4,573 1,128,018 Due to related parties 580,373 - 140,926 721,299 Deposits received - - 39,471 39,471 Deferred income - 6,362 6,362 Short term bank loan 1,206,695 - - 1,206,695 Long-term bank loan - current portion - 43,861 43,861 ----------- ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 8,333,514 36,535 453,474 8,823,523 Long-term bank loan - non-current portion - - 437,194 437,194 Due to a shareholder - - 1,299,615 1,299,615 ----------- ----------- ----------- ----------- Total liabilities 8,333,514 36,535 2,190,283 10,560,332 ----------- ----------- ----------- ----------- Minority interest - - - 423,509 (c) 423,509 ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY 4,081 (a) 3,500 (b) Common stock 603,347 1,206,695 17,726 (1,810,042) (c) 25,307 Additional paid-in capital - - 15,846,315 7,482,919 (a) 25,825,734 2,496,500 (b) Due from related party (4,785,937) (1,362,989) - 6,148,926 (c) - Dedicated reserves 301,674 110,872 - (412,546) (c) - Accumulated (deficit) profit (179,434) 621,782 (11,839,029) (442,348) (c) (11,839,029) ----------- ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (4,060,350) 576,360 4,025,012 14,012,012 ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 4,273,164 612,895 6,215,295 24,995,853 =========== =========== =========== ===========
CHINA WORLD TRADE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE-MONTH PERIOD ENDED MARCH 31, 2004 -------------------------------------------- PRO FORMA Pro forma CONSOLIDATED GNGCM GHIAL The Company adjustments BALANCE ----------- ----------- ----------- ----------- ----------- US$ US$ US$ US$ US$ OPERATING REVENUES 1,702,463 163,543 303,771 2,169,777 ----------- ----------- ----------- ----------- OPERATING EXPENSES Operating costs and expenses (956,869) (9,724) (186,001) (1,152,594) Selling, general and administrative expenses (134,490) (60,282) (1,626,937) (1,821,709) ----------- ----------- ----------- ----------- PROFIT (LOSS) FROM OPERATIONS 611,104 93,537 (1,509,167) (804,526) NON-OPERATING (EXPENSES) INCOME Other income 1,958 61 89 2,108 Interest expenses (18,647) - (3,992) (22,639) ----------- ----------- ----------- ----------- PROFIT (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 594,415 93,598 (1,513,070) (825,057) INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS Provision for income taxes (42,446) (4,573) - (47,019) ----------- ----------- ----------- ----------- PROFIT (LOSS) BEFORE MINORITY INTEREST 551,969 89,025 (1,513,070) (872,076) ----------- ----------- ----------- ----------- MINORITY INTEREST - - - (335,880) (d) (335,880) ----------- ----------- ----------- ----------- NET PROFIT (LOSS) 551,969 89,025 (1,513,070) (1,207,956) =========== =========== =========== =========== LOSS PER SHARE OF COMMON STOCK - Basic - - (0.09) (0.06) =========== =========== =========== =========== Weighted average number of shares of common stock outstanding - - 16,249,106 4,081,238 (e) 20,330,344 =========== =========== =========== ===========
CHINA WORLD TRADE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 2003 --------------------------------- PRO FORMA Pro forma CONSOLIDATED GNGCM GHIAL The Company adjustments BALANCE ----------- ----------- ----------- ----------- ----------- US$ US$ US$ US$ US$ OPERATING REVENUES 1,975,098 929,916 2,885,600 5,790,614 OPERATING EXPENSES Operating costs and expenses (899,503) (61,364) (1,213,169) (2,174,036) Selling, general and administrative expenses (572,878) (189,106) (3,954,066) (4,716,050) ----------- ----------- ----------- ----------- PROFIT (LOSS) FROM OPERATIONS 502,717 679,446 (2,281,635) (1,099,472) NON-OPERATING (EXPENSES) INCOME Other income 17,119 99 2,490 19,708 Interest expenses (75,251) - (14,811) (90,062) Equity in net loss of affiliate - - (32,051) (32,051) ----------- ----------- ----------- ----------- PROFIT (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 444,585 679,545 (2,326,007) (1,201,877) INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS Provision for income taxes (573,448) (25,979) - (599,427) ----------- ----------- ----------- ----------- PROFIT (LOSS) BEFORE MINORITY INTEREST (128,863) 653,566 (2,326,007) (1,801,304) MINORITY INTEREST - - 120,471 (417,097) (d) (296,626) ----------- ----------- ----------- ----------- NET PROFIT (LOSS) (128,863) 653,566 (2,205,536) (2,097,930) =========== =========== =========== =========== LOSS PER SHARE OF COMMON STOCK - Basic - - (0.23) (0.15) =========== =========== =========== =========== Weighted average number of shares of common stock outstanding - - 9,699,264 4,081,238 (e) 13,780,502 =========== =========== =========== ===========
1. BASIS OF PRO FORMA PRESENTATION The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the historical consolidated financial statements and accompanying notes contained in the Company's Form 10-KSB for the year September 30, 2003 filed on January 13, 2004, the Company's Form-10QSB quarterly report for the three-month period ended March 31, 2004 filed on May 14, 2004 and the audited financial statements of GNGCM and GHIAL for the year ended December 31, 2003 and for the three-month period ended March 31, 2004 prepared in accordance with USGAAP. The Company has changed its financial year end date from September 30 to December 31 of each calendar year with effect from the period ended December 31, 2003. Therefore the Company's Form 10-KSB for its financial year ended December 31, 2003 covers the year ended September 30, 2003 and its Form 10-QSB for the first quarter falling into the financial year ending December 31, 2004 covers the three-month period ended March 31, 2004. The statutory financial statements of GNGCM and GHIAL are prepared in accordance with accounting principles generally accepted in the Peoples' Republic of China, which differ in certain significant respects from the USGAAP. For the purposes of preparing these unaudited pro forma condensed consolidated financial statements, management of GNGCM and GHIAL has prepared a set of financial statements for each of the companies under USGAAP. These financial statements have been audited and adopted as the bases for preparing these unaudited pro forma condensed consolidated financial statements. However, the financial year end date of both GNGCM and GHIAL falls on December 31. Accordingly, their results for the year ended December 31, 2003 have been adopted in preparing the unaudited pro forma condensed statement of operations for the year ended September 30, 2003. On April 20, 2004, a wholly-owned subsidiary of the Company (the "Transferee") entered into an Equity Transfer Agreement (the "Agreement") with the major shareholders of GNGCM and GHIAL (the "Transferors"), pursuant to which the Transferee would acquire from the Transferors 51% interest in GNGCM for an aggregate consideration of approximately US$11,127,000 of which US$3,640,000 was to be paid in the form of cash and US$7,487,000 was to be paid in the form of restricted shares issued by the Company. The Agreement also contemplated a loan agreement in the amount of US$3,640,000 pursuant to which the one of the Transferors would loan the said amount to GNGCM as part of the transaction. Completion of the Agreement was subject to a group reorganisation to be completed by GNGCM. Upon completion of the reorganisation, GNGCM shall hold 7 subsidiaries, with GHIAL being the most significant one. On June 1, 2004, a supplementary agreement to the Agreement was entered into by making several changes to the Agreement, amongst which the aggregate consideration was reduced to US$10,232,000, of which US$2,745,000 was to be paid in the form of cash and US$7,487,000 was to be paid in the form of restricted shares of the Company. The Acquisition, which was mainly carried out for the Company's expansion purposes, was completed on August 2, 2004 and the Company has issued 4,081,238 shares of US$0.001 to satisfy the consideration which was to be paid in the form of shares of the Company. 2. PRO FORMA ADJUSTMENTS Pro forma adjustments are necessary to reflect the adjustments necessary to give full effect to the acquisition as if it had been occurred at the beginning of the periods presented. These pro forma adjustments include the adjustments for the difference between the considerations paid for the assets acquired and the estimated fair value of such assets and to eliminate minority interests. As there were no intercompany transactions or balances, no pro forma adjustments for elimination in this respect is necessary. Certain reclassifications have been made to conform GNGCM's and GHIAL's historical amounts to the Company's presentation. The pro forma consolidated provision for income taxes does not reflect the amounts that would have resulted had the Company, GNGCM and GHIAL filed consolidated income tax returns during the periods presented. The pro forma adjustments included in the unaudited pro forma condensed consolidated financials statements are as follows: (a) Adjustment to record the consideration for the acquisition of 51% interest in GNGCM and 26.5% effective interest in GHIAL of the total purchase price of US$10,232,000, approximately US$1,241,000 in cash was paid on August 2, 2004, approximately US$1,500,000 in cash was deferred until September 30, 2004 and the remainder of the purchase price was satisfied in the form of approximately US$7,487,000 in market value of 4,081,238 shares of US$0.001. (b) Adjustment to reflect exercise of warrants by two of the major shareholders. In July 2004, two of the major shareholders of the company exercised warrants to purchase 3,500,000 shares of US$0.001 at a total consideration of US$2,500,000. Part of the consideration was used for settlement of the purchase price for the acquisition as mentioned in (a) above. (c) Elimination of investment in GNGCM and GHIAL: GNGCM GHIAL Total --------- --------- ---------- US$ US$ US$ Consideration 10,232,000 Common stock (603,347) (1,206,695) (1,810,042) Due from related party 4,785,937 1,362,989 6,148,926 Dedicated reserves (301,674) (110,872) (412,546) Retained earnings 179,434 (621,782) (442,348) Minority interests - 423,509 423,509 --------- --------- ---------- 14,139,499 ========== (d) Adjustment to reflect the minority interest's share of results of GNGCM and GHIAL for the three-month period ended March 31, 2004 and for the year ended December 31, 2003. (e) Adjustment to reflect the increase in weighted average number of shares outstanding by 4,081,238 common stocks as if they had been issued on October 1, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CHINA WORLD TRADE CORPORATION By: /s/ John Hui -------------- John Hui President Date: August 12, 2004 EXHIBIT INDEX Exhibit Number Description ------- ----------- 10.1 Equity Transfer Agreement, dated April 20, 2004. 10.2 Supplementary Agreement to Share Exchange Agreement, dated June 1, 2004.