-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CpI0EuuIdpEXhQkEsKFV6X0Z47wxq8rEa0y19DSsjsQy4xoph40ke2ITwqtGvzYG 7XLbYh9tyYlhlneDYmuWnA== 0001264931-05-000016.txt : 20050118 0001264931-05-000016.hdr.sgml : 20050117 20050118120609 ACCESSION NUMBER: 0001264931-05-000016 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 20050118 DATE AS OF CHANGE: 20050118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHINA WORLD TRADE CORP CENTRAL INDEX KEY: 0001081834 STANDARD INDUSTRIAL CLASSIFICATION: OPERATIVE BUILDERS [1531] IRS NUMBER: 870629754 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-122092 FILM NUMBER: 05532818 BUSINESS ADDRESS: STREET 1: GOLDION DIGITAL NETWORK CENTER STREET 2: 138 TI YU RD. E. 4TH FL CITY: TIAN HE GUANGZHOU STATE: K3 ZIP: 00000 BUSINESS PHONE: 01185298826818 MAIL ADDRESS: STREET 1: GOLDION DIGITAL NETWORK CENTER STREET 2: 138 YI TU RD E. CITY: TIAN HE GUANGHOU STATE: K3 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: TXON INTERNATIONAL DEVELOPMENT CORP DATE OF NAME CHANGE: 19990329 SB-2 1 doc1.txt COMMISSION FILE NO.___________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 REGISTRATION STATEMENT ON FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 CHINA WORLD TRADE CORPORATION (NAME OF SMALL BUSINESS ISSUER IN OUR CHARTER) Nevada (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 3751 87-0629754 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) 3rd Floor, Goldlion Digital Network Center 138 Tiyu Road East, Tianhe Guangzhou, The PRC 011-8620-3878-0286 (ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES) Chi Hung Tsang Chairman and President China World Trade Corporation 138 Tiyu Road East, Tianhe Guangzhou, The PRC 011-8620-3878-0286 (NAME, ADDRESS AND TELEPHONE OF AGENT FOR SERVICE) COPIES TO: Bernard Chan, CFO Harold H. Martin, Esq. China World Trade Corporation 17111 Kenton Drive Room 1217, 12th Floor Suite 204B 10 Metropolis Drive Cornelius, North Carolina 28031 Hunghom, Hong Kong (704) 894-9760 Office (852) 2330-6622 Office (704) 894-9759 Fax (852) 2333-8844 Fax APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this registration statement. If any of the Securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box: [X] 1 If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act of 1933 registration number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SHARE (1) OFFERING PRICE (1) FEE (1) - --------------------------- -------------- ---------------- ------------------ ------------ Common Stock ($.001 par value) 16,981,717 (2) $ 2.10 $ 35,661,605 $ 4,518.33 - --------------------------- -------------- ---------------- ------------------ ------------ TOTAL $ 35,661,605 $ 4,518.33
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended (the "Securities Act"), based upon the average of the bid and asked price for the common stock of $2.10, as reported on the OTC Bulletin Board on January 12, 2005. (2) Pursuant to Rule 416(a) of the Securities Act this registration statement shall be deemed to cover additional securities that may be offered or issued to prevent dilution resulting from stock splits, stock dividends or similar transactions. The information in this prospectus is not complete and may be changed. Our company and the selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. We hereby amend this registration statement on such date or dates as may be necessary to delay its effective date until we shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a) may determine. 2 16,981,717 SHARES CHINA WORLD TRADE CORPORATION COMMON STOCK This prospectus relates to the offering for sale of up to 16,981,717 shares of our common stock, par value $.001, by the selling stockholders identified in this prospectus. The common stock covered by this prospectus includes up to 14,285,714 shares of common stock issuable from time to time to Cornell Capital Partners, LP ("Cornell Capital"), which will become a shareholder pursuant to a Standby Equity Distribution Agreement (hereinafter "SEDA"). The prices at which all selling stockholders may sell their shares will be determined by the prevailing market price for the shares or through negotiated transactions. We are not selling any securities in this offering and therefore will not receive any of the proceeds from the sale of the shares. We will, however, receive proceeds from the sale of securities under the SEDA that we have entered into with Cornell Capital, which permits us to make an advance notice to Cornell Capital for the purchase of up to $3.0 million in shares of common stock on our initial advance notice and for the purchase of up to $1.5 million in shares of common stock per advance notice thereafter. In the aggregate, Cornell Capital has committed to provide us with up to $30.0 million in order to purchase our common stock, subject to the terms and conditions of the SEDA. At no time will Cornell Capital own shares sufficient to make it an "affiliate" of our company within the meaning of the Securities Act of 1933, as amended. We may receive proceeds from the exercise of Series A Warrants to purchase 250,001 shares of common stock that are held by Bridges & PIPES LLC ("Bridges & PIPES"), at an exercise price of $2.50 per share, the exercise of Series A Warrants to purchase 450,000 shares of common stock that are held by Cornell Capital, at an exercise price of $2.50 per share, the exercise of Placement Agent's Warrants to purchase 112,667 shares of common stock that are held by Duncan Capital, LLC ("Duncan Capital"), at an exercise price of $2.50 per share, the exercise of Series A Warrants to purchase 33,334 shares of common stock that are held by Stealth Capital, LLC, at an exercise price of $2.50 per share, and the exercise of Series A Warrants to purchase 75,000 shares of common stock that are held by TCMP3 Partners ("TCMP3 Partners"), at an exercise price of $2.50 per share. The shares underlying all of these warrants are also being registered under this prospectus. All costs associated with the registration of all securities offered hereby will be borne by us. The selling stockholders consist of: Bridges & PIPES LLC 583,335 Cornell Capital Partners, LP 15,860,714 Duncan Capital, LLC 262,667 Stealth Capital, LLC 100,001 TCMP3 Partners 175,000 ---------- Total 16,981,717 Our common stock is quoted on the Over-The-Counter Bulletin Board under the symbol CWTD.OB. On December 30, 2004, the reported closing price of our stock on the OTC Bulletin Board was $2.10 per share. We have submitted an application to list our common stock on the American Stock Exchange, Inc., but there can be no assurances whether or not such application will be accepted. The price per share for our common stock will fluctuate based on the supply and demand for the shares in the market, as well as on other factors. 3 The selling stockholders consist of (i) Bridges & PIPES, who intends to sell 333,334 shares of our common stock which it owns, and may exercise and sell the shares of our common stock underlying Series A Warrants to purchase 250,001 of our shares, (ii) Cornell Capital, who intends to sell up to 15,860,714 shares of common stock, 14,285,714 of which are under the SEDA, 900,000 of which are shares of our common stock which it owns, 450,000 of which are shares that it may sell underlying Series A Warrants to purchase our common stock, and 225,000 of which Cornell Capital received as compensation under the SEDA, (iii) Duncan Capital, who intends to sell 150,000 shares of our common stock, which it received as compensation for agreeing to serve as Placement Agent under the SEDA, and may exercise and sell shares of our common stock underlying Placement Agent's Warrants to purchase 112,667 of our shares, which it received for acting as placement agent under earlier financings with us, (iv) Stealth Capital, LLC, who intends to sell 66,667 shares of our common stock which it owns, and may exercise and sell the shares of our common stock underlying Series A Warrants to purchase 33,334 of our shares, and (v) TCMP3 Partners, who intends to sell 100,000 shares of our common stock which it owns, and may exercise and sell the shares of our common stock underlying Series A Warrants to purchase 75,000 of our shares. After all of the shares referred to above have been issued, China World Trade's then-outstanding common stock would be 47,871,714, and the 14,285,714 shares of common stock under the SEDA would equal 30%. The selling stockholders will receive all of the amounts received upon any sale by them of the common stock, less any brokerage commissions or other expenses incurred by them. Cornell Capital is an "underwriter" within the meaning of the Securities Act of 1933, as amended, in connection with the resale of common stock under the SEDA. Cornell Capital has agreed to pay us 99% of, or a 1% discount to, the lowest closing bid price of the common stock during the five consecutive trading day period immediately following the notice date. In addition, Cornell Capital will retain 4% of each advance under the SEDA. Cornell Capital also received a one-time commitment fee in the form of 225,000 of our shares of common stock. The 1% discount, the 4% retainage fee, and the 225,000 shares of our common stock which were paid as a fee, are underwriting discounts payable to Cornell Capital. We have engaged Duncan Capital, an unaffiliated registered broker-dealer, to advise us in connection with the SEDA. Duncan Capital was paid a fee of 150,000 shares of our common stock on November 30, 2004, equal to approximately $315,000 based on our stock price on December 30, 2004, and will retain 4% of each advance under the SEDA. We have agreed with Bridges & PIPES and TCMP3 Partners not to submit to Cornell Capital our initial advance notice for the purchase of up to $3.0 million in shares of our common stock until thirty (30) days after the effectiveness of the registration statement of which this prospectus forms a part. See "The Offering" at page 10. Brokers or dealers effecting transactions in these shares should confirm that the shares are registered under the applicable state law or that an exemption from registration is available. These securities are speculative and involve a high degree of risk. Please refer to "Risk Factors" beginning on page 16. 4 With the exception of Cornell Capital, which is an "underwriter" within the meaning of the Securities Act of 1933, as amended, no other underwriter or person has been engaged to facilitate the sale of the shares of common stock in this offering. This offering will terminate twenty-four months after the accompanying registration statement is declared effective by the Securities and Exchange Commission. None of the proceeds from the sale of stock by the selling stockholders will be place in escrow, trust or any similar account. The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The date of this prospectus is January 14, 2005, subject to completion. 5 TABLE OF CONTENTS PART I PROSPECTUS SUMMARY 7 THE OFFERING 8 RISK FACTORS 16 FORWARD LOOKING STATEMENTS 30 USE OF PROCEEDS 31 DILUTION 32 STANDBY EQUITY DISTRIBUTION AGREEMENT 33 PLAN OF DISTRIBUTION 35 LEGAL PROCEEDINGS 36 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS 36 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 40 DESCRIPTION OF SECURITIES 40 INTEREST OF EXPERTS AND COUNSEL 41 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES. 42 DESCRIPTION OF BUSINESS 42 MANAGEMENT'S DISCUSSION AND ANALYSIS 75 DESCRIPTION OF PROPERTY 79 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 80 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 80 EXECUTIVE COMPENSATION 84 FINANCIAL STATEMENTS 86 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 143 HOW TO GET MORE INFORMATION 143 PART II OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION 146 RECENT SALES OF UNREGISTERED SECURITIES 146 INDEMNIFICATION OF DIRECTORS AND OFFICERS 150 EXHIBITS 151 UNDERTAKINGS 151 SIGNATURES 153 6 PROSPECTUS SUMMARY The following is a summary of the pertinent information regarding this offering. This summary is qualified in its entirety by the more detailed information and financial statements and related notes included in this Prospectus. The Prospectus should be read in its entirety, as this summary does not contain all facts necessary to make an investment decision. CERTAIN DEFINITIONS AND SUPPLEMENTAL INFORMATION All references to "China" or "PRC" in this Annual Report are references to The People's Republic of China. Unless otherwise specified, all references in this Annual Report to "U.S. dollars," "dollars," or "$" are to United States Dollars; all references to "Renminbi" or "RMB" are to Renminbi, which is the official currency of China. Unless otherwise specified, for the convenience of the reader, translation of amounts from Renminbi to U.S. dollars has been made. CHINA WORLD TRADE CORPORATION We were incorporated in the State of Nevada in 1998 under the name Weston International Development Corporation. On July 28, 1998, the Company changed its name to Txon International Development Corporation. On September 25, 2000 we changed our name from Txon International Development Corporation to China World Trade Corporation. We will refer to our company as "China World Trade" or the "Company". Our executive office is located at 3rd Floor, Goldlion Digital Network Center, 138 Tiyu Road East, Tianhe, Guangzhou, the PRC 510620. OUR BUSINESS Our business plan involves the pursuit of three distinct lines of business. These include (i) the business clubs located in major cities of China, including Guangzhou, the PRC and Beijing, the PRC, with plans to open clubs in Shanghai and Shenzhen, the PRC, each club in association with the World Trade Center Association, by which we have positioned ourselves as a platform to facilitate trade between China and the world market, (ii) the business travel services, in which our latest acquisition, the New Generation Group of Companies, an indirect majority owned subsidiary, will continue its market leadership as one of the leading consolidators of airline tickets and hotel accommodations in China, and also as an agency for life and accidental insurance in the Guangdong Province, and (iii) the business value-added services, in which we will concentrate on trading operations and providing interactive marketing and incentive programs for merchants, financial institutions, telecom operators, and large corporations with significant client bases, as well as consultancy services. Our growth in the industries of trade, travel and finance, should enable us to provide value added services and target many cross marketing opportunities. No assurances can be given, however, that we will be successful in our endeavors. Our growth and development as a business enterprise has been marked by a number of significant corporate events. Pursuant to a Share Exchange Agreement, dated as of August 10, 2000, between Virtual Edge Limited ("VEL") and Main Edge International Limited ("Main Edge"), Main Edge transferred all of the issued and outstanding shares of the capital stock of VEL to the Company in exchange of 1,961,175 shares of our pre-split common stock, representing approximately 75% of our outstanding shares of the common stock. According, we controlled the operations of VEL, and Main Edge became our majority stockholder. We then undertook an 8-for-1 forward split that was effective on 15th day of September 2000, which resulted in Main Edge owing 15,689,400 shares of our common stock. Then, three major developments occurred. These were: (i) the consummation of two private placement financings by Powertronic Holdings Limited ("Powertronic") in September 2002 and December 2002 in which it acquired shares of our common stock, (ii) an acquisition of all the issued and outstanding shares of General Business Network (Holdings) Ltd. in December 2002, and (iii) a 1-for-30 reverse stock split that was effective on September 1, 2002. As a result of these transactions, Mr. Chi Hung Tsang became the new major shareholder owning 4,000,000 shares of our common stock and Powertronic owns 2,000,000 shares. Mr. Chi Hung Tsang is currently Chairman of our Board of Directors. On May 7, 2004, our Company, through one of its wholly-owned subsidiaries, acquired 51% of the capital stock of CEO Clubs China Limited, a Hong Kong corporation ("CEO Clubs China"), for a total consideration of cash and shares of our common stock in the amount of US$480,000. CEO Clubs China is an authorized chapter to operate under the "CEO Clubs" trademarks in the Greater China Region, including the PRC, Hong Kong and Taiwan. Comprised of thirteen chapters in the U.S. and China, the CEO Clubs are a 25-year-old not-for-profit association, organized on a by-membership-only basis. Members must be CEO's of businesses, which have over $2.0 million in annual sales. The annual sales of our corporate club member average $20,000,000. In December of 2002, CEO Clubs China opened its first international chapter in China. 7 Finally, on August 2, 2004, a wholly-owned subsidiary of ours consummated an acquisition of 51% of the capital stock of Guangdong New Generation Commercial Management Limited, a limited liability company organized and existing under the laws of the PRC ("New Generation"), for an aggregate consideration of US$10,232,000, payable approximately US$2,741,000 in cash and approximately US$7,487,000 in market value of common stock of China World Trade. New Generation is the pioneer and one of the market leaders in the travel agency business through operations of its ten subsidiaries in Southern China. It is a market leader in ticketing sales for international and domestic flights as well as inbound business travel. It is also one of the leading consolidators of airline tickets and hotel rooms in China. New Generation has already acquired the necessary licenses to operate as a ticketing and travel agent in the PRC, a highly regulated business. In addition, Guangdong Huahao Insurance Agency Limited, one of the New Generation Group of companies, is also a licensed insurance agent in China and provides, in particular, accidental and life insurances to individual policyholders in the Guangdong Province of China. While there can be no assurances of success, we believe that the New Generation Group of Companies will contribute a significant revenue base to our company. We currently have approximately 300 full-time employees. THE OFFERING This offering relates to the sale of common stock by certain persons who are the selling stockholders consisting of (i) Cornell Capital, who intends to sell up to 15,860,714 shares of common stock, 14,285,714 of which are under the Standby Equity Distribution Agreement (the "SEDA"), 900,000 of which are shares of our common stock which it owns, 450,000 of which are shares that it may sell underlying Series A Warrants to purchase our common stock, and 225,000 of which Cornell Capital received as compensation under the SEDA, (ii) Bridges & PIPES, who intends to sell 333,334 shares of our common stock which it owns, and may exercise and sell the shares of our common stock underlying Series A Warrants to purchase 250,001 of our shares, (iii) Duncan Capital, who intends to sell 150,000 shares of our common stock, which it received as compensation for agreeing to serve as Placement Agent under the SEDA, and may exercise and sell shares of our common stock underlying Placement Agent's Warrants to purchase 112,667 of our shares, which it received for acting as placement agent under earlier financings with us, (iv) Stealth Capital, LLC, who intends to sell 66,667 shares of our common stock which it owns, and may exercise and sell the shares of our common stock underlying Series A Warrants to purchase 33,334 of our shares, and (v) TCMP3 Partners, who intends to sell 100,000 shares of our common stock which it owns, and may exercise and sell the shares of our common stock underlying Series A Warrants to purchase 75,000 of our shares. The Series A Warrants to purchase shares of our common stock are hereinafter referred to as the "Warrants". 8 The commitment amount of the SEDA is $30.0 million. At an assumed price of $2.10 per share, we would only be able to receive net proceeds of $27.3 million using the 14,285,714 shares being registered in this registration statement under the SEDA. In the event that the market price of our common stock were to decline significantly as a result of sales of shares by Cornell Capital under the SEDA, we may need to register additional shares and to obtain shareholder approval to increase the authorized shares of common stock to access additional amounts under the SEDA. Pursuant to the SEDA, we may, at our discretion, periodically issue and sell to Cornell Capital shares of common stock for a total purchase price of $30.0 million. The amount of each advance is subject to a maximum advance amount of $1.5 million, except for the first advance, which may be in the amount of $3.0 million. We may not submit any advance within seven trading days of a prior advance. Cornell Capital will pay us 99% of, or a 1% discount to, the lowest closing bid price of the common stock during the five consecutive trading day period immediately following the notice date. Of each advance made by us, Cornell Capital shall retain 4% of each advance. In addition, Cornell Capital received a one-time commitment fee in the form of 225,000 shares of our common stock on November 30, 2004. Cornell Capital intends to sell any shares purchased under the SEDA at the then prevailing market price. We have engaged Duncan Capital to act as Placement Agent with respect to the SEDA, pursuant to a Placement Agent Agreement, dated November 30, 2004 (the "Placement Agent Agreement"). Duncan Capital has received 150,000 shares of our common stock, and in addition will retain 4% of the gross proceeds of each advance held in escrow, as compensation for its services. The Placement Agent Agreement provides that the services of the Placement Agent consist of reviewing the terms of the SEDA and advising us with respect to those terms. Duncan Capital is not participating as an underwriter in this offering. The 225,000 shares of our common stock paid to Cornell Capital as compensation under the SEDA, as well as the 150,000 shares of our common stock paid to Duncan Capital under the Placement Agent Agreement, are subject to a lock-up arrangement which assures us that they will not be immediately sold on the market at a low price per share. This arrangement provides that, for a period of ninety days, Cornell Capital and Duncan Capital will not sell their shares of common stock if the volume weighted average price of our common stock, as quoted by Bloomberg, LP (the "VWAP"), is less than $1.50. Thereafter, they are entitled to sell their shares free of any limitation other than as hereinafter set forth. In addition, for a period of twelve months following the declaration of effectiveness of this registration statement, Cornell Capital and Duncan Capital will not sell more than 25% of their shares every thirty calendar days if the VWAP of our common stock is less than $2.50. If the VWAP of our common stock is higher than $2.50, Cornell Capital and Duncan Capital are entitled to sell their shares free of any limitation. In addition, pursuant to a letter agreement dated November 19, 2004, we agreed with Bridges & PIPES and TCMP3 Partners that we would not submit our initial advance notice to Cornell Capital for the purchase of common stock under the SEDA for a period of thirty (30) days after the date of effectiveness of the registration statement of which this prospectus is a part. In return, Bridges & PIPES and TCMP3 Partners agreed to waive their demand rights under a Registration Rights Agreement that gave them the option to be the sole registrants, without Cornell Capital, on this registration statement. Bridges & PIPES received 83,334 Series A Warrants and TCMP3 Partners received 25,000 Series A Warrants, among other things, in consideration of their agreement. Finally, Cornell Capital agreed to a lockup and a "no trade" provision with respect to any shares of common stock that owns until thirty (30) days after effectiveness of the registration statement of which this prospectus forms a part. 9 Among other things, this prospectus relates to shares of common stock to be issued under the SEDA. There are substantial risks to investors as a result of the issuance of shares of common stock under the SEDA. These risks include dilution of shareholders, significant decline in our stock price and our inability to draw sufficient funds when needed. There is an inverse relationship between our stock price and the number of shares to be issued under the SEDA. That is, as our stock price declines, we would be required to issue a greater number of shares under the SEDA for a given advance. This inverse relationship is demonstrated by the following table, which shows the number of shares to be issued under the SEDA at a recent price of $2.10 per share and 25%, 50% and 75% discounts to the recent price. Recent 25% 50% 75% ---------- ---------- ---------- ---------- Purchase Price: $2.10 $1.58 $1.05 $0.53 No. of Shares (1): 14,285,714 18,987,341 28,571,428 56,603,774 Total Outstanding (2): 45,175,711 49,877,338 59,461,425 87,493,771 Percent Outstanding (3): 31.6% 38.1% 50.5% 64.7% - --------------------------- (1) Represents the number of shares of common stock to be issued to Cornell Capital under the SEDA at the prices set forth in the table, assuming sufficient authorized shares are available. (2) Represents the total number of shares of common stock outstanding after the issuance of the shares to Cornell Capital under the SEDA. (3) Represents the share of common stock to be issued as a percentage of the total number of shares outstanding. 10 TERMS OF THE OFFERING Common Stock Offered 16,981,717 shares by the Selling Stockholders Offering Price Market price Common Stock Outstanding Before the Offering (1) 30,889,997 Use of Proceeds We will not receive any proceeds from the sale of the common stock. However, we may receive proceeds upon the exercise of the Warrants owned by certain of the Selling Stockholders. In addition, we may receive proceeds from Cornell Capital under the SEDA. All proceeds that we receive will be used for general working capital purposes. Risk Factors The securities offered hereby are speculative and involve a high degree of risk, including the risk of substantial and immediate dilution. See "Risk Factors" at page 16 and "Dilution at page 32. In addition, there are substantial risks to investors in our common stock as a result of the issuance of shares of common stock under the SEDA. These risks include dilution of shareholders, significant decline in our stock price and our inability to draw sufficient funds when needed. - --------------------------- (1) Excludes up to 14,285,714 shares of common stock to be issued under the SEDA, 4,952,500 options and warrants to purchase our common stock. 11
SUMMARY CONSOLIDATED FINANCIAL INFORMATION ASSETS US$ US$ UNAUDITED AUDITED 9/30/2004 9/30/2003 ---------- --------- CURRENT ASSETS Cash and cash equivalents 1,137,278 273,220 Trade and other receivables 8,236,107 240,293 Rental and other deposits 1,549,172 363,833 Prepayments 206,845 30,031 Inventories 8,588 325,494 Short-term investment 24,163 - ---------- --------- TOTAL CURRENT ASSETS 11,162,153 1,232,871 Intangible asset 1,722,676 - Goodwill 8,965,499 251,448 Property, plant and equipment, net 3,879,057 2,881,585 ---------- --------- TOTAL ASSETS 25,729,385 4,365,904 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade and other payables 6,165,838 1,809,380 Deferred income 10,495 39,991 Short-term bank loans 1,570,598 300,000 Long-term bank loan - current portion 44,746 42,994 ---------- --------- TOTAL CURRENT LIABILITIES 7,791,677 2,192,365 Long-term bank loan - non-current portion 414,597 459,344 Due to a shareholder 333,722 - ---------- --------- TOTAL LIABILITIES 8,539,996 2,651,709 ---------- --------- MINORITY INTEREST 3,376,955 3,531 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, par value of US$0.001 each; 10,000,000 shares authorized, none issued or outstanding - - Common stock, par value of US$0.001 each; 50,000,000 shares authorized, 25,896,699 shares issued at September 30, 2004 25,897 10,971 Additional paid-in capital 26,987,112 11,096,208 Accumulated deficit (13,200,575) (9,396,515) ---------- --------- TOTAL STOCKHOLDERS' EQUITY 13,812,434 1,710,664 ---------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 25,729,385 4,365,904 ========== =========
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NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30 2004 2003 2003 2002 ------------ ------------ ------------ ------------ US$ US$ US$ US$ Operating revenues 1,582,866 2,379,536 2,885,600 193,024 Operating costs and expenses (538,611) (1,085,454) (1,213,169) (83,738) Selling, general and administrative expenses (3,839,486) (3,192,166) (3,954,066) (1,827,959) ------------ ------------ ------------ ------------ Loss from operations (2,795,231) (1,898,084) (2,281,635) (1,718,673) Non-operating income (expenses) Other income 129,883 2,572 2,490 - Interest expenses (31,965) (17,083) (14,811) (8,120) Equity in net loss of affiliate - (32,051) (32,051) - ------------ ------------ ------------ ------------ Loss before income taxes and minority interest (2,697,313) (1,944,646) (2,326,007) (1,726,793) Provision for income taxes (15,836) - - - ------------ ------------ ------------ ------------ Loss before minority interest (2,713,149) (1,944,646) (2,326,007) (1,726,793) Minority interest (161,467) 40,522 120,471 92,976 ------------ ------------ ------------ ------------ Net loss (2,874,616) (1,904,124) (2,205,536) (1,633,817) ============ ============ ============ ============
CHINA WORLD TRADE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2004 PRO FORMA Pro forma CONSOLIDATED GNGCM GHIAL The Company adjustments BALANCE ----------- ----------- ----------- ----------- ----------- US$ US$ US$ US$ US$ ASSETS CURRENT ASSETS Cash and cash equivalents 1,846,128 12,496 32,935 (2,745,000) (a) 1,646,559 2,500,000 (b) Trade receivable 1,038,457 - 22,084 1,060,541 Other receivable - 697,720 13,844 711,564 Due from related parties 2,505 - 75,818 78,323 Rental and other deposits 744,061 - 254,953 999,014 Prepayments - - 102,428 102,428 Inventories - - 9,142 9,142 ----------- ----------- ----------- ----------- TOTAL CURRENT ASSTS 3,631,151 710,216 511,204 4,607,571 Intangible asset - - 1,590,000 1,590,000 Goodwill - - 359,346 14,575,068 (C) 14,934,414 Property, plant and equipment, net 127,174 19,648 3,259,749 3,406,571 Investment in a subsidiary - - - 10,232,000 (a) - (10,232,000) (c) ----------- ----------- ----------- ----------- TOTAL ASSETS 3,758,325 729,864 5,720,299 24,538,556 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade payables 3,707,934 - 18,176 3,726,110 Accrued charges 1,522,974 - 104,187 1,627,161 Other payables - 31,036 107,616 138,652 Tax payables 1,151,972 3,514 - 1,155,486 Due to related parties 696,215 - 235,327 931,542 Deposits received - - 40,315 40,315 Deferred income - - 6,551 6,551 Short term bank loan 1,206,695 - - 1,206,695 Long-term bank loan - current portion - - 44,301 44,301 ----------- ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 8,285,790 34,550 556,473 8,876,813 Long-term bank loan - - non-current portion - - 425,952 425,952 Due to a shareholder - - 954,995 954,995 ----------- ----------- ----------- ----------- Total liabilities 8,285,790 34,550 1,937,420 10,257,760 ----------- ----------- ----------- ----------- Minority interest - - - 510,917 (C) 510,917 ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY 4,081 (a) 3,500 (b) Common stock 1,810,042 1,206,695 17,837 (3,016,737) (C) 25,418 Additional paid-in capital - - 16,207,204 7,482,919 (a) 26,186,623 2,496,500 (b) Due from related party (7,081,663) (1,313,152) - 8,394,815 (c) - Dedicated reserves 477,757 121,156 - (598,913) (c) - Accumulated (deficit) profit 266,399 680,615 (12,442,162) (947,014) (c) (12,442,162) ----------- ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (4,527,465) 695,314 3,782,879 13,769,879 ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 3,758,325 729,864 5,720,299 24,538,556 =========== =========== =========== ===========
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CHINA WORLD TRADE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS THREE-MONTH PERIOD ENDED JUNE 30, 2004 - -------------------------------------------- PRO FORMA Pro forma CONSOLIDATED GNGCM GHIAL The Company adjustments BALANCE ----------- ----------- ----------- ----------- ----------- US$ US$ US$ US$ US$ OPERATING REVENUES 2,650,848 289,469 639,340 3,579,657 ----------- ----------- ----------- ----------- OPERATING EXPENSES Operating costs and expenses (1,030,345) (19,916) (347,546) (1,397,807) Selling, general and administrative expenses (294,433) (103,413) (2,502,045) (2,899,891) ----------- ----------- ----------- ----------- PROFIT (LOSS) FROM OPERATIONS 1,326,070 166,140 (2,210,251) (718,041) NON-OPERATING (EXPENSES) INCOME Other income 3,193 96 102,150 105,439 Interest expenses (38,938) (8) (8,730) (47,676) ----------- ----------- ----------- ----------- PROFIT (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 1,290,325 166,228 (2,116,831) (660,278) Provision for income taxes (116,440) (8,086) - (124,526) ----------- ----------- ----------- ----------- PROFIT (LOSS) BEFORE MINORITY INTEREST 1,173,885 158,142 (2,116,831) (784,804) MINORITY INTEREST - - 628 (116,203) (d) (115,575) ----------- ----------- ----------- ----------- NET PROFIT (LOSS) 1,173,885 158,142 (2,116,203) (900,379) =========== =========== =========== ===========
Footnotes: (1) For an explanation of notes (a) through (d), refer to the pro forma adjustments set forth on page 142 of this prospectus. (2) GNGCM is an abbreviation for Guangdong New Generation Commercial Management Limited, a corporation organized and existing under the laws of the Peoples' Republic of China. (3) GHIAL is an abbreviation for Guangdong Hauhao Insurance Agency Limited, a corporation organized and existing under the laws of the Peoples' Republic of China. (4) The Company refers to China World Trade Corporation. 14
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) =========== =========== =========== ===========
RISK FACTORS WE ARE SUBJECT TO VARIOUS RISKS THAT MAY MATERIALLY HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR UNCERTAINTIES ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT. 15 RISKS RELATED TO OUR BUSINESS AND INDUSTRY. ------------------------------------------- WE HAVE HAD NET LOSSES FROM OUR OPERATIONS AND ANTICIPATE THAT LOSSES WILL CONTINUE. WE MAY NOT BE ABLE TO BECOME PROFITABLE IN THE FUTURE. We have had a history of losses from our operations. We had a net loss from operations for the year ended September 30, 2003 of $2,205,536. We also had a net loss from operations for the nine-months ended September 30, 2004 of $2,874,616. This nine-month loss was primarily attributable to an increase in professional fee related expenses paid to outside consultants in shares of common stock of the Company in the amount of approximately $1,000,000. We may not be profitable in the future. IF WE ARE UNABLE TO RAISE ADDITIONAL CAPITAL, WE WILL LIKELY HAVE TO CURTAIL OUR OPERATIONS. We presently have limited operating capital. In addition, we have only a limited credit facility and other committed sources of capital. We believe we need at least $2.5 million in additional capital in 2005 to maintain our current operations. The SEDA is intended to provide funds for general working capital to us, although there can be no assurances as to the amount of funds it will be able make available. Current revenue from our operations is not sufficient to cover our costs, our current expansion or our plans for the future. We may be unable to expand credit arrangements on satisfactory terms. There is a risk that we will be unable to obtain additional capital when needed even if advances are made under the SEDA, which would require us to curtail our operations. WE ARE A HOLDING COMPANY THAT DEPENDS ON OUR FOREIGN SUBSIDIARIES. We are a holding company incorporated under the laws of Nevada. Our business activities are presently carried out through seventeen majority and wholly-owned subsidiary companies. Seven of these companies are incorporated under the laws of the British Virgin Islands, five of these companies are incorporated under the laws of Hong Kong, and the remaining five are incorporated in the People's Republic of China. Accordingly, we must rely entirely upon distributions from the subsidiaries to generate funds. Otherwise, we will be unable to meet our obligations and other cash flow needs, including funds necessary for working capital. Each subsidiary is a separate and distinct legal entity that has no contingent or other obligation to make any funds available to us, whether by dividends, loans or other payments. In addition, there may be restrictions imposed by their respective foreign governments that would limit the ability of these companies to pay dividends to a foreign corporate holding company. OUR BUSINESS MODEL IS LARGELY UNTESTED. While all of our business activities are focused on the servicing, trade, travel and finance industries within China, we currently operate three divisions, one engaged in business clubs in China, one of which provides business travel services principally in the airline ticketing and hotel room consolidation market, and one that provides business value-added services, such as credit card services and merchant related businesses, including consultancy services. Some of our services could be provided by governmental agencies or better financed competitors. These different and varied business ventures require differing personnel with varying skill sets, and are separately organized and managed. We believe that these various business interests can be successfully combined and jointly managed despite their diverse nature. However, there can be no assurances that our endeavors will be successful. 16 WE MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE OUR BUSINESS CLUB OPERATIONS. Our business strategy for our business clubs is to grow through our subsidiaries by serving domestic companies attempting to enter into the international business community, as well as companies attempting to do business with China. Our success will depend on our ability to deliver quality support services to our customers. Specifically, the following factors may affect our ability to manage our growth: - We may not have adequate resources to expand our operational, financial and management information systems to accommodate the needs of a diverse client base; - Finding, training and retaining qualified bilingual persons with knowledge of the requirements, business practices and customs of both the United States and China may be expensive, time consuming and difficult; - We may not have sufficient resources to maintain relationships with governmental agencies, service providers and other third parties in both countries. OUR BUSINESS CLUB OPERATIONS MAY BE ADVERSELY AFFECTED BY THE RELATIONS BETWEEN THE UNITED STATES AND CHINA. Our business endeavors involving the China World Trade Association and our business clubs focus on fostering business relations with the People's Republic of China. Two of our subsidiaries operate business clubs in Guangzhou and Beijing, the PRC for foreign business interests. Our business is directly affected by political and economic conditions in China and would be adversely affected by disruptions in the diplomatic and political relationships between the U.S. and China. Further, public opinion of U.S. corporations conducting business with the Chinese may fluctuate and could impact the success of this aspect of our business plan. THE INDUSTRY IN WHICH OUR BUSINESS CLUBS OPERATE AND THE MARKET FOR OUR SERVICES IS CHARACTERIZED BY RAPIDLY EVOLVING DEVELOPMENTS, EVOLVING INDUSTRY STANDARDS, AND FREQUENT SERVICE INTRODUCTIONS AND ENHANCEMENTS. Our business plan for the business clubs is based on the need for foreign companies to have introduction and access to the economic opportunities of the People's Republic of China. This industry in which China World Trade Corporation operates and the market for our services is characterized by rapid business and technological developments, evolving industry standards, and frequent introductions of new and enhanced services. Other groups, including competitors, government and non-profit associations, may provide some or all of same services. New and enhanced services by our competitors could render our existing services obsolete and unmarketable. OUR BUSINESS CLUBS OPERATIONS ARE SUBJECT TO THE FOREIGN INVESTMENT CLIMATE AND INTERNATIONAL TRADE OPERATIONS IN CHINA. The Chinese government owns the majority of productive assets in China. The Chinese government has recently attempted economic reforms to decentralize some industries and encourage private economic development. Our business plan seeks to capitalize on these reforms. If the reforms are inconsistent or ineffectual, the Chinese government may discontinue or alter the policies. If that happened, we expect the impact would be negative for our operations and could result in a total investment loss in our common stock. 17 WE ARE SUBJECT TO THE UNCERTAINTIES OF THE CHINESE LEGAL SYSTEM. Our business plan depends on fostering business relationships pertaining to the People's Republic of China. Our business clubs and some of our other activities operate from facilities located in China. Accordingly, we must conform to the governmental regulations and rules of China. The Chinese legal infrastructure is distinctly different in operation from its United States counterpart. The PRC legal system is a system based on written statutes and their interpretation by the Supreme People's Court. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, the PRC government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. These laws and regulations are relatively new, and because of the limited volume of published cases and their non-binding nature, interpretation and enforcement of these laws and regulations involve uncertainties. In addition, as the PRC legal system develops, changes in such laws and regulations may develop. We cannot assure you that the legal climate in China will remain stable, predictable or favorable to our operations. OUR LIMITED OPERATING HISTORY MAY NOT SERVE AS AN ADEQUATE BASIS TO JUDGE OUR FUTURE PROSPECTS AND OPERATING RESULTS. We have only a limited operating history from which you can evaluate our business and our prospects. We have encountered and will continue to encounter risks and difficulties frequently experienced by early-stage companies in evolving industries such as the travel service industry in China. Some of the risks relate to our ability to: - attract and retain customers and encourage our customers to engage in repeat transactions; - retain our existing agreements with travel suppliers such as hotels and airlines and to expand our service offerings on satisfactory terms with our travel suppliers; - operate, support, expand and develop our operations, our call center, our website, and our communications and other systems; - diversify our sources of revenue; - maintain effective control of our expenses; - attract and retain qualified employees; - raise additional capital; - respond to changes in our regulatory environment; and - respond to competitive market conditions. If we are not successful in addressing any or all of these risks, our business may be materially affected in an adverse manner. 18 DECLINES OR DISRUPTIONS IN THE TRAVEL INDUSTRY GENERALLY COULD REDUCE OUR REVENUES. Since our indirect acquisition of 51% of the capital stock of the New Generation Group of Companies, our business is greatly affected by the health of the travel industry in China. Because travel expenditures are highly sensitive to the general business climate and personal discretionary spending levels, economic downturns and catastrophic events tend to have an adverse impact on the travel industry. Adverse trends or events that tend to reduce travel and are likely to reduce our revenues include: - increases in prices in the airline, hotel or other travel-related sectors; - increases in the occurrence of travel-related accidents; - outbreak of war or conflict across the Taiwan Strait or elsewhere in the Asia-Pacific region. - increases in terrorism or the occurrence of a terrorist attack in the Asia-Pacific region or elsewhere; - poor weather conditions or changes in climate throughout a particular region; and - man-made or natural disasters that occur in any particular region. As a result of any of these events, over which we have no control, our operating results and financial conditions could be materially and adversely affected. OUR QUARTERLY RESULTS ARE LIKELY TO FLUCTUATE BECAUSE OF SEASONALITY IN THE TRAVEL INDUSTRY IN CHINA. Our business travel operations experience seasonal fluctuations, reflecting seasonal variations in demand for travel services. During the first quarter, demand for travel services generally declines and the number of bookings flattens or decreases, in part due to a slowdown in business activity during the Chinese New Year holiday. Demand for travel services generally peaks during the second half of the year and there may be seasonal fluctuations in allocations of travel services made available to us by travel suppliers. Consequently, our revenues may fluctuate from quarter to quarter. WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR RAPID GROWTH BECAUSE SUCH GROWTH MAY PRESENT SIGNIFICANT CHALLENGES TO OUR MANAGEMENT AND ADMINISTRATIVE SYSTEMS AND RESOURCES. We have experienced rapid growth primarily through the acquisition of control of the New Generation Group of Companies during the present fiscal year. On June 30, 2004, we had approximately 120 employees. After the New Generation acquisition on August 2, 2004, we had approximately 300 employees. Our integration of the New Generation employees and continued expansion may present significant challenges to our management and administrative systems and resources. In order to be successful, we must: - maintain an effective management team; - adequately train our employees; - improve our information management, administrative systems and internal controls; and - address investor relations and required disclosure issues associated with being a rapidly growing public company. If we fail to address any of the foregoing concerns, our operating results and financial condition could be adversely affected. 19 IF WE FAIL TO ATTRACT AND RETAIN CUSTOMERS IN A COST-EFFECTIVE MANNER, OUR ABILITY TO GROW AND MAINTAIN PROFITABILITY MAY BE IMPAIRED. Our business strategy is substantially dependent on our ability to increase the overall number of airline and hotel customer transactions with us in a cost-effective manner. In order to increase the number of transactions, we must attract new visitors to our call center and website, convert these visitors into paying customers and capture repeat business from existing customers. Although we have spent significant financial and other resources on sales and marketing and plan to continue to do so, we cannot assure you that these efforts will be cost-effective in attracting new customers or increasing transaction volume. If we do not achieve our marketing objectives, our ability to grow our revenues and maintain profitability may be impaired. OUR BUSINESS MAY BE HARMED IF WE FAIL TO STRENGTHEN OUR CORPORATE IMAGE RECOGNITION AMONG CURRENT AND POTENTIAL CUSTOMERS, SUPPLIERS AND BUSINESS PARTNERS. We believe that we must be successful in the promotion of our China World Trade Corporation's corporate image in order to continue to grow our business and secure new business relationships. We must introduce new consumers to our China World Trade and New Generation names and ensure that the name is associated with quality and value. We cannot assure you that we will be successful in our efforts to introduce the names to a wider group of consumers or that we will be successful in establishing our brand image among consumers. If we fail to strengthen our name recognition among our current and potential customers, suppliers and business partners, our operating results and financial condition may be adversely affected. ANY SLOWDOWN OF ECONOMIC GROWTH IN CHINA COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS. We cannot assure you that the growth of the economy in China will continue or that any slowdown will not have a negative effect on our business. OUR TRAVEL BUSINESS DEPENDS ON THE TECHNOLOGY INFRASTRUCTURE OF THIRD PARTIES. We rely on third-party computer systems and other service providers, including the computerized reservation systems of airlines and hotels to make reservations and confirmations. Other third parties provide, for instance, our back-up data center, telecommunications access lines, significant computer systems and software licensing, support and maintenance service and air-ticket delivery. Any interruption in these or other third-party services or deterioration in their performance could impair the quality of our service. OUR ONLINE BUSINESS RELIES ON THE EXISTENCE OF AN ADEQUATE TELECOMMUNICATIONS INFRASTRUCTURE FOR CONTINUED GROWTH OF CHINA'S INTERNET MARKET. Although private sector Internet service providers currently exist in China, almost all access to the Internet is maintained through a network owned by China Netcom under the regulatory supervision of China's Ministry of Information Industry. In addition, the national networks in China connect to the Internet through a government-controlled international gateway. This international gateway is the only channel through which a domestic Chinese user can connect to the international Internet network. We rely on this infrastructure and China Netcom to provide data communications capacity, primarily through local telecommunications lines. We cannot assure you that this infrastructure will be further developed. In addition, we will have no access to alternative networks and services, on a timely basis if at all, in the event of any infrastructure disruption or failure. The Internet infrastructure in China may not support the demands associated with continued growth in Internet usage. 20 THE CONTENT ON OUR WEBSITE MAY SUBJECT US TO LITIGATION, WHICH MAY BE TIME-CONSUMING AND COSTLY TO DEFEND. The content on our website contains information about flights, hotels and popular vacation destinations, as well as customer feedback about certain travel-related services. Third parties could take legal action against us for any false or misleading information accessible on our websites. Any claims could be time consuming to defend, result in litigation and divert management's attention and resources, any of which could have a material and adverse impact on our operating results and financial condition. NEW GENERATION'S INSURANCE OPERATIONS EXPERIENCED GROWTH IN REVENUES FROM $255,052 FOR THE YEAR ENDED DECEMBER 31, 2002 TO $929,916 FOR THE YEAR ENDED DECEMBER 31, 2003, AND IT HAD NET LOSS FROM OPERATIONS OF $9,937 FOR THE YEAR ENDED DECEMBER 31, 2002, AND NET PROFIT FROM OPERATIONS OF $653,566 FOR THE YEAR ENDED DECEMBER 31, 2003. THERE CAN BE NO ASSURANCES THAT THIS RAPID GROWTH IN REVENUE AND PROFITABILITY WILL CONTINUE IN THE FUTURE. New Generation's insurance operations experienced growth in revenues from $255,052 for the year ended December 31, 2002 to $929,916 for the year ended December 31, 2003, and it had net loss from operations of $9,937 for the year ended December 31, 2002, and net profit from operations of $653,566 for the year ended December 31, 2003. Due to a number of risk factors that are discussed below, the most important of which may be increasing competition in its markets with low barriers to entry for competitors, there can be no assurances that this rapid growth in revenue or profitability will continue in the future. WE CANNOT ACCURATELY FORECAST OUR COMMISSION REVENUES BECAUSE OUR COMMISSIONS DEPEND ON PREMIUM RATES CHARGED BY INSURANCE COMPANIES, WHICH HAVE HISTORICALLY VARIED AND, AS A RESULT, HAVE BEEN DIFFICULT TO PREDICT. We are primarily engaged in insurance brokerage and agency activities, and derive revenues largely from commissions paid by insurance companies. We do not determine or set insurance premiums. Premium rates are determined by insurers based on a fluctuating market. Premium rates depend on, among other things, line of business, geographical region, insurance carrier and specific underwriting factors. Because we do not determine the timing and extent of premium pricing changes, we cannot accurately forecast our commission revenues, including whether they will significantly decline. As a result, our budgets for future acquisitions, capital expenditures, dividend payments and other expenditures may have to be adjusted to account for unexpected changes in revenues. WE DERIVE A SUBSTANTIAL PORTION OF OUR COMMISSION REVENUES FROM ONE INSURANCE COMPANY, THE LOSS OF WHICH COULD RESULT IN ADDITIONAL EXPENSE AND LOSS OF MARKET SHARE. Our life and accident insurance programs are primarily underwritten by HuaAn Assets Insurance Co. Ltd. For the year ended December 31, 2003 and the nine months ended September 30, 2004, approximately $404,000, or 41%, and $196,000, or 50%, respectively, or our commissions and fees were generated from policies underwritten by HuaAn Assets Insurance Co. Ltd. If our relationship with HuaAn Assets Insurance Co. Ltd. were terminated, we believe that other insurance companies would be available to underwrite the business, although some additional expense and loss of market share would result. 21 BECAUSE OUR BUSINESS IS HIGHLY CONCENTRATED IN THE GUANGDONG PROVINCE, ADVERSE CONDITIONS OR REGULATORY CHANGES IN THIS PROVINCE COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. For the year ended December 31, 2003, our insurance operations derived $404,000, or 100% of its commissions and fees from the Guangdong Province. For the nine months ended September 30, 2004, our insurance operations derived $196,000, or 100% of its commissions and fees from the Guangdong Province. We believe that the regulatory environment for insurance agencies in Guangdong currently is no more restrictive than in other provinces of China. Because our business is concentrated in one province, we face greater exposure to unfavorable changes in regulatory conditions in Guangdong's insurance agencies than an insurance agency whose operations are more diversified through a greater number of provinces. In addition, the occurrence of adverse economic conditions, natural or other disasters, or other circumstances specific to or otherwise significantly impacting Guangdong Province could adversely affect our financial condition and results of operations. OUR GROWTH STRATEGY DEPENDS IN PART ON THE ACQUISITION OF INSURANCE AGENCIES, WHICH MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS IN THE FUTURE AND WHICH, IF CONSUMMATED, MAY NOT BE ADVANTAGEOUS TO US. Our growth strategy includes the acquisition of insurance agencies. Our ability to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, and expand into new markets, will require us to continue to implement and improve our operations, financial, and management information systems. Part of the time and expense related to newly acquired agencies includes the integration of an acquired agency's existing computer system into ours. Further, integrated, acquired entities may not achieve levels of revenue, profitability, or productivity comparable to our existing locations, or otherwise perform as expected. In addition, we compete for acquisition and expansion opportunities with entities that have substantially greater resources. Acquisitions also involve a number of special risks, such as: diversion of management's attention; difficulties in the integration of acquired operations and retention of personnel; entry into unfamiliar markets; unanticipated problems or legal liabilities; and tax and accounting issues, some or all of which could have a material adverse effect on the results of our operations and our financial condition. OUR CURRENT MARKET SHARE MAY DECREASE AS A RESULT OF INCREASED COMPETITION FROM INSURANCE COMPANIES AND THE FINANCIAL SERVICES INDUSTRY. The insurance agency business is highly competitive and we actively compete with numerous firms for clients and insurance carriers, many of which have relationships with insurance companies or have a significant presence in niche insurance markets that may give them an advantage over us. Because relationships between insurance agencies and insurance carriers or clients are often local or regional in nature, this potential competitive disadvantage is particularly pronounced outside of the Guangdong Province. In addition, a number of insurance companies are engaged in the direct sale of insurance, primarily to individuals, and do not pay commissions to agents and brokers. In addition, because of legislation permitting banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation, and we therefore may experience increased competition from insurance companies and the financial services industry, as a growing number of larger financial institutions increasingly, and aggressively, offer a wider variety of financial services, including insurance, than we currently offer. 22 WE COMPETE IN A HIGHLY REGULATED INDUSTRY, WHICH MAY RESULT IN INCREASED EXPENSES OR RESTRICTIONS ON OUR OPERATIONS. We conduct business and are subject to comprehensive regulation and supervision by government agencies in Guangdong Province and in Beijing, China. The primary purpose of such regulation and supervision is to provide safeguards for policyholders rather than to protect the interests of stockholders. The laws and regulations we are subject to deal with, among other things, licensing to transact business, licensing of agents, admittance of assets, regulating premium rates, approving policy forms, regulating unfair trade and claims practices, establishing reserve requirements and solvency standards, and restricting payment of dividends. WE HAVE NOT DETERMINED THE AMOUNT OF RESOURCES AND THE TIME THAT WILL BE NECESSARY TO ADEQUATELY RESPOND TO RAPID TECHNOLOGICAL CHANGE IN OUR INDUSTRY, WHICH MAY ADVERSELY AFFECT OUR BUSINESS AND OPERATING RESULTS. Frequent technological changes, new products and services and evolving industry standards are all influencing the insurance business the Internet, for example, is increasingly used to transmit benefits and related information to clients and to facilitate business-to-business information exchange and transactions. We believe that the development and implementation of new technologies will require additional investment of our capital resources in the future. We have not determined, however, the amount of resources and the time that this development and implementation may require, which may result in short-term, unexpected interruptions to our business, or may result in a competitive disadvantage in price and/or efficiency, as we endeavor to develop or implement new technologies. QUARTERLY AND ANNUAL VARIATIONS IN OUR COMMISSIONS THAT RESULT FROM THE TIMING OF POLICY RENEWALS AND THE NET EFFECT OF NEW AND LOST BUSINESS PRODUCTION MAY HAVE UNEXPECTED EFFECTS ON OUR RESULTS OF OPERATIONS. Our commission income (including contingent commissions but excluding fees), which typically accounts for approximately 8% of our total annual revenues, can vary quarterly or annually due to the timing of policy renewals and the net effect of new and lost business production. The factors that cause these variations are not within our control. Specifically, consumer demand for insurance products can influence the timing of renewals, new business and lost business, which includes generally policies that are not renewed, and cancellations. In addition, as discussed, we rely on insurance companies for the payment of certain commissions. Because these payments are processed internally by these insurance companies, we may not receive a payment that is otherwise expected from a particular insurance company in one of our quarters or years until after the end of that period, which can adversely affect our ability to budget for significant future expenditures. Quarterly and annual fluctuations in revenues based on increases and decreases associated with the timing of policy renewals have had an adverse effect on our financial condition in the past, and we may experience such effects in the future. The Business Model for our business value-added services in unproven in China. There can be no assurances that our endeavors will be successful. Our business value-added services focus on interactive marketing and incentive programs for merchants, financial institutions, telecom operators, and large corporations with significant client bases. However, while such programs are well established in some developed countries, these business models are still unproven in China. These services heavily rely on the supports of large corporations in China, and such support may be difficult to sustain since large corporations would prefer to invest in those ideas that are proven to have minimum risks. 23 WE ARE SUBJECT TO THE FOREIGN INVESTMENT CLIMATE AND INTERNATIONAL TRADE OPERATIONS IN CHINA. The majority of productive assets in China are owned by the Chinese government. The Chinese government has recently attempted economic reforms to decentralize some industries and encourage private economic development. Our business plan seeks to capitalize on these reforms. If the reforms are inconsistent or ineffectual, the Chinese government may discontinue or alter the policies. If that happened, we expect the impact would be negative for our operations and could result in a total investment loss in our common stock. WE ARE SUBJECT TO THE UNCERTAINTIES OF THE CHINESE LEGAL SYSTEM. Our business plan depends on fostering business relationships pertaining to the People's Republic of China. Our business clubs and some of our other activities operate from facilities located in China. Accordingly, we must conform to the governmental regulations and rules of China. The Chinese legal infrastructure is distinctly different in operation from its United States counterpart. The PRC legal system is a system based on written statutes and their interpretation by the Supreme People's Court. Prior court decisions may be cited for reference but have limited preferential value. Since 1979, the PRC government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. These laws and regulations are relatively new, and because of the limited volume of published cases and their non-binding nature, interpretation and enforcement of these laws and regulations involve uncertainties. In addition, as the PRC legal system develops, changes in such laws and regulations may develop. We cannot assure you that the legal climate in China will remain stable, predictable or favorable to our operations. WE MAY SUFFER CURRENCY EXCHANGE LOSSES IF THE RENMINBI DEPRECIATES RELATIVE TO THE U.S. DOLLAR. Our reporting currency is the U.S. dollar. However, a substantial portion of our assets and revenues are denominated in the Chinese currency, Renminbi, commonly referred to as RMB. Our assets and revenues expressed in our U.S. dollar financial statements will decline in value if the Renminbi depreciates relative to the U.S. dollar. Any such depreciation could adversely affect the market price of our common stock. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations and we do not intend to engage in any such transactions. In addition, our currency exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert Renminbi into U.S. dollars. 24 WE MAY NOT BE ABLE TO FREELY CONVERT RENMINBI INTO FOREIGN CURRENCY. A portion of our revenues and operating expenses will be denominated in Renminbi while a portion of our capital expenditures are denominated in U.S. dollars. Under current Chinese regulations, the payment of dividends, trade and service-related foreign transactions to a foreign investor of a foreign-invested enterprise is treated as a "current account" payment for which the approval of the State Administration of Foreign Exchange is not required. However, in order to distribute dividends we may be required to file documentation to a designated foreign exchange bank. The Bank must certify that all requirements have been met, such as payment of taxes, directors' approval and a capital verification report issued by an accounting firm. If a foreign-invested enterprise dissolves, a return of capital, which includes foreign direct investment, is treated as a "capital account" payment. This typically requires approval of the State Administration of Foreign Exchanges' in addition to the filing of documentation. China World Trade may currently convert Renminbi for transactions under the "current account" without the approval of the State Administration of Foreign Exchange for settlement of "current account" transactions, including payment of dividends, by providing commercial documents evidencing these transactions. They may also retain foreign exchange in their current accounts (subject to a ceiling approved by the State Administration of Foreign Exchange) to satisfy foreign exchange liabilities or to pay dividends. However, the relevant Chinese governmental authorities may limit or eliminate the ability to purchase and retain foreign currencies in the future. Such change of policy would materially and adversely affect our business, financial condition and results of operations. OUR SHAREHOLDERS MAY NOT BE ABLE TO ENFORCE U.S. CIVIL LIABILITIES CLAIMS ARISING UNDER THE SECURITIES LAWS OF THE UNITED STATES OR ANY STATE THEREOF. Our operations and assets are largely outside the United States and are held through wholly-owned subsidiaries incorporated under the laws of China and Hong Kong. Many of our directors and officers are nationals and/or residents of China. All or a substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons. In addition, there is uncertainty as to whether the courts of the China would recognize or enforce judgments of United States courts obtained against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in these countries against us or such persons predicated upon the securities laws of the United States or any state thereof. YOU WILL HAVE LIMITED PARTICIPATION IN THE MANAGEMENT OR OPERATIONS OF THE COMPANY. Currently, our officers and directors own approximately 44% of our common stock. The Chairman of our Board, Mr. Chi Hung Tsang currently owns 12,605,948 shares, which is approximately 42% of our outstanding shares. Mr. Chi Hung Tsang also holds warrants that permit the issuance of up to 4,500,000 additional shares upon exercise. As a result, he will have significant influence over all matters requiring approval by our stockholders without the approval of minority stockholders. In addition, he may be able to elect all of the members of our Board of Directors, which will allow him to significantly control our affairs and management. He will also be able to affect most corporate matters requiring stockholder approval by written consent, without the need for a duly noticed and duly-held meeting of stockholders. Accordingly, you will be limited in your ability to influence change in how we conduct our business. 25 THERE IS LIMITED LIABILITY OF OUR MANAGEMENT UNDER OUR ARTICLES OF INCORPORATION AND BY-LAWS AND THEY ARE HELD HARMLESS FOR CERTAIN ACTIONS UNDER STATE LAW. SUCH PROVISIONS SUBSTANTIALLY LIMIT OUR SHAREHOLDERS' ABILITY TO HOLD OFFICERS AND DIRECTORS LIABLE FOR BREACHES OF FIDUCIARY DUTY. China World Trade has adopted provisions to its Articles of Incorporation and Bylaws which limit the liability of its Officers and Directors, and provide for indemnification by China World Trade of its Officers and Directors to the full extent permitted by Nevada corporate law, which generally provides that its officers and directors shall have no personal liability to China World Trade or its stockholders for monetary damages for breaches of their fiduciary duties as directors, except for breaches of their duties of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, acts involving unlawful payment of dividends or unlawful stock purchases or redemptions, or any transaction from which a director derives an improper personal benefit. Such provisions substantially limit the shareholder's ability to hold officers and directors liable for breaches of fiduciary duty, and may require China World Trade to indemnify its officers and directors. This limits a shareholder's ability to hold officers and directors accountable in general, which renders their investment more risky. RISK RELATED TO THIS OFFERING ----------------------------- THERE IS CURRENTLY A LIMITED MARKET FOR OUR COMMON STOCK. There is currently a limited trading market for our shares of Common Stock, and there can be no assurance that a more substantial market will ever develop or be maintained. Any market price for shares of our Common Stock is likely to be very volatile, and numerous factors beyond our control may have a significant adverse effect. In addition, the stock markets for small market capitalization stocks generally have experienced, and continue to experience, extreme price and volume fluctuations which have affected the market price of many small companies and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions, may also adversely affect the market price of our Common Stock. Further, there is no correlation between the present limited market price of our Common Stock and our revenues, book value, assets or other established criteria of value. The present limited quotations of our Common Stock should not be considered indicative of the actual value of China World Trade or our Common Stock FUTURE SALES OF OUR COMMON STOCK COULD PUT DOWNWARD SELLING PRESSURE ON OUR SHARES, AND ADVERSELY AFFECT THE STOCK PRICE. THERE IS A RISK THAT THIS DOWNWARD PRESSURE MAY MAKE IT IMPOSSIBLE FOR AN INVESTOR TO SELL HIS SHARES AT ANY REASONABLE PRICE. Future sales of substantial amounts of our common stock in the public market, or the perception that such sales could occur, could put downward selling pressure on our shares, and adversely affect the market price of our common stock. Such sales could be made pursuant to a registered offering such as the SEDA, or Rule 144 under the Securities Act of 1933, as amended, as shares become eligible for sale under the Rule. 26 THE MARKET PRICE OF OUR SHARES OF COMMON STOCK MAY BE DEPRESSED BY THE OVERHANG OF CERTAIN OUTSTANDING WARRANTS ISSUED TO INSIDERS. In 2002, the Company issued warrants to Powertronic and Mr. Tsang. These warrants permit Powertronic to purchase up to four million shares and Mr. Tsang to purchase up to four million shares of common stock. The warrants may be exercised within two years of their issuance at an exercise price of US$0.575 per share and US$0.92 per share, respectively, which is considerably below the current market price of our common stock. On December 5, 2003, the Company entered into another warrant agreement with Mr. Tsang in exchange for Mr. Tsang's surrender of certain rents for space occupied by our company. This agreement permits Mr. Tsang to purchase up to six million additional shares at an exercise price, which starts at $0.75 per share. Exercise of all or part of the remaining 4,500,000 warrants to purchase shares of our common stock, which have "cashless exercise" provisions, could depress the market price for the shares WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK AND YOU MAY NEVER RECEIVE DIVIDENDS. THERE IS A RISK THAT AN INVESTOR IN OUR COMPANY WILL NEVER SEE A RETURN ON INVESTMENT AND THE STOCK MAY BECOME WORTHLESS. We have never paid dividends on our common stock. We intend to retain earnings, if any, to finance the development and expansion of our business. Future dividend policy will be at the discretion of the Board of Directors and will be contingent upon future earnings, if any, our financial condition, capital requirements, general business conditions and other factors. Future dividends may also be affected by covenants contained in loan or other financing documents, which may be executed by us in the future. Therefore, there can be no assurance that cash dividends of any kind will ever be paid. If you are counting on a return on your investment in the common stock, the shares are a risky investment. BECAUSE OUR COMMON STOCK IS CONSIDERED A PENNY STOCK, ANY INVESTMENT IN OUR COMMON STOCK IS CONSIDERED TO BE A HIGH-RISK INVESTMENT AND IS SUBJECT TO RESTRICTIONS ON MARKETABILITY. Our Shares are "penny stocks" within the definition of that term under the Securities Exchange Act of 1934, which are generally equity securities with a price of less than $5.00. Our shares will be subject to rules that impose sales practice and disclosure requirements on certain broker-dealers who engage in certain transactions involving a penny stock. Broker-dealers may be discouraged from effecting transactions in our shares because they are subject to the penny stock rules. These rules impose restrictions on the marketability of the common stock and may affect its market value. EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF SHARES UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT. The sale of shares pursuant to the SEDA will have a dilutive impact on our stockholders. For example, if the offering occurred on December 1, 2004, at an assumed offering price of $2.10 per share, the new stockholders would experience an immediate dilution in the net tangible book value of $1.35 per share. Dilution per share at prices of $1.50, $1.00, and $0.50 per share would be $0.75, $0.25 and $-0.25, respectively. As a result, our net income per share could decrease in future periods, and the market price of our common stock could decline. In addition, the lower our stock price, the more shares of common stock we will have to issue under the SEDA to draw down the full amount. If our stock price is lower, then our existing stockholders will experience greater dilution. 27 UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT CORNELL CAPITAL WILL PAY LESS THAN THE THEN-PREVAILING MARKET PRICE OF OUR COMMON STOCK. The common stock to be issued under the SEDA will be issued at a 1% discount to the lowest closing bid price for the five days immediately following the notice date of an advance. In addition, Cornell Capital will retain 4% from each advance. Based on this discount, Cornell Capital will have an incentive to sell immediately to realize the gain on the 1% discount. These discounted sales could cause the price of our common stock to decline, based on increased selling of our common stock. THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE. The selling stockholders intend to sell in the public market 16,981,717 shares of common stock being registered in this offering. That means that up to 16,981,717 shares may be sold pursuant to this registration statement. Such sales may cause our stock price to decline. The officers and directors of our company and those shareholders who are significant shareholders as defined by the Commission will continue to be subject to the provisions of various insider trading rules and Rule 144 regulations. THE SALE OF OUR STOCK UNDER OUR STANDBY EQUITY DISTRIBUTION AGREEMENT COULD ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF OUR STOCK PRICE. In many circumstances, the provisions of a SEDA for companies that are traded on the Over-The-Counter Bulletin Board have the potential to cause a significant downward pressure on the price of common stock. This is especially the case if the shares being placed into the market exceed the market's ability to take up the increased stock or if we have not performed in such a manner to show that the equity funds raised will be used to grow our company. Such an event could place further downward pressure on the price of common stock. Under the terms of our SEDA, We may request numerous drawdowns pursuant to the terms of the SEDA. Even if we use the SEDA to grow our revenues and profits or invest in assets that are materially beneficial to us, the opportunity exists for short sellers and others to contribute to the future decline of our company's stock price. If there are significant short sales of stock, the price decline that would result from this activity will cause the share price to decline more so which in turn may cause long holders of the stock to sell their shares thereby contributing to sales of stock in the market. If there is an imbalance on the sell side of the market for the stock, the price will decline. It is not possible to predict those circumstances whereby short sales could materialize or to what the share price could drop. In some companies that have been subjected to short sales the stock price has dropped to near zero. This could happen to our stock price. 28 THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING. The price in this offering will fluctuate based on the prevailing market price of the common stock on the Over-The-Counter Bulletin Board. Accordingly, the price you pay in this offering may be higher or lower than prices paid by other people participating in this offering. WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT WHEN NEEDED. We are dependent on external financing to fund our operations. Our financing needs are expected to be provided, for the most part, from the SEDA. No assurances can be given that such financing will be available in sufficient amounts or at all when needed, in part, because we are limited to a maximum draw down of $1.5 million (after the first draw down of $3.0 million) during any seven trading day period. In addition, the number of shares being registered may not be sufficient to draw all funds available to us under the SEDA. Based on the assumed offering price of $2.10 per share, and the 14,285,714 shares we are registering, we would not be able to draw the entire $30.0 million available under the SEDA. At this assumed price, we will be able to draw $27,300,000 with the 14,285,714 shares being registered. We would be required to register 1,285,714 additional shares at this assumed price to obtain the entire $30.0 million available under the SEDA. Based on the limited number of available authorized shares of common stock, in the event that the price of our common stock declines significantly, we would most likely need to obtain shareholder approval to increase the authorized shares of common stock to access additional amounts under the SEDA. WE MAY NOT BE ABLE TO DRAW DOWN UNDER THE STANDBY EQUITY DISTRIBUTION AGREEMENT IF CORNELL CAPITAL HOLDS MORE THAN 9.9% OF OUR COMMON STOCK. In the event that Cornell Capital holds more than 9.9% of the then-outstanding shares of our common stock, we will then be unable to draw down on the SEDA. Currently, Cornell Capital has beneficial ownership of 3.6% of our common stock according to our shareholders' list dated December 31, 2004, and therefore we would be able to draw down on the SEDA so long as Cornell Capital's beneficial ownership remains below 9.9%. If Cornell Capital's beneficial ownership increases to 9.9%, we would be unable to draw down on the SEDA. WE HAVE SUBMITTED AN APPLICATION TO LIST OUR COMMON STOCK ON THE AMERICAN STOCK EXCHANGE, INC. THERE CAN BE NO ASSURANCES THAT SUCH APPLICATION WILL BE ACCEPTED. We have submitted an application to list our common stock on the American Stock Exchange, Inc. (the "AMEX"). Our common stock is currently quoted on the Over-The-Counter Bulletin Board. A listing on the AMEX may assist our company to develop a broader and more liquid trading market for our common stock, and it may expose our company to a wider range of better-capitalized potential investors. Our application is currently under review, and immediate action is not expected. There can be no assurances that it will ever be accepted. 29 FORWARD LOOKING STATEMENTS Included in this report are various forward-looking statements, which can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate," "continue," "believe" or other similar words. We have made forward-looking statements with respect to the following, among others: our goals and strategies; our ability to earn sufficient revenues; our ability to continue as a going concern; and our future revenue performance and our future results of operations. These statements are forward-looking and reflect our current expectations. These forward-looking statements are subject to a number of risks and uncertainties, some of which are beyond our control. The factors described above and the risk factors referred to in "Risk Factors" could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements. Therefore, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the forward-looking statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all such factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. USE OF PROCEEDS This prospectus relates to shares of our common stock that may be offered and sold from time to time by certain selling stockholders. There will be no proceeds to us from the sale of shares of common stock in this offering, other than any proceeds that may result from the exercise by the Selling Stockholders of the Warrants. However, we will receive the proceeds from the sale of shares of common stock to Cornell Capital under the SEDA. The purchase price of the shares purchased under the SEDA will be equal to 99% of the lowest closing bid price of our common stock on the Over-the-Counter Bulletin Board for the five days immediately following the notice date. We will pay Cornell Capital 4% and Duncan Capital 4% of each advance as an additional fee. Pursuant to the SEDA, we cannot draw more than $1.5 million every seven trading days, except for the first draw which can be up to $3.0 million, or more than $30.0 million over twenty-four months. For illustrative purposes only, we have set forth below our intended use of proceeds for the range of net proceeds indicated below to be received under the SEDA. The table assumes estimated offering expenses of $85,000, plus 4% retainage payable to Cornell Capital under the SEDA and 4% retainage payable to Duncan Capital under the Placement Agent Agreement. The figures below are estimates only, and may be changed due to various factors, including the timing of the receipt of the proceeds. First Succeeding Advance Advances ----------- ------------ Gross Proceeds $ 3,000,000 $ 1,500,000 Net Proceeds $ 2,675,000 $ 1,295,000 No. of shares issued under the SEDA at an assumed price of $2.10 per share 1,428,581 714,286 USE OF PROCEEDS AMOUNT AMOUNT ----------- ------------ General Working Capital $ 2,675,000 $ 1,295,000 30 The SEDA limits our use of proceeds to general working capital and prohibits the use of proceeds to pay any judgment or liability incurred by any officer, director or employee of our company, except under certain limited circumstances. DILUTION The net tangible book value of our company as of September 30, 2004 was a surplus of $3,124,259 or $0.12 per share of common stock. Net tangible book value per share is determined by dividing the tangible book value of our company (total tangible assets less total liabilities) by the number of outstanding shares of our common stock. Since this offering is being made solely by the selling stockholders and none of the proceeds will be paid to our company, with the exception of the shares acquired upon the exercise of the Warrants, our net tangible book value will only be impacted in an insignificant way by this offering. Our net tangible book value and our net tangible book value per share, however, will be impacted by the common stock to be issued under the SEDA. The amount of dilution will depend on the offering price and the number of shares to be issued under the SEDA. The following example shows the dilution to new investors at an offering price of $2.10 per share, which is in the range of the recent share price. If we assume that we had issued 14,285,714 shares of common stock under the SEDA at an assumed offering price of $2.10 per share (i.e., the number of shares registered in this offering under the SEDA), less retention fees of $240,000 and offering expenses of $85,000, our net tangible book value as of September 30, 2004 would have been $30,099,259 or $0.75 per share. Note that at an offering price of $2.10 per share, we would receive net proceeds of $27,300,000, or $2,700,000 less than the entire amount available under the SEDA. At an assumed offering price of $2.10, Cornell Capital would receive a discount of $300,000 on the purchase of 14,285,714 shares of common stock. Such an offering would represent an immediate increase in the net tangible book value to existing stockholders of $0.63 per share and an immediate dilution to new stockholders of $1.35 per share. The following table illustrates the per share dilution: Assumed public offering price per share $ 2.10 Net tangible book value per share before this offering $ 0.12 Increase attributable to new investors $ 1.98 ------- Net tangible book value per share after this offering $ 0.75 Dilution per share to new stockholders $ 1.35 The offering price of our common stock is based on the then-existing market price. In order to give prospective investors an idea of the dilution per share that they may experience, we have prepared the following table showing the dilution per share at various assumed offering prices: ASSUMED NO. OF SHARES DILUTION PER SHARE OFFERING PRICE TO BE ISSUED TO NEW INVESTORS $2.10 14,285,714 (1) $ 1.35 $1.50 14,285,714 $ 0.75 $1.00 14,285,714 $ 0.25 $0.50 14,285,714 $-0.25 - ------------------------------------ (1) This represents the maximum number of shares of common stock that are being registered under the SEDA at this time. 31 STANDBY EQUITY DISTRIBUTION AGREEMENT Summary On November 15, 2004, we finalized a SEDA with Cornell Capital, pursuant to which we may, at our option, periodically sell to Cornell Capital shares of common stock for a total purchase price of up to $30.0 million. For each share of common stock purchased under the SEDA, Cornell Capital will pay 99% of, or a 1% discount to, the lowest closing bid price of our common stock on the Over-the-Counter Bulletin Board or other principal market on which our common stock is traded for the five days immediately following the notice date. The number of shares purchased by Cornell Capital for each advance is determined by dividing the amount of each advance by the purchase price for the shares of common stock. Further, Cornell Capital will retain 4% of each advance under the SEDA, and Duncan Capital will retain 4% of each advance under the Placement Agent Agreement. Cornell Capital is a private limited partnership whose business operations are conducted through its general partner, Yorkville Advisors, LLC. Duncan Capital, which is a registered broker-dealer, was engaged to advise us in connection the SEDA. For all of its services, we agreed to pay Cornell Capital the 1% discount, the 4% retainage, and 225,000 shares of our common stock, which shares are subject to a lock-up arrangement previously described that is intended to prevent their immediate sale at a low market price. For all of its services, we agreed to pay Duncan Capital the 4% retainage and 150,000 shares of our common stock, which is also subject to the same lock-up arrangement. The effectiveness of the sale of the shares under the SEDA is conditioned upon us registering the shares of common stock with the Securities and Exchange Commission and obtaining all necessary permits or qualifying for exemptions under applicable state law. The costs associated with this registration will be borne by us. There are no other significant closing conditions to draws under the SEDA. An Analysis Of The Standby Equity Distribution Agreement Pursuant to the SEDA, we may periodically sell shares of common stock to Cornell Capital to raise capital to fund our working capital needs. The periodic sale of shares is known as an advance. We may request an advance every seven trading days. A closing will be held six trading days after such written notice at which time we will deliver shares of common stock and Cornell Capital will pay the advance amount. The closing occurs subject to the terms of an escrow agreement between us, Cornell Capital and the Escrow Agent. There are no closing conditions imposed on us for any of the draws other than that we have filed our periodic and other reports with the Securities and Exchange Commission, delivered the stock for an advance, the trading of our common stock has not been suspended, and we have given written notice and associated correspondence to Cornell Capital. We are limited, however, on our ability to request advances under the SEDA based on the number of shares we have registered on this registration statement. For example, at an assumed offering price of $2.10, we would not be able to draw the entire gross proceeds of $30.0 million available under the SEDA with the 14,285,714 shares we are registering. We would be required to register 1,285,714 additional shares at this assumed price to obtain the entire $30.0 million available under the SEDA. Based on the limited number of available authorized shares of common stock, in the event of that the market price of our common stock declined significantly in the market, we may need to obtain shareholder approval to increase the authorized shares of common stock to access additional amounts under the SEDA. In order to access all funds available to us under the SEDA with the 14,285,714 shares being registered under the SEDA in this offering, the average price of shares issued under the SEDA would need to be $2.34. 32 We may request advances under the SEDA once the underlying shares are registered with the Securities and Exchange Commission. Thereafter, we may continue to request advances until Cornell Capital has advanced $30.0 million or 24 months after the effective date of this registration statement, whichever occurs first. The amount of each advance is subject to a maximum amount of $1.5 million, except for the first advance, which can be requested in an amount up to $3.0 million, and we may not submit an advance within seven trading days of a prior advance. The amount available under the SEDA is not dependent on the price or volume of our common stock. Our ability to request advances is conditioned upon us registering the shares of common stock with the SEC. In addition, we may not request advances if the shares to be issued in connection with such advances would result in Cornell Capital owning more than 9.9% of our outstanding common stock. Cornell Capital's current beneficial ownership of our common stock is 3.6% and therefore we would be permitted to make draws on the SEDA so long as Cornell Capital's beneficial ownership of our common stock remains lower than 9.9%. We do not have any agreements with Cornell Capital regarding the distribution of such stock, although Cornell Capital has indicated that it intends to promptly sell any stock received under the SEDA. We cannot predict the actual number of shares of common stock that will be issued pursuant to the SEDA, in part, because the purchase price of the shares will fluctuate based on prevailing market conditions and we have not determined the total amount of advances we intend to draw. Nonetheless, we can estimate the number of shares of our common stock that will be issued using certain assumptions. Assuming we issued the number of shares of common stock being registered in the accompanying registration statement at a recent price of $2.10 per share, we would issue 14,285,714 shares of common stock to Cornell Capital for net proceeds of $27,300,000. These shares would represent 30% of our outstanding common stock upon issuance. We will need to register additional shares of common stock in order to fully utilize the $30.0 million available under the SEDA if the average price at which we sell shares under the SEDA is equal to $2.10 per share. There is an inverse relationship between our stock price and the number of shares to be issued under the SEDA. That is, as our stock price declines, we would be required to issue a greater number of shares under the SEDA for a given advance. This inverse relationship is demonstrated by the following table, which shows the number of shares to be issued under the SEDA at a recent price of $2.10 per share and 25%, 50% and 75% discounts to the recent price. Recent 25% 50% 75% ---------- ---------- ---------- ---------- Purchase Price: $2.10 $1.58 $1.05 $0.53 No. of Shares (1): 14,285,714 18,987,341 28,571,428 56,603,774 Total Outstanding (2): 45,175,711 49,877,338 59,461,425 87,493,771 Percent Outstanding (3): 31.6% 38.1% 50.5% 64.7% - ------------------------------------ (1) Represents the number of shares of common stock to be issued to Cornell Capital under the SEDA at the prices set forth in the table, assuming sufficient authorized shares are available. (2) Represents the total number of shares of common stock outstanding after the issuance of the shares to Cornell Capital under the SEDA, not including shares issued under the Warrants. (3) Represents the shares of common stock to be issued as a percentage of the total number of shares outstanding. 33 Proceeds used under the SEDA will be used in the manner set forth in the "Use of Proceeds" section of this prospectus. We cannot predict the total amount of proceeds to be raised in this transaction because we have not determined the total amount of the advances we intend to draw. Cornell Capital has the ability to permanently terminate its obligation to purchase shares of common stock from us under the SEDA if there shall occur any stop order or suspension of the effectiveness of this registration statement for an aggregate of fifty (50) trading days other than due to acts by Cornell Capital or if we fail materially to comply with certain terms of the SEDA, which remain uncured for thirty (30) days after notice from Cornell Capital. PLAN OF DISTRIBUTION The selling stockholders have advised that the sale or distribution of our common stock owned by the selling stockholders may be effected directly to purchasers by the selling stockholders as principals or through one or more underwriters, brokers, dealers or agents from time to time in one or more transactions (which may involve crosses or block transactions) (i) on the Over-the-Counter market or in any other market on which the price of our shares of common stock are quoted or (ii) in transactions otherwise than on the Over-the-Counter market or in any other market on which the price of our shares of common stock are quoted. Any of such transactions may be effected at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at varying prices determined at the time of sale or at negotiated or fixed prices, in each case as determined by the selling stockholders or by agreement between the selling stockholders and underwriters, broker, dealers or agents, or purchasers. If the selling stockholders effect such transactions by selling their shares of common stock to or through underwriters, brokers, dealers or agents, such underwriters, brokers, dealers or agents may receive compensation in the form of discounts, concessions or commissions from the selling stockholders or commissions from purchasers of common stock for whom they may act as agent (which discounts, concessions or commissions as to particular underwriters, brokers, dealers or agents may be in excess of those customary in the types of transactions involved). Cornell Capital is an "underwriter" within the meaning of the Securities Act of 1933, as amended, in connection with the sale of common stock under the SEDA. Cornell Capital will pay us 99% of, or a 1% discount to, the lowest closing bid price of our common stock on the Over-the-Counter Bulletin Board or other principal trading market on which our common stock is traded for the five days immediately following the advance date. In addition, Cornell Capital will retain 4% of the proceeds received by us under the SEDA, and received 225,000 shares of our common stock on November 30, 2004. The 1% discount, the 4% retainage and the 225,000 shares of common stock are underwriting discounts. In addition, we engaged Duncan Capital, an unaffiliated broker-dealer, to advise us in connection with the SEDA. Duncan Capital has entered into the Placement Agent Agreement with us, pursuant to which Duncan Capital has reviewed the terms of the SEDA and has advised us concerning these terms. Duncan Capital, to our knowledge, will not be participating in the distribution of shares that may be issued under the SEDA. For its services in regard to the SEDA, Duncan Capital received 150,000 shares of our common stock and will retain an amount equal to 4% of each advance. Both Cornell Capital and Duncan Capital are subject to a lock-up arrangement with us, which generally prevents the immediate sale of their 225,000 and 150,000 shares, respectively, for a certain period of time at a low market price. Cornell Capital was formed in February 2000 as a Delaware limited partnership. Cornell Capital is a domestic hedge fund in the business of investing in and financing public companies. Cornell Capital does not intend to make a market in our stock or to otherwise engage in stabilizing or other transactions intended to help support the stock price. Prospective investors should take these factors into consideration before purchasing our common stock. 34 Under the securities laws of certain states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. The selling stockholders are advised to ensure that any underwriters, brokers, dealers or agents effecting transactions on behalf of the selling stockholders are registered to sell securities in all fifty states. In addition, in certain states the shares of common stock may not be sold unless the shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. We will pay the entire expenses incident to this registration, offering and sale of the shares of common stock to the public hereunder other than commissions, fees and discounts of underwriters, broker, dealers and agents. If any of these other expenses exists, we expect the selling stockholders to pay these expenses. We have agreed to indemnify Cornell Capital and its controlling persons against certain liabilities, including liabilities under the Securities Act. We estimate the expenses of the offering to be borne by us will be approximately $85,000. For its services, Duncan Capital received 150,000 shares of our common stock on December 6, 2004, and will retain an amount equal to 4% of each advance. The offering expenses consist of: an SEC registration fee of $4,518.33, legal fees of $50,000, state Blue Sky fees of $7,500 and miscellaneous expenses of $1,000. We will not receive any proceeds from the sale of any of the shares of common stock under the SEDA. The selling stockholders should be aware that the anti-manipulation provisions of Regulation M under the Exchange Act will apply to purchases and sales of shares of common stock by the selling stockholders, and that there are restrictions on market-making activities by persons engaged in the distribution of the shares. Under Regulation M, the selling stockholders or their agents may not bid for, purchase, or attempt to induce any person to bid for or purchase, shares of our common stock while such selling stockholders are distributing shares covered by this prospectus. Accordingly, except as noted below, the selling stockholders are not permitted to cover short sales by purchasing shares while the distribution is taking place. Cornell Capital can cover any short positions only with shares received from us under the SEDA. The selling stockholders are advised that if a particular offer of common stock is to be made on terms constituting a material change from the information set forth above with respect to the Plan of Distribution, then, to the extent required, a post-effective amendment to the accompanying registration must be filed with the Securities and Exchange Commission. LEGAL PROCEEDINGS We are not aware of any pending or threatened legal proceedings, in which we are involved. In addition, we are not aware of any pending or threatened legal proceedings in which entities affiliated with our officers, directors or beneficial owners are involved. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS Directors and Executive Officers Our Bylaws provide that we shall have that number of directors determined by the majority vote of the board of directors. Currently we have five directors. Each director will serve until our next annual shareholder meeting. Directors are elected for one-year terms. Our Board of Directors elects our officers at the regular annual meeting of the Board of Directors following the annual meeting of shareholders. Vacancies may be filled by a majority vote of the remaining directors then in office. Our directors and executive officers are as follows: 35 NAME AGE POSITION - ---- --- -------- William Chi Hung Tsang 43 Chairman, Director and President Zeliang Chen 39 Vice Chairman and Director John H.W. Hui 46 Vice Chairman, Chief Executive Office and Director Chi Ming Chan 43 General Manager and Director Chao Ming Luo 54 Director Bernard K. Chan 40 Chief Financial Officer Ye Xin Long 59 Independent Director Hamid R. Seyedin 53 Independent Director Samuel Yung 46 Independent Director Chi Kin Ho 35 Independent Director Backgrounds of Directors Executive Directors Mr. William Chi Hung Tsang, aged 43, is the President and Chairman of the Board of Directors of China World Trade Corporation. Mr. Tsang has more than 15 years of experience in leatherwear manufacturing and property investment. Prior to joining the Company, he was an executive director with a listed company for over 10 years. He is a member of the Beijing Municipal Committee of the Chinese People's Political Consultative Conference; committee member of Chinese General Chamber of Commerce, Hong Kong; vice chairman of Hong Kong United Youth Association Limited; chief president of New Territories Commercial & Industrial General Association Ltd.; and vice chairman of both Hong Kong Chamber of Commerce in China - Guangdong and Guangzhou Federation of Industry & Commerce. He is also an honorary president of North-East Overseas Chinese Friendship Association U.S.A., and an honorable citizen of Guangzhou. Mr. Zeliang Chen, aged 39, is the Vice Chairman and Director of the Company. Mr. Chen graduated with honors from Renmin University of China with a Bachelor of Law. He is the founder of Guangdong Hua Hao Group of Companies and is a committee member of the Private Enterprise Council of Guangdong Province. Mr. Chen now is a Chief Executive Officer and Chairman of Guangdong New Generation Travel Service Co., Ltd., Director of Guangdong Huahao Industries Group of Companies, Director and Vice Chairman of China World Trade Corporation. Mr. John H.W. Hui, aged 46, is the Vice Chairman of the Board of Directors and Chief Executive Officer of the Company. Mr. Hui has over 10 years experience in China trade and investment. He is responsible for the overall corporate development of the Company. Mr. Hui is also the President of Beijing World Trade Center Club and Guangzhou World Trade Center Club. He has excellent relationships with the China partners and the principals of the World Trade Center Association in New York and other WTCs around the world. Mr. Hui is a current member of the Canada Business Council Beijing, and American Chamber of Commerce, Guangdong. 36 Mr. Chi Ming Chan, aged 43, is a Director and General Manager of the Company. Mr. Chan is responsible for the strategic planning, corporate development and project implementation of the Company. Before joining us, Mr. Chan was a Corporate Development Strategist for Renren Holding Ltd., a publicly listed company on the Hong Kong Stock Exchange. Mr. Chan founded Asian Information Resources (Holding) Ltd. in 1995, which eventually listed on the Hong Kong Stock Exchange in 1999. A specialist in Chinese law and China affairs, Mr. Chan is an expert in networking, Internet technology, database technology and management of technical resources. He developed an electronic database system for the Law-on-Line project of the University of Hong Kong and has provided technical consultancy to this project since 1991. He has also developed the Dongguan Network, which has become a successful model for other cities in China. He was appointed by the Asian Development Bank (ADB) as a consultant for the TA Project No. 2702 - Study on PRC Legal Information System and the Electronic Data Expert for the TA project No. 3000. Mr. Chan holds a Master of Law degree from Lancaster University, the United Kingdom, a Master of Philosophy degree in Physics and Bachelor Degree in Physics both from the Chinese University of Hong Kong. Mr. Chao Ming Luo, aged 54, is a Director of the Company. Mr. Luo has long-term collaborative relations with Hong Kong business circles and associations. He was employed at the Xinhua News Agency Hong Kong from 1983 to 1996; he then joined the Xinhua News Agency Hong Kong Branch Guangzhou Representative Office in 1996 before joining the Company. He is the Chief Council Member of Guangdong Overseas Friendship Association, and Council Member of Guangzhou Overseas Friendship Association. Mr. Luo worked as the Electric Design Technician in Guangzhou Design Institute and the Assistant of Electric Technology Specialty, Electric Engineering Department in Guangdong University of Technology. Independent Directors and Members of Audit Committee Mr. Ye Xin Long, aged 59, is an Independent Director of the Company. Mr. Ye has over 35 years of experience doing business in China and investing in Chinese enterprises. He has an excellent relationship with the Beijing Municipal Government and the Guangzhou Municipal Government. Mr. Hamid R. Seyedin, aged 53, is an Independent Director and a member of the audit committee of the Company. Mr. Seyedin is the CEO of First Washington Group and President of the American Chamber of Commerce in Guangdong. Under his leadership since 2003, the American Chamber of Commerce in Guangdong has grown by more than 83% in membership and 300% in revenues. In 1991, former U.S. President George Bush recognized him in writing for his involvement with the passage of the Fast Track Procedures for the North American Free Trade Agreement (NAFTA). Appointed by three governors of the State of Maryland to four terms of office, he served as the Chairman of Montgomery College and State Chairman of the Maryland Association of Community Colleges representing all seventeen colleges in the State. He served on the Board of Directors of the Kennedy Institute, by appointment of Cardinal James A. Hickey (then Archbishop of Washington). He was a recipient of an award in business from the U.S. Department of Commerce. He received recognition from the U.S. Senate Sergeant At Arms for his service to the U.S. Senate Deliberations. Finally, he served two terms on the Maryland Advisory Committee of the U.S. Civil Rights Commission. 37 Mr. Samuel Yung, aged 46, is an Independent Director and a member of the audit committee of China World Trade Corporation. Mr. Yung is a Senior District Director of American International Assurance Co. (Bermuda) Ltd., a member company of American International Group, Inc. He was the President of The Life Underwriters Association of Hong Kong in 1991, President of the General Agents and Managers Association of Hong Kong in 1996, and Advisory Board Chairman of the General Agents & Managers Association International between 1997 and 1999. Mr. Yung has also participated in numerous community services and served as council member for a number of government committees. In addition, he also serves as advisor to many educational associations. Mr. Yung is a Certified Financial PlannerCM, a Chartered Insurance Agency Manager, a Registered Financial Consultant, a Certified Manager of Financial Advisor, and a Chartered Financial Practitioner. Mr. Chi Kin Ho, aged 35, is an Independent Director and a member of the audit committee of the Company. Mr. Ho is a principal of CCP C.P.A. Limited of Hong Kong, an accounting firm focusing on providing statutory audit service. Mr. Ho is a U.S. Certified Public Accountant, a member of AICPA, and associate member of Hong Kong Accounting Association. He has over ten years of experience in both U.S. and China in the area of financial accounting, U.S. taxation and reporting, as well as management advisory. Mr. Ho earned his Bachelor of Business Administration Degree from Hawaii Pacific University. Officers Mr. Bernard K. Chan, aged 40, is the Chief Financial Officer of the Company. He oversees M&A and financial projects of China World Trade Corporation. Mr. Chan has over 15 years of experience in the areas of financial advisory, direct private investments and corporate finance. He was a Managing Partner of a local corporate finance firm concentrating on providing advisory of U.S. listing and capital raising. Prior to that, Mr. Chan was a member of senior management for several listed companies in Hong Kong and the largest private landowner in Hawaii, focusing on direct investments and assets management. He is also a Registered Investment Advisor. Mr. Chan earned his Master of Business Administration Degree in International Management and Investment Finance, Master of Science Degree in Applied Econometrics, and Bachelor of Business Administration Degree in Investment Finance, all from the University of Hawaii. There are no familial relationships between our officers and directors. Section 16(a) Beneficial Ownership Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of common stock and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by Commission regulations to furnish us with copies of all Section 16(a) reports they file. To the best of our knowledge (based solely upon a review of the Form 3, 4 and 5 filed), we believe that as of the end of this fiscal year, no officer, director or 10% beneficial shareholder failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934, as amended. 38 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the number of shares of common stock beneficially owned as of October 31, 2004 by (i) those persons or groups known to us who will beneficially own more than 5% of our common stock; (ii) each Director and director nominee; (iii) each executive officer whose compensation exceeded $100,000 in the fiscal year ended September 30, 2003 or calendar year ended December 31, 2002; and, (iv) all directors and executive officers as a group. The information is determined in accordance with Rule 13d-3 promulgated under the Exchange Act based upon information furnished by persons listed or contained in filings made by them with the Securities and Exchange Commission by information provided by such persons directly to us. Except as indicated below, the stockholders listed possess sole voting and investment power with respect to their shares. Percentage Name/Address(1) Number of Shares Ownership(1) --------------- ------------------ ------------ William Chi Hung Tsang (2) 12,605,948 40.81% Powertronic Holdings Limited 5,574,074 18.04% Grand Perfection Limited 2,040,619 6.61% Bernard Chan 104,752 ** Chi Ming Chan 53,272 ** Chao Ming Luo 26,636 ** John Hui 55,321 ** All Officers and Directors as a Group (6 persons) 14,886,548 48.19% ** Less than 1% (1) Based on 30,889,997 shares outstanding as of December 31, 2004 and not including 4,500,000 shares of common stock issuable on the exercise of outstanding warrants. (2) Assuming William Chi Hung Tsang does not exercise his right to purchase 4,500,000 shares of common stock pursuant to a warrant issued by the Company. DESCRIPTION OF SECURITIES The following statements constitute summaries of the material provisions of China World Trade Corporation's Certificate of Incorporation and Bylaws, as amended. Such summaries do not purport to be complete and are qualified in their entirety by reference to the full text of the Certificate of Incorporation and Bylaws, which are contained in the Exhibits to this registration statement. Our Articles of Incorporation authorize the issuance of up to 50,000,000 Common Shares, $.001 par value per common share and 10,000,000 shares of preferred stock, $0.001 par value per share. As of December 31, 2004, we have issued 30,889,997 shares of common stock. No preferred shares are issued and outstanding: 39 Common Stock - General Provisions. Each share of Common Stock is equal to every other share of Common Stock. Each share of Common Stock shall entitle the holder thereof to one vote upon all matters upon which stockholders have the right to vote. There are no preemptive rights. Our Common Shares have a par value of $.001 per share, and have the following rights. Liquidation Rights. In the event of any voluntary or involuntary liquidation, distribution or winding up of the Corporation, after distribution in full to the holders of shares of preferred stock, the Common Stock shareholders shall be entitled to receive all of the remaining assets of the Corporation legally available for distribution. The distribution to the stockholders will occur ratably in proportion to the number of shares of Common Stock held by them. Dividend Rights. Subject to the rights of any outstanding preferred stock, (if issued) the holders of shares of Common Stock shall be entitled to receive dividends declared by the Board of Directors. Dividends may be payable in cash, stock or otherwise. China World Trade Corporation has not paid dividends to date and it is not anticipated that any dividends will be paid in the foreseeable future. Our policy has been to retaining earning, if any, to finance our future growth. Accordingly, future dividends, if any, will depend upon, among other considerations, on our need for working capital and other financial conditions. Voting Rights. Holders of Common Shares of China World Trade Corporation are entitled to cast one vote for each share held at all shareholders meetings for all purposes. The holders of shares of Common Stock vote together as one class on all matters submitted to a vote of stockholders of the Corporation. Other Rights. Common Shares are not redeemable, have no conversion rights and carry no preemptive or other rights to subscribe to or purchase additional Common Shares in the event of a subsequent offering. Options, Rights or Warrants. The Corporation has and may continue to make offerings of options, rights or warrants to subscribe for shares of capital stock. Preferred Stock. The Preferred Stock may be issued from time to time in one or more series. The preferred stock shall have voting rights of 100 to 1 per share over the voting rights of common stock. The Board of Directors hereby may issue preferred shares in one or more classes or series and with respect to each such class or series to fix and determine the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. INTEREST OF EXPERTS AND COUNSEL Our Financial Statements for the period ended September 30, 2003, have been included in this prospectus in reliance upon Moores Rowland Mazars, independent Certified Public Accountants, as experts in accounting and auditing. The Law Offices of Harold H. Martin, P.A. has rendered an opinion on the validity of our common stock being registered. Mr. Martin is not an affiliate of China World Trade. 40 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES. China World Trade will indemnify to the fullest extent permitted by, and in the manner permissible under the laws of the State of Nevada, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, partner, officer, employee or agent of another Corporation, partnership, joint venture, trust or other enterprise. The indemnification covers expenses (including attorneys' fees), judgments, fines and amounts paid in settlement. It also covers costs. Advancements towards these expenses may be made by the Company. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities, other than the payment by us of expenses incurred or paid by our directors, officers or controlling persons in the successful defense of any action, suit or proceedings, is asserted by such director, officer, or controlling person in connection with any securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issues. DESCRIPTION OF BUSINESS Company History China World Trade Corporation, ("China World Trade" or the "Company) was incorporated in the State of Nevada on January 29, 1998 under the name Txon International Development Corporation to conduct any lawful business, to exercise any lawful purpose and power, and to engage in any lawful act or activity for which corporations may be organized under the General Corporation Laws of Nevada. On August 14, 2000, pursuant to a share exchange agreement dated August 10, 2000, by and among Main Edge International Limited, a British Virgin Islands corporation ("Main Edge"), Virtual Edge Limited, a British Virgin Islands corporation and a wholly-owned subsidiary of Main Edge ("Virtual Edge"), Richard Ford, Jeanie Hildebrand and Gary Lewis, the Company acquired from Main Edge all of the shares of Virtual Edge (the "Acquisition") in exchange for an aggregate of one million nine hundred sixty one thousand, one hundred and seventy five (1,961,175) shares of our common stock, which shares equaled 75.16% of the Company's issued and outstanding shares after giving effect to the Acquisition. On September 15, 2000, the Company changed its name from Txon International Development Corporation to China World Trade Corporation and effectuated an 8 for 1 forward stock split. As a result of the forward stock split, Main Edge held 15,689,400 shares of our common stock, which shares equal 75.16% of our issued and outstanding shares. In September 2002, the Company underwent a debt for equity capital restructuring whereby certain creditors of the Company converted an aggregate of $2,731,677 into an aggregate of 4,000,000 shares of common stock. 41 Powertronic Holdings Limited ("Powertronic"), a British Virgin Islands company, entered into a share purchase agreement dated September 3, 2002 (the "First Share Purchase Agreement") with the Company, to purchase 1,000,000 Share and warrants (the "First Warrants") to purchase up to 2,000,000 Shares, for the total purchase price of US$500,000.00. Additionally, Powertronic entered into a second share purchase agreement dated December 17, 2002 (the "Second Share Purchase Agreement") with the Company, to purchase an additional 1,000,000 Shares and warrants (the "Second Warrants") to purchase up to an additional 2,000,000 Shares, for the total purchase price of US$500,000.00. The First Warrants and the Second Warrants may be exercised within two year of their issue at an exercise price of US$0.575 per share. The Company entered into a share exchange agreement (the "Share Exchange Agreement") dated as of December 17, 2002, with Mr. William Chi Hung Tsang ("Mr. Tsang"), the sole beneficial owner of the share capital in General Business Network (Holdings) Ltd. ("GBN"), a Hong Kong company. Pursuant to the Share Exchange Agreement, the Company acquired from Mr. Tsang all of the issued and outstanding shares of GBN in exchange for four million (4,000,000) Shares and warrants (the "Tsang Warrants") to purchase an additional four million (4,000,000) Shares. As of the date of acquisition, GBN owned two rental properties located at 20/F, Goldlion Digital Network Center, Unit 01-10, 138 Tiyu Road East, Tianhe, Guangzhou, the PRC and Flat B, 12/F., Champion Center, 301-309 Nathan Road, Hong Kong, collectively valued in excess of US$ 4,000,000. The Tsang Warrants may be exercised within two year of their issue at an exercise price of US$0.92 per Share. On September 12, 2002, 1,000,000 shares and the first warrants were issued pursuant to the First Share Purchase Agreement. The Second Share Purchase Agreement and the Share Exchange Agreement were each completed on January 24, 2003 and on that date one million (1,000,000) Shares, and the Second Warrants were issued to Powertronic and four million (4,000,000) Shares and the Tsang Warrants were issued to Mr. Tsang. On May 7, 2004, the Company, through one of its wholly-owned subsidiaries, acquired 51% of the capital stock of CEO Clubs China Limited ("CEO Clubs China") for a total consideration in cash and shares of the common stock of China World Trade in the amount of US$480,000. CEO Clubs China is a Hong Kong corporation with authorized chapter to operate under the "CEO Clubs" trademarks in the Greater China Region, including the PRC, Hong Kong and Taiwan. Comprised of thirteen chapters in the U.S. and China, the CEO Club is a 25-year-old nonprofit, by-invitation-only membership association. Members must be CEOs of businesses that have above $2,000,000 in annual sales. Our average club member has $20,000,000 in annual sales. In December of 2002, the Club opened its first international chapter in China. On August 2, 2004, we consummated an acquisition of 51% of the capital stock of Guangdong New Generation Commercial Management Limited, a limited liability company organized and existing under the laws of the PRC ("New Generation"), for an aggregate consideration of US$10,232,000, payable approximately US$2,741,000 in cash and approximately US$7,487,000 in market value of common stock of China World Trade. New Generation is the pioneer and one of the market leaders in the travel agency business through operations of its ten subsidiaries in Southern China. It is a leader in ticketing sales for international and domestic flights as well as inbound business travel. It is also one of the leading consolidators of hotel rooms and airline tickets in China. New Generation has already acquired the necessary licenses to operate as a ticketing and travel agent in the PRC, a highly regulated business. In addition, New Generation is also a licensed insurance agent in China to provide, in particular, accidental and life insurances. While there can be no assurances of success, it is believed that New Generation will contribute a significant revenue base to our company. 42 Overview Our business plan involves the pursuit of three distinct lines of business. These include (i) the business clubs located in major cities of China, including Guangzhou, the PRC and Beijing, the PRC, with plans to open clubs in Shanghai and Shenzhen, the PRC, each club in association with the World Trade Center Association, by which we have positioned ourselves as a platform to facilitate trade between China and the world market, (ii) the business travel services, in which our latest acquisition, the New Generation Group of Companies, a majority indirectly owned subsidiary, will continue its market leadership as one of the leading consolidators of airline tickets and hotel accommodations in China, and as an agent for the provision of life and accident insurance in the Guangdong Province of China, and (iii) the business value-added services, in which we will concentrate on interactive marketing and incentive programs for merchants, financial institutions, telecom operators, and large corporations with significant client bases, as well as consultancy services. Our growth in the industries of trade, travel and finance, should enable us to provide value added services and target many cross marketing opportunities. No assurances can be given, however, that we will be successful in our endeavors. Our executive office is located at 3rd Floor, Goldlion Digital Network Center, 138 Tiyu Road East, Tianhe, Guangzhou, the PRC 510620. We currently operate the Guangzhou World Trade Center Club, which is located at 3rd Floor, Goldlion Digital Network Center, 138 Tiyu Road East, Tianhe, Guangzhou PRC, and the Beijing World Trade Center Club, which is located at 2nd Floor, Office Tower II, Landmark Towers Beijing, 8 North Dongsanhuan Road, Beijing, the PRC. We expect to open World Trade Center Clubs in Shanghai and Shenzhen in 2005. As part of our Business Clubs, we plan to create a Chinese/English internet portal to serve foreign and Chinese small to medium sized businesses. We are also, through our indirect acquisition of a majority of the capital stock of the New Generation Group of Companies, a leading business travel service provider in China. In addition, through another New Generation Company, we are a leading life and accident insurance agency in the Guangdong Province. Finally, through our business value-added services division, we provide business services in the areas of interactive marketing and incentive programs in China, and consultancy services. Our financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles. In this prospectus, unless otherwise specified, all dollar amounts are expressed in United States Dollars. History of Virtual Edge Virtual Edge was incorporated in the British Virgin Islands on February 18, 1999 as an investment holding company. On October 5, 1999, pursuant to a share exchange, Virtual Edge acquired a majority interest in Infotech Enterprises Limited ("Infotech"). Infotech was incorporated on July 2, 1999 and is engaged in building a bilingual (Chinese and English) Business-to-Business internet portal. 43 On October 10, 1999, Virtual Edge signed an agreement with Belford Enterprises Limited ("Belford") pursuant to which Belford agreed to transfer its 75% interest in Beijing World Trade Center Club ("BWTCC") to Virtual Edge. BWTCC is engaged in the establishment of a club located in Beijing, the PRC, and provides recreation, business center services, communication and information services, products exhibitions services, commercial and trading brokerage services to its members. On October 18, 2000, pursuant to a Share Exchange Agreement with Vast Opportunity Limited, we acquired the remaining interest in Infotech. On November 10, 2001, Virtual Edge Limited signed an agreement with Guangzhou City International Exhibition Co., Ltd. pursuant to which a co-operative joint venture company, Guangzhou World Trade Center Club ("GWTCC") was formed to operate a business club in Guangzhou, the PRC to provide services including food and beverages, recreation, business center, communication and information, products exhibitions, as well as commercial and trading brokerage services to its members. Virtual Edge will share 75% of the profits from the operation of GWTCC. Located at Goldlion Digital Network Center in Guangzhou, GWTCC had its grand opening on January 28, 2002. Our Corporate Structure We do business in China, through seventeen, direct and indirect, majority and wholly-owned subsidiary companies. Seven of these companies are incorporated under the laws of the British Virgin Islands, five of these companies are incorporated under the laws of Hong Kong, and the remaining five are incorporated in the People's Republic of China. All of our business operations are located in China. Set forth below is an organizational chart depicting the relationships among our various companies.
China World Trade Corporation (USA) --------- 100% 100% 100% 100% 100% 100% ----------- ----------- --------- -------- ---------- -------- Virtual China Chance Creative Sino China World General Edge Enterprises Idea Platform Trade Business Limited Limited Group Limited Corporation Network (BVI) (BVI) Limited (BVI) (BVI) (holdings) (BVI) Limited (HK) - ------- ------- ----------- ----------- --------- -------- ---------- -------- -------- 100% 75% 100% 75% 51% 60% 100% 100% 100% - ------- ------- ----------- ----------- --------- -------- ---------- -------- -------- Topstar Beijing Infotech Guangzhou CEO Clubs WTC Link GBN Wealth General Polysend Intern- World Enterprises World Trade China Intern Management Business Trading ational Trade Limited Center Club Limited -ational Limited Network Limited Limited Center (BVI) Limited (HK) Limited (HK) (GZ) Co. (HK) (BVI) Club (PRC) (HK) Limited (PRC) (PRC) - ------- ------- ----------- ----------- --------- -------- ---------- -------- -------- 100% 51% -------- -------- Guangdong Guangdong WTC Link New Generation Information Commercial Service Management Limited Limited (PRC) (PRC) -------- --------
44 OUR BUSINESS PLAN IN EACH AREA OF OPERATIONS Business Plan For Our Business Clubs - ----------------------------------------- The Opportunity in China China has been considered one of the fastest growing economies in the world. Their accession into WTO will offer new opportunities for foreign companies to invest and do business in China. WTO membership for China will change the methods of market entry for overseas companies. Foreign companies will need to have well-tailored plans to cope with China's target audience, services, marketing, finance, and human resources for the effective entry into the China market. The unique business culture and legal system in China will cause the local business information and services in China to become a key component to commerce. As a whole, the consequential lower barriers to entry into the China market, and a more attractive investment environment, will provide small and medium sized foreign enterprises with investment opportunities for the first time. China's accession into the WTO also provides significant business opportunities to the small to medium size private companies in China. The increase in involvement from foreign companies and investors in the China market means more opportunities to do business with foreign companies. Under the trend of globalization, the Chinese market will evolve from many segmented and monopolized markets to an integrated national market that is open to the world economy. The small and medium sized companies in China will enjoy much lower cost to enter into the worldwide market but will also confront intensified competition, lowered profit margins, and new rules of the game. These Chinese companies will need up-to-date business intelligence, professional strategic planning and the access to the worldwide business network to ensure the success in the new environment. And with its imminent accession into WTO, there will be unique opportunities for foreign investment and international trade. The World Trade Centers Association ("WTCA") is a not-for-profit corporation that focuses on promoting and assisting world trade activities. Its mission is to encourage world trade by fostering and supporting the development and operation of World Trade Centers in every region of the world. WTCA was established in 1970 and has memberships from more than 330 cities in about 100 countries with global members of over 750,000 enterprises. The World Trade Centers ("WTC") supported by the WTCA provide businesses with access to a diverse array of state-of-the-art international trade services and facilities, which enables them to increase their international trade. In the WTCA, every local member of a WTC in a city is automatically a member of all WTCs worldwide. This helps the WTCs to market their local membership, and also vastly increases the amount of services that a WTC can offer to its local members. Therefore, the WTCs worldwide form a reciprocal business network for businesses to access the international trade resources that may be expensive and even inaccessible in a domestic environment. Our plan is to open and operate World Trade Center Clubs (the "Business Clubs"), which will be associated with the World Trade Center Association, in major cities in China, where Business Club members can relax, entertain, network and meet potential business partners in person, or via the Video Conferencing facilities of the WTCA worldwide network. 45 The facilities of the Business Clubs will likely include restaurants, a bar, a fitness center, saunas and spas, conference rooms, video conferencing facilities, smart offices and a library. The services to be offered by the Business Clubs may include the provision of trade agency and trade information, business services including smart offices, secretarial and translation services, conference room and video conferencing services. The Business Clubs may also operate a Business Consultation and Fulfillment and Logistics Counseling Service via a 24/7 call center manned by business professionals experienced in the China trade. Members of the Business Club will be entitled to WTCA membership and be entitled to the services and benefits of over 300 WTCs worldwide. Facilities of the Business Clubs Through our subsidiaries, Guangzhou World Trade Center Club and Beijing World Trade Center Club, we provide a full range of top quality commercial and recreational services to our members. The clubhouses are luxuriously decorated and provide an elegant environment under which members can enjoy our facilities that include: - Chinese and western fine dining, - Seminar and conference rooms, - Library, - Executive Suites, - Office and meeting room packages, - Videoconferencing facilities, - Exhibition rooms, and - Cigar and wine corner. In terms of business services, they offer their members: - Liaison work with potential trading partners, - International economic and trade exhibitions and seminars, - Interpreters and secretarial services, - Organized trips to participate in World Trade Center Association sponsored activities, - Reception of visiting delegations of foreign World Trade Center Association member units, - Arrange meetings with Chinese government bodies, business corporations, and - Legal consultancy and travel management services. Marketing Strategy We plan to market Business Club memberships mainly to international companies and businessmen doing business in China and local Chinese companies and businessmen seeking business opportunities within and outside China. We will utilize the good reputation and recognition of WTCA and the recreational and business facilities which will be offered at each Business Club to establish the Guangzhou Club, Beijing Club and other potential Business Clubs in various cities in the PRC as the premier business clubs of their kind. We also hope to make the ChinaWTC.com website into a distinctive Chinese/English language Internet portal. We will achieve our goals by placing advertisements with traditional media, such as newspapers, television, radio, magazines etc.; placing banners on high traffic web sites; sending e-mails to potential users; participating in trade shows; employing the services of external public relations and marketing firms; television "infomercials" and talk shows; outdoor advertising signs and attending / holding press conferences. 46 We will form strategic alliances with companies that can contribute services and local expertise in various market sectors. These alliances will increase our content and navigation services, support our advertising services and expand our distribution networks. We will form vertical alliances, such as exhibition management companies and travel agents, which will either allow us to integrate their products to our services offerings or to access their distribution networks. We will also form horizontal alliances, such as golf clubs and other business clubs, to increase our client base. An integral part of our success is dependent on the development and enhancement of our products and services. We will incorporate new technologies from third parties, expand products and services internally and conduct market research to remain aware and informed of the evolving user tastes and latest technologies. The New Generation acquisition has demonstrated the success of our strategies to grow the revenues of the Company through vertical consolidation. By acquiring New Generation, we have integrated the services offered by New Generation into the services offered by the Business Clubs. On the other hand, the acquisition of the CEO Clubs China is an example of our strategies to horizontally consolidate other business clubs so as to increase our client base. Sources of Income The Company will generate income from its Business Club activities in several ways. CWTC's goal is to be the operator of World Trade Centers in major Chinese cities. While the worldwide business network from WTCA together with the reciprocal services will be the core attraction to businesspersons in China, the business community maintained by CWTC covering major cities in China will be an even more valuable asset in the long term. Through its presence in major cities in China, CWTC will develop a community of active businesspersons from small and medium sized enterprises with a common interest in world trade. The Business Club is a core component of CWTC. The target market for the Business Club will be the owners and senior managements of the small and medium sized enterprises in China. The Business Club will provide to members a full range of top quality commercial and recreational services, education programs and the business networking programs, and Business Club facilities together with an elegant environment. The CWTC Business Club will also help members to liaise with potential trading partners from overseas, to join international economic and trade exhibitions and seminars, and to organize international business trips. As part of the reciprocal arrangement under the WTCA, the Business Club will also provide services to visiting delegations from foreign WTC members. The CWTC Business Club will help foreign companies or businesspersons to minimize the barrier of doing business in China. Services provided to foreign companies and businessperson may include organizing meetings with Chinese government bodies, business corporations and potential partners. The revenue of the Business Club business will come from membership fees, fees collected from training and events such as seminars. 47 At each Business Club will be a Business Center, which is operated for the benefit of the members and others. While the Business Center's services are not confined to member of the Business Club, members of the Club will enjoy special discounts for the Business Center services and more dedicated support from the staffs under the Business Club. The Business Center will provide: - Temporary offices - Seminar and Conference rooms - Video conferencing facility - Exhibition rooms - Interpreters and secretarial services - Business consultation services The revenue from a Business Center is derived from rental fees of facilities and services fees. Finally, the Company intends to negotiate and acquire the necessary approval from WTCA to license the China World Trade Center intellectual property rights including the logo and trademark to third parties. The licensees may use the logo and trademark of CWTC to quickly establish a brand for their products such as office accessories, or to attract a group of clients for certain services such as credit cards offered by the Business Value-Added division. Revenue will be generated from royalty fees, which may be paid in cash, stock or other property. Competition With respect to the Guangzhou Club, the Beijing Club and the other Business Clubs to be established in China, we believe that the Business Clubs are a unique facility, associated with a recognized and respected international organization, whose mission is the enhancement of international trade, and which offers prestigious business and recreational facilities to its member. There are other country clubs in China, such as the Beijing American Club, which offer more in terms of recreational facilities and services, however, none of them offer the business services, network of international companies and online trade information in combination with a first class club environment. Additionally, there are organizations, like the American Chamber of Commerce, which provide limited trade and business information and networking capabilities, but they do not offer a prestigious club setting, recreational facilities or the amount of business services that are available to Club members. Governmental Regulation of Our Business Club Operations in China The operation of our Business Clubs must conform to the governmental regulations and rules of the Peoples' Republic of China. The Chinese Legal System The practical effect of the People's Republic of China legal system on our business operations in China can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the General Corporation Laws of the several states. Similarly, the People's Republic of China accounting laws mandate accounting practices, which are not consistent with US Generally Accepted Accounting Principles. The China accounting laws require that an annual "statutory audit" be performed in accordance with People's Republic of China accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designate financial and tax authorities, at the risk of business license revocation. 48 Second, while the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Because the terms of the respective Articles of Association provide that all business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden applying Chinese substantive law, the Chinese minority partner in our joint venture companies will not assume a privileged position regarding such disputes. Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the "United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). "Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises. China's Accession into the WTO On November 11, 2001, China signed an agreement to become a member of the World Trade Organization sometimes referred to as the WTO, the international body that sets most trade rules, further integrating China into the global economy and significantly reducing the barriers to international commerce. China's membership in the WTO was effective on December 11, 2001. China has agreed upon its accession to the WTO to reduce tariffs and non-tariff barriers, remove investment restrictions, provide trading and distribution rights for foreign firms, and open various service sectors to foreign competition. China's accession to the WTO may favorably affect our business in that reduced market barriers and a more transparent investment environment will facilitate increased investment opportunities in China, while tariff rate reductions and other enhancements will enable us to develop better investment strategies and attract investment capital. In addition, the WTO's dispute settlement mechanism provides a credible and effective tool to enforce members' commercial rights. Also, with China's entry to the WTO, it is believed that the relevant laws on foreign investment in China will be amplified and will follow common practices. Business Plan For Our Air-Ticketing and Hotel Booking Businesses - ------------------------------------------------------------------------ China World Trade engages in the air-ticketing, hotel room booking and travel agency businesses through its indirect 51% ownership of Guangdong New Generation Commercial Management Ltd., a company organized and existing under the laws of the Peoples' Republic of China ("New Generation"). New Generation has ten operating subsidiaries in Southern China through which it operates these businesses. We believe that there are significant opportunities in the travel and tourism industry in China, which are set forth below, although there can be no assurances that we will be able to capitalize on them. 49 Summary Of New Generation's Business Travel Services We seek to serve China's emerging class of frequent independent travelers, or FITs, who engage in business and leisure travel. According to the China Statistical Yearbook 2003, China's domestic tourism spending totaled approximately RMB388 billion in 2002, and we believe FITs to be a fast-growing, yet relatively underserved segment of this market. Through our professional team of staff, our nationwide 24-hour toll-free call center, our user-friendly Chinese and English language website and our extensive reseller network, we provide our customers with consolidated travel information and the ability to book airline tickets at discounted rates nationwide within China. We also provide our customers with the ability to book hotel rooms at discounted rates in over 200 cities in China. The majority of our hotel suppliers are three-, four- or five-star hotels, as rated by the China National Tourism Bureau, catering to higher-end travelers. We also offer other travel related services, such as vacation packages and corporate travel services, at competitive prices. Since the inception of New Generation in 1998, it has built one of the largest air-ticketing distribution networks in China. New Generation offers our customers a wide selection of flights and hotel rooms in all major cities in China, usually at significant discounts to published rates. Our airline ticketing volume has increased from over 440,000 tickets for the six months ended June 30, 2004 to 710,000 tickets for the nine months ended September 30, 2004. This approximates US$43 million in value of transactions for the six months ended June 30, 2004. We issue and deliver air tickets using a network of local agents throughout major cities in China. New Generation started its hotel booking business in April 2004. Concurrently, the management mainly concentrates on establishing a nationwide network and improving the existing IT platform. Up to September 2004, the number of directly contracted hotels has reached 300, plus over 2,000 hotels in over 200 cities that can be accessed through sub-contracts with other hotel booking agents. In addition, we successfully entered a three-party agreement with China Southern Airlines (CZ), the largest airline group in China, and InterContinental Hotels Group, a leading global hospitality group. Under this agreement, we can provide customers with any of InterContinental's 38 hotels in China and any of CZ's tickets departing from Guangzhou (via e-ticketing) at special packing prices. For these reasons, although at present the hotel booking volume appears small, with only 904 room-nights for the six months ended September 30, 2004, we believe that this business will be increasing quickly and it will soon become a major revenue generator of New Generation in the very near future. New Generation has experienced significant growth since it began operations in 2002. For the nine months ended September 30, 2004, it generated revenues, including revenues generated from the insurance business, of RMB33.1 million (US$4.0 million), an increase of 100% over RMB116.8 million (US$2.0 million) generated in the nine months ended September 30, 2003. New Generation generated revenues of RMB24.0 million (US$2.9 million) for the year ended December 31, 2003, an increase of 52.9% from 2002. It recorded a net income of RMB14.6 million (US$1.8 million) for the nine-months ended September 30, 2004, and a net income of RMB0.4 million (US$0.05 million) for the nine months ended September 30, 2003, an increase of 3,520%. The Travel And Tourism Industry In China The facts and statistics used in this prospectus relating to the travel industry and economy in China are derived from various government and institute research publications. While we have taken reasonable care to ensure that these facts and statistics presented are accurately reproduced from such sources, we have not independently verified them. These facts and statistics may not be comparable to similar facts and statistics collected for the industry or economy in the United States and other countries. 50 In terms of domestic tourism spending in 2002, the approximately RMB388 billion (US $46.9 billion) travel industry in China is large and growing rapidly. We expect the industry to continue to experience rapid growth as China's economy continues to develop. Travel and tourism in China is characterized by a highly fragmented and inefficient travel service sector due to many factors, including the lack of consolidated hotel ownership, the lack of a centralized hotel reservation system, the localized nature of travel agencies and a dual regulatory regime. We believe that the fragmented nature of the travel market in China will create increasing demand for central reservation platforms such as our own capable of consolidating a wide range of travel information and negotiating favorable terms with travel suppliers on the basis of scale from our aggregated demand. According to the China National Tourism Administration, as of the end of 2002, China had more than 11,500 travel agencies, with the top 100 domestic travel agencies having an aggregate market share of less than 2%. As the requirements of travelers become more complex, we believe that these local agencies, which had been accustomed to providing services using state-owned travel suppliers, have been increasingly unable to respond to the changing needs of business and leisure travelers in China. In addition, the development of China's tourism infrastructure has resulted in an increasing number of travelers who choose to engage in leisure travel without the constraints inherent in packaged group tours. These frequent independent travelers, or FITs, represent a key segment of the growing travel industry in China that we seek to serve. The increasing accessibility of the Internet in China creates a foundation for new markets and opportunities, providing the ability to bring together a large number of segmented suppliers and customers in a highly fragmented travel industry. We believe that we are well positioned to benefit from these trends in China's travel industry. Historical Background Following the founding of the People's Republic of China, government agencies and state-owned enterprises dominated commercial activity in China up until the late 1970s when the Chinese government began to introduce market-based economic reforms. In the past, large state-owned travel agencies provided travel services to the consumers. The three largest travel agencies, the China Travel Service, or CTS, the China International Travel Service, or CITS, and the China Youth Travel Service, or CYTS, operated as loosely organized groups of individual local agencies that often had strong ties to local governments. The local offices of these organizations functioned individually with their own networks of customers and service suppliers. The choices available to travelers through these organizations were limited and the quality of services was inconsistent. For example, accommodation and transportation arrangements would be limited to hotels and airlines with which the local branch of the travel agencies had established relationships. While these state-owned agencies have made some efforts to integrate their widespread operations across the country, high levels of decentralization have persisted in the travel industry in China. The Growth of the Economy and Tourism Industry in China China's economy has grown rapidly in recent years with compound annual GDP growth of 8.9% in the period from 2000 through 2003. As China's economy has developed, the per capita annual incomes of urban and rural households have also increased. The following table sets forth certain statistical information regarding China's recent economic performance and per-capita annual income for the periods indicated. 51 YEAR 2000 2001 2002 2003 CAGR ------ ------ ------ ------ ------ GDP (RMB in billions) 8,947 9,731 10,479 11,669 8.9% Real GDP growth rate (%) 9.0 8.8 7.7 9.1 N/A Per capita GDP (RMB) 7,086 7,651 8,184 N/A 7.5% Per capita annual income of rural households (RMB) 3,146 3,307 3,449 N/A 4.7% Per capita annual income of urban households (RMB) 6,296 6,869 8,117 N/A 14.0% ______________ Sources: China Statistical Yearbooks 2001, 2002 and 2003. Expenditures on tourism have grown at an even faster pace than GDP. In conjunction with rising per capita income in China, government policies have also fostered the development of the leisure travel and market. In the past decade, the central government and various levels of local governments in China have actively sought to promote investment in tourism infrastructure in order to further develop tourism. According to the China Statistical Yearbook, investment in capital construction for the tourism sector rose from RMB2.5 billion in 1998 to RMB5.1 billion in 2002. Since 1998, a total of RMB16.4 billion has been invested in capital construction for travel and tourism. Various levels of government have also introduced a number of policy initiatives to encourage tourism, including the introduction in 1999 of weeklong holidays for Labor Day in May and National Day in October, paid vacation days and the relaxation of many outbound travel restrictions. By 2003, the number of official off-days, including weekends and holidays, had reached 114 days per year, helping to stimulate travel demand. Guangdong is among China's largest tourism provinces, with the number of inbound visitors, number of foreign visitors and international tourism receipts ranked number one in 2002 and 2003. In the first half of 2004, the provincial government announced a program concerning accelerating the growth of the tourism industry. It suggested that Guangdong should fully utilize its advantages in resources, markets, locations and facility to improve its international competitiveness and become the hub of inbound and outbound tourists and a significant tourism destination in the Asia Pacific Region in 2010. To achieve this goal, the government advocates glorifying the cultural endowment of the Ling Nan area, to develop the industry through attracting foreign and private investment, integrating tourism resources of Guangdong, Hong Kong and Macau, forging cooperation with neighboring provinces to establish the "Wide Pear River Delta" tourism network. Domestic travel volume has risen from approximately 280 million trips in 1990 to approximately 878 million trips in 2002, most of which was leisure oriented. In 2002 China posted 12.0% and 10.1% increases from 2001 in the number of domestic trips and in domestic tourism spending, respectively. International tourism grew as well, rising 11.0% in terms of international tourist arrivals and 14.6% in terms of international tourism revenues in 2002. China's growth in tourism was adversely affected in the first half of 2003 due to the effects of SARS, but growth in tourism has since recovered and is expected to be robust in 2004. The following table shows a summary of certain tourism statistics in China for the periods indicated. 52 YEAR 2000 2001 2002 2003* CAGR ------ ------ ------ ------ ------ Domestic tourism spending (RMB in billions) 317.6 352.2 387.8 344.2 10.5% Tourists (Overnight Visitors) (in millions) 31.2 33.2 36.8 33.0 8.6% International tourism receipts (US$ in billions) 16 17.8 20.4 17.4 12.1% * Resulting from the breakout of SARS in 2003 Sources: The Yearbooks of China Tourism Statistics 2001, 2002 and 2003 The expansion in economic activity and tourism in China has led to a rapid expansion in the hotel sector. According to the Yearbook of China Tourism Statistics, the number of star-rated hotels, as rated by China National Tourism Bureau, grew from 853 in 1992 to 8,880 in 2002, with the number of rooms growing from 167,195 in 1992 to 897,206 in 2002. The following table shows the growth in the number of hotels in China with star rating and associated occupancy rates as of the dates and for the periods indicated.
AS OF DECEMBER 31, 2000 2001 2002 2003* CAGR -------- -------- -------- -------- ------ Number of hotels with star rating 6,029 7,358 8,880 9,751 17.5% Three-to-five-star hotels 2,368 2,857 3,656 4,091 20.2% One- and two-star hotels 3,661 4,501 5,224 5,660 15.8% Total number of rooms 594,678 816,260 897,206 992,800 19.3% Total number of occupied room-nights (in millions) 125.0 174.2 197.1 N/A N/A Average occupancy rate (%) 57.6 58.5 60.2 56.14 N/A
Sources: The Yearbooks of China Tourism Statistics 2001, 2002 and 2003 Domestic air traffic in China has also been increasing rapidly. According to the China Statistical Yearbook, the number of civil flight routes connecting parts of China increased from 385 routes in 2000 to 1,015 routes in 2002. The following table shows recent traffic volume for China's airline industry and 53 at selected airports in China as well as some statistics for selected airports in the United States for the periods indicated for comparison purposes.
YEAR 2000 2001 2002 2003 CAGR -------- -------- -------- -------- ------ (IN MILLIONS OF PASSENGERS, EXCEPT FOR FLIGHT ROUTES) Total annual number of domestic air passengers 60.3 68.3 77.6 174.3 N/A Total number of domestic civil aviation flight routes 385 563 1,015 961 40.4% Annual airport traffic in Beijing (PEK) 21.7 24.2 27.2 24.3 4.4% Annual airport traffic in Shanghai Shanghai Pudong (PVG)(1) 5.5 6.9 11.0 15.1 37.3% Shanghai Hongqiao (SHA) 12.1 13.8 13.7 9.7 -5.3% Annual airport traffic in New York (JFK) 32.8 29.4 29.9 N/A N/A Annual airport traffic in Chicago (ORD)(2) 72.1 67.4 66.6 69.5 -1.1%
(1) The Shanghai Pudong International Airport opened on October 1, 1999. As a result, growth rates for passenger traffic at this airport may not represent an accurate basis of comparison. (2) The decline in airport traffic in the United States in 2001 and 2002 may reflect to a significant extent the effects of the terrorist attacks on September 11, 2001. Sources: National Bureau of Statistics of China website (www.stats.gov.cn/english/); China Statistical Yearbooks 2000 - 2003; the John F. Kennedy International Airport website (www.panynj.gov/aviation/jfkframe.h tm); the Chicago O'Hare International Airport website (www.ohare.com/ohare/home.asp). Changing Travel Patterns in China Leisure travel in China has in the past consisted principally of packaged group tours. Traditional travel agencies in China focus on packaged group tours. According to CYTS, one of the largest traditional travel agencies, approximately 90% of their customers traveled in tour groups in 2002. The typical tour group follows a set itinerary and is organized by a travel agency. The agency receives a fixed fee and negotiates discounted prices for hotel rooms and other travel related services either directly or through other intermediaries. Guided tour groups are generally useful to travelers who travel infrequently and who are unfamiliar with their destinations and who are looking for an economical way of travel. However, tour groups offer minimal flexibility in the choice of destinations, length of stay and timing of one's travel. According to market data from CEIC Data Company Ltd., the frequent independent traveler, or FIT, segment of travelers grew at an approximately 18% compound annual growth rate from 1999 to 2002 and is the largest growing group of travelers in China. FITs are defined as travelers who do not travel with tour groups and who require flexibility in the selection of accommodations and transportation. FITs are typically more sophisticated urban dwellers who value customized experiences. We expect that as Chinese travelers become wealthier and more experienced with leisure travel, the appeal of traditional tours will become less important than the ability to arrange one's own schedule. 54 In the past, business travelers, who usually traveled on government business, had little choice but to accept the arrangements made by their organizations or by local travel agencies hired by their organizations. Accommodation and transportation arrangements were generally in the form of state-owned guesthouses or airlines that were part of the travel agent's network. We believe that the increase in commercial activity has contributed to a growing number of people in China conducting business travel outside of government related business travel. Traditionally, most companies in China have relied on either local travel agencies or their internal resources for business travel planning. Companies in China have begun to recognize the importance of focusing on their core competency by outsourcing non-critical functions. A growing number of medium and large-sized companies are beginning to centralize their corporate travel management by outsourcing to professional travel service providers. Inefficiencies and Fragmentation in the Travel Market in China The travel market in China is highly fragmented with an underdeveloped booking, reservation and fulfillment infrastructure, and with no dominant nationwide travel agencies. As a result of market reforms, a gradual shift from state-owned to privately-owned travel agencies and changing travel patterns, the travel market in China is undergoing a period of change. While competition among the older state-owned travel agencies and the privately owned travel agencies has significantly promoted the development of China's travel service, the industry remains inefficient and is likely to remain so in the foreseeable future. Inefficiencies in the air-ticketing system. Currently, TravelSky Technology Limited, or TravelSky, operates the only nationwide system for air-ticket reservations in China. Consumers in China do not have access to direct bookings on TravelSky unless it is done through individual travel agencies. Moreover, the delivery of air tickets remains inefficient. The majority of consumers in China receive their air tickets through physical delivery and payment to the travel agency is made upon delivery. The process of physical delivery means that consumers in China do not have a reliable or timely delivery process that can respond to last minute travel needs. For example, business travelers who change their flight destinations at the last minute often have to wait for the delivery of a physical ticket before they can initiate their travel. While some airlines in China have recently begun to offer electronic ticketing, there is currently no universal electronic ticketing system available. However, the International Air Transport Association (IATA) recently announced that all members should adopt electronic tickets in 2007. As the employment of e-ticketing requires more capital investment on IT and relevant facilities, as well as more investment on staff training, smaller players will most likely be shaken out of the market during the process. On the other hand, this trend implies that business opportunities for larger agencies with relatively mature business models and operating at a large scale, such as New Generation, would survive. Inefficiencies in the hotel reservation system. According to the Year Book of China Tourism Statistics 2003, as of December 31, 2002, China had 3,656 three-, four- or five-star hotels. Hotels in China are generally run independently and are not part of large chains. The largest hotel chains in China are small relative to the larger hotel chains in the United States. There is no industry wide electronic reservation infrastructure similar to that available in the United States and parts of Europe. 55 There is no national distribution system for hotel rooms in China. Travel agents generally have to negotiate room availability and rates with the hotel each time they make a booking. Hotel suppliers in China are not able to benefit from an efficient distribution system that is managed by a centralized process. Until recently, travelers in China did not have access to comprehensive hotel information or a central location for bookings. Instead, travelers in China are still mainly interacting through walk-in room reservations, direct call-in reservations, business conventions and traditional travel agency bookings. There are some business operators, such as CTRIP and E-Long, developing centralized hotel booking platforms in China by utilizing scalable information technology platforms. Given the huge and ever growing market in China, we believe that there will be several key hotel reservation services providers in China in the long run. With our competitive advantage in the flight ticketing business, New Generation intends to package the flight ticket and hotel rooms into new products in order to segment the market. We believe that we will be one of the key players in hotel room reservation services nationally. Inefficiencies in traditional travel agencies. Travel agencies in China tend to be unaffiliated, small office operations. Even the four travel agencies that operate on a nationwide basis are mostly structured such that each office operates independently from the others. Consumers in China have generally not been able to enjoy the benefits that can be offered by a nationwide, integrated travel agency. Inefficiencies created by separate regulatory regimes. Under current regulations, two distinct regulatory bodies regulate the travel industry in China. In order to sell air tickets, travel agencies must obtain a permit from the Civil Aviation Administration of China. If a travel agency intends to conduct the air-ticketing business in more than one city, an air-ticketing permit is required for every city, as there is currently no national air-ticketing license. In addition, in order to conduct other travel-related business such as hotel reservations, the travel agency must obtain a separate license from the China National Tourism Administration. Consumers who wish to purchase both air tickets and make hotel reservations through a single agency must use a travel agency that performs both functions. Many traditional travel agencies are unable to perform both functions given the limited number of licenses that can be issued and the costs associated with obtaining each license. As a result, consumers are often forced to arrange travel plans with multiple travel agencies. The Opportunity for the New Generation Group We expect the travel and tourism industry in China to continue to grow rapidly as China's economy continues to expand. China's travel service industry is fragmented and inefficient. This fragmentation creates a market opportunity for our centralized reservation system for air-ticketing and hotel reservations, which offers comprehensive information and favorable terms negotiated with travel service suppliers across China who are offered economies of scale from our aggregated demand. Our Strengths We have quickly become one of the leading travel service providers in China by capitalizing on our following competitive strengths: 56 Established large scale ticketing business. One distinctive strength of New Generation is the established relationship with airlines and the existing large scale of transactions in the flight ticketing services. Many players in the industry provide the services for room reservations but not ticketing services. There are thousands of suppliers for room reservation services, while very limited number of airlines in China. A small company can easily establish contacts with hotels and be their agents since the capital required is small and the relationship with suppliers is easy to manage. However, to be a flight ticket agent requires much more capital and close relationships with airlines, which are normally very scarce and critical resources in this business. The large scale of New Generation's operations will be an entry barrier for new entrants in the region. Extensive resources in the airport. New Generation is the first travel agent in China who provides customers with seamless pre-boarding services in the terminal. In 1998, it established "Red Carpet Service Zone" in the old Guangzhou Baiyun International Airport, the third largest airport in China, to provide customers with extensive services ranging from air-ticketing, check-in services to airport pick-up. After that, Huahao Group, New Generation's former parent company, entered into a 10-year joint venture agreement with a subsidiary of Baiyun Airport Company Ltd. to provide easy boarding services. The joint venture was reported as the first example in China of cooperation between a private company and the highly regulated airport industry. Brand leadership. As one of the early movers in the industry to adopt modern communications and Internet technologies, we believe that we have established one of the best-known brands for travel services in China. We believe our customers associate the New Generation brand with value, convenience and innovation. Nationwide reach for nationwide travel destinations. Our customers can book domestic and international air tickets and make reservations for accommodation at over 2,300 hotels in more than 200 cities across China, vacation packages and rental cars by calling our centralized 24-hour call center from anywhere in China or by logging onto our website. New Generation is ranked one of the top air-ticketing companies in China, in terms of volume of tickets sold and value of transactions. We issue and deliver air tickets using a network of local agents in major cities in China, covering all the 961 domestic routes. Total customer focus. We provide our customers with comprehensive travel information, allowing them to conveniently compare prices, browse availability and amenity options, and select the price and supplier that best meet their individual travel needs. Our user-friendly websites, well trained call center representatives and continuous service development efforts reflect our focus on providing superior customer service. Strong supplier value. We offer our travel suppliers access to aggregated consumer demand and the ability to promote their services to a large and growing base of frequent independent travelers seeking higher-end travel services. In addition, our call center and web-based transaction and service platform, with its easy-to-use supplier interface, allows our suppliers to promote their services at low incremental cost and with minimal changes to their existing systems. In addition, New Generation has also established a strong business partnership with the leading Chinese airline groups, including China Southern Airlines and Air China. By the end of November 2004, New Generation had set up three direct air ticket sales centers under the name of the Guangzhou Branch of Air China, in selected strategic locations in Guangzhou. It also entered into a co-operation agreement with the Guangzhou branch of China Southern Airlines Company Limited to provide commuters with downtown check-in and connections services for flights of the China Southern Airline in the new Guangzhou Baiyun International Airport. The close business partnership not only allows New Generation to benefit from more favorable sales related promotional and marketing policies, but also, enables it to get involved in the air carriers' operational activities as a value-added services provider. 57 Streamlined business operations through tailored information management systems. We have drawn on our in-depth knowledge of the business practices unique to China's travel service industry to develop proprietary processes and technology-based systems for use in our business. These processes and systems incorporate customer relationship management, order processing, financial reporting and performance management and enable us to coordinate effectively the activities of our staff, agents, suppliers and resellers. This results in streamlined operations, a higher degree of operating flexibility and stronger customer relationships through enhanced customer service. Scalable and cost-efficient services. Our services and transaction processing, enabled by our centralized call-center and web-based distribution technologies, provides superior scalability and significant cost advantages over traditional methods of travel service distribution. We can expand our range of services and extend our geographical reach without making major changes to our existing infrastructure or incurring significant capital costs. Experienced management. We believe that our management team, which includes Mr. William Chi Hung Tsang, and a seasoned team of senior managers at the operations level with significant experience in the areas of travel service operations, marketing, technology and finance, is one of the strongest management teams in the travel service industry in China. Our Strategy Our goal is to become the leading provider of travel services in China. We seek to achieve revenue and earnings growth by pursuing the following key business strategies: Strengthen brand awareness and marketing. We seek to strengthen consumer awareness of our brand by pursuing an aggressive marketing strategy based on online and traditional media advertising. We seek to encourage consumer conversion and the use of our services through segment-based marketing, targeted promotions and focused telemarketing efforts. We also seek to promote the awareness of our brand and increase our penetration among our target customers by leveraging the customer bases of other leading businesses and customer service companies. : - increasing advertising using publications such as company brochures and DM magazines. - cooperating with commercial banks for them to offer co-branded credit cards; and - entering into arrangements with major airlines in China, such as China Southern Airlines, under which travel booking inquiries are directed from their service hotlines to us. Expand our range of travel services. We intend to capitalize on our leadership in air-ticketing utilizing a centralized modern call center and web-based distribution technologies and leverage the reach and efficiency of our distribution of services by growing our hotel reservations and other travel related services, such as vacation packages, car rentals and corporate travel services. We seek to expand the selection of our destination services, such as restaurant and entertainment bookings, and offer our customers greater flexibility in choosing the desired combination of travel services. 58 The agreement with InterContinental and China Southern Airlines has forged a strong business partnership among the three parties. It is anticipated an effective way to differentiate us from other competitors in the domestic market is through the provision for "air ticket and hotel" package. We believe that the extensive network resources based on air-ticketing, IT platform and strategic alliances with other product and service providers will be converted to our advantage that competitors will find difficult to imitate. Enhance customer experience. We seek to enhance our customer's experience by providing more personalized care, and by strengthening and expanding travel supplier relationships to offer our customers a wider range of travel services. We seek to deliver consistently high-quality customer service through continuous improvements in the information technology systems utilized in our call center, and in the content, features and functions of our websites. We seek to retain our most loyal customers and generate repeat ticketing by offering loyalty rewards and additional specialized services, including dedicated VIP lounges at airports and a VIP call service with reduced waiting time. Our VIP call service, staffed by a dedicated team of specially trained representatives, provides VIP customers personalized travel advice and services. A Customer Relationship Management (CRM) system will be deployed in the first quarter of 2005. This CRM system will integrate the call center, and websites together with other resources to offer comprehensive incentive programs and personalized services in a proactive style. Interactive information delivered through the mobile telephone network will also be employed. Enhance efficiency and profitability. We have built our operating infrastructure to take advantage of the inherent cost advantages of our centralized call center and web-based distribution technologies. We also seek to increase the efficiency of our marketing programs by tracking the effectiveness of our expenditures on various marketing activities. We continue to capitalize on improvements in electronic commerce infrastructure, such as the introduction of electronic ticketing. By using exclusive online promotional offers, we believe we will be able to benefit from the increasing adoption of online commerce among consumers by attracting additional customers and migrating existing customers to our websites, thereby lowering our operating costs. Enhance our technology infrastructure. We design and maintain our systems with a view to enhancing consumer-friendliness and providing adaptive solutions for our airline and other travel service suppliers. We seek to streamline our transaction processes through ongoing technology upgrades to our transaction and services level. Selectively pursue complementary acquisitions. We seek to supplement the organic growth of our business by pursuing acquisitions which would enable us to expand our service offerings, our customer base and our distribution network. We seek to capitalize on the opportunities for consolidation in China's fragmented and inefficient travel service industry by selectively exploring opportunities to acquire other travel service businesses such as air-ticketing agencies, hotel-room consolidators, tour-package agencies and corporate travel providers. 59 Develop travel solutions for corporate clients. We will enhance our travel services by providing corporate travel solution services that cover more international corporations and large national corporations in the region. The corporate market is a fast growing market with high profit margin. With our comprehensive resources in ticketing, hotel reservations, business club facility and airport services, we are confident that we can be one of the leading services providers in the region. At the moment, we have over 30 corporate clients including large scale joint ventures such as Guangzhou Honda and Panasonic Wan Bao. Our Travel Services - Operating Revenues on a Pro-Forma Basis We offer our customers a wide selection of travel services. The following table sets forth the pro-forma amount of our revenues represented by each travel-related service for the periods indicated on a dollar and percentage basis:
CHINA WORLD TRADE CORPORATION GROUP - OPERATING REVENUE ON A PRO-FORMA BASIS JAN TO JAN TO JAN TO JAN TO JAN TO JAN TO JAN TO JAN TO SEP 2004 SEP 2004 DEC 2003 DEC 2003 DEC 2002 DEC 2002 DEC 2001 DEC 2001 USD % USD % USD % USD % ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- TRAVEL SERVICES Air-ticketing 3,274,853 90.19% 1,975,098 99.43% 1,652,756 100.00% - N/A Hotel reservations 1,500 0.04% 0.00% 0.00% - N/A Other travel related services 354,820 9.77% 11,300 0.57% 0.00% - N/A ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- 3,631,173 100.00% 1,986,398 100.00% 1,652,756 100.00% - N/A ========== ========== ========== ========== ========== ========== ========== ==========
Air-ticketing. We provide a 24-hour air-ticketing service through our toll-free call center and websites. We act as agents for all major airlines in China and international airlines that operate flights that originate from selected cities in China. We make flight reservations through TravelSky, which is the operator of the only nationwide system for air-ticket reservations in China, and currently issue and deliver air tickets using a network of local agents throughout major cities in China. Under current regulations, travel agents, including us, have no discretion to offer discounts on airline tickets. However, we have successfully negotiated escalating commissions with many airlines based on the number of air tickets we sell. Our air-ticketing process begins when a customer initiates an inquiry through our toll-free call center or our websites. The customer is informed of the available flights based on their schedule and desired air carrier and we then confirm a booking for a seat on the selected flight through our call center. Booking information is sent to one of our local agents in the city where the customer wants the ticket to be issued and delivered. We have relationships with a network of local ticketing agents throughout major cities in China. We use these local agents and other third party delivery companies to deliver the tickets to our customers and collect payments for the tickets. We then collect the airfare from the delivery company, pay the agent's commission and the cost of the tickets, and retain the balance ourselves. We currently do not pre-purchase air tickets for resale. 60 We believe that air-ticketing sales will continue their rapid pace of growth. In the nine months ended September 30, 2004, we sold approximately 710,000 air tickets, compared to approximately 440,000 air tickets sold in the six months ended June 30, 2004. We anticipate that the expected adoption of e-tickets in China will allow consumers to better use our call center and websites to book air tickets and will benefit our air-ticketing business by allowing us to reach a broader customer base without materially increasing our operating costs. Hotel reservations. We currently have room supplier relationships with more than 2,300 hotels in over 200 cities throughout China. We seek to offer a range of hotel options at a variety of prices, with the majority of our hotel suppliers being three-, four- or five-star hotels, catering to higher-end customers. For the nine months ended September 30, 2004, we derived 0.05% of our total revenues from our hotel bookings. We act primarily as an agent in our hotel-related transactions. When a customer makes an initial inquiry through either our call center or our websites, we match the customer's request with our allotment of rooms and make a reservation for the customer with the appropriate hotel supplier. The hotel supplier returns a confirmation that is passed along to the customer by phone, fax or email. When the customer checks into the hotel on the designated date, the hotel informs us of the customer's check in. The customer settles his hotel bill directly with the hotel, and we are entitled to a fraction of the room rate as a commission. Upon the completion of a customer's stay, we verify with the hotel the length of the stay and calculate our commissions, ranging from 10% to 20% of the hotel room rate, which the hotels pay us on a monthly basis. We pay no penalty to the hotel for "no shows" on confirmed bookings, although we are not paid any commission in respect of "no show" bookings. We do not currently pre-purchase hotel rooms until the customer has paid us, and consequently do not carry significant inventory risk. However, as we supplement our current agent business model with a merchant business model, we may suffer losses if we are unable to accurately predict the inventory we need. Depending on our agreement with the individual hotel supplier, we either receive a guaranteed allotment of hotel room-nights per month or operate on an "as-requested" basis. Our agreements with hotels typically contain some or all of the following provisions: - Room pricing. The hotel guarantees negotiated room rates that are lower than published rates. In addition, the customer is also able to enjoy promotional rates if such rates are in effect. - Room supply. The hotel must notify us of any shortages of hotel rooms so that we can make alternative accommodations for our customers. - Customer accommodation. The hotel must upgrade the customer to a higher level of accommodation if, due to the fault of the hotel, a customer's reserved room is not available upon check in. - Confirmation of the customer's stay. The hotel must inform us of the length of the customer's stay. We confirm a customer's length of stay by contacting the hotel to verify the customer's check-in and check-out dates and contact customers to crosscheck the information reported by the hotel. We continuously rate our hotel on the basis of the accuracy and timeliness of the reported information. - Extended stay. The hotel must immediately inform us if the customer extends their stay beyond the original booking. We then book the extended stay and calculate the additional commission. - Commission payments. The hotel pays us either a flat, pre-negotiated or an escalating commission based on the number of hotel room nights we book. 61 Our agreements with our hotel room suppliers are in writing for the most part. We enter into agreements with companies that own hotels. Due to the fragmented nature of the hotel industry in China where hotels are generally owned separately, we generally enter into agreements with hotel companies on an individual hotel basis. Since our hotel booking business is at the initial stage, the volume of room-nights is still too small to help obtain any guarantee on room allotments. New Generation believes that the market will increase quickly in the near future. To achieve rapid market growth to reach certain scale, New Generation has successfully entered into a business partnership agreement with InterContinental Hotels Group and China Southern Airlines. An agreement concerning the purchase of one of the largest hotel booking service providers in China is also under negotiation. If the purchase is successful, we believe that the hotel booking business will soon become a core business of the Company as a whole. Vacation packages. We offer third-party vacation packages that include air transportation, hotel accommodation and other travel related services to many popular destinations in China. A vacation package transaction begins in the same way as the majority of our other transactions, with the customer initiating an inquiry either through our toll-free call center or our websites. The customer selects the desired vacation package and places an order with us. After confirming both the hotel reservation and transportation arrangements with the appropriate travel supplier, we send our customer a confirmation and arrange for ticket delivery, if needed, through a local travel agency. The customer pays for the vacation upon delivery of the appropriate confirmation or air ticket, and we deduct our commission. In general, our customers only pay a penalty if they cancel their reservations at a late stage. We select vacation packages to serve the unique needs of FITs. Many of our vacation packages are designed as self-guided tours that permit FITs to travel to desired locations without adhering to the rigid schedules that are typical of tour group packages. Corporate travel service. We have recently begun to provide companies in China a corporate travel service providing travel planning, hotel reservations, air-ticketing and rental car bookings. By centralizing their travel management functions, our corporate clients can reduce their travel costs and the associated administrative burden. We also assist companies in planning, executing and streamlining their travel budgets. Marketing We market our services through a combination of direct marketing, online marketing, traditional media advertising and co-marketing with established brands. We seek to build our New Generation brand identity which consumers will associate with choice, convenience and value. Direct marketing. We conduct direct marketing activities principally at major airports and transportation hubs in China. Our promotional efforts at these locations include the distribution of complimentary membership cards. 62 Online marketing. These portals feature hyperlinks to our websites for air-ticket and hotel service recommendations to their web visitors. In some cases we operate on a co-branded basis, where we provide our services and our brand is featured on these portals. In other cases, we operate on a private label basis, where we deliver our services using the brand name of the originating website. In both cases, we pay commissions based on the bookings generated through our co-marketers. We feel that our online marketing effort is an important part of our marketing strategy and serves as a cost-effective marketing tool. In addition, our online presence serves as an additional channel to capture targeted customers through association with established Internet brands in China. We believe that the Internet will continue to experience growth in China, and our relationships with top Internet portals in China will position us well to exploit its potential. Traditional marketing. Our traditional media advertising efforts include newspaper and broadcast advertising. The focus of our media advertising efforts is to promote awareness of the New Generation brand among our potential customers. Co-marketing relationships. We seek to expand our market reach by entering into co-marketing agreements with companies that have a large customer base and strong brand recognition. We believe that we are able to reach more customers and capitalize on their brand recognition in promoting our services and in enhancing our credibility. We have developed co-marketing agreements with some of the largest companies in China with a view to establishing our brand. Distribution We are one of the leading online travel service providers in China. We distribute our travel services through the following principal channels: - our twenty-four hours per day, seven days per week, toll-free call center, - our popular Internet website, and - our extensive nationwide network of resellers. Call center. We operate a 24-hour call center staffed by more than 32 customer service representatives (CSRs). The number of CSRs will increase to 104 by the end of 2005 to meet the requirement of our business development. The call center is accessible nationwide on a toll free basis for fixed line telephone calls in China and by calling 4008-168-168 in China. Our call center typically handles more than 150 calls per day. Although, it currently contributes little to the total air-ticketing reservations and hotel bookings, we are fully confident that with our market expansion, 20% of our total transactions will be generated from on-line transactions. We believe that our call center constitutes a cost-efficient distribution channel because of the available pool of low-cost labor in China. We expect our call center will become our principal distribution channel going forward, due to China's large and growing mobile and fixed-line phone subscribers and consumer preference for the personalized service we are able to provide through our call center. Website. We offer our travel services through our user-friendly website www.4008168168.com. Our Chinese and English language websites allow us to expand our customer base and improve customer service with minimum transaction costs. Customers can browse travel service options, compare prices, book and confirm orders through our website. Our website is designed to provide customers with a quick, efficient and flexible service that facilitates comparison among our large number of travel suppliers. 63 Reseller network. We have developed an extensive nationwide network of over 60 non-exclusive resellers, consisting of smaller travel and air-ticketing agencies that utilize our call center and websites to distribute travel services. We pay our resellers a portion of our commission, subject to an escalating scale, based on the number of hotel reservations and air-ticket bookings they generate for us. Our air-ticketing network is generating revenues from resellers' monthly administration fees, ticketing system rentals and Physical Identity Devices maintenance fees. The volume of tickets sold and value of transactions are incorporated into our total volume and total transaction values that contribute to the scaling and improvement of our bargaining power with air carriers. Technology We believe that we have a leading technology team in the travel service industry in China. Our goal is to develop a high-performance, reliable, scalable and secure system in-house to support our business demands for new features and functionalities. We have built a sophisticated, proprietary back office system encompassing order processing, customer relationship management, inventory control, business intelligence and staff performance management functions that coordinates the activities of our internal departments, clients, agents and partners within a single cohesive platform. We have also invested in an advanced, in-bound call center for phone based bookings and a scalable network infrastructure system utilizing hardware and software from top-tier vendors. Our system connects us with our suppliers, clients and agents. Our infrastructure security system is designed to ensure that our users can only access and use our system according to their assigned authorization levels. Our system also includes VPN and encryption technologies to allow for secure Intranet access, as well as an intrusion detection system, which is designed to detect security breaches. Our infrastructure security system, however, may not be adequate at all times and we may experience occasional security breaches. As of September 30, 2004, we employed approximately 150 staff members to maintain and enhance our transaction and service infrastructure. Competition The travel service industry in China is extremely large, highly fragmented and intensely competitive. We compete with eLong, Inc., Ctrip.com International, Ltd, traditional travel agencies such as CTS, CITS and CYTS, and hotel suppliers that sell their room inventory directly to consumers. The major markets in which we currently compete include the relatively affluent coastal areas of China. As China's market continues to grow, we may face further competition from other new domestic hotel room consolidators or international players such as expedia.com or priceline.com that may seek to expand into China. We may also face increasing competition from hotels and airlines should they further expand into the direct selling market or engage in alliances with other travel service providers besides us. We compete on the basis of brand recognition, selection, price, ease of use, accessibility of information, breadth of services offered, convenience, and customer service and satisfaction. We cannot assure you that we will compete successfully with any of our current or future competitors. 64 Employees The following table sets forth the number of New Generation Group employees categorized by function as of the dates indicated. AS OF SEPTEMBER AS OF SEPTEMBER 31 30 ------------------------------------------ 2004 2003 2002 2001 ---- ---- ---- ---- Management and administration 25 28 34 48 Customer service 30 45 54 62 Sales and marketing 4 6 8 16 Supplier management 3 5 6 13 Technical services 3 4 5 8 ---- ---- ---- ---- Total 65 88 107 147 We participate in government-mandated multi-employer defined contribution plans under which certain pensions, medical and other welfare benefits are provided to employees. We make monthly payments to these plans based on the employee's compensation. We have not entered into any collective bargaining agreements. We consider our relations with our employees to be good. Facilities Our headquarters in Guangzhou Rihang Hotel are located in an adjoining property of approximately 1,740 square meters. Our call center is located in a leased space of approximately 600 square meters. We lease the premises for our call center under a two-year term lease, expiring in 2006. We also maintain branch and sales offices in major cities in Guangdong Province including Foshan, Shunde, Dongguan Zhongshan and Gaoming. We believe that adequate facilities are available to accommodate our future expansion plans. Legal Proceedings We are currently not involved in any material litigation, arbitration or administrative proceedings that could have a material adverse effect on our financial condition or results of operations. From time to time, we may be involved in disputes with individual employees. So far as we are aware, no material litigation, arbitration or administrative proceedings are pending. Regulation The travel industry in China is subject to substantial regulation by the Chinese government. This section sets forth a summary of certain significant Chinese regulations that affect our business and our industry. Scope of Regulation 65 Current PRC laws and regulations impose substantial restrictions on foreign ownership in air-ticketing, advertising and Internet businesses in China. Restrictions on Foreign Ownership Air-ticketing. The principal regulation governing foreign ownership in air-ticketing business in China is The Foreign Investment Industrial Guidance Catalogue (2002). Under this regulation, a foreign investor currently cannot own 100% of an air-ticketing agency in China. It is our understanding that while there is no regulation stipulating an upper limit of foreign ownership, the Chinese government will not permit substantial foreign ownership in an air-ticket agency. However, it is our understanding that beginning on December 11, 2004, foreign investors will be permitted to own 100% of an air-ticketing agency. Travel agency. The principal regulation governing foreign ownership in travel agencies in China is the Establishment of Foreign Controlled and Wholly Foreign Owned Travel Agencies Tentative Provisions (2003). Recently, foreign investors that - primarily engage in travel agency business; - have annual revenue from travel services exceeding US$40 million (in the case of foreign-controlled travel agencies) or US$500 million (in the case of wholly foreign owned travel agencies; - are members of travel industrial associations in their home countries or regions have been permitted to establish or own travel agencies in Beijing, Shanghai, Guangzhou, Shenzhen, Xian or other approved national tourism areas, upon the approval of the PRC government, subject to substantial restrictions on the scope of their business. For example, foreign invested travel agencies are prohibited from engaging in the business of overseas travel by PRC citizens or travel by persons from the other regions of the PRC to Hong Kong, Macau or Taiwan. In addition, other than its head office, foreign-invested travel agencies are not allowed to open branch offices. Advertising Agencies. The principal regulations governing foreign ownership in advertising agencies in China include. - The Foreign Investment Industrial Guidance Catalogue (2002); and - The Administrative Regulations Concerning Foreign Invested Advertising Enterprises (2004) Under these regulations, foreign investors can currently own up to 70% of the equity interest in an advertising agency in China. Beginning on December 10, 2005, foreign investors will be permitted to own 100% of an advertising agency. Internet content provision. The principal regulations governing foreign ownership in the Internet content provision business in China include: - The Administrative Rules for Foreign Investments in Telecommunications Enterprises (2001); and - The Foreign Investment Industrial Guidance Catalogue (2002) 66 Under these regulations, a foreign entity is prohibited from owning more than 50% of a Chinese entity that provides value-added telecommunications services, including Internet content provision. General Regulation of Businesses Air-ticketing. The air-ticketing business is subject to the supervision of the Civil Aviation Administration of China, or CAAC, and its regional branches. The principal regulation governing air-ticketing business in China is the Administration on Civil Aviation Transporting Marketing Agency Business Regulations (1993). Under this regulation, an air-ticketing agency must obtain a permit from CAAC or its regional branch in every city in which the agency proposes to conduct business. The two types of air-ticketing permits in China are permits for selling tickets for international flights and flights to Hong Kong, Macau and Taiwan and permits for selling tickets for domestic flights in China except flights to Hong Kong, Macau and Taiwan. Travel agency. The travel agency industry is subject to the supervision of the China National Tourism Administration and local tourism administrations. The principal regulations governing travel agencies in China include: - The Administration of Travel Agencies Regulations (1996), as amended, and - The Rules of Implementation of the Administration of Travel Agencies Regulations (2001) Under these regulations, a travel agency must obtain a license from the China National Tourism Administration in order to conduct cross-border travel business, and a license from the provincial-level tourism administration in order to conduct a domestic travel agency business. Advertising. The State Administration of Industry and Commerce is responsible for regulating advertising activities in China. The principal regulations governing advertising, including online advertising in China include: - The Advertising Law (1994); and - The Administration of Advertising Regulations (1987) Under these regulations, any entity conducting advertising activities must obtain an advertising permit from the local Administration of Industry and Commerce. Internet content provision service and online commerce. The provision of travel-related content on the websites is subject to Chinese laws and regulations relating to the telecommunications industry and the Internet, and regulated by various government authorities, including the Ministry of Information Industry and the State Administration of Industry and Commerce. The principal regulations governing the telecommunications industry and the Internet include: - The Telecommunications Regulations (2000) - The Administrative Measures for Telecommunications Business Operating Licenses (2001); and - The Internet Information Services Administrative Measures (2000) 67 Under these regulations, Internet content provision services are classified as value-added telecommunications businesses, and a commercial operator of such services must obtain an Internet content provision license from the appropriate telecommunications authority in order to carry out any commercial Internet content provision operations in China. With respect to online commerce, there are no specific Chinese laws at the national level governing or defining online commerce activities, and no government authority has been designated to regulate these activities. There are existing regulations governing retail business that require companies to obtain licenses in order to engage in the business. However, it is unclear whether these existing regulations will be applied to online commerce. Regulation of Foreign Currency Exchange and Dividend Distribution Foreign currency exchange. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended. Under these rules, the Renminbi is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loans or investments in securities outside China without the prior approval of the State Administration of Foreign Exchange of the People's Republic of China, or SAFE. Pursuant to the Foreign Currency Administration Rules, foreign-invested enterprises in China may purchase foreign exchange without the approval of SAFE for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange, subject to a cap approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. However, the relevant Chinese government authorities may limit or eliminate the ability of foreign-invested enterprises to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from SAFE. Dividend distribution. The principal regulations governing distribution of dividends by foreign-invested companies include: - The Sino-foreign Equity Joint Venture Law (1979), as amended; - The Regulations of Implementation of the Sino-foreign Equity Joint Venture Law (1983), as amended; - The Foreign Investment Enterprise Law (1986), as amended; and - The Regulations of Implementation of the Foreign Investment Enterprise Law (1990), as amended. Under these regulations, foreign-invested enterprises in China may pay dividends only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, wholly foreign owned enterprises in China are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless such reserve funds have reached 50% of their respective registered capital. These reserves are not distributable as cash dividends. In addition, our wholly-owned subsidiaries are required to allocate portions of their respective after-tax profits to their enterprise expansion funds and staff welfare and bonus funds at the discretion of their boards of directors. Our affiliated Chinese entities are required to allocate at least 5% of their respective after-tax profits to their respective statutory welfare funds. Allocations to these statutory reserves and funds can only be used for specific purposes and are not transferable to us in the forms of loans, advances, or cash dividends. 68 Business Plan For Our Life And Accident Insurance Agency Business - -------------------------------------------------------------------------- China World Trade is engaged in the accident and life insurance business through its indirect 51% ownership interest of Hauhao Insurance Agency Ltd., a limited liability company organized and existing under the laws of the Peoples' Republic of China ("Hauhao Insurance"). Hauhao Insurance was formed in 2002 and is engaged in the life and accident insurance agency business in the Guangdong Province of China. Hauhao Insurance places insurance for and services personal accounts throughout the Guangdong Province of China. The Company acts as an agent in soliciting, negotiating and effecting contracts of insurance through insurance companies located across China, and also acts as a broker in procuring contracts of insurance on behalf of insured's. Hauhao Insurance specializes in a popular market niche known as life and accident insurance. The Industry Insurance brokerage companies principally serve businesses, public institutions and individual clients, which we refer to as "insured's," by placing general and specialty insurance coverage on their behalf with insurance carriers, which we refer to as "insurers," and providing risk management consulting services. Through their knowledge of the insurance market and preferred relationships with insurers, insurance brokers are able to assist their clients by negotiating competitive rates and policy terms. Insurance brokers also serve as a distribution channel for insurers and perform much of the administrative and customer service functions insurers would have to otherwise perform were they to sell insurance coverage directly. Insurance brokers are typically compensated by commissions paid by insurers on the premium volume placed. These services, whether to individuals or institutions, are generally referred to as retail brokering. Our Business A substantial portion of the commission and fee business of Hauhao Insurance is derived from placing insurance for individuals. It services its clients through its network of four offices in the Guangdong Province. No material part of the company's business is dependent upon a single customer or on a few customers, the loss of any one or more of which would have a materially adverse effect on the Company. We placed insurance for a total of 7,273 customers in 2002 and 88,473 customers in 2003. Competition The Company believes it is one of the three largest insurance brokers in the Guangdong Province in terms of total revenues. The insurance brokerage and service business is highly competitive and there are many insurance brokerage and service organizations as well as individuals throughout the world who actively compete with the Company in every area of its business. Several competing firms are significantly larger and have many times the commission and/or fee revenues of Hauhao Insurance. There are firms in a particular locality which are as large as or larger than particular local office of our company which is located there. We believe that the primary factors determining its competitive position with other organizations in its industry are the overall cost and the quality of services rendered. 69 Hauhao Insurance is also in competition with certain insurance companies which write insurance directly for their customers. Certain government benefits relating to life, health, disability, and accident are also alternatives to private insurance and hence indirectly compete with our business. To date, such direct writing and government benefits have had, in the opinion of the management of Hauhao Insurance, relatively little effect on its business and operations, but we can make no prediction as to their effect in the future. Commissions And Fees The two major sources of operating revenues are commissions from brokerage and risk management operations and service fees from risk management operations. Information with respect to these two major sources as well as investment income and other revenue, including non-recurring gains, are as follows (in thousands): 12/31/2001 12/31/2002 12/31/2003 09/30/2004 USD USD USD USD Commission income 255,052 929,916 366,163 Fee income - - - Investment income & others 409 99 136 Non-recurring income - - - Note 1: The Company incorporated on January 15, 2002, so no data is available on the above column. The primary source of Hauhao's compensation for its brokerage services is commissions paid by insurance companies which are usually based on a percentage of the premium paid by the insured. Commission rates are dependent on a number of factors including the type of insurance, the particular insurance company and the capacity in which our company acts. In some cases we are compensated for brokerage or advisory services directly by a fee from a client, particularly when insurers do not pay commissions. We also receive contingent commissions which are generally based on the profit the insurance company makes on the overall volume of business placed by the company in a given period of time. Occasionally, we share commissions with other brokers who have participated with us in placing insurance or servicing insureds. Our Strengths - A leading distributor of insurance to the individual consumer. With the scale and size of our operations in the Guangdong Province, and our customer base, we believe that we are well positioned to serve as an effective distribution channel for life and accident insurance to individuals. - Strategic relationships with leading insurance companies. Under our agreements with the People's Insurance Company of China (PICC), Pingan Insurance Company of China and the China Pacific Insurance Company, which were executed in January 2002, we distribute life and accident products. We believe that these arrangements help to differentiate us from our competitors and provide opportunities to generate incremental revenues. 70 - Experienced and motivated management team. Our top executive officers have over 35 years of combined experience in the insurance brokerage and financial services industries and are supported by a group of highly motivated professionals throughout our operations. Our Chief Executive Officer of the New Generation Group, Zeliang Chen, has been with us since 2002. During his 10 years in the industry, he has gained substantial experience in insurance and financial services, the development of cross selling strategies, and operational integration. Due to his track record in the industry, he was appointed as the Representative Committee Member of China Insurance Brokerage Association in 2003, for a three-year term. - Cross-selling potential with the ticketing services. Our leading positions in the insurance brokerage industry and air-ticketing business are both secured on the basis of a large number of individual consumers. Given the similarities in their selling procedure, there lies a great potential for combined selling possibilities. In fact, life and accidental insurances can be incorporated with air-ticketing and hotel booking services, serving as value-added product to our core business in the business traveling segment. Business Strategy Our objective is to continue our revenue growth while sustaining our profitability, and, to achieve this, we will focus on capitalizing on our competitive strengths and implementing the business strategy outlined below: - Increase Operating Efficiencies. We expect to realize continued improvement in our profit margin by consolidating the back-office operations of our brokerage business, completing strategic acquisitions and increasing the productivity of our sales professionals. Our management is incentivized to improve our profit margins by a variety of equity incentives and performance bonuses. - Pursue fold-in and strategic acquisitions. We believe in growth through acquisitions. We intend to make selective acquisitions of businesses currently operating in our geographic footprint and consolidating the operations into our existing infrastructure. Our acquisition criteria include strong financial performance, talented management, specialized area of expertise, critical geographical presence and excellent client and insurance carrier relationships. - Enhance competitive advantage. Since air-ticketing and hotel booking operations are both time consuming and require a long-term investment horizon, the majority of the market players are concentrating in either the air-ticketing business or hotel booking services. Few players compete in both markets. For this reason, we believe that with the combination of our strengths in the air ticketing and hotel booking business, we are able to enhance our competitive advantage by providing packaged services to meet various customer needs. Better integration in business travel related products and services can build up business resource barriers to entry, which are hard to overcome. Sales Our sales strategy is to be a single distribution point to the individual consumer market, serving their life and accident insurance and other risk management needs. Consequently, our sales strategy emphasizes: - Using consultative needs assessment to identify our clients' insurance priorities; - Promoting teamwork between sales professional and product specialists on a local and regional basis. - Maintaining an on-going consultative and trusted advisor relationship with out clients to increase client retention. 71 We have 16 sales professionals, who we evaluate by measuring the revenues they generate from new business and cross-selling and the revenues they are able to retain from existing clients. We originate sales opportunities through a number of channels. We focus primarily on selling products and services to new and existing clients on a direct basis. In addition, we sell through approximately 50 professional associations and affinity groups. Professional associations such as those in the entertainment and construction industries, generates sales opportunities by virtue of the recognition we develop in those industries. Finally, A fast-growing component of our sales strategy is to distribute supplementary voluntary insurance products to employees of our business clients through worksite marketing arrangements. We believe that this sales channel can ultimately be used to distribute non-insurance-related financial products and services as well. We utilize sales force automation software to manage and track the progression and status of sales prospects. Through regular updates to the system by our sales professionals, we are able to monitor sales opportunities as they evolve from the initial prospect phase through ultimate acceptance or refusal by the client. Detailed information on each sales prospect, including client information, size of revenue opportunity and type of product being sold, is recorded. As a result, sales force automation is able to serve as both a contact management application for our sales professionals and a business management tool for our regional and corporate sales management executives. Business Plan For Our Business Value-Added Services - --------------------------------------------------------- China World Trade provides business value-added services to a variety of customers. These services concentrate on business consultancy services, interactive marketing and incentive programs management for merchant chains and large corporations with a huge user base. Business Consultancy Services China World Trade's business consultancy services are focused in the financial advisory sector, and include mergers and acquisitions advisory services, corporate restructuring advisory services and corporate finance advisory services, with an emphasis on consultation in equity and debt financings. A specialty niche has been to consult with and advise local PRC companies in seeking foreign capital for their expansion programs. These services are fee based, and payment to China World Trade is structured either on a flat fee basis or on a success fee basis. In addition, China World Trade assists foreign companies to establish their businesses in China and assists Chinese companies in developing the international trade dimension of their own businesses. China World Trade also conducts market research, industrial research and competitive analyses for foreign companies that are preparing to enter China, including providing product sourcing studies and matching services. Credit Cards and Merchant Related Businesses China World Trade provides credit cards through co-branding arrangements. Guangdong World Trade Link Information Services Limited ("WTC Link"), a subsidiary of China World Trade, recently formed a partnership with the Agricultural Bank of China to manage the Bank's co-brand credit card project. WTC Link is an active provider of interactive marketing and customer royalty solution and services in China. It works with China Telecom to develop and manage the merchants' privilege VIP member services. WTC Link also formed a partnership with China Unionpay to develop the royalty systems for bankcard holders in the Guangdong Province. The fees for these services are determined on a negotiated basis. WTC Link has launched a royalty program with over 300 merchants in Guangzhou. This program allows merchants to provide discounts to clients who apply the discount by SMS and receive the authorization instantly. This program enables WTC Link to capture the mobile phone number and provide CRM solution to merchants based on the FRM analysis of the client's consumption behavior. An interactive SMS gateway backed by China Mobil and China Unicom has been established for this project. It is expected that around 1,000 merchants will join this network in the first half of 2005. 72 Events Management Services China World Trade assists foreign companies to organize and participate in conferences and exhibitions in China and assists Chinese companies to organize and participate in conferences and exhibitions overseas. This is a service for fee business. Virtual Office Virtual office services help foreign companies to establish a presence in China at minimum cost. Foreign companies can also manage their communication with their China partners over the Internet. China World Trade establishes individual operations and separate management teams for each value-added service. The revenue of value-added business division will be the services fees from various services rendered. Strategic Investments We expand our business through strategic investments. Strategic ventures which have no synergy with our business or have negative impact to our cash flow will not be initially considered. A group of business subsidiaries with synergies will enable us to gain organic growth and lead us to evolve into a conglomerate in the Chinese business environment. The New Generation acquisition is an example of a major strategic investment that has show the twin promise of high revenue growth and product diversification. Employees We believe our future success will depend in large part upon the continued service of its key technical and senior management personnel and its ability to attract and retain technical and managerial personnel. There can be no assurance that we will retain our key technical and managerial employees or that we can attract, assimilate or retain other highly qualified technical and managerial personnel in the future. None of our employees are subject to any collective bargaining agreements. MANAGEMENT'S DISCUSSION AND ANALYSIS The discussion contained in this prospectus contains "forward-looking statements" that involve risk and uncertainties. These statements may be identified by the use of terminology such as "believes", "expects", "may", or "should", or "anticipates", or expressing this terminology negatively or similar expressions or by discussions of strategy. The cautionary statements made in this prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this prospectus. Our actual results could differ materially from those discussed in this prospectus. Important factors that could cause or contribute to such differences include those discussed under the caption entitled "risk factors," as well as those discussed elsewhere in this prospectus. 73 RESULTS OF OPERATIONS The following table shows the selected unaudited condensed consolidation income statement data of the Company and its subsidiaries for the nine-months ended September 30, 2004 and 2003. The data should be read in conjunction with the audited Condensed Consolidated Financial Statements of the Company and related notes thereto. Nine-month period Year ended (Amounts in thousands US$) ended September 30* September 30 2004 2003 2003 2002 -------- -------- -------- -------- Revenue 1,583 2,380 2,886 193 Operating costs and expenses (539) (1,086) (1,213) (84) -------- -------- -------- -------- Gross profit 1,044 1,294 1,673 109 Selling, general & administrative expenses (3,839) (3,192) (3,954) (1,828) -------- -------- -------- -------- Loss from operations (2.795) (1,898) (2,281) (1,719) Non-operating (expenses) income 130 (30) (30) - Interest expenses (32) (17) (15) (8) Provision for income taxes (16) - - - Minority interests (162) 41 120 93 Net loss (2,875) (1,904) (2,206) (1,634) -------- -------- -------- -------- * China World Trade Corporation has changed its fiscal year end to December 31 with effect from the period ended December 31, 2003 NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2003. OPERATING REVENUE Our business plan is to pursue three distinct lines of business. These include (i) the business clubs located in major cities of China, including Guangzhou, the PRC and Beijing, the PRC, with plans to open clubs in Shanghai and Shenzhen, the PRC, each club in association with the World Trade Center Association, by which we have positioned ourselves as a platform to facilitate trade between China and the world market, (ii) the business travel services, in which our latest acquisition, the New Generation Group of Companies, an indirect majority owned subsidiary, will continue its market leadership as one of the leading consolidators of airline tickets and hotel accommodations in China, and (iii) the business value-added services, in which we will concentrate on interactive marketing and incentive programs for merchants, financial institutions, telecom operators, and large corporations with significant client bases, as well as consultancy services. Our growth in the industries of trade, travel and finance, should enable us to provide value added services and target many cross marketing opportunities. 74 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased by $647,000 or 20% to $3,839,000 for the nine-month period ended September 30, 2004. The increase was primarily due to the increase in professional fees in the amount of $435,000 and the increase of G&A expenses resulting from the consolidation of two months of operating results of New Generation. FINANCIAL INCOME/(EXPENSES), NET There was approximately $32,000 of interest expenses for the nine-month period ended September 30, 2004, compared to approximately $17,000 for the same corresponding period in year 2003. The increase was the result of the interest expense on our New Generation bank loan and the revolving loan of GBN (Guangzhou), an indirect wholly-owned subsidiary. INCOME TAXES The Company is subject to income taxes on an equity basis on income arising in or derived from the tax jurisdiction in which it is domiciled and operates. The Hong Kong subsidiaries incurred losses for taxation purposes for the period and thus Hong Kong Profits Tax has not been provided. Since the PRC subsidiaries have sustained losses for the PRC income tax purposes, the Company has not recorded any PRC income tax expense. PRC income tax in the future will be calculated at the applicable rates relevant to the PRC subsidiaries. NET INCOME (LOSS) We had a net loss of approximately $2,875,000 for the nine-month period ended September 30, 2004, compared to a net loss of approximately $1,904,000 for the nine-month period ended September 30, 2003, an increase of $971,000. This increased loss was due primarily to approximately $1,000,000 in common stock issued for legal and professional services. LIQUIDITY AND CAPITAL RESOURCES On September 30, 2004, we had cash and cash equivalents of $1,137,278 and a net increase of cash and cash equivalents of $822,507 for the nine-month period ended September 30, 2004. This compares with cash and cash equivalents of $273,220 on September 30, 2003 and a net increase of cash and cash equivalents of $198,865 for the nine month period ended September 30, 2003. On September 30, 2004, we had a working capital surplus of $3,370,476 as compared to a working capital deficit of $959,494 on September 30, 2003. The variation in our working capital deficit was primarily attributable to an increase in trade and other receivables as well as in rental and other deposits of $7,995,814 and $1,185,339, respectively. Net cash used in operating activities was $2,091,336 for the nine-months ended September 30, 2004, as compared with $650,561 for the same period ended September 30, 2003. The increase in cash used in operating activities was primarily attributable to the increase of payments in trade and other receivables, as well as in rental and other deposits. 75 Net cash used in investing activities was $3,535,109 for the nine-months months ended September 30, 2004, as compared with net cash provided by investing activities of $42,611 for the same period ended September 30, 2003. Cash flows in the nine-month period were used for the acquisition of subsidiary companies, property, plant and equipment during the period. Net cash provided by financing activities totaled $6,448,952 for the nine-months ended September 30, 2004, as compared with net cash provided by financing activities of $806,815 for the nine-months ended September 30, 2003. The cash provided by financing activities for the 2004 period included shareholders' capital contributions of $2,821,824 and new shares issuance of $4,302,378, while the cash provided by financing activities during the 2003 period was attributable to a new bank loan. We estimate we will need approximately $2,500,000 in additional capital during 2005. If revenues increase during 2005, we may have sufficient cash flow from operations. If operations do not provide the necessary cash flow, we may need to raise capital through either debt or equity financing, such as through the SEDA offering of which this prospectus is a part. There can be no assurance that such capital will be available to us when needed or on terms favorable to the Company, as discussed under the risk factors associated with our SEDA offering. For the most part, we have funded our cash needs from inception through September 30, 2004, with a series of debt and equity transactions, primarily with related parties. In late August, 2004, we issued shares of our common stock and warrants in a private placement to two investors for an aggregate purchase price of $650,000, and another two investors for $1,450,000 in late November, 2004. The failure to receive additional financing could have a material adverse effect on operations and our financial condition. GOING CONCERN QUALIFICATION TO AUDITOR'S OPINION For the fiscal year ended September 30, 2003, our independent auditors have raised substantial doubt about our ability to continue as a going concern. The ability of China World Trade to continue as a going concern is dependent on developing operations, increasing revenues and obtaining new capital. Management has enacted the following plan to address these issues: (1) obtain funding from new investors to alleviate the China World Trade's capital deficiency and (2) seek additional trade and distribution affiliates to increase sales and improve cash flows. There can be no assurance that these efforts by management will be successful. It is important to note that the "going concern" qualification imposed by our independent auditors for the fiscal year ended September 30, 2003 was removed in their audit of our financial results for the three months ended March 31, 2004. OTHER SIGNIFICANT EVENTS On November 19, 2003, the Company entered into an acquisition agreement (the "Acquisition Agreement") with Mr. William Chi Hung Tsang ("Mr. Tsang"), the beneficial owner of the 21st to 23rd Floors of Goldlion Digital Network Center, 138 Tiyu Road East, Tianhe, Guangzhou, the PRC ("the Premises"). On December 5, 2003, pursuant to the Acquisition Agreement, Mr. Tsang purchased from the Company 3,000,000 common shares and warrants to purchase an additional 6,000,000 common shares in exchange for giving the Company the rights to the after tax rental income of the Premises we occupy for a five year period commencing on December 1, 2003 and ending on November 30, 2008. As reported in Form 8-K on December 15, 2003, this transaction has the following effects: (1) The acquisition of shares by Mr., Tsang, our Chairman, resulted in a change of control of our Company; and (2) We recorded an intangible asset of $1,800,000 which represents the present value of future cash flows we will receive under this Acquisition Agreement. As of December 31, 2003, the current book value of the intangible asset was $1,770,000 and is being amortized on a straight line basis for five years. 76 On August 2, 2004, a wholly-owned subsidiary of ours consummated an acquisition of 51% of the capital stock of Guangdong New Generation Commercial Management Limited, a limited liability company organized and existing under the laws of the PRC ("New Generation"), for an aggregate consideration of US$10,232,000, payable approximately US$2,741,000 in cash and approximately US$7,487,000 in market value of common stock of China World Trade. New Generation is the pioneer and one of the market leaders in the travel agency business through operations of its ten subsidiaries in Southern China. It is a market leader in ticketing sales for international and domestic flights as well as inbound business travel. It is also one of the leading consolidators of airline tickets and hotel rooms in China. New Generation has already acquired the necessary licenses to operate as a ticketing and travel agent in the PRC, a highly regulated business. In addition, New Generation is also a licensed insurance agent in China to provide, in particular, accidental and life insurances. While there can be no assurances of success, we believe that New Generation will contribute a significant revenue base to our company. CRITICAL ACCOUNTING POLICIES Besides the accounting policies as described in note 5 to the audited financial statements for the year ended September 30, 2003, no other material accounting policies have been adopted by the Company. DESCRIPTION OF PROPERTY Our main office and the Guangzhou World Trade Center Club facilities are located at 3rd Floor, Goldlion Digital Network Center, 138 Tiyu Road East, Tianhe, Guangzhou, and the PRC 510620. Such office and club facilities are held pursuant to a lease from Guangzhou Silver Disk Property Management Co. Ltd., which provides for an aggregate monthly rental of approximately RMB$350,000 and expires on July 31, 2007. Our Beijing World Trade Center Club facilities are located at 2nd Floor, Office Tower II, Landmark Towers Beijing, 8 North Dongsanhuan Road, Beijing, the PRC. The five-year lease for the location of the BWTCC club facilities, which runs from February 1, 2004 to January 31, 2009, was executed by Beijing Landmark Towers Co Ltd. and BWTCC. The terms of the lease provide for an aggregate monthly rental amount and management fees of approximately RMB$121,180 and contains a rent free period from February 1, 2004 to January 31, 2006. Pursuant to the Share Exchange Agreement dated December 17, 2002, entered into by the Company and Mr. William Chi Hung Tsang, the Company acquired the entire issued share capital of GBN, which owns two commercial properties, one located at 20/F, Goldlion Digital Network Center, Unit 01-10, 138 Tiyu Road East, Tianhe, Guangzhou, the PRC (the "PRC Property") and the other at Flat B, 12/F, Champion Center, 301-309 Nathan Road, Hong (the "Hong Kong Property"). The Company occupies most of the rental area of the PRC property and rents out the Hong Kong Property at an annual rental income of HK $102,000. 77 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company entered into a acquisition agreement (the "Acquisition Agreement") dated November 19, 2003, with Mr. William Chi Hung Tsang ("Mr. Tsang"), the owner of the 21st to 23rd Floor of Goldlion Digital Network Center, 138 Tiyu Road, Tianhe, Guangzhou 510620, the PRC (the "Premises"). Mr. Tsang assigned to the company rents and other consideration valued at $1,800,000. Mr. Tsang was issued 3,000,000 common shares and warrants to purchase an additional 6,000,000 common shares (the "Warrants") for US$1,800,000 (US$0.60 per common share). The Warrants may be exercised between December 5, 2003 and December 1, 2005 at an exercise price of US$0.75 per common share. By a Settlement Agreement dated December 5, 2003, the Company converted US$456,661.73 that was previously advanced by Mr. Tsang into 761,103 common shares of the Company. In the quarter ended December 31, 2003, a personal guarantee was granted from Mr. Tsang in the amount of $19, 231. As a result of these transactions, Mr. Tsang will beneficially own 71.82% of the common shares of the Company, assuming exercise of all of his warrants. The Company entered into several consulting agreements. On December 9, 2003, the Company issued 100,000 and 50,000 shares to Greentree Financial Group, Inc. and RR Inv Holding Inc., respectively. On December 11, 2003, the Company issued 500,000 shares each to TMT Consultant and Mr. Andy Lau for consultancy services provided. On December 16, 2003, the Company issued 100,000 shares to Wall Street Strategies, Inc. for consultancy services provided. The Company entered into a relationship with respect to rent and related expenses with Guangzhou Goldlion City Properties Co., Ltd. and Guangzhou Cyber Strategy Limited in the approximate amount of $96,154, and Dimension Marketing Limited in the amount of $80,645. These amounts have been classified as current liabilities. The amounts due to related parties represent unsecured advances which are interest-free and repayable on demand. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information Our common stock began quotation on the Over-the-Counter Bulletin Board ("OTCBB") on June 28, 2000 and was initially quoted under the symbol TXON before the symbol was changed to CHWT. On June 26, 2002, our common stock was delisted from trading on OTCBB for not being a current reporting company under the Securities Exchange Act of 1934. Our common stock was then quoted under the symbol CWTD on the Pink Sheets from September 2002 to November 2003. As of November 26, 2003, our common stock was again quoted on the OTCBB, under the symbol CWTD. The following table sets forth the range of bid prices of our common stock as quoted on the OTCBB and Pink Sheets LLP, respectively, during the periods indicated. The prices reported represent prices between dealers, do not include markups, markdowns or commissions and do not necessarily represent actual transactions. 78 High (1) Low ------- ----- 2004 First Quarter $9.20 $1.00 Second Quarter $5.00 $1.07 Third Quarter $9.95 $1.80 2003 First Quarter $0.0001 (2) Second Quarter $0.0001 (2) Third Quarter $0.0001 (2) Fourth Quarter $0.0001 (2) 2002 First Quarter $0.001 (2) Second Quarter $0.001 (2) Third Quarter $0.001 (2) Fourth Quarter $0.001 (2) (1) We declared a 1 for 30 reverse stock split effective September 1, 2002. All reported historical information has been adjusted accordingly to reflect the impact of the reverse stock split. (2) Information not available. Our common shares are issued in registered form. Interwest Transfer Company in Salt Lake City, Utah, is the registrar and transfer agent for our common stock. Effective September 1, 2002, we executed a 1 for 30 reverse stock split of the outstanding shares of common stock. In September, 2002, we underwent a debt-for-equity capital restructuring and issued shares to eleven creditors for the settlement of debts and fees pursuant to settlement agreements, as follows: No. of Name of Creditor Date (2002) Consideration Shares Mr. James Mak September 8 87,500 Mr. James Mak September 8 35,000 Mr. Roy Wu September 9 87,500 Mr. Alfred Or September 10 156,645 Mr. Andersen Chan September 10 60,000 Mr. Bernard Chan September 8 73,355 Superwear Limited September 9 500,000 Simple Fortune Inc. September 9 490,000 Sinogolf Limited September 9 510,000 Top-Trained Securities Limited September 11 1,000,000 Splendid Partner Holdings Limited September 12 500,000 I&V Ltd. September 12 500,000 79 The shares of common stock delivered as consideration pursuant to the debt for equity restructuring were issued on January 22, 2003. As a result of two share purchase agreements dated September 3, 2002 and December 17, 2002, respectively, and entered into between the Company and Powertronic Holdings Limited, on January 24, 2003 we issued a total of 2,000,000 shares of common stock and warrants to purchase up to 4,000,000 shares of common stock for a total purchase price of $1,000,000 to Powertronic Holdings Limited. As a result of a share exchange agreement dated December 17, 2002 entered into between the Company and Mr. William Chi Hung Tsang, on January 24, 2003, we issued 4,000,000 shares of common stock and warrants to purchase up to 4,000,000 shares of common stock in exchange of 100% of the share capital of General Business Network (Holdings) Ltd. As of December 31, 2004, there were 103 holders of record of 30,889,997 outstanding shares of common stock of the Company, not including approximately 1,500 holders of our shares in street name. Dividends We have not previously paid any cash dividends on its common stock and do not anticipate paying dividends on its common stock in the foreseeable future. It is the present intention of management to retain any earnings to provide funds for the operation and expansion of our business. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operation, financial condition, contractual and legal restrictions and other factors the board of directors deem relevant. Penny Stock Characterization Our Shares are "penny stocks" within the definition of that term as contained in the Securities Exchange Act of 1934, which are generally equity securities with a price of less than $5.00. Our shares will then be subject to rules that impose sales practice and disclosure requirements on certain broker-dealers who engage in certain transactions involving a penny stock. These will impose restrictions on the marketability of the common stock. Under the penny stock regulations, a broker-dealer selling penny stock to anyone other than an established customer or "accredited investor" must make a special suitability determination for the purchaser and must receive the purchaser's written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth in excess of $5,000,000 or annual income exceeding $200,000 individually or $300,000 together with his or her spouse is considered an accredited investor. In addition, unless the broker-dealer or the transaction is otherwise exempt, the penny stock regulations require the broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission relating to the penny stock market. A broker-dealer is also required to disclose commissions payable to the broker-dealer and the Registered Representative and current bid and offer quotations for the securities. In addition a broker-dealer is required to send monthly statements disclosing recent price information with respect to the penny stock held in a customer's account, the account's value and information regarding the limited market in penny stocks. As a result of these regulations, the ability of broker-dealers to sell our stock may affect the Selling Stockholders or other or other holders seeking to sell their shares in the secondary market. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. 80 These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. These additional sales practice and disclosure requirements could impede the sale of our securities. In addition, the liquidity for our securities may be adversely affected, with concomitant adverse affects on the price of our securities. There are 452,500 outstanding options to purchase shares of our common stock pursuant to the 2003 Non-Qualified Employee Stock Plan. Agreements to Register On December 5, 2003, a Registration Rights Agreement was executed by the Company conferring upon Chi Hung Tsang demand registration rights for (i) 3,000,000 shares of the Company's common stock ("Company Shares"), each with par value US$0.001 per share (the "Common Stock"); and (ii) a two year warrant to purchase up to 6,000,000 shares of the Common Stock at an exercise price of US$0.75 per share. Upon written demand, the Company shall, register the shares, the warrants and the shares issuable upon exercise of the warrants as soon as practicable and in no event later than 90 days from the notice. In addition, the Company must maintain the registration statement until all of the securities are sold or otherwise become freely tradable. We have a Registration Rights Agreement, dated August 26, 2004, with the Purchasers under a Securities Purchase Agreement that was also executed on August 26, 2004, covering an aggregate of 2,321,003 shares of common stock issued to the Purchasers, and shares of common stock issuable to the Purchasers upon the exercise of warrants. In addition, we have a Registration Rights Agreement with Cornell Capital Partners, LP, dated November 15, 2004, covering the 14,285,714 shares of our common stock that may be registered for sale pursuant to the SEDA, in addition to 375,000 shares of common stock issued as compensation under the SEDA. Shares Eligible for Future Sale Upon effectiveness of this registration statement, the 16,981,717 shares of common stock sold in this offering will be freely tradable without restrictions under the Securities Act of 1933, except for any shares held by our "affiliates", which will be restricted by the resale limitations of Rule 144 under the Securities Act of 1933. In general, under Rule 144 as currently in effect, any of our affiliates and any person or persons whose sales are aggregated who has beneficially owned his or her restricted shares for at least one year, may be entitled to sell in the open market within any three-month period a number of shares of common stock that does not exceed the greater of (i) 1% of the then outstanding shares of our common stock, or (ii) the average weekly trading volume in the common stock during the four calendar weeks preceding such sale. Sales under Rule 144 are also affected by limitations on manner of sale, notice requirements, and availability of current public information about us. Non-affiliates who have held their restricted shares for two years may be entitled to sell their shares under Rule 144 without regard to any of the above limitations, provided they have not been affiliates for the three months preceding such sale. 81 Further, Rule 144A as currently in effect, in general, permits unlimited resales of restricted securities of any issuer provided that the purchaser is an institution that owns and invests on a discretionary basis at least $100 million in securities or is a registered broker-dealer that owns and invests $10 million in securities. Rule 144A allows our existing stockholders to sell their shares of common stock to such institutions and registered broker-dealers without regard to any volume or other restrictions. Unlike under Rule 144, restricted securities sold under Rule 144A to non-affiliates do not lose their status as restricted securities. Currently, approximately 7,100,000 shares of our common stock are available for sale in accordance with the provisions of Rule 144. Additionally, future sales of stock owned by our affiliates may be permitted according to Rule 144. The availability for sale of substantial amounts of common stock under Rule 144 could adversely affect prevailing market prices for our securities. EXECUTIVE COMPENSATION No compensation in excess of $100,000 was awarded to, earned by, or paid to any executive officer of China World Trade during the years 2003, 2002 and 2001, except as described below. The following table and the accompanying notes provide summary information for each of the last three fiscal years concerning cash and non-cash compensation paid or accrued by John H. W. Hui and Keith Yat Chor Wong, China World Trade's chief executive officer and secretary for the past three years.
SUMMARY COMPENSATION TABLE Other Securities All Annual Restricted Underlying Other Compen- Stock Options LTIP Compen- Name of officer Year Salary Bonus sation Award(s) SARs(#) payouts sation - --------------- ---- -------- ----- ------ ------- -------- ------- ------- John Hui, CEO 2003 147,436 - - - - - - John Hui, CEO 2002 140,321 - - - - - - John Hui, CEO 2001 90,000 - - - - - - William Chi Hung Tsang, Chairman & Director 2003 141,026 - - - - - - C.M. Chan, Director 2003 30,769 - - - - - -
There are currently no employment agreements. However, employment agreements for several directors and officers are being constructed for 2005. Compensation of Directors In 2001, China World Trade committed itself to compensate each of its Board of Directors with 2,000 shares of its common stock per annum. Board members typically meet on a bi-monthly basis. 82 2003 Non-Qualified Stock Compensation Plan The following table sets forth information about our 2003 Non-Qualified Stock Compensation Plan adopted by our Board of Directors and filed with the Commission as Exhibit 10.1 to our Registration Statement on Form S-8 on October 28, 2003. Shares issuable upon exercise of options Shares remaining available to be granted in Weighted average exercise for future issuance the future price of outstanding options -------------------------- -------------------- ---------------------------- 638,184 452,500 $0.673 Pursuant to the 2003 plan, we registered 2,000,000 shares of common stock and 1,000,000 options to purchase shares of common stock at $0.673 per share, for a total registration for issuance of 3,000,000 shares of common stock. The Compensation Committee of the Board of Directors will issue common stock and award options to employees, directors, officers, consultants, advisors and other persons associated with our company. The 2003 plan is intended to provide a method whereby our company may be stimulated by the personal involvement of our employees, directors, officers, consultants, advisors and other persons in our business and reward such involvement, thereby advancing the interests of our company and all of its shareholders. A copy of the 2003 plan has been filed as an exhibit to this registration statement. As of the date of this prospectus, a total of 1,503,000 shares of common stock were issued to consultants and 985,000 options were issued to our management pursuant to our 2003 Non-Qualified Stock Compensation Plan. 83 FINANCIAL STATEMENTS INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of China World Trade Corporation We have audited the accompanying consolidated balance sheet of China World Trade Corporation (a Nevada corporation) and subsidiaries as of September 30, 2003 and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended September 30, 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 audit. The financial statements of the Company as of September 30, 2002 were audited by other auditors whose report, dated March 17, 2003 and included a going concern emphasize paragraph, expressed an unqualified opinion on those statements. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provide a reasonable basis for our opinion. In our opinion, the 2003 consolidated financial statements referred to above present fairly, in all material respects, the financial position of China World Trade Corporation and subsidiaries as of September 30, 2003 and the results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered losses from operations during the year and has a negative working capital that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /S/ MOORES ROWLAND MAZARS CHARTERED ACCOUNTANTS CERTIFIED PUBLIC ACCOUNTANTS HONG KONG DATE: 13 JANUARY, 2004 84
CHINA WORLD TRADE CORPORATION CONSOLIDATED BALANCE SHEET - ------------------------------------------------------------------------------------ As of September 30, 2003 Audited --------- US$ ASSETS Note CURRENT ASSETS Cash and cash equivalents 273,220 Trade and other receivables 9 240,293 Rental and other deposits 10 363,833 Prepayments 30,031 Inventories 325,494 --------- TOTAL CURRENT ASSETS 1,232,871 Goodwill 11 251,448 Property, plant and equipment, net 12 2,881,585 --------- TOTAL ASSETS 4,365,904 ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade and other payables 14 1,809,380 Deferred income 39,991 Short-term bank loan 15 300,000 Long-term bank loan - current portion 16 42,994 --------- TOTAL CURRENT LIABILITIES 2,192,365 Long-term bank loan - non-current portion 16 459,344 --------- TOTAL LIABILITIES 2,651,709 --------- MINORITY INTEREST 3,531 --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, par value of US$0.001 each; 10,000,000 shares authorized, none issued or outstanding - Common stock, par value of US$0.001 each; 50,000,000 shares authorized, 10,970,497 shares issued at September 30, 2003 10,971 Additional paid-in capital 11,096,208 Accumulated deficit (9,396,515) --------- TOTAL STOCKHOLDERS' EQUITY 1,710,664 --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 4,365,904 =========
85
CHINA WORLD TRADE CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS - --------------------------------------------------------------------------- Year ended September 30, ------------------------ 2002 2003 ---------- ---------- US$ US$ Note OPERATING REVENUES 193,024 2,885,600 Operating costs and expenses (83,738) (1,213,169) Selling, general and administrative expenses (1,827,959) (3,954,066) ---------- ---------- LOSS FROM OPERATIONS (1,718,673) (2,281,635) NON-OPERATING (EXPENSES) INCOME Other income - 2,490 Interest expenses (8,120) (14,811) Equity in net loss of affiliate 13 - (32,051) ---------- ---------- LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (1,726,793) (2,326,007) Provision for income taxes 7 - - ---------- ---------- LOSS BEFORE MINORITY INTEREST (1,726,793) (2,326,007) MINORITY INTEREST 92,976 120,471 ---------- ---------- NET LOSS (1,633,817) (2,205,536) ========== ========== LOSS PER SHARE OF COMMON STOCK - - Basic (0.23) (0.23) ========== ========== Weighted average number of shares of common stock outstanding 6,970,497 9,699,264 ========== ==========
CHINA WORLD TRADE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------- Year ended September 30, ------------------------ 2002 2003 ---------- ---------- US$ US$ Note CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS (1,633,817) (2,205,536) ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES: MINORITY INTEREST 17,777 (120,471) EQUITY IN NET LOSS OF AFFILIATE - 32,051 STOCK ISSUED FOR SERVICES 1,948,843 600,000 PROPERTY, PLANT AND EQUIPMENT WRITTEN OFF 854 - DEPRECIATION 229 79,303 IMPAIRMENT LOSS ON PROPERTY, PLANT AND EQUIPMENT - 106,975 INCREASE IN DEFERRED INCOME 8,114 31,877 CHANGES IN WORKING CAPITAL: TRADE AND OTHER RECEIVABLES (38,924) (89,875) RENTAL AND OTHER DEPOSITS (341,731) (11,484) PREPAYMENTS (2,420) (23,299) INVENTORIES (35,930) (289,564) TRADE AND OTHER PAYABLES (882,466) 1,222,960 ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES (959,471) (667,063) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: ACQUISITION OF SUBSIDIARY 20 - 123,707 ACQUISITION OF AN AFFILIATE - (32,051) ACQUISITION OF PROPERTY, PLANT AND EQUIPMENT (3,275) (92,824) ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (3,275) (1,168) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: PROCEED FROM COMMON STOCK TO BE ISSUED 500,000 - CAPITAL CONTRIBUTION FROM MINORITY SHAREHOLDER OF A SUBSIDIARY - 106,225 INCREASE IN NOTES PAYABLES 72,796 - ADVANCES FROM OTHER CREDITORS 161,278 - NET ADVANCES FROM RELATED PARTIES 261,517 - PROCEED FROM NEW BANK LOAN - 812,820 REPAYMENT OF AMOUNT BORROWED - (10,482) ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 995,591 908,563 ---------- ---------- NET INCREASE IN CASH AND CASH EQUIVALENTS 32,845 240,332 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43 32,888 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR 32,888 273,220 ========== ========== ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS CASH AND BANK BALANCES 32,888 273,220 ========== ========== NON-CASH INVESTING AND FINANCING ACTIVITIES COMMON STOCK ISSUED FOR SERVICES 729,969 600,000 PURCHASE OF SUBSIDIARY BY ISSUANCE OF COMMON STOCK 20 - 3,200,000 ========== ==========
CHINA WORLD TRADE CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------- COMMON STOCK ------------------------------------------ AMOUNT ADDITIONAL AMOUNT TO BE PAID IN ACCUMULATED ISSUED ISSUED CAPITAL DEFICIT NO. OF SHARES US$ US$ US$ US$ ---------------- -------- --------- --------------- ------------ BALANCE AS OF SEPTEMBER 30, 2001 796,205 794 2 2,851,705 (5,557,162) STOCK ISSUED FOR SERVICES ON DECEMBER 20, 2001 1,228,689 156 1,073 626,771 - ISSUANCE OF STOCK TO BE ISSUED - 2 (2) - - STOCK ISSUED FOR CONSTRUCTION OF A WEB PORTAL ON DECEMBER 20, 2001 18,958 19 - 119,981 - STOCK ISSUED IN EXCHANGE FOR DEBT CANCELLATION ON SEPTEMBER 12, 2002 3,926,645 - 3,927 2,712,750 - STOCK ISSUED FOR CASH ON SEPTEMBER 12, 2002 1,000,000 - 1,000 499,000 - NET LOSS - - - - (1,633,817) ---------------- ----------- ------------ ---------- ------------ BALANCE AS OF SEPTEMBER 30, 2002 6,970,497 971 6,000 6,810,207 (7,190,979) CANCELLATION OF STOCK ISSUED FOR SERVICES ON OCTOBER 1, 2002 (1,000,000) - (1,000) (8,999) - ISSUANCE OF STOCK TO BE ISSUED ON JANUARY 22, 2003 - 5,000 (5,000) - - ADJUSTMENT TO VALUE OF STOCK ISSUED FOR SERVICES ON JANUARY 22, 2003 - - - 300,000 - STOCK ISSUED IN EXCHANGE FOR SHAREHOLDINGS IN A SUBSIDIARY ON JANUARY 24, 2003 4,000,000 4,000 - 3,196,000 - ISSUANCE OF STOCK FOR CASH AND SERVICES ON JANUARY 24, 2003 1,000,000 1,000 - 799,000 - NET LOSS - - - - (2,205,536) ------------ ---------- ------------ --------------- ------------ BALANCE AS OF SEPTEMBER 30, 2003 10,970,497 10,971 - 11,096,208 (9,396,515) ============ ========== ============ =============== ============
86 NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF BUSINESS The Company was incorporated under the laws of the State of Nevada on January 29, 1998 as Weston International Development Corporation. On July 28, 1998, the name of the Company was changed to Txon International Development Corporation. On August 14, 2000, the Company acquired 100% shareholdings of Virtual Edge Limited, a British Virgin Islands ("BVI") company, pursuant to a share exchange agreement dated August 10, 2000. On September 15, 2000 the Company changed its name to China World Trade Corporation. One of its subsidiaries incorporated in the People's Republic of China ("PRC") has commenced its business in providing catering services, product exhibition services, business center and conference services, and communication and information services to its members since August 1, 2002. Pursuant to the Share Exchange Agreement entered into between the Company and Mr. William Chi Hung Tsang ("Mr. Tsang") on December 17, 2002, Mr. Tsang agreed to transfer 10,000 ordinary shares of General Business Network (Holdings) Limited ("GBN") to the Company in exchange for the issuance by the Company of 4,000,000 shares of its common stock and a two-year warrant (the "Warrant") to purchase up to 4,000,000 shares of the common stock of the Company. The Warrant is exercisable at a price of US$0.92 per share. The acquisition, which was mainly carried out for the Company's expansion purposes, was completed on January 24, 2003 and GBN became a wholly-owned subsidiary of the Company. GBN was incorporated in Hong Kong on July 15, 2002 and is principally engaged in property investments and investment holding. Details of the subsidiaries and their principal activities as of the date of this report are summarized below:
DATE OF ACQUISITION/ PLACE OF EQUITY INTEREST OWNED PRINCIPAL NAME OF COMPANY FORMATION INCORPORATION BY THE COMPANY ACTIVITIES DIRECT INDIRECT VIRTUAL EDGE LIMITED AUGUST 14, 2001 BVI 100% - INVESTMENT HOLDING GENERAL BUSINESS NETWORK JANUARY 24, 2003 HONG KONG 100% - INVESTMENT (HOLDINGS) LIMITED HOLDING AND PROPERTIES INVESTMENT GUANGZHOU WORLD TRADE CENTRE DECEMBER 29, 2001 PRC - 75% CLUB SERVICES CLUB POLYSEND TRADING LIMITED MARCH 6, 2003 HONG KONG - 70% LEATHER TRADING DIMENSION MARKETING (CHINA) MARCH 14, 2003 HONG KONG - 51% ADVERTISING LIMITED BUSINESS INFOTECH ENTERPRISES LIMITED JULY 2, 1999 BVI 49% 51% INACTIVE BEIJING WORLD TRADE CENTRE APRIL 1, 1999 PRC - 75% INACTIVE CLUB GBN WEALTH MANAGEMENT LIMITED APRIL 4, 2003 HONG KONG - 70% INACTIVE TOPSTAR INTERNATIONAL LIMITED MARCH 18, 2003 BVI - 100% INACTIVE
2. BASIS OF PRESENTATION The financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("USGAAP"). This basis of accounting differs from that used in the statutory financial statements of the subsidiaries incorporated in BVI, Hong Kong and the PRC, which were prepared in accordance with generally accepted accounting principles in Hong Kong, and the accounting principles and the relevant financial regulations applicable to enterprises with foreign investments as established by the Ministry of Finance of China respectively. 87 3. PREPARATION OF FINANCIAL STATEMENTS The Company has a negative working capital of US$959,494 as of September 30, 2003. In addition, the Company had a loss of US$2,205,536 and US$1,633,817 for the years ended September 30, 2003 and 2002 respectively. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Continuation of the Company as a going concern is dependent upon obtaining additional working capital through additional equity funding and attaining profitable operations in the future. The management has developed a strategy, which it believes will accomplish these objectives which will enable the Company to operate in the future. However, there can be no assurance that the Company will be successful with its efforts to raise additional capital and attaining profitable operations. The inability of the Company to secure additional financing and attaining profitable operations in the near term could adversely impact the Company's business, financial position and prospects. 4. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46, ("FIN 46") "Consolidation of Variable Interest Entities" which changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and apply in the first fiscal period beginning after June 15, 2003, for variable interest entities created prior to February 1, 2003. The management believes that adoption of this statement does not have impact on the Company's financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity". The SFAS No.150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that those instruments be classified as liabilities in statements of financial position. In addition to its requirements for the classification and measurement of financial instruments in its scope, SFAS No. 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after September 15, 2003. Management believes that adoption of the SFAS No. 156 does not have significant impact on its consolidated financial statements. 5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of accounting. The financial statements are prepared in accordance --------------------- with generally accepted accounting principles in the US. 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. 88 (b) Principles of consolidation. The consolidated financial statements include --------------------------- the financial information of the Company and its subsidiaries. The results of subsidiaries acquired or disposed of during the year are consolidated from or up to the date of their effective dates of acquisition or disposal respectively. All material intercompany balances and transactions have been eliminated in consolidation. (c) Goodwill on consolidation. Goodwill represents the excess of the purchase -------------------------- consideration payable in acquisitions of subsidiaries over the fair value of the net assets acquired at the time of acquisition. Goodwill on consolidation is stated at cost when it arises. As part of an ongoing review of the valuation and amortization of goodwill, management assesses the carrying value of the goodwill to determine if changes in facts and circumstances suggest that it may be impaired. If this review indicates that the goodwill is not recoverable, the carrying value of the goodwill would be reduced to its estimated fair market value. On disposal of a subsidiary, any attributable amount of purchased goodwill is included in the calculation of the gain or loss on disposal. (d) Revenue recognition. The Company recognizes revenue in accordance with SEC ------------------- Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements", 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. Services revenue is recognized when the services are provided. (e) Deferred income. Deferred income represents unamortized non-refundable ---------------- admission fees and membership fees received but the related services, or portion of the services have not yet been rendered. (f) 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. (g) Translation of foreign currency. The subsidiaries maintain their accounting ------------------------------- books and records in United States Dollars ("US$"), Hong Kong Dollars ("HK$") and Renminbi ("RMB"). Foreign currency transactions during the year are translated to US$ at the approximate rates of exchange on the dates of transactions. Monetary assets and liabilities denominated in foreign currencies at year end and translated at the approximate rates of exchange ruling at the balance sheet date. Non-monetary assets and liabilities are translated at the rates of exchange prevailing at the time the asset or liability was acquired. Exchange gains or losses are recorded in the statements of operations. On consolidation, the financial statements of the subsidiaries whose accounting books and records are denominated in currencies other than US$ are translated into US$ using the closing rate method, whereby the balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The share capital and retained earnings are translated at exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. 89 All exchange differences arising on the consolidation are recorded within equity. Historically, foreign exchange transactions have not been material to the financial statements. (h) 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 Company maintains the majority of its cash balances in one financial institution. (i) Property, plant and equipment. Property, plant and equipment are stated at ----------------------------- cost less accumulated depreciation and accumulated impairment losses. 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 capitalized 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 income statement. Depreciation is provided to write off the cost less accumulated impairment losses 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 the following rates per annum: LAND AND BUILDINGS 50 YEARS LEASEHOLD IMPROVEMENTS 2 - 3 YEARS FURNITURE AND FIXTURES 5 - 10 YEARS OFFICE AND COMPUTER EQUIPMENT 3 - 5 YEARS The Company recognizes an impairment loss on PPE 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. (j) Equity method of accounting. The equity method of accounting is used when ---------------------------- the Company has an investment in, and exercises significant influence over, another entity. Under the equity method, original investments are recorded at cost and adjusted by the Company's share of undistributed earnings or losses of these entities. (k) Inventories. Inventories are stated at the lower of cost and net realizable ----------- value. Cost, which comprises all costs of purchase and, where applicable, other costs that has been incurred in bringing the inventories to their present location and condition, is calculated using the first-in, first-out method. Net realizable value represents the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 90 (l) 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 and receivable under operating leases are recognized as expense and revenue on the straight-line basis over the lease terms. The Company leases certain premises under non-cancelable operating leases. Rental expenses under operating leases were US$123,324 and US$698,694 for the year ended September 30, 2002 and 2003 respectively. There was no capital lease currently in effect. (m) 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. (n) 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. (o) Earnings (Loss) per share. Basic earnings (loss) per share exclude dilution ------------------------- and are computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding for the periods. Diluted earnings per share are computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding adjusted to reflect potentially dilutive securities. (p) Segment reporting. The Company adopted SFAS No. 131, "Disclosure about ------------------ Segments of an Enterprise and Related Information". Segment information is disclosed in Note 24 to the financial statements. (q) 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. Accounts receivable are presented net of an allowance for doubtful accounts of US$30,502 as of September 30, 2003. (r) Affiliate. An affiliate is an entity controlled by another entity directly, --------- or indirectly through one or more intermediaries. The term control (including the terms controlling, controlled by and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract, or otherwise. 6. CHANGE OF FINANCIAL YEAR END The Company has resolved to change its financial year end date from September 30 to December 31 of each calendar year with effect from the period ended December 31, 2003 in order to coincide with that of its major operating subsidiaries, namely Guangzhou World Trade Centre Club (a cooperative joint venture company established in Guangzhou, the PRC) and General Business Network (Holdings) Limited, another 100% owned subsidiary of the Company. 91 7. INCOME TAXES The Company is subject to income taxes on an entity basis on income arising in or derived from the tax jurisdiction in which it is domiciled and operates. The Hong Kong subsidiaries incurred losses for taxation purposes for the year and thus Hong Kong Profits Tax has not been provided. Since the PRC subsidiaries have sustained losses for the PRC income tax purposes, the Company has not recorded any PRC income tax expense. PRC income tax in the future will be calculated at the applicable rates relevant to the PRC subsidiaries. 8. LOSS PER SHARE OF COMMON STOCK On September 1, 2002, all of the Company's issued and outstanding shares of common stock of US$0.001 each underwent a one for thirty reverse stock split, with no change in their par value. The Company's authorized share capital of 50,000,000 shares of common stock of US$0.001 each remains unchanged. The comparative amount of the loss per share of common stock and the weighted average number of shares of common stock outstanding have been adjusted as a result of the reverse stock split mentioned above. 9. TRADE AND OTHER RECEIVABLES AS OF SEPTEMBER 30, 2003 NOTE US$ TRADE RECEIVABLES 81,541 DUE FROM RELATED PARTIES 19(C) 138,553 OTHER RECEIVABLES 20,199 -------------------- 240,293 ==================== 10. RENTAL AND OTHER DEPOSITS Included in rental and other deposits is deposit paid to Guangzhou Goldlion City Properties Co., Ltd. of US$338,283. For relationship with the Company, please refer to note 19 to these financial statements. 11. GOODWILL The acquisition of GBN, details of which has been mentioned in note 1 above, has been accounted for under the purchase method of accounting. The purchase price of US$3,200,000 was allocated to the assets and liabilities acquired based on their estimated fair values at the date of acquisition. This allocation has resulted in acquired goodwill of US$251,448, which is subject to an impairment review annually. The results of GBN have been included in the consolidated financial statements since the acquisition date. 92 The following unaudited pro forma information presents a summary of our consolidated results of operations as if the acquisition had been taken place on October 1, 2002. YEAR ENDED SEPTEMBER 30, 2003 US$ OPERATING REVENUES 2,885,600 ============ NET LOSS (2,319,548) ============ LOSS PER SHARE (0.24) ============ 12. PROPERTY, PLANT AND EQUIPMENT, NET AS OF SEPTEMBER 30, 2003 US$ LAND AND BUILDINGS 2,997,559 LEASEHOLD IMPROVEMENTS 102,649 FURNITURE AND FIXTURES 5,583 OFFICE AND COMPUTER EQUIPMENT 34,279 LESS: ACCUMULATED DEPRECIATION (258,485) ------------ NET BOOK VALUE 2,881,585 ============ In view of the sluggish economy and the operating loss experienced by the rental and club operations of the Company, management has carried out a review of the recoverability of certain properties held by reference to the prevailing market price of similar properties. Management believes that an impairment loss of US$45,973 should be provided for the year ended September 30, 2003. In addition, management also considers that an impairment loss of US$61,002 should be recognized on the leasehold improvements carried on the balance sheet. These losses have been recognized as an expense and included in "selling, general and administrative expenses" in the statements of operations. 13. EQUITY IN NET ASSETS OF AFFILIATE On August 26, 2002, the Company signed an agreement with ACV Ltd ("ACV") pursuant to which both parties agreed to form a wholly-foreign owned enterprise named General Business Network (Guangzhou) Limited ("GBN(GZ)"). GBN(GZ) was approved and registered with the Guangzhou Industrial and Commercial Administrative Management Bureau, the PRC, on December 31, 2002. The license granted for the operation of GBN(GZ) is valid for a period of ten years from December 25, 2002 through to December 25, 2012. The registered capital of GBN(GZ) is HK$500,000 (US$64,102). Pursuant to the joint venture agreement, each party shall contribute 50% of the registered capital of GBN(GZ) and in return each party will enjoy 50% interest in GBN(GZ). GBN(GZ) is still in the organization stage and will be engaged in the provision of information technology related services. 93 On 12 June 2003, the Company had made its 50% contribution to GBN(GZ) in accordance with the terms of the joint venture agreement. Its investment in GBN(GZ) has been accounted for by the equity method during the period. The Company's current year's operations include a loss of $32,051, which represents the Company's share of loss on its investment in GBN(GZ). As GBN(GZ) is still in its preliminary stage of operations, no revenue has been generated and thus loss from operations is resulted. The loss reduced the Company's investment in GBN Guangzhou to zero and, as a consequence, the Company's future financial results will not be negatively affected by GBN(GZ)'s ongoing operations. The Company has no obligation to fund future operating losses of GBN(GZ). 14. TRADE AND OTHER PAYABLES AS OF SEPTEMBER 30, 2003 Note US$ TRADE PAYABLES 25,189 BILLS PAYABLE 646,558 ACCRUED CHARGES 139,895 OTHER PAYABLES 127,024 NOTES PAYABLES 14(a) 79,616 DUE TO RELATED PARTIES 19(d) 726,237 DEPOSITS RECEIVED 64,861 ------------ 1,809,380 ============ 14(a) ON FEBRUARY 15, 2001 THE COMPANY ENTERED INTO A PROMISSORY NOTE WITH A THIRD PARTY IN THE AMOUNT OF US$60,000 WITH A 12% ANNUAL INTEREST RATE AND IS DUE UPON DEMAND. PURSUANT TO A RELEASE AGREEMENT DATED DECEMBER 9, 2003, THE COMPANY SETTLED THE PROMISSORY NOTE FOR A TOTAL PAYMENT OF US$70,054, WITH THE REMAINING BALANCE OF US$9,562 BEING WAIVED BY THE LENDER. OUT OF THE TOTAL PAYMENT OF US$70,054, US$45,000 AND US$25,054 REPRESENT AMOUNT PAID BY MR. WILLIAM CHI HUNG TSANG ND MR. JOHN HUI ON BEHALF OF THE COMPANY RESPECTIVELY. 15. SHORT-TERM BANK LOAN The Company obtained a bank loan of US$300,000 during the year from a creditworthy commercial bank in Guangzhou to finance its operations. The loan is collateralized by the Company's properties located in the PRC and deposits placed in the bank. The outstanding loan balance as of September 30, 2003 bears interest at 3% p.a. over Singapore Interbank Money Market Offer Rate ("SIBOR"), which is 1.15% quoted on date of drawing of loan. The whole amount would be repayable on November 30, 2003. 16. LONG-TERM BANK LOAN The Company obtained a bank loan of US$512,820 as of September 30, 2003 from a creditworthy commercial bank in Hong Kong to finance its operations. The loan is collateralized by the Company's properties located in the PRC. 94 The outstanding loan balance of US$502,338 as of September 30, 2003 bears interest at 4% per annum and is repayable serially from 2003 to 2013. The maturity of the long-term bank loan is as follows: PRINCIPAL PAYABLES DURING THE FOLLOWING PERIODS US$ 42,994 OCTOBER 2003 TO SEPTEMBER 2004 44,746 OCTOBER 2004 TO SEPTEMBER 2005 46,569 OCTOBER 2005 TO SEPTEMBER 2006 48,466 OCTOBER 2006 TO SEPTEMBER 2007 319,563 FROM OCTOBER 2007 ONWARDS --------- 502,338 ========= 17. BANKING FACILITIES The Company had various lines of credit under banking facilities as follows: AS OF SEPTEMBER 30, 2003 US$ FACILITIES GRANTED COMMITTED CREDIT LINES 2,162,594 ============ UTILIZED COMMITTED CREDIT LINES 1,453,106 ============ UNUTILIZED FACILITIES COMMITTED CREDIT LINE 709,487 ============ Details of guarantees and related parties transactions were disclosed in notes 15, 16 and 18 respectively. 18. PLEDGE OF ASSETS The Company has pledged land and buildings with a net book value of approximately US$2,737,869 to secure general banking facilities granted to the Company. 19. RELATED PARTY TRANSACTIONS (A) NAMES AND RELATIONSHIP OF RELATED PARTIES EXISTING RELATIONSHIPS WITH THE COMPANY ------------------------------------ MR. ALFRED OR A SHAREHOLDER AND FORMER DIRECTOR OF THE COMPANY MR. BENNY CHO A DIRECTOR OF A SUBSIDIARY MR. BERNARD CHAN A SHAREHOLDER OF THE COMPANY MR. BOBBY YU A DIRECTOR OF A SUBSIDIARY MR. CHAN CHI MING A DIRECTOR OF THE COMPANY MR. JAMES MAK A SHAREHOLDER AND DIRECTOR OF THE COMPANY MR. JOHN HUI A DIRECTOR OF THE COMPANY MR. RINGO LEUNG A DIRECTOR OF THE COMPANY MR. STEVEN HUI CLOSE FAMILY MEMBER OF A DIRECTOR OF THE COMPANY MR. WILLIAM CHI HUNG TSANG A SHAREHOLDER AND DIRECTOR OF THE COMPANY BEIJING WANLONG ECONOMIC PRC PARTNER OF A SUBSIDIARY CONSULTANCY CORPORATION LTD. DIMENSION MARKETING LIMITED A SHAREHOLDER OF A SUBSIDIARY GBN(GZ) AN AFFILIATE OF THE COMPANY GUANGZHOU CITY INTERNATIONAL PRC PARTNER OF A SUBSIDIARY EXHIBITION CO. GUANGZHOU CYBER STRATEGY LIMITED A COMPANY IN WHICH A DIRECTOR OF THE COMPANY HAS BENEFICIAL INTEREST GUANGZHOU GOLDLION CITY PROPERTIES A COMPANY CONTROLLED BY CLOSE FAMILY CO. LTD. MEMBERS OF A DIRECTOR GUANGZHOU GOLDLION COMMERCIAL A COMPANY CONTROLLED BY CLOSE FAMILY NETWORK CO., LTD. MEMBERS OF A DIRECTOR HEALTH & WEALTH INC. A COMPANY IN WHICH A DIRECTOR OF THE COMPANY HAS BENEFICIAL INTEREST PILOT MANAGEMENT LIMITED A SHAREHOLDER OF A SUBSIDIARY UNION EAST CONSULTANTS LIMITED A COMPANY IN WHICH A DIRECTOR OF THE COMPANY HAS BENEFICIAL INTEREST (B) SUMMARY OF RELATED PARTY TRANSACTIONS YEAR ENDED SEPTEMBER 30, 2002 2003 ---------- ---------- US$ US$ CONSULTANCY FEE EXPENSES TO MR. BERNARD CHAN - 17,948 MR. BOBBY YU - 8,462 MR. JOHN HUI - 146,436 MR. WILLIAM CHI HUNG TSANG - 141,026 MR. CHAN CHI MING - 30,769 BEIJING WANLONG ECONOMIC CONSULTANCY CORPORATION LTD. - 18,122 GUANGZHOU CITY INTERNATIONAL EXHIBITION CO. - 18,122 HEALTH & WEALTH INC. - 15,024 ========== ========== RENT AND RELATED EXPENSES TO GUANGZHOU GOLDLION CITY PROPERTIES CO., LTD. AND GUANGZHOU GOLDLION COMMERCIAL CO., LTD. - 713,044 DIMENSION MARKETING LIMITED - 2,692 ========== ========== CONSULTANCY FEE INCOME FROM GUANGZHOU CYBER STRATEGY LIMITED - 288,462 ========== ========== MEMBERSHIP FEE INCOME FROM GUANGZHOU CYBER STRATEGY LIMITED - 48,024 UNION EAST CONSULTANTS LIMITED - 32,016 ========== ========== ASSETS PURCHASED FROM DIMENSION MARKETING LIMITED - 691 ========== ========== PERSONAL GUARANTEE GRANTED FROM MR. WILLIAM CHI HUNG TSANG - 19,231 ========== ========== (C) DUE FROM RELATED PARTIES AS OF SEPTEMBER 30, 2003 US$ MR. ALFRED OR 1,208 GUANGZHOU CYBER STRATEGY LIMITED 59,909 GENERAL (GUANGZHOU) BUSINESS NETWORK LIMITED 73,590 PILOT MANAGEMENT LIMITED 3,846 ------------ CLASSIFIED AS CURRENT ASSETS 138,553 ============ 95 The amounts due from related parties represent unsecured advances which are interest-free and repayable on demand. (D) DUE TO RELATED PARTIES AS OF SEPTEMBER 30, 2003 US$ MR. WILLIAM CHI HUNG TSANG 475,224 MR. RINGO LEUNG 5,776 MR. CHAN CHI MING 5,128 MR. JAMES MAK 2,340 MR. JOHN HUI 44,264 MR. STEVEN HUI 41,179 GUANGZHOU GOLDLION CITY PROPERTIES CO., LTD. 17,022 GUANGZHOU CITY INTERNATIONAL EXHIBITION COMPANY 4,530 BEIJING WANLONG ECONOMIC CONSULTANCY CORPORATION LTD .31,708 HEALTH & WEALTH INC. 18,421 DIMENSION MARKETING LIMITED 80,645 ------------ CLASSIFIED AS CURRENT LIABILITIES 726,237 ============ The amounts due to related parties represent unsecured advances which are interest-free and repayable on demand. 20. SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION (A) SUMMARY OF EFFECT OF ACQUISITION OF SUBSIDIARY YEAR ENDED SEPTEMBER 30, 2003 US$ NET ASSETS ACQUIRED PROPERTY, PLANT AND EQUIPMENT 2,971,993 CASH AND CASH EQUIVALENTS 123,707 TRADE AND OTHER RECEIVABLES 106,628 RENTAL AND OTHER DEPOSITS 10,618 PREPAYMENTS 4,312 TRADE AND OTHER PAYABLES (268,706) ------------ 2,948,552 ADD: GOODWILL ARISING FROM ACQUISITION OF SUBSIDIARY 251,448 ------------ CONSIDERATION 3,200,000 ============ (B) ANALYSIS OF THE NET INFLOW OF CASH AND CASH EQUIVALENTS IN RESPECT OF ACQUISITION DURING THE PERIOD YEAR ENDED SEPTEMBER 30, 2003 US$ CONSIDERATION (3,200,000) BANK BALANCE AND CASH ACQUIRED 123,707 ISSUANCE OF COMMON STOCK FOR SATISFYING THE CONSIDERATION 3,200,000 ------------ NET INFLOW OF CASH AND CASH EQUIVALENTS 123,707 ============ 96 21. OPERATING LEASE COMMITMENT AS OF SEPTEMBER 30, 2003, THE COMPANY HAS TOTAL OUTSTANDING COMMITMENTS NOT PROVIDED FOR UNDER NON-CANCELABLE OPERATING LEASES, WHICH ARE PAYABLES AS FOLLOWS: AS OF SEPTEMBER 30, 2003 US$ 568,470 2005 572,664 2006 616,158 2007 543,668 2008 - ------------ 2,300,960 ============ IN ADDITION, THE COMPANY HAS COMMITTED TO PAY CONTINGENT RENT AT 2% TO 10% ON THE MONTHLY TURNOVER OF A SUBSIDIARY WHEN THE SUBSIDIARY'S MONTHLY TURNOVER EXCEEDS RMB500,000 (US$60,408) DURING THE LEASE PERIOD ENDING IN JULY 2007. THE TOTAL OUTSTANDING COMMITMENTS UNDER NON-CANCELABLE OPERATING LEASES, WHICH ARE RECEIVABLE AS FOLLOWS: AS OF SEPTEMBER 30, 2003 US$ 2004 85,536 2005 24,177 2006 10,814 ------------ 120,527 ============ 22. RETIREMENT PLAN The Company did not operate any retirement plan before December 2000. Following the implementation of the Mandatory Provident Fund ("MPF") in Hong Kong with effect from December 2000, the Company operates a Mandatory Provident Fund ("MPF") plans for its Hong Kong employees. The pension expenses charged to the statement of operations amounted to US$115 and US$720 for the years ended September 30, 2002 and 2003 respectively. As stipulated by PRC regulations, the Company maintains a defined contribution retirement plan for all of its employees who are residents of PRC. All retired employees of the Company are entitled to an annual pension equal to their basic annual salary upon retirement. The Company 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 years ended September 30, 2002 and 2003 was US$1,960 and US$36,329 respectively. 23. STOCK OPTIONS AND WARRANTS Powertronic Holdings Limited ("Powertronic"), a British Virgin Islands company, entered into a share purchase agreement dated September 3, 2002 (the "First Share Purchase Agreement") with the Company, to purchase 1,000,000 share and warrants (the "First Warrants") to purchase up to 2,000,000 shares, for the total purchase price of US$800,000. Additionally, Powertronic entered into a second share purchase agreement dated December 17, 2002 (the "Second Share Purchase Agreement") with the Company, to purchase an additional 1,000,000 shares and warrants (the "Second Warrants") to purchase up to an additional 2,000,000 shares, for the total purchase price of US$800,000. The First Warrants and the Second Warrants may be exercised within two year of their issue at an exercise price of US$0.575 per share. 97 As mentioned in note 1 above, the Company issued a two-year warrant to Mr. Tsang at an exercise price of US$0.92 per share. All options and warrants have been granted at exercise prices greater than the market value on the date of granting. All options vest 100% at date of grant. 2003 US$ OPTIONS OUTSTANDING, BEGINNING OF YEAR 2,000,000 GRANTED 4,000,000 CANCELED - EXERCISED - ------------ OPTIONS AND WARRANTS OUTSTANDING, END OF YEAR 6,000,000 ============ 24. BUSINESS SEGMENT INFORMATION
YEAR ENDED SEPTEMBER 30, 2002 2003 ---------- ---------- US$ US$ OPERATING REVENUES CLUB SERVICES 193,024 1,718,854 CONSULTANCY SERVICE - 288,462 RENTAL - 47,189 SALE OF GOODS - 814,111 OTHERS - 16,984 ---------- ---------- 193,024 2,885,600 ========== ========== YEAR ENDED SEPTEMBER 30, 2002 2003 ---------- ---------- US$ US$ PROFIT (LOSS) FROM OPERATIONS CLUB SERVICES (341,365) (910,942) CONSULTANCY SERVICE (616,946) 54,644 RENTAL - (511,352) SALE OF GOODS - (33,528) OTHERS - (62,429) ---------- ---------- (958,311) (1,463,607) CORPORATE EXPENSES (760,362) (818,028) ---------- ---------- CONSOLIDATED OPERATING LOSS (1,718,673) (2,281,635) OTHER INCOME - 2,490 INTEREST EXPENSE (8,120) (14,811) EQUITY IN NET LOSS OF AFFILIATE - (32,051) ---------- ---------- CONSOLIDATED LOSS BEFORE INCOME TAXES (1,726,793) (2,326,007) ========== ==========
98 AS OF SEPTEMBER 30, 2003 US$ TOTAL ASSETS CLUB SERVICES 236,599 CONSULTANCY SERVICE - RENTAL 3,904,394 SALE OF GOODS 4,440 OTHERS 220,471 ------------ CONSOLIDATION TOTAL 4,365,904 ============ 25. POST BALANCE SHEET EVENT Subsequent to the balance sheet date, the Company has issued 3,761,103 shares to Mr. William Chi Hung Tsang in consideration for assignment of the 5-year rental income of the properties owned by him and settlement of amount due him. In addition, the Company has issued 1,250,000 shares for consultancy services provided by the third party consultants. 99 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND OWNERS OF GUANGDONG NEW GENERATION COMMERCIAL MANAGEMENT LIMITED We have audited the accompanying 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 years of the two-year 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 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 years in the two-year 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 100
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. 101
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) --------------- ---------- ---------- PROFIT 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) --------------- ---------- ---------- PROFIT BEFORE INCOME TAXES 594,415 444,585 39,406 Provision for income taxes 5 (42,446) (573,448) (351,792) --------------- ---------- ---------- NET PROFIT (LOSS) 551,969 (128,863) (312,386) =============== ========== ========== The financial statements should be read in conjunction with the accompanying notes.
102
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 provided by (used in) 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 (DECREASE) IN CASH AND CASH EQUIVALENTS 2,096,215 (778,161) 894,829 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD/YEAR 216,151 994,312 99,483 --------------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD/YEAR 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.
103 NOTES TO FINANCIAL STATEMENTS 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. 104 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. 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 DECEMBER31, ----------------- ------------------------- 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, -------------------------- hghly iquid 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. 105 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 accumulated 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 capitalized 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. 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-cancelable 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 years of the two-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. 106 (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 ========== ========== ==========
107 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 108 (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. (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
109 13. RETIREMENT PLAN As stipulated by PRC regulations, the Company maintains a defined contribution retirement plan for all of its employees who are residents of PRC. All retired employees of the Company are entitled to an annual pension equal to their basic annual salary upon retirement. The Company 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 was 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. 110 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. 111 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND OWNERS OF GUANGDONG HAUHAO INSURANCE AGENCY LIMITED We have audited the accompanying 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 periods/years in the two-year 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 period/year 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 112 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.
113
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.
114
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 profit (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 PROVIDED BY 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 (DECREASE) INCREASE 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.
115
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 profit - - - 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 profit - - - 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.
116 NOTES TO FINANCIAL STATEMENTS 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. For information purposes, the commission income of the Company was derived from insurance policies with total premium income as follows: 117
Period from January 15, THREE-MONTH Year ended 2002 (date of PERIOD ENDED December 31, incorporation) to March 31, 2004 2003 December 31, 2002 -------------- ----------- ------------ US$ US$ US$ PREMIUM INCOME OF INSURANCE POLICIES 1,345,381 36,725,635 2,119,703 ============== =========== ============
118 (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 capitalized 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. 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. 119 (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$60,335 for the three-month period ended March 31, 2004 and each of the period/year ended December 31, 2003. (h) Related parties. Parties are considered to be related if one party has the --------------- ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. (i) Use of estimates. The preparation of the financial statements in ---------------- conformity with USGAAP requires the Company's management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reported periods. Actual amounts could differ from those estimates. Estimates are used for, but not limited to, the accounting for certain items such as allowance for doubtful accounts, depreciation, taxes and contingencies. (j) Allowance for doubtful accounts. The Company provides an allowance for ---------------------------------- doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company's estimate of the allowance for doubtful account will change. Accounts receivable are presented net of allowances for doubtful accounts of US$-, 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
120 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 121 (b) Summary of related party transactions
Period from January 15, THREE-MONTH Year ended 2002 (date of PERIOD ENDED December 31, incorporation) to March 31, 2004 2003 December 31, 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 Company maintains a defined contribution retirement plan for all of its employees who are residents of PRC. All retired employees of the Company are entitled to an annual pension equal to their basic annual salary upon retirement. The Company 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 period/year ended December 31, 2003 was US$598, US$3,092 and US$1,650 respectively. 122 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$1,206,695. The said amount has been fully paid up upon its incorporation. 13. STATUTORY RESERVES Statutory reserves of the Company include the statutory common reserve fund and the statutory common welfare fund. Pursuant to regulations in the PRC, the Company sets aside 10% of its profit after tax for the statutory common reserve fund (except when the fund has reached 50% of the Company's registered capital) and 5% of its profit after tax for the statutory common welfare fund. The statutory common reserve fund can be used for the following purposes: - - to make good losses in previous years; or - - to convert into capital, provided such conversion is approved by a resolution at a owners' general meeting and the balance of the statutory common reserve fund does not fall below 25% of the registered capital. The statutory common welfare fund, which is to be used for the welfare of the staff and workers of the Company, is of a capital nature. 123 UNAUDITED FINANCIAL STATEMENTS OF CHINA WORLD TRADE CORPORATION FOR THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2004 AND 2003 CHINA WORLD TRADE CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2004 ASSETS CURRENT ASSETS NOTE US$ CASH AND CASH EQUIVALENTS 1,137,278 TRADE AND OTHER RECEIVABLES 3 8,236,107 RENTAL AND OTHER DEPOSITS 1,549,172 PREPAYMENTS 206,845 INVENTORIES 8,588 SHORT-TERM INVESTMENT 24,163 -------------- TOTAL CURRENT ASSETS 11,162,153 -------------- INTANGIBLE ASSET 1,722,676 GOODWILL 8,965,499 PROPERTY, PLANT AND EQUIPMENT, NET 3,879,057 -------------- TOTAL ASSETS 25,729,385 ============== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES TRADE AND OTHER PAYABLES 4 6,165,838 DEFERRED INCOME 10,495 SHORT-TERM BANK LOANS 1,570,598 LONG-TERM BANK LOAN - CURRENT PORTION 5 44,746 -------------- TOTAL CURRENT LIABILITIES 7,791,677 LONG-TERM BANK LOAN - NON-CURRENT PORTION 5 414,597 DUE TO A SHAREHOLDER 8(E) 333,722 -------------- TOTAL LIABILITIES 8,539,996 MINORITY INTEREST 3,376,955 124 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY PREFERRED STOCK, PAR VALUE OF US$0.001 EACH; 10,000,000 SHARES AUTHORIZED, NONE ISSUED OR OUTSTANDING - COMMON STOCK, PAR VALUE OF US$0.001 EACH; 50,000,000 SHARES AUTHORIZED, 25,896,699 SHARES (INCLUDING 433,333 SHARES TO BE ISSUED)ISSUED AT SEPTEMBER 30, 2004 6 25,897 ADDITIONAL PAID-IN CAPITAL 26,987,112 ACCUMULATED DEFICIT (13,200,575) -------------- TOTAL STOCKHOLDERS' EQUITY 13,812,434 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 25,729,385 ============== THE FINANCIAL STATEMENTS SHOULD BE READ IN CONJUNCTION WITH THE ACCOMPANYING NOTES.
CHINA WORLD TRADE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three-month and nine-month periods ended September 30, 2004 and 2003 ================================================================================================================= THREE-MONTH PERIOD ENDED SEPTEMBER 30, NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ US$ US$ US$ US$ UNAUDITED UNAUDITED UNAUDITED UNAUDITED OPERATING REVENUES 943,526 995,145 1,582,866 2,379,536 Operating costs and expenses (191,066) (620,546) (538,611) (1,085,454) Selling, general and administrative expenses (1,337,440) (1,556,410) (3,839,486) (3,192,166) ------------ ------------ ------------ ------------ LOSS FROM OPERATIONS (584,980) (1,181,811) (2,795,231) (1,898,084) NON-OPERATING INCOME (EXPENSES) Other income 27,733 1,065 129,883 2,572 Interest expense (23,235) (11,251) (31,965) (17,083) Equity in net loss of affiliate - - - (32,051) ------------ ------------ ------------ ------------ LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (580,482) (1,191,997) (2,697,313) (1,944,646) Provision for income taxes (15,836) - (15,836) - ------------ ------------ ------------ ------------ LOSS BEFORE MINORITY INTEREST (596,318) (1,191,997) (2,713,149) (1,944,646) Minority interest (162,095) - (161,467) 40,522 ------------ ------------ ------------ ------------ NET LOSS (758,413) (1,191,997) (2,874,616) (1,904,124) ============ ============ ============ ============ LOSS PER SHARE OF COMMON STOCK- Basic (0.03) (0.11) (0.15) (0.18) ============ ============ ============ ============ Weighted average number of shares of common stock outstanding 23,362,506 10,970,497 19,148,417 10,618,849 ============ ============ ============ ============
The financial statements should be read in conjunction with the accompanying notes. 125
CHINA WORLD TRADE CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine-month period ended September 30, 2004 =============================================================================================================== NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 2003 ------------ ------------ Note US$ US$ UNAUDITED UNAUDITED CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (2,874,616) (1,904,125) Adjustments to reconcile net loss to net cash used in operating activities: Minority interest 161,467 (40,522) Amortization of intangible assets 270,000 - Equity in net loss of affiliate - 32,051 Stock issued for services 640,407 600,000 Depreciation 149,456 77,622 Impairment loss on property, plant and equipment - 106,975 Impairment loss on goodwill 251,448 - Decrease in deferred income (12,682) (357,628) Changes in working capital: Trade and other receivables (1,108,413) 300,578 Rental and other deposits (722,766) (9,821) Prepayments 362,923 45,499 Inventories 64,795 (268,917) Trade and other payables 726,645 767,727 ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (2,091,336) (650,561) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of subsidiaries 9 (3,459,562) 123,707 Acquisition of an affiliate - (32,051) Acquisition of property, plant and equipment (63,707) (49,045) Purchase of investment securities (11,840) - ------------ ------------ NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,535,109) 42,611 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Capital contribution from minority shareholder of a subsidiary 2,821,824 4,477 Advance from a shareholder 333,722 - Proceed from new bank loans - 812,820 Repayment of amount borrowed (1,008,972) (10,482) Issuance of new shares 4,302,378 - ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 6,448,952 806,815 ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 822,507 198,865 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 314,771 74,355 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD 1,137,278 273,220 ============ ============ ANALYSIS OF BALANCES OF CASH AND CASH EQUIVALENTS Cash and bank balances 1,137,278 273,220 ============ ============ NON-CASH INVESTING AND FINANCING ACTIVITIES Common stocks issued for services 640,407 600,000 Purchase of subsidiaries by: - issuance of common stock 7,703,768 3,200,000 - purchase consideration in arrear 70,000 - ============ ============
The financial statements should be read in conjunction with the accompanying notes. 126 CHINA WORLD TRADE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE-MONTH AND NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2004 AND 2003 1. BASIS OF PRESENTATION The accompanying financial data as of September 30, 2004 and for the three-month and nine-month periods ended September 30, 2004 and 2003, have been prepared by the Company, without audit. Following the change of the Company's financial year end date from September 30 to December 31 with effect from the period ended December 31, 2003, these quarterly financial statements have been prepared based on the newly adopted financial year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's audited financial statements for the year ended September 30, 2003. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates. In the opinion of the management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows as of September 30, 2004 and for the three-month and nine-month periods ended September 30, 2004 and 2003, have been made. The results of operations for the three-month and nine-month periods ended September 30, 2004 and 2003 are not necessarily indicative of the operating results for the full year. 2. PREPARATION OF FINANCIAL STATEMENTS The Company has net loss of US$758,413 and US$2,874,616 for the three-month and nine-month periods ended September 30, 2004. The Company is an investment holding company. The subsidiaries are principally engaged in the businesses of providing club services, business traveling services and properties investments. Management has developed a strategy, which it believes can be accomplished and will enable the Company to operate in the future. However, there can be no assurance that the Company will be successful with its efforts to attain profitable operations. The inability of the Company to attain profitable operations in the near term could adversely impact the Company's business, financial position and prospects. 127 3. TRADE AND OTHER RECEIVABLES AS OF SEPTEMBER 30, 2004 Note US$ ------------- Trade receivables 1,288,475 Due from related parties 8(c) 6,751,033 Other receivables 196,599 ------------- 8,236,107 ============= 4. TRADE AND OTHER PAYABLES AS OF SEPTEMBER 30, 2004 Note US$ ------------- Trade payables 2,808,570 Income tax payable 12 1,165,343 Accrued charges 133,778 Other payables 12 1,808,388 Due to related parties 8(d) 197,012 Deposits received 52,747 ------------- 6,165,838 ============= 5. LONG-TERM BANK LOAN The outstanding loan balance of US$459,343 as of September 30, 2004 bears interest at 4% per annum and is repayable serially from 2004 to 2013. The maturity of the long-term bank loan is as follows: PRINCIPAL PAYABLES DURING THE FOLLOWING PERIODS US$ 44,746 October 2004 to September 2005 - --------- 46,568 October 2005 to September 2006 48,466 October 2006 to September 2007 50,440 October 2007 to September 2008 52,495 October 2008 to September 2009 216,628 from October 2009 onwards - --------- 414,597 - --------- 459,343 ========= 128 6. ISSUANCE OF SHARES THE FOLLOWING CAPITAL STOCK TRANSACTIONS, WHICH WERE ALL RECORDED AT FAIR VALUES AS OF THEIR RESPECTIVE DATES OF AGREEMENT, OCCURRED DURING THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2004: (a) On July 12, 2004, the Company issued 43,500 shares to CEOcast Inc. for consulting services provided. (b) On July 20, 2004, Mr. William Chi Hung Tsang and Powertronic Holdings Limited ("Powertronic") exercised a two-year warrant. Mr. Tsang and Powertronic purchased 1,500,000 and 2,000,000 shares of the common stock of the Company at a price of US$0.92 and US$0.575 per share respectively. As of September 30, 2004, Mr. Tsang held 4,500,000 and 2,500,000 warrants to purchase 4,500,000 and 2,500,000 shares at a price of US$0.75 and US$0.92 respectively, and Powertronic held 2,000,000 warrants to purchase 2,000,000 shares at a price of US$0.575. (c) On July 21, 2004, the Company entered into an agreement with Duncan Capital for private placement. 433,333 shares to be issued was included in common stock at September 30, 2004. (d) On July 30, 2004, the Company issued 4,081,238 shares to the shareholders of Guangdong New Generation Commercial Management Limited ("GNGCM") and Guangdong Hauhao Insurance Agency Limited ("GHIAL") as consideration for 51% interest of GNGCM. (e) On August 31, 2004, the Company issued 2,000 shares to The Equitis Group as a compensation for termination of a contract. 7. STOCK-BASED COMPENSATION The Company records compensation expense for stock-based employee compensation plans using the intrinsic value method in which compensation expense, if any, is measured as the excess of the market price of the stock over the exercise price of the award on the measurement date. On December 31, 2003, the Board of Directors adopted a stock option plan (the 2003 Plan). The 2003 Plan allows the Board of Directors to grant stock options to various employees of the Company. 1,000,000 stock options were issued in accordance with the terms of the 2003 Plan on December 31, 2003 to certain officers and directors at an exercise price of US$0.673 per share. The stock options will vest and become exercisable according to the following schedule: ON APRIL 30, 2004: 25 % ON DECEMBER 30, 2004: 25 % EACH QUARTER THEREAFTER: 6.25% (UNTIL FULLY VESTED) As the exercise price of the 2003 Plan is higher than the market price of the underlying stock on the date of grant, pursuant to APB Opinion No. 25, no compensation expense has been recognized for stock options granted. Had compensation expenses for the same stock options been determined based on their fair values at the dates of grant and been amortized over the period from the date of grant to the date that the award is vested, consistent with the provisions of SFAS No. 123, the Company's net loss and loss per share would have been reported as follows: 129
Three-month period ended September 30, Nine-month period ended September 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ US$ US$ US$ US$ Net loss As reported (758,413) (1,191,997) (2,874,616) (1,904,124) ------------ ------------ ------------ ------------ Total stock-based compensation expenses (60,881) - (263,819) - ============ ============ ============ ============ Pro forma (819,294) (1,191,997) (3,138,435) (1,904,124) ============ ============ ============ ============ Basic net loss per share As reported (0.03) (0.11) (0.15) (0.18) ------------ ------------ ------------ ------------ Pro forma (0.04) (0.11) (0.16) (0.18) ============ ============ ============ ============
The options granted had a weighted average "fair value" per share on date of grant of US$0.65. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expenses over the options' vesting periods, i.e., 3 years as prescribed under the 2003 Plan. The fair value of the option is estimated on the date of the grant using the Black-Scholes option price model, assuming no dividends and with the following assumptions : RISK-FREE INTEREST RATE 2.1 % EXPECTED VOLATILITY 2.24 % CONTRACTUAL LIFE 3 YEARS 8. RELATED PARTY TRANSACTIONS (a) Names and relationship of related parties Existing relationships with the Company ---------------------------------------- Mr. Bernard Chan A shareholder and officer of the Company Mr. Bobby Yu A former director of a subsidiary Mr. Chan Chi Ming A director of the Company Mr. Luo Chao Ming A director of the Company Mr. John Hui A director of the Company Mr. Ringo Leung A former director of the Company Mr. William Tsang A shareholder and director of the Company Beijing Wanlong Economic Consultancy Corporation Ltd. PRC partner of a subsidiary General (Guangzhou) Business Network Ltd. An affiliate of the Company Guangzhou City International Exhibition Co. PRC partner of a subsidiary Guangzhou Cyber Strategy Limited A company in which a director of the Company has beneficial interest Guangzhou Goldlion City Properties Co., Ltd. A company controlled by close family members of a director Xelex Inc. A company in which a shareholder of the Company has beneficial interest Top Link Ventures Limited A company in which a director of the Company has beneficial interest Union East Consultants Limited A company in which a former director of a subsidiary has beneficial interest Dimension Marketing Limited A shareholder of a former subsidiary Mr. Simon Guo A director of a subsidiary Mr. Li Jingping A director of a subsidiary Mr. Yang Xin A shareholder of the Company Mr. Zhao Lin A shareholder of the Company Mr. Cui Wencheng A shareholder of the Company Mr. Ho Chi Kin An independent director of the Company Huahao Industries Group Co. Ltd. A shareholder of a subsidiary Guangzhou SRX Travel Service Limited A company in which a director of the company has beneficial interest Guangzhou XZR International Travel Services Limited A company in which a director of the company has beneficial interest Huang Ze Hua A shareholder of a subsidiary Chen De Xiong A shareholder of a subsidiary 130 (b) Summary of related party transactions
Three-month period ended Nine-month period ended September 30, September 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ US$ US$ US$ US$ Consulting fee expenses to - ----------------------------- Mr. Ringo Leung - - 5,128 - Mr. Chan Chi Ming - 15,385 - 30,769 Mr. Bernard Chan - 3,846 2,564 12,821 Mr. Bobby Yu - - - 4,231 Mr. John Hui - 57,692 57,692 141,026 Mr. William Tsang - 57,692 57,692 141,026 Mr. Luo Chao Ming 4,349 - 13,048 - Mr. Ho Chi Kin 1,500 - 1,500 - Beijing Wanlong Economic Consultancy Corporation Ltd. 4,531 4,531 13,592 13,592 Guangzhou City International Exhibition Co. 4,531 4,531 13,592 13,592 Xelex Inc. 15,384 - 35,897 - Top Link Ventures Limited 15,385 - 46,154 - Guangzhou Cyber Strategy Limited - - 1,938 - ============ ============ ============ ============ Rent and related expenses to - -------------------------------- Guangzhou Goldlion City Properties Co., Ltd. 116,607 187,713 337,526 541,389 Huahao Industries Group Co. Ltd. 37,622 - 37,622 - ============ ============ ============ ============ Consultancy fee income from - ------------------------------ Guangzhou Cyber Strategy Limited - - - 192,308 ============ ============ ============ ============ Membership fee income from - ----------------------------- Guangzhou Cyber Strategy Limited - - - 32,016 Union East Consultants Limited - - 16,008 32,016 ============ ============ ============ ============ Loans advanced to - ------------------- Dimension Marketing Limited - 1,194 - 2,692 ============ ============ ============ ============ Assets purchase from - ---------------------- Huahao Industries Group Co. Ltd. 451,970 - 451,970 - ============ ============ ============ ============
131 8. RELATED PARTY TRANSACTIONS (CONTINUED) (c) Due from related parties AS OF September 30, 2004 US$ ------------------ Guangzhou Cyber Strategy Limited 159,876 Guangdong Huahao Industrial Group Co. Limited 5,643,874 Guangzhou SRX Travel Service Limited 2,508 Guangzhou XZR International Travel Services Limited 42,285 Huang Ze Hua 360,029 Chen De Xiong 542,461 ------------------ 6,751,033 ================== The amount due from related parties represent unsecured advances which are interest-free and repayable on demand. (d) Due to related parties AS OF September 30, 2004 US$ ------------------ Suo Hong Xia 24,163 Mr. John Hui 11,626 Mr. Ringo Leung 1,095 Guangzhou Goldlion City Properties Co., Ltd. 4,450 Beijing Wanlong Economic Consultancy Corporation Ltd. 22,653 Guangzhou City International Exhibition Company 13,592 Cui Wencheng 11,616 Yang Xin 7,488 Simon Guo 28,942 Li Jingping 65,771 Zhao Lin 5,616 ------------------ 197,012 ================== The amounts due to related parties represent unsecured advances which are interest-free and repayable on demand. 8. RELATED PARTY TRANSACTIONS (e) Due to a shareholder AS OF September 30, 2004 US$ ------------------ Mr. William Tsang 333,722 ================== The amount due to a shareholder represents unsecured advances which is interest-free and not repayable within one year. 9. SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION (a) Summary of effect of acquisition of subsidiaries NINE MONTHS ENDED SEPTEMBER 30, 2004 2003 ---------- ---------- US$ US$ NET ASSETS ACQUIRED Property, plant and equipment 1,106,022 2,971,993 Intangible assets 222,676 - Cash and cash equivalents 1,259,274 123,707 Trade and other receivables 6,941,366 106,628 Rental and other deposits 569,237 10,618 Prepayments 11,733 4,312 Short-term investments 12,323 - Trade and other payables (3,905,614) (268,706) Short-term bank loans (2,247,164) - Minority interest (390,133) - ---------- ---------- 3,579,720 2,948,552 Add: Goodwill arising from acquisition of subsidiaries 8,965,499 251,448 ---------- ---------- Consideration 12,545,219 3,200,000 ========== ========== 132 9. SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED) (b) Analysis of the net inflow of cash and cash equivalents in respect of acquisition during the period NINE MONTHS ENDED SEPTEMBER 30, 2004 2003 ---------- ---------- US$ US$ Consideration (12,545,219) (3,200,000) Bank balance and cash acquired 1,259,274 123,707 Issuance of common stock for satisfying the consideration 7,706,383 3,200,000 Purchase consideration in arrear 120,000 - ---------- ---------- Net outflow of cash and cash equivalents (3,459,562) 123,707 ========== ========== In addition to the above consideration of US$12,545,219, the Company has committed to inject cash of US$120,000 to a newly acquired subsidiary as operating funds. 10. MATERIAL BUSINESS COMBINATIONS 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 Guangdong New Generation Commercial Management Limited ("GNGCM") and Guangdong Hauhao Insurance Agency Limited ("GHIAL") (the "Transferors"), pursuant to which the Transferee would acquire from the Transferors 51% interest in GNGCM (the "Acquisition") 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 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 reorganization to be completed by GNGCM. Upon completion of the reorganization, GNGCM shall hold 7 subsidiaries (collectively "GNGCM Group"). 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. Completion of the acquisition of GNGCM Group enables the Company to expand its business to the high growth, travel-related businesses. The acquisition has been accounted for under the purchase method of accounting. The purchase price of US$10,232,000 was allocated to the assets and liabilities acquire based on their estimated fair value at the date of acquisition. This allocation has resulted in acquired goodwill of US$8,652,530. The results of GNGCM Group have been included in the consolidated financial statements since the acquisition date. 133 PRO FORMA RESULTS PRESENTATION The following unaudited pro forma information presents a summary of our consolidated results of operations as if the Acquisition had been taken place on January 1, 2003.
Three-month period ended Nine-month period ended September 30, September 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ US$ US$ US$ US$ UNAUDITED UNAUDITED UNAUDITED UNAUDITED OPERATING REVENUES 1,356,217 1,992,518 5,002,939 4,415,469 ============ ============ ============ ============ NET LOSS (148,650) (1,149,021) (1,208,279) (1,871,461) ============ ============ ============ ============ LOSS PER SHARE (0.01) (0.1) (0.06) (0.18) ============ ============ ============ ============
11. BUSINESS SEGMENT INFORMATION
Three-month period ended Nine-month period ended September 30, September 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ US$ US$ US$ US$ OPERATING REVENUES Club services 176,831 418,654 349,920 1,307,391 Consultancy service - - - 192,309 Rental 184,169 18,517 527,013 48,741 Sale of goods - 543,043 123,560 814,111 Travel ticketing agency 540,969 - 540,969 - Travel insurance 39,788 - 39,788 - Travel information service - - - - Sales of clothing 1,769 - 1,769 - Others - 14,931 (153) 16,984 ------------ ------------ ------------ ------------ 943,526 995,145 1,582,866 2,379,536 ============ ============ ============ ============
134 11. BUSINESS SEGMENT INFORMATION (CONTINUED)
Three-month period ended Nine-month period ended September 30, September 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ US$ US$ US$ US$ PROFIT (LOSS) FROM OPERATIONS Club services (222,106) (117,064) (726,285) (388,147) Consultancy service - - - 101,128 Rental (25,266) (196,595) (111,009) (575,585) Sale of goods (3,029) (4,154) (31,019) (37,682) Travel ticketing agency 330,671 - 330,671 - Travel insurance 16,328 - 16,328 - Travel information service (77,879) - (77,879) - Sales of clothing (92) - (92) - Others - (37,405) - (25,512) ------------ ------------ ------------ ------------ 18,627 (355,218) (599,285) (925,798) Corporate expenses (603,607) (826,593) (2,195,946) (972,286) ------------ ------------ ------------ ------------ Consolidated operating loss (584,980) (1,181,811) (2,795,231) (1,898,084) Other income 27,733 1,065 129,883 2,572 Interest expense (23,235) (11,251) (31,965) (17,083) Equity in net loss of an affiliate - - - (32,051) Minority interest (162,095) - (161,467) 40,522 Income taxes (15,836) - (15,836) - ------------ ------------ ------------ ------------ Net loss (758,413) (1,191,997) (2,874,616) (1,904,124) Income taxes included in segment profit (loss) above 15,836 - 15,836 - ------------ ------------ ------------ ------------ Net loss before income taxes (742,577) (1,191,997) (2,858,780) (1,904,124) ============ ============ ============ ============
135 12. CONTINGENT LIABILITIES Prior to the completion of acquisition by the Company, GNGCM had been paying mainland China income tax at a basis of calculation which was not in accordance with the standard basis of calculation as stipulated by the mainland China tax law. The shortfall of the underpaid tax liabilities, related surcharges and penalty up to the date of acquisition by the Company has already been fully provided in the consolidated financial statements. However, GNGCM would potentially be liable to further surcharge for late payment and penalty, additional to the amount being provided, for the period since the date of acquisition by the Company and up to the balance sheet date. A shareholder of GNGCM has undertaken to indemnify the Company against such shortfall and additional tax-related liabilities. As of September 30, 2004, the estimated further surcharges and penalties which GNGCM was potentially liable amounted to US$25,183. The following pro forma financial statements and notes of the Registrant and (i) Guangdong New Generation Commercial Management Limited and (ii) Guangdong Huahao Insurance Agency Limited (hereinafter, the "Constituent Companies") are set forth below: An Unaudited Pro Forma Condensed Consolidated Balance Sheet of the Constituent Companies as of June 30, 2004, and an Unaudited Pro Forma Condensed Consolidated Statement of Operations of the Constituent Companies for the six months ended June 30, 2004 and year ended September 30, 2003. The following unaudited pro forma condensed consolidated balance sheet as of June 30, 2004 and the unaudited pro forma condensed consolidated statements of operations for the six-month period ended June 30, 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 June 30, 2004 is presented to give effect to the Acquisition as if it had occurred on June 30, 2004. The unaudited pro forma condensed consolidated statements of operations of the Company, GNGCM and GHIAL for the six-month period ended June 30, 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 six-month period ended June 30, 2004 filed on August 19, 2004, the audited financial statements of GNGCM and GHIAL for the year ended December 31, 2003 and the unaudited management accounts of GNGCM and GHIAL for the six-month period ended June 30, 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. 136
CHINA WORLD TRADE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 2004 - ----------------------- PRO FORMA Pro forma CONSOLIDATED GNGCM GHIAL The Company adjustments BALANCE ----------- ----------- ----------- ----------- ----------- US$ US$ US$ US$ US$ ASSETS CURRENT ASSETS Cash and cash equivalents 1,846,128 12,496 32,935 (2,745,000) (a) 1,646,559 2,500,000 (b) Trade receivables 1,038,457 - 22,084 1,060,541 Other receivables - 697,720 13,844 711,564 Due from related parties 2,505 - 75,818 78,323 Rental and other deposits 744,061 - 254,953 999,014 Prepayments - - 102,428 102,428 Inventories - - 9,142 9,142 ----------- ----------- ----------- ----------- TOTAL CURRENT ASSETS 3,631,151 710,216 511,204 4,607,571 Intangible asset - - 1,590,000 1,590,000 Goodwill - - 359,346 14,575,068 (c) 14,934,414 Property, plant and equipment, net 127,174 19,648 3,259,749 3,406,571 Investment in a subsidiary - - - 10,232,000 (a) - (10,232,000) (c) ----------- ----------- ----------- ----------- TOTAL ASSETS 3,758,325 729,864 5,720,299 24,538,556 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade payables 3,707,934 - 18,176 3,726,110 Accrued charges 1,522,974 - 104,187 1,627,161 Other payables - 31,036 107,616 138,652 Tax payables 1,151,972 3,514 - 1,155,486 Due to related parties 696,215 - 235,327 931,542 Deposits received - - 40,315 40,315 Deferred income - - 6,551 6,551 Short term bank loan 1,206,695 - - 1,206,695 Long-term bank loan - current portion - - 44,301 44,301 ----------- ----------- ----------- ----------- TOTAL CURRENT LIABILITIES 8,285,790 34,550 556,473 8,876,813 Long-term bank loan - - non-current portion - - 425,952 425,952 Due to a shareholder - - 954,995 954,995 ----------- ----------- ----------- ----------- Total liabilities 8,285,790 34,550 1,937,420 10,257,760 ----------- ----------- ----------- ----------- Minority interest - - - 510,917 (c) 510,917 ----------- ----------- ----------- ----------- STOCKHOLDERS' EQUITY 4,081 (a) 3,500 (b) Common 1,810,042 1,206,695 17,837 (3,016,737) (c) 25,418 Additional paid-in capital - - 16,207,204 7,482,919 (a) 26,186,623 2,496,500 (b) Due from related party (7,081,663) (1,313,152) - 8,394,815 (c) - Dedicated reserves 477,757 121,156 - (598,913) (c) - Accumulated (deficit) profit 266,399 680,615 (12,442,162) (947,014) (c) (12,442,162) ----------- ----------- ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (4,527,465) 695,314 3,782,879 13,769,879 ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 3,758,325 729,864 5,720,299 24,538,556 =========== =========== =========== ===========
137
CHINA WORLD TRADE CORPORATION UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS SIX-MONTH PERIOD ENDED JUNE 30, 2004 - ----------------------------------------- PRO FORMA Pro forma CONSOLIDATED GNGCM GHIAL The Company adjustments BALANCE ----------- ----------- ----------- ----------- ----------- US$ US$ US$ US$ US$ OPERATING REVENUES 2,650,848 289,469 639,340 3,579,657 OPERATING EXPENSES Operating costs and expenses (1,030,345) (19,916) (347,546) (1,397,807) Selling, general and administrative expenses (294,433) (103,413) (2,502,045) (2,899,891) ----------- ----------- ----------- ----------- PROFIT (LOSS) FROM OPERATIONS 1,326,070 166,140 (2,210,251) (718,041) NON-OPERATING (EXPENSES) INCOME Other income 3,193 96 102,150 105,439 Interest expenses (38,938) (8) (8,730) (47,676) ----------- ----------- ----------- ----------- PROFIT (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 1,290,325 166,228 (2,116,831) (660,278) INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS Provision for income taxes (116,440) (8,086) - (124,526) ----------- ----------- ----------- ----------- PROFIT (LOSS) BEFORE MINORITY INTEREST 1,173,885 158,142 (2,116,831) (784,804) MINORITY INTEREST - - 628 (116,203) (d) (115,575) ----------- ----------- ----------- ----------- NET PROFIT (LOSS) 1,173,885 158,142 (2,116,203) (900,379) =========== =========== =========== =========== LOSS PER SHARE OF COMMON STOCK - - Basic - - (0.12) (0.04) =========== =========== =========== =========== Weighted average number of shares of common stock outstanding - - 17,018,219 4,081,238 (e) 21,099,457 =========== =========== =========== ===========
138
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 ended September 30, 2003 filed on January 13, 2004, the Company's Form-10QSB quarterly report for the six-month period ended June 30, 2004 filed on August 19, 2004, the audited financial statements of GNGCM and GHIAL for the year ended December 31, 2003 and the unaudited management accounts of GNGCM and GHIAL for the six-month period ended June 30, 2004 prepared in accordance with USGAAP. 139 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 second quarter falling into the financial year ending December 31, 2004 covers the six-month period ended June 30, 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 the year ended December 31, 2003 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 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 reorganization, 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. 140 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 financial statements are as follows: (a) Adjustment to record the consideration for the acquisition of 51% interest in GNGCM and 26.52% 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 (1,810,042) (1,206,695) (3,016,737) DUE FROM RELATED PARTY 7,081,663 1,313,152 8,394,815 DEDICATED RESERVES (477,757) (121,156) (598,913) RETAINED EARNINGS (266,399) (680,615) (947,014) MINORITY INTERESTS - 510,917 510,917 ---------- 14,575,068 ========== (d) Adjustment to reflect the minority interest's share of results of GNGCM and GHIAL for the six-month period ended June 30, 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The accounting firm of Moores Rowland Mazars audited our financial statements. We have had no changes in or disagreements with our accountant 141 HOW TO GET MORE INFORMATION We have filed with the Securities and Exchange Commission in Washington, DC, a registration statement on Form SB-2 under the Securities Act of 1933, as amended, with respect to the shares we are offering. We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended, and are required to file reports pursuant to its provisions. This prospectus does not contain all of the information set forth in the registration statement, as permitted by the rules and regulations of the Commission. Reference is hereby made to the registration statement and shares to which this prospectus relates. Copies of the registration statement and other information filed by us with the Commission can be inspected and copied at the public reference facilities maintained by the Commission in Washington, DC at 450 Fifth Street, NW, Washington, DC 20549. In addition, the Commission maintains a World Wide Web site that contains reports, proxy statements and other information regarding registrants, such as China World Trade, which are filed electronically with the Commission at the following Internet address: (http:www.sec.gov). [The rest of this page intentionally left blank] 142
========================================= ======================================= Until _____________, 2004 (40 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - -------------------------------- TABLE OF CONTENTS CHINA WORLD TRADE CORPORATION - -------------------------------- Prospectus Summary The Offering Risk Factors Forward Looking Statements UP TO 16,981,717 SHARES Use of Proceeds COMMON STOCK Dilution $.001 PAR VALUE Standby Equity Distribution Agreement Plan of Distribution Legal Proceedings Directors & Executive Officers Security Ownership Description of Securities Interests of Named Experts ---------- SEC's Position on Indemnification PROSPECTUS Description of Business ---------- Management's Discussion & Analysis Description of Property Certain Relationships and Related Transactions Market for Common Stock Executive Compensation Financial Statements JANUARY14, 2005 No dealer, salesperson or other person has been authorized to give any information or to make any representations other than those contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by China World Trade. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to whom it is unlawful to make such offer in any jurisdiction. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that information contained herein is correct as of any time subsequent to the JANUARY14, 2005 date hereof or that there has been no change in the affairs of the China World Trade since such date. ======================================= =========================================
143 PART II INFORMATION NOT REQUIRED TO BE INCLUDED IN PROSPECTUS OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table is an itemization of all expenses, without consideration to future contingencies, incurred or expected to be incurred by China World Trade Corporation in connection with the issuance and distribution of the securities being offered by this prospectus. Items marked with an asterisk (*) represent estimated expenses. We have agreed to pay all the costs and expenses of this offering. Selling security holders will pay no offering expenses. Item Expense - ---- ----------- SEC Registration Fee $ 4,518.33 Legal Fees and Expenses* $ 50,000 State Blue Sky Fees* $ 7,500 Miscellaneous* $ 1,000 ============================================ Total* $ 62,118.33 * Estimated Figure RECENT SALES OF UNREGISTERED SECURITIES A. MR. WILLIAM CHI HUNG TSANG Pursuant to an agreement entered between the Company and Mr. William Chi Hung Tsang dated November 19, 2003, the Company acquired the after-tax rental income of a property located in Guangzhou, China for a five-year period commencing from December 1, 2003 to November 30, 2008 in exchange for 3,000,000 newly issued shares of the Company and a two-year warrant to purchase up to 6,000,000 shares of the Company at an agreed upon price. The 3,000,000 shares were issued on December 5, 2003. Fair value of the issued shares is US$0.60 each, representing the closing bid price of the Company's shares on November 19, 2003. The rental income stream acquired has been capitalized as an intangible asset and is amortized on a straight-line basis over five years. On December 5, 2003, the Company issued 761,103 shares to Mr. William Chi Hung Tsang for partial settlement of amounts due to him. The shares were recorded at fair values of the shares issued. The amounts were recognized as expenses in the three-month period ended December 31, 2003. We relied on exemptions provided by Section 4(2) of the Securities Act of 1933, as amended. We made this offering based on the following facts: (1) the issuance was an isolated private transaction which did not involve a public offering; (2) there was only one offeree, (3) the offered has agreed to the imposition of a restrictive legend on the face of the stock certificate representing its shares, to the effect that it will not resell the stock unless its shares are registered or an exemption from registration is available; (4) the offered was a sophisticated investor; (5) there were no subsequent or contemporaneous public offerings of the stock; (6) the stock was not broken down into smaller denominations; and (7) the negotiations for the sale of the stock took place directly between the offered and our management. 144 B. GREENTREE FINANCIAL GROUP, INC. and RR INV HOLDING INC. On December 9, 2003, we issued 400,000 shares of our common stock to Greentree Financial Group, Inc. for professional services, including: - Assistance in preparation of private offering documents - Compliance with state Blue Sky regulations - Compliance with the Securities and Exchange Commission's periodic reporting requirements - Tax and accounting services - EDGAR services - Preparation of interim financial information - Locating product vendors - Other consulting services We also issued 50,000 shares to RR INV Holding INC for consultancy services provided. The shares were recorded at fair values of the shares issued. The amounts were recognized as expenses in the three-month period ended December 31, 2003. We relied on exemptions provided by Section 4(2) of the Securities Act of 1933, as amended. We made this offering based on the following facts: (1) the issuance was an isolated private transaction which did not involve a public offering; (2) there was only two offered, (3) the offered has agreed to the imposition of a restrictive legend on the face of the stock certificate representing its shares, to the effect that it will not resell the stock unless its shares are registered or an exemption from registration is available; (4) the offered was a sophisticated investor ; (5) there were no subsequent or contemporaneous public offerings of the stock; (6) the stock was not broken down into smaller denominations; and (7) the negotiations for the sale of the stock took place directly between the offered and our management. C. TMT CONSULTANT AND MR. ANDY LAU On December 11, 2003, the Company issued 500,000 shares each to Mr. Andy Lau and TMT Consultant for consultancy services provided. Mr. Lau's services included: - Developing information technology strategy and project implementation of IT-enabled business centers operated throughout China. - Formulation the network topology and the IT applications plan of the business centers in Guangzhou. - Assisting and facilitating the establishment of the IT network of the business centers, and supervising the project progress implemented by outsourced project team. - Facilitating the cooperation between CWTD and any third party into-tech service providers under the consent of CWTD to enhance the value added service delivered through the info-tech network. TMT Consultant's services included: - Developing sales and marketing strategies and implementing CWTD's co-brand VISA credit card in associate with the Agricultural Bank of China. - Formulating the visual identity of all the marketing material of the co-brand credit card. - Assisting and facilitating the discussion and cooperation between CWTD and China advertising companies in creating publicity in China. - Facilitating the cooperation of CWTD and predefined third party service provider to enhance the value added service of the co-branded credit card. 145 We relied on exemptions provided by Section 4(2) of the Securities Act of 1933, as amended. We made this offering based on the following facts: (1) the issuance was an isolated private transaction which did not involve a public offering; (2) there was only two offered, (3) the offered has agreed to the imposition of a restrictive legend on the face of the stock certificate representing its shares, to the effect that it will not resell the stock unless its shares are registered or an exemption from registration is available; (4) the offered was a sophisticated investor ; (5) there were no subsequent or contemporaneous public offerings of the stock; (6) the stock was not broken down into smaller denominations; and (7) the negotiations for the sale of the stock took place directly between the offered and our management. D. WALL STREET STRATEGIES, INC. On December 16, 2003, the Company issued 100,000 shares to Wall Street Strategies, Inc. for consultancy services provided. The shares were recorded at fair values of the shares issued. The amounts were recognized as expenses in the three-month period ended December 31, 2003. E. DEBT RESTRUCTURING Effective September 1, 2002, we consummated a 1 for 30 reverse stock split of the outstanding shares of common stock. In September, 2002, we completed a debt-for-equity capital restructuring and issued shares to certain creditors for the settlement of debts and fees pursuant to settlement agreements, as follows: Name of Creditor Date (2002) No. of Shares - ---------------- ------------ ------------- Mr. James Mak September 8 87,500 Mr. James Mak September 8 35,000 Mr. Roy Wu September 9 87,500 Mr. Alfred Or September 10 156,645 Mr. Andersen Chan September 10 60,000 Mr. Bernard Chan September 8 73,355 Superwear Limited September 9 500,000 Simple Fortune Inc. September 9 490,000 Sinogolf Limited September 9 510,000 Top-Trained Securities Limited September 11 1,000,000 Splendid Partner Holdings Limited September 12 500,000 I & V Ltd. September 12 500,000 146 The shares of common stock delivered as consideration in the debt for equity restructuring were issued on January 22, 2003. As a result of two share purchase agreements dated September 3, 2002 and December 17, 2002, respectively, and entered into between the Company and Powertronic Holdings Limited, on January 24, 2003 we issued a total of 2,000,000 shares of common stock and warrants to purchase up to 4,000,000 shares of common stock for a total purchase price of $1,000,000 to Powertronic Holdings Limited. As a result of a share exchange agreement dated December 17, 2002 entered into between the Company and Mr. William Chi Hung Tsang, on January 24, 2003, we issued 4,000,000 shares of common stock and warrants to purchase up to 4,000,000 shares of stock in exchange for 100% of the share capital of General Business Network (Holdings) Ltd. We relied on exemptions provided by Section 4(2) of the Securities Act of 1933, as amended. We made this offering based on the following facts: (1) the issuance was an isolated private transaction which did not involve a public offering; (2) there was only one offered, (3) the offeree has agreed to the imposition of a restrictive legend on the face of the stock certificate representing its shares, to the effect that it will not resell the stock unless its shares are registered or an exemption from registration is available; (4) the offeree was a sophisticated investor ; (5) there were no subsequent or contemporaneous public offerings of the stock; (6) the stock was not broken down into smaller denominations; and (7) the negotiations for the sale of the stock took place directly between the offeree and our management. F. TCMP3 PARTNERS AND BRIDGES & PIPES LLC INVESTORS On August 26, 2004, we entered into a Securities Purchase Agreement with the TCMP3 Partners and Bridges & PIPES LLC (together being the "Purchasers"), providing for the issuance by us of (i) 333,334 shares of common stock at a price of $1.50 per share and 166,667 Series A five year Warrants to purchase shares of our common stock at $2.50 per share to Bridges & PIPES LLC, and (ii) 100,000 shares of common stock at a price of $1.50 per share and 50,000 Series A five year Warrants to purchase shares of our common stock at $2.50 per share to TCMP3 Partners, for an aggregate purchase price of $650,000. In addition, we granted each Purchaser an option (the "Option") to purchase that number of shares equal to the number of shares initially purchased by the Purchaser on the Closing Date (the "Firm Shares"). Upon exercise of the Option at a purchase price of $3.00 per share of common stock, the Purchaser would also receive, without additional consideration, five-year Series B Warrants to purchase 50% of the Firm Shares at an exercise price equal to $4.00 per share. To date, neither of the Purchasers has exercised the Option. In connection with this offering, we retained the services of Duncan Capital LLC to act as Placement Agent, and for its services Duncan Capital LLC was entitled to receive compensation equal to (i) a cash fee of ten percent of the aggregate purchase price of the shares of common stock and warrants sold, (ii) the issuance of a five-year non-cashless exercised provisioned warrant to purchase such number of shares of common stock as shall equal ten percent of the aggregated number of shares sold in the offering and shares exercised upon exercised upon exercise of the Series A Warrants and Series B Warrants at an exercise price of $2.50 per share, and (iii) a cash fee of ten percent upon our receipt of proceeds, if any, upon the exercise of the Series A Warrants and Series B Warrants by the Purchasers. Duncan Capital LLC currently has been issued a Placement Agent's warrant to purchase 43,000 of our common shares at an exercise price equal to $2.50 per share, which is being registered pursuant to this prospectus. 147 In this offering, we relied on the exemption from registration of Section 4(2) under the Securities Act and Regulation D promulgated pursuant thereto. G. CORNELL CAPITAL PARTNERS, LP AND STEALTH CAPITAL, LLC On December 3, 2004, we had a second closing under the Securities Purchase Agreement with two new Purchasers, Cornell Capital Partners, LLC and Stealth Capital, LLC, who together purchased an aggregate of $1,450,000 of our shares of common stock and Series A Warrants, as follows: (i) Cornell Capital purchased 900,000 shares of common stock at $1.50 per share, and received 450,000 Series A Warrants, and (ii) Stealth Capital purchased 66,667 shares of common stock at $1.50 per share, and received 33,334 Series A Warrants. For its services as Placement Agent, Duncan Capital, LLC received 69,667 Placement Agent Warrants, which are exercisable at $2.50 per share. In addition, Bridges & PIPES, LLC was issued 83,334 Series A Warrants and TCMP3 Partners was issued 25,000 Series A Warrants for their agreement to waive their rights under the Registration Rights Agreement to be the sole registrants, together with Cornell Capital and Stealth Capital, in a demand registration made on our Company. They were issued the warrants pursuant to a Letter Agreement that, among other things, permitted our Company to enter into a SEDA with Cornell Capital Partners, LP and register the shares to be issued pursuant to the SEDA together with the shares and warrants owned by Bridges & PIPES, LLC and TCMP3 Partners on one registration statement and to be offered for sale pursuant to one prospectus. In connection with the issuance of securities at this second closing, we relied on the exemption from registration of Section 4(2) under the Securities Act and Regulation D promulgated pursuant thereto. INDEMNIFICATION OF DIRECTORS AND OFFICERS China World Trade shall indemnify to the fullest extent permitted by, and in the manner permissible under the laws of the State of Nevada, any person made, or threatened to be made, a party to an action or proceeding, whether criminal, civil, administrative or investigative, including an action involving liability under the Securities Act of 1933, as amended, by reason of the fact that he is or was a director or officer of China World Trade Corporation, or served any other enterprise as director, officer or employee at the request of China World Trade. The Board of Directors, in its discretion, shall have the power on behalf of China World Trade to indemnify any person, other than a director or officer, made a party to any action, suit or proceeding by reason of the fact that he/she is or was an employee of China World Trade. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling an issuer pursuant to the foregoing provisions, the opinion of the Commission is that such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore unenforceable. 148 EXHIBITS EXHIBIT NUMBER EXHIBIT DESCRIPTION 3.1 Articles of Incorporation* 3.2 Amendment to Articles of Incorporation* 3.3 Bylaws* 4 Form of Stock Certificate* 5 Legal Opinion 10.1 Standby Equity Distribution Agreement 10.2 Registration Rights Agreement 10.3 Placement Agent Agreement 10.4 Securities Purchase Agreement 10.5 Registration Rights Agreement 10.6 Bridges & PIPES LLC Series A Warrant Agreements 10.7 TCMP3 Partners Series A Warrant Agreements 10.8 Cornell Capital Partners, LP Series A Warrant Agreement 10.9 Stealth Capital, LLC Series A Warrant Agreement 10.10 Placement Agent's Warrant Agreements 10.11 Employment Agreement, as amended, with John H. W. Hui* 10.12 Employment Agreement, as amended, with Keith Yat Chor Wong* 10.13 Consulting Agreement with Greentree Financial Group, Inc. 10.14 Facilities Lease Agreement* 10.15 2003 Non-Qualified Stock Compensation Plan (1) 23.1 Consent of Harold H. Martin, Esq. (Included in exhibit 5) 23.2 Consent of Moores Rowland Mazars * Incorporated by reference from Registrant's registration statement on Form 10-SB, filed with the Commission on September 9, 1999, SEC File No. 333-87992. (1) Incorporated by reference from Form S-8 filed on December 22, 2003. UNDERTAKINGS The undersigned Registrant hereby undertakes: 1. To file, during any period in which it offers or sells securities, a post-effective amendment to this registration statement to: - Include any prospectus required by Section 10(a)(3) of the securities Act of 1933. - Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in the volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. - Include any additional or changed material information on the plan of distribution. 149 2. That, for determining liability under the Securities Act of 1933, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. 3. To file a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. 4. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. 5. In the event that a claim for indemnification against such liabilities, other than the payment by the Registrant of expenses incurred and paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding, is asserted by such director, officer or controlling person in connection with the securities being registered hereby, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. 150 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements of filing of Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned, in the Guangzhou, The PRC on January 14, 2005. China World Trade Corporation /s/ John H. W. Hui ------------------------ By: John H. W. Hui Title: Vice Chairman & CEO, Director /s/ Bernard Chan -------------------- By: Bernard Chan Title: Chief Financial Officer In accordance with the requirements of the Securities Act of 1933, this registration statement was signed by the following persons in the capacities and on the date stated. /s/ John H. W. Hui ------------------------ By: John H. W. Hui Title: Vice Chairman and CEO, Director Date: January 14, 2005 /s/ Chi Ming Chan ---------------------- By: Chi Ming Chan Title: General Manager, Director Date: January 14, 2005 /s/ William Chi Hung Tsang -------------------------------- By: William Chi Hung Tsang Title: Chairman and President ` Date: January 14, 2005 /s/ Chao Ming Luo ---------------------- By: Chao Ming Luo Title: Director Date: January 14, 2005 /s/ Zeliang Chen ------------------- By: Zeliang Chen Title: Vice Chairman and Director Date: January 14, 2005 151 EX-5 2 doc2.txt LEGAL OPINION EX-5 LAW OFFICES OF HAROLD H. MARTIN, P.A. 17111 KENTON DRIVE, SUITE 204B CORNELIUS, NC 28031 TELEPHONE FACSIMILE 704-894-9760 704-894-9759 January 14, 2004 Board of Directors China World Trade Corporation 3rd Floor, Goldlion Digital Network Center 138 Tiyu Road East, Tianhe Guangzhou, Peoples' Republic of China Re: Up to 16,981,717 Shares to be Registered on Form SB-2 (the "Shares") Gentlemen: We have acted as securities counsel for China World Trade Corporation, a Nevada corporation (the "Company"), and certain of its shareholders (the "Selling Shareholders"), in connection with the registration of the Shares described in the prospectus of the Company dated January 14, 2005 (the "Prospectus"), contained in the Registration Statement on Form SB-2 (the "Registration Statement") of the Company. Terms which are used in this opinion and are not defined herein, shall have the meanings assigned to them in the Prospectus. In connection with this matter, we have examined the originals or copies certified or otherwise identified to our satisfaction of the following: (a) Articles of Incorporation of the Company, as amended to date; (b) By-laws of the Company, as amended to date; (c) Certificates from the Secretary of State of the State of Nevada, dated as of a recent date, stating that the Company is duly incorporated and in good standing in the State of Nevada; (d) Share Certificates of the Company; and (e) The Registration Statement. In addition to the foregoing, we have also relied as to matters of fact upon the representations made by the Company and its representatives and upon representations made by the Selling Shareholders. Further, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, and the conformity to original documents of all documents submitted to us as certified or as photo-static copies. Based upon and in reliance upon the foregoing, and after examination of such corporate and other records, certificates and other documents and such matters of law as we have deemed applicable or relevant to this opinion, it is our opinion that the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State. Board of Directors China World Trade Corporation January 14, 2005 Page 2. of Nevada, the jurisdiction of its incorporation, and has full corporate power and authority to own its properties and conduct business as described in the Registration Statement. The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, with a par value of $.001 per share, of which there were 30,889,997 issued and outstanding as of December 31, 2004, and 10,000,000 shares of Preferred Stock, with a par value of $.001 per share, of which none are issued and outstanding. Proper corporate proceedings have been taken validly to authorize such authorized capital stock and all the outstanding shares of such capital stock (including the Shares), when delivered in the manner and/or on the terms described in the Registration Statement (after it is declared effective), will be duly and validly issued, fully paid and non-assessable. The shareholders of the Company have no preemptive rights with respect to the Common Stock of the Company. The opinions which we express herein are based on federal corporate and securities laws and the laws of the State of North Carolina. We hereby consent to the use of this opinion as an exhibit to the Registration Statement. In giving this consent, we do not hereby admit that we come within the category of person whose consent is required under Section 7 of the Securities Act of 1933, or the general rules and regulations thereunder. Very truly yours, LAW OFFICES OF HAROLD H. MARTIN, P.A. By: /s/ Harold H. Martin ------------------ Harold H. Martin President EX-10.1 3 doc3.txt STANDBY EQUITY DISTRIBUTION AGREEMENT EX-10.1 STANDBY EQUITY DISTRIBUTION AGREEMENT ------------------------------------- THIS AGREEMENT dated as of the ___ day of October 2004 (the "Agreement") --------- between CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"), and CHINA WORLD TRADE CORPORATION, a corporation organized and -------- existing under the laws of the State of Nevada (the "Company"). ------- WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein, the Company shall issue and sell to the Investor, from time to time as provided herein, and the Investor shall purchase from the Company up to Thirty Million U.S. Dollars ($30,000,000) of the Company's common stock, par value $_____ per share (the "Common Stock"); and ------------- WHEREAS, such investments will be made in reliance upon the provisions of Regulation D ("Regulation D") of the Securities Act of 1933, as amended, and the ------------ regulations promulgated thereunder (the "Securities Act"), and or upon such --------------- other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments to be made hereunder. WHEREAS, the Company has engaged Duncan Capital Group (the "Placement Agent"), to act as the Company's exclusive placement agent in ---------------- connection with the sale of the Company's Common Stock to the Investor hereunder pursuant to the Placement Agent Agreement dated the date hereof by and among the Company, the Placement Agent and the Investor (the "Placement Agent Agreement"). ------------------------- NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I. CERTAIN DEFINITIONS Section 1.1. "Advance" shall mean the portion of the Commitment Amount ------- requested by the Company in the Advance Notice. Section 1.2. "Advance Date" shall mean the date Butler Gonzalez LLP Escrow ------------- Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as the Investor's Counsel, is in possession of free trading shares from the Company and therefore an Advance by the Investor to the Company can be made and Butler Gonzalez LLP can release the free trading shares to the Investor. The Advance Date shall be the first (1st) Trading Day after expiration of the applicable Pricing Period for each Advance. Section 1.3. "Advance Notice" shall mean a written notice to the Investor --------------- setting forth the Advance amount that the Company requests from the Investor and the Advance Date. Section 1.4. "Advance Notice Date" shall mean each date the Company --------------------- delivers to the Investor an Advance Notice requiring the Investor to advance funds to the Company, subject to the terms of this Agreement. No Advance Notice Date shall be less than seven (7) Trading Days after the prior Advance Notice Date. Section 1.5. "Bid Price" shall mean, on any date, the closing bid price (as --------- reported by Bloomberg L.P.) of the Common Stock on the Principal Market or if the Common Stock is not traded on a Principal Market, the highest reported bid price for the Common Stock, as furnished by the National Association of Securities Dealers, Inc. Section 1.6. "Closing" shall mean one of the closings of a purchase and ------- sale of Common Stock pursuant to Section 2.3. Section 1.7. "Commitment Amount" shall mean the aggregate amount of up to ------------------ Thirty Million U.S. Dollars ($30,000,000) which the Investor has agreed to provide to the Company in order to purchase the Company's Common Stock pursuant to the terms and conditions of this Agreement. Section 1.8. "Commitment Period" shall mean the period commencing on the ------------------ earlier to occur of (i) the Effective Date, or (ii) such earlier date as the Company and the Investor may mutually agree in writing, and expiring on the earliest to occur of (x) the date on which the Investor shall have made payment of Advances pursuant to this Agreement in the aggregate amount of Thirty Million U.S. Dollars ($30,000,000), (y) the date this Agreement is terminated pursuant to Section 2.5, or (z) the date occurring twenty-four (24) months after the Effective Date. Section 1.9. "Common Stock" shall mean the Company's common stock, par ------------ value $_____ per share. Section 1.10. "Condition Satisfaction Date" shall have the meaning set forth --------------------------- in Section 7.2. Section 1.11. "Damages" shall mean any loss, claim, damage, liability, costs ------- and expenses (including, without limitation, reasonable attorney's fees and disbursements and costs and expenses of expert witnesses and investigation). Section 1.12. "Effective Date" shall mean the date on which the SEC first --------------- declares effective a Registration Statement registering the resale of the Registrable Securities as set forth in Section 7.2(a). Section 1.13. "Escrow Agreement" shall mean the escrow agreement among the ----------------- Company, the Investor, and Butler Gonzalez LLP, dated the date hereof. Section 1.14. "Exchange Act" shall mean the Securities Exchange Act of 1934, ------------ as amended, and the rules and regulations promulgated thereunder. Section 1.15. "Material Adverse Effect" shall mean any condition, ------------------------- circumstance, or situation that would prohibit or otherwise materially interfere with the ability of the Company to enter into and perform any of its obligations under this Agreement or the Registration Rights Agreement in any material respect. Section 1.16. "Market Price" shall mean the lowest VWAP of the Common Stock ------------ during the Pricing Period. Section 1.17. "Maximum Advance Amount" shall be up to Three Million U.S. ------------------------ Dollars (US$3,000,000) on the initial Advance Notice hereunder , and up to One Million Five Hundred Thousand Dollars ($1,500,000) per Advance Notice there after. Section 1.18. "NASD" shall mean the National Association of Securities ---- Dealers, Inc. Section 1.19. "Person" shall mean an individual, a corporation, a ------ partnership, an association, a trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. Section 1.20. "Placement Agent" shall mean Duncan Capital Group, a ---------------- registered broker-dealer. Section 1.21. "Pricing Period" shall mean the five (5) consecutive Trading --------------- Days after the Advance Notice Date. Section 1.22. "Principal Market" shall mean the Nasdaq National Market, the ---------------- Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board or the New York Stock Exchange, whichever is at the time the principal trading exchange or market for the Common Stock. Section 1.23. "Purchase Price" shall be set at ninety nine percent (99%) of -------------- the Market Price during the Pricing Period. Section 1.24. "Registrable Securities" shall mean the shares of Common Stock ---------------------- to be issued hereunder (i) in respect of which the Registration Statement has not been declared effective by the SEC, (ii) which have not been sold under circumstances meeting all of the applicable conditions of Rule 144 (or any similar provision then in force) under the Securities Act ("Rule 144") or (iii) -------- which have not been otherwise transferred to a holder who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend. Section 1.25. "Registration Rights Agreement" shall mean the Registration ------------------------------- Rights Agreement dated the date hereof, regarding the filing of the Registration Statement for the resale of the Registrable Securities, entered into between the Company and the Investor. Section 1.26. "Registration Statement" shall mean a registration statement ----------------------- on Form S-1 or SB-2 (if use of such form is then available to the Company pursuant to the rules of the SEC and, if not, on such other form promulgated by the SEC for which the Company then qualifies and which counsel for the Company shall deem appropriate, and which form shall be available for the resale of the Registrable Securities to be registered thereunder in accordance with the provisions of this Agreement and the Registration Rights Agreement, and in accordance with the intended method of distribution of such securities), for the registration of the resale by the Investor of the Registrable Securities under the Securities Act. Section 1.27. "Regulation D" shall have the meaning set forth in the ------------- recitals of this Agreement. Section 1.28. "SEC" shall mean the Securities and Exchange Commission. --- Section 1.29. "Securities Act" shall have the meaning set forth in the --------------- recitals of this Agreement. Section 1.30. "SEC Documents" shall mean Annual Reports on Form 10-KSB, -------------- Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K and Proxy Statements of the Company as supplemented to the date hereof, filed by the Company for a period of at least twelve (12) months immediately preceding the date hereof or the Advance Date, as the case may be, until such time as the Company no longer has an obligation to maintain the effectiveness of a Registration Statement as set forth in the Registration Rights Agreement. Section 1.31. "Trading Day" shall mean any day during which the New York ------------ Stock Exchange shall be open for business. Section 1.32. "VWAP" shall mean the volume weighted average price of the ---- Company's Common Stock as quoted by Bloomberg, LP. ARTICLE II. ADVANCES Section 2.1. Investments. ----------- (a) Advances. Upon the terms and conditions set forth herein -------- (including, without limitation, the provisions of Article VII hereof), on any Advance Notice Date the Company may request an Advance by the Investor by the delivery of an Advance Notice. The number of shares of Common Stock that the Investor shall receive for each Advance shall be determined by dividing the amount of the Advance by the Purchase Price. No fractional shares shall be issued. Fractional shares shall be rounded to the next higher whole number of shares. The aggregate maximum amount of all Advances that the Investor shall be obligated to make under this Agreement shall not exceed the Commitment Amount. Section 2.2. Mechanics. --------- (a) Advance Notice. At any time during the Commitment Period, the --------------- Company may deliver an Advance Notice to the Investor, subject to the conditions set forth in Section 7.2; provided, however, the amount for each Advance as designated by the Company in the applicable Advance Notice, shall not be more than the Maximum Advance Amount. The aggregate amount of the Advances pursuant to this Agreement shall not exceed the Commitment Amount. The Company acknowledges that the Investor may sell shares of the Company's Common Stock corresponding with a particular Advance Notice on the day the Advance Notice is received by the Investor. There shall be a minimum of seven (7) Trading Days between each Advance Notice Date. (b) Date of Delivery of Advance Notice. An Advance Notice shall be ------------------------------------ deemed delivered on (i) the Trading Day it is received by facsimile or otherwise by the Investor if such notice is received prior to 12:00 noon Eastern Time, or (ii) the immediately succeeding Trading Day if it is received by facsimile or otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day which is not a Trading Day. No Advance Notice may be deemed delivered on a day that is not a Trading Day. (c) Pre-Closing Share Credit. Within two (2) business days after -------------------------- the Advance Notice Date, the Company shall credit shares of the Company's Common Stock to the Investor's counsel's balance account with The Depository Trust Company through its Deposit Withdrawal At Custodian system, in an amount equal to the amount of the requested Advance divided by the closing Bid Price of the Company's Common Stock as of the Advance Notice Date multiplied by one point one (1.1). Any adjustments to the number of shares to be delivered to the Investor at the Closing as a result of fluctuations in the closing Bid Price of the Company's Common Stock shall be made as of the date of the Closing. Any excess shares shall be credited to the next Advance. In no event shall the number of shares issuable to the Investor pursuant to an Advance cause the Investor to own in excess of nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company. (d) Hardship. In the event the Investor sells the Company's Common -------- Stock pursuant to subsection (c) above and the Company fails to perform its obligations as mandated in Section 2.5 and 2.2 (c), and specifically fails to provide the Investor with the shares of Common Stock for the applicable Advance, the Company acknowledges that the Investor shall suffer financial hardship and therefore shall be liable for any and all losses, commissions, fees, or financial hardship caused to the Investor. Section 2.3. Closings. On each Advance Date, which shall be the first (1st) -------- Trading Day after expiration of the applicable Pricing Period for each Advance, (i) the Company shall deliver to the Investor's Counsel, as defined pursuant to the Escrow Agreement, shares of the Company's Common Stock, representing the amount of the Advance by the Investor pursuant to Section 2.1 herein, registered in the name of the Investor which shall be delivered to the Investor, or otherwise in accordance with the Escrow Agreement and (ii) the Investor shall deliver to Butler Gonzalez LLP (the "Escrow Agent") the amount of the ------------- Advance specified in the Advance Notice by wire transfer of immediately available funds which shall be delivered to the Company, or otherwise in accordance with the Escrow Agreement. In addition, on or prior to the Advance Date, each of the Company and the Investor shall deliver to the other through the Investor's Counsel, all documents, instruments and writings required to be delivered by either of them pursuant to this Agreement in order to implement and effect the transactions contemplated herein. Payment of funds to the Company and delivery of the Company's Common Stock to the Investor shall occur in accordance with the conditions set forth above and those contained in the Escrow Agreement; provided, however, that to the extent the Company has not paid the fees, - -------- ------- expenses, and disbursements of the Investor, the Investor's counsel, or Kirkpatrick & Lockhart, LLP in accordance with Section 12.4, the amount of such fees, expenses, and disbursements may be deducted by the Investor (and shall be paid to the relevant party) from the amount of the Advance with no reduction in the amount of shares of the Company's Common Stock to be delivered on such Advance Date. Section 2.4. Termination of Investment. The obligation of the Investor to -------------------------- make an Advance to the Company pursuant to this Agreement shall terminate permanently (including with respect to an Advance Date that has not yet occurred) in the event that (i) there shall occur any stop order or suspension of the effectiveness of the Registration Statement for an aggregate of fifty (50) Trading Days, other than due to the acts of the Investor, during the Commitment Period, and (ii) the Company shall at any time fail materially to comply with the requirements of Article VI and such failure is not cured within thirty (30) days after receipt of written notice from the Investor, provided, -------- however, that this termination provision shall not apply to any period - ------- commencing upon the filing of a post-effective amendment to such Registration Statement and ending upon the date on which such post effective amendment is declared effective by the SEC. Section 2.5. Agreement to Advance Funds. ----------------------------- (a) The Investor agrees to advance the amount specified in the Advance Notice to the Company after the completion of each of the following conditions and the other conditions set forth in this Agreement: (i) the execution and delivery by the Company, and the Investor, of this Agreement and the Exhibits hereto; (ii) Investor's Counsel shall have received the shares of Common Stock applicable to the Advance in accordance with Section 2.2(c) hereof; (iii)the Company's Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement shall have been declared effective by the SEC; (iv) the Company shall have obtained all material permits and qualifications required by any applicable state for the offer and sale of the Registrable Securities, or shall have the availability of exemptions therefrom. The sale and issuance of the Registrable Securities shall be legally permitted by all laws and regulations to which the Company is subject; (v) the Company shall have filed with the Commission in a timely manner all reports, notices and other documents required of a "reporting company" under the Exchange Act and applicable Commission regulations; (vi) the fees as set forth in Section 12.4 below shall have been paid or can be withheld as provided in Section 2.3; and (vii)the conditions set forth in Section 7.2 shall have been satisfied. (viii)the Company shall have provided to the Investor an acknowledgement, from ___________ as to its ability to provide all consents required in order to file a registration statement in connection with this transaction; (ix) The Company's transfer agent shall be DWAC eligible. Section 2.6. Lock Up Period. ----------------- (i) During the Commitment Period, the Company shall not issue or sell (i) any Common Stock or Preferred Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance or (ii) issue or sell any warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than the Bid Price on the date of issuance. (ii) On the date hereof, the Company shall obtain from each officer and director a lock-up agreement, as defined below, in the form annexed hereto as Schedule 2.6 agreeing to only sell in compliance with the volume limitation of Rule 144. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF INVESTOR Investor hereby represents and warrants to, and agrees with, the Company that the following are true and as of the date hereof and as of each Advance Date: Section 3.1. Organization and Authorization. The Investor is duly -------------------------------- incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority to purchase and hold the securities issuable hereunder. The decision to invest and the execution and delivery of this Agreement by such Investor, the performance by such Investor of its obligations hereunder and the consummation by such Investor of the transactions contemplated hereby have been duly authorized and requires no other proceedings on the part of the Investor. The undersigned has the right, power and authority to execute and deliver this Agreement and all other instruments (including, without limitations, the Registration Rights Agreement), on behalf of the Investor. This Agreement has been duly executed and delivered by the Investor and, assuming the execution and delivery hereof and acceptance thereof by the Company, will constitute the legal, valid and binding obligations of the Investor, enforceable against the Investor in accordance with its terms. Section 3.2. Evaluation of Risks. The Investor has such knowledge and --------------------- experience in financial tax and business matters as to be capable of evaluating the merits and risks of, and bearing the economic risks entailed by, an investment in the Company and of protecting its interests in connection with this transaction. It recognizes that its investment in the Company involves a high degree of risk. Section 3.3. No Legal Advice From the Company. The Investor acknowledges ---------------------------------- that it had the opportunity to review this Agreement and the transactions contemplated by this Agreement with his or its own legal counsel and investment and tax advisors. The Investor is relying solely on such counsel and advisors and not on any statements or representations of the Company or any of its representatives or agents for legal, tax or investment advice with respect to this investment, the transactions contemplated by this Agreement or the securities laws of any jurisdiction. Section 3.4. Investment Purpose. The securities are being purchased by the ------------------- Investor for its own account, for investment and without any view to the distribution, assignment or resale to others or fractionalization in whole or in part. The Investor agrees not to assign or in any way transfer the Investor's rights to the securities or any interest therein and acknowledges that the Company will not recognize any purported assignment or transfer except in accordance with applicable Federal and state securities laws. No other person has or will have a direct or indirect beneficial interest in the securities. The Investor agrees not to sell, hypothecate or otherwise transfer the Investor's securities unless the securities are registered under Federal and applicable state securities laws or unless, in the opinion of counsel satisfactory to the Company, an exemption from such laws is available. Section 3.5. Accredited Investor. The Investor is an "Accredited Investor" ------------------- ------------------- as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act. Section 3.6. Information. The Investor and its advisors (and its counsel), ----------- if any, have been furnished with all materials relating to the business, finances and operations of the Company and information it deemed material to making an informed investment decision. The Investor and its advisors, if any, have been afforded the opportunity to ask questions of the Company and its management. Neither such inquiries nor any other due diligence investigations conducted by such Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor's right to rely on the Company's representations and warranties contained in this Agreement. The Investor understands that its investment involves a high degree of risk. The Investor is in a position regarding the Company, which, based upon employment, family relationship or economic bargaining power, enabled and enables such Investor to obtain information from the Company in order to evaluate the merits and risks of this investment. The Investor has sought such accounting, legal and tax advice, as it has considered necessary to make an informed investment decision with respect to this transaction. Section 3.7. Receipt of Documents. The Investor and its counsel have ---------------------- received and read in their entirety: (i) this Agreement and the Exhibits annexed hereto; (ii) all due diligence and other information necessary to verify the accuracy and completeness of such representations, warranties and covenants; (iii) the Company's Form 10-KSB for the year ended ___________ and Form 10-QSB for the period ended ____________; and (iv) answers to all questions the Investor submitted to the Company regarding an investment in the Company; and the Investor has relied on the information contained therein and has not been furnished any other documents, literature, memorandum or prospectus. Section 3.8. Registration Rights Agreement and Escrow Agreement. The ------------------------------------------------------- parties have entered into the Registration Rights Agreement and the Escrow Agreement, each dated the date hereof. Section 3.9. No General Solicitation. Neither the Company, nor any of its ------------------------ affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the shares of Common Stock offered hereby. Section 3.10. Not an Affiliate. The Investor is not an officer, director or ---------------- a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with the Company or any "Affiliate" of the Company (as that term is defined in Rule 405 of the --------- Securities Act). Neither the Investor nor its Affiliates has an open short position in the Common Stock of the Company, and the Investor agrees that it will not, and that it will cause its Affiliates not to, engage in any short sales of or hedging transactions with respect to the Common Stock, provided that the Company acknowledges and agrees that upon receipt of an Advance Notice the Investor will sell the Shares to be issued to the Investor pursuant to the Advance Notice, even if the Shares have not been delivered to the Investor. Section 3.11. Trading Activities. The Investor's trading activities with ------------------- respect to the Company's Common Stock shall be in compliance with all applicable federal and state securities laws, rules and regulations and the rules and regulations of the Principal Market on which the Company's Common Stock is listed or traded. Neither the Investor nor its affiliates has an open short position in the Common Stock of the Company and, except as set forth below, the Investor shall not and will cause its affiliates not to engage in any short sale as defined in any applicable SEC or National Association of Securities Dealers rules on any hedging transactions with respect to the Common Stock. Without limiting the foregoing, the Investor agrees not to engage in any naked short transactions in excess of the amount of shares owned (or an offsetting long position) during the Commitment Period. The Investor shall be entitled to sell Common Stock during the applicable Pricing Period. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as stated below, on the disclosure schedules attached hereto or in the SEC Documents (as defined herein), the Company hereby represents and warrants to, and covenants with, the Investor that the following are true and correct as of the date hereof: Section 4.1. Organization and Qualification. The Company is duly -------------------------------- incorporated or organized and validly existing in the jurisdiction of its incorporation or organization and has all requisite power and authority corporate power to own its properties and to carry on its business as now being conducted. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. Section 4.2. Authorization, Enforcement, Compliance with Other Instruments. ------------------------------------------------------------- (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any related agreements, in accordance with the terms hereof and thereof, (ii) the execution and delivery of this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any related agreements by the Company and the consummation by it of the transactions contemplated hereby and thereby, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its stockholders, (iii) this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and any related agreements have been duly executed and delivered by the Company, (iv) this Agreement, the Registration Rights Agreement, the Escrow Agreement, the Placement Agent Agreement and assuming the execution and delivery thereof and acceptance by the Investor and any related agreements constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies. Section 4.3. Capitalization. As of the date hereof, the authorized capital -------------- stock of the Company consists of _________ shares of Common Stock, par value $_____ per share and _________ shares of Preferred Stock of which ________ shares of Common Stock and _________ shares of Preferred Stock were issued and outstanding. All of such outstanding shares have been validly issued and are fully paid and nonassessable. Except as disclosed in the SEC Documents, no shares of Common Stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. Except as disclosed in the SEC Documents, as of the date hereof, (i) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, (ii) there are no outstanding debt securities (iii) there are no outstanding registration statements other than on Form S-8 and (iv) there are no agreements or arrangements under which the Company or any of its subsidiaries is obligated to register the sale of any of their securities under the Securities Act (except pursuant to the Registration Rights Agreement). There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by this Agreement or any related agreement or the consummation of the transactions described herein or therein. The Company has furnished to the Investor true and correct copies of the Company's Certificate of Incorporation, as amended and as in effect on the date hereof (the "Certificate of --------------- Incorporation"), and the Company's By-laws, as in effect on the date hereof (the - ------------- "By-laws"), and the terms of all securities convertible into or exercisable for ------- Common Stock and the material rights of the holders thereof in respect thereto. Section 4.4. No Conflict. The execution, delivery and performance of this ------------ Agreement by the Company and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Certificate of Incorporation, any certificate of designations of any outstanding series of preferred stock of the Company or By-laws or (ii) conflict with or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the Principal Market on which the Common Stock is quoted) applicable to the Company or any of its subsidiaries or by which any material property or asset of the Company or any of its subsidiaries is bound or affected and which would cause a Material Adverse Effect. Except as disclosed in the SEC Documents, neither the Company nor its subsidiaries is in violation of any term of or in default under its Articles of Incorporation or By-laws or their organizational charter or by-laws, respectively, or any material contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order or any statute, rule or regulation applicable to the Company or its subsidiaries. The business of the Company and its subsidiaries is not being conducted in violation of any material law, ordinance, regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state securities laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or the Registration Rights Agreement in accordance with the terms hereof or thereof. All consents, authorizations, orders, filings and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof. The Company and its subsidiaries are unaware of any fact or circumstance which might give rise to any of the foregoing. Section 4.5. SEC Documents; Financial Statements. Since __________, the -------------------------------------- Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC under of the Exchange Act. The Company has delivered to the Investor or its representatives, or made available through the SEC's website at http://www.sec.gov, true and complete copies of the SEC Documents. As of their respective dates, the financial statements of the Company disclosed in the SEC Documents (the "Financial Statements") complied as -------------------- to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and, fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). No other information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Section 4.6. 10b-5. The SEC Documents do not include any untrue statements ----- of material fact, nor do they omit to state any material fact required to be stated therein necessary to make the statements made, in light of the circumstances under which they were made, not misleading. Section 4.7. No Default. Except as disclosed in the SEC Documents, the ---------- Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement or any of the exhibits or attachments hereto will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under its Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound, or any statute, or any decree, judgment, order, rules or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, in each case which default, lien or charge is likely to cause a Material Adverse Effect on the Company's business or financial condition. Section 4.8. Absence of Events of Default. Except for matters described in ---------------------------- the SEC Documents and/or this Agreement, no Event of Default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (as so defined), has occurred and is continuing, which would have a Material Adverse Effect on the Company's business, properties, prospects, financial condition or results of operations. Section 4.9. Intellectual Property Rights. The Company and its subsidiaries ---------------------------- own or possess adequate rights or licenses to use all material trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights necessary to conduct their respective businesses as now conducted. The Company and its subsidiaries do not have any knowledge of any infringement by the Company or its subsidiaries of trademark, trade name rights, patents, patent rights, copyrights, inventions, licenses, service names, service marks, service mark registrations, trade secret or other similar rights of others, and, to the knowledge of the Company, there is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding trademark, trade name, patents, patent rights, invention, copyright, license, service names, service marks, service mark registrations, trade secret or other infringement; and the Company and its subsidiaries are unaware of any facts or circumstances which might give rise to any of the foregoing. Section 4.10. Employee Relations. Neither the Company nor any of its ------------------- subsidiaries is involved in any labor dispute nor, to the knowledge of the Company or any of its subsidiaries, is any such dispute threatened. None of the Company's or its subsidiaries' employees is a member of a union and the Company and its subsidiaries believe that their relations with their employees are good. Section 4.11. Environmental Laws. The Company and its subsidiaries are (i) ------------------ in compliance with any and all applicable material foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) have received all permits, licenses ------------------ or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval. Section 4.12. Title. Except as set forth in the SEC Documents, the Company ----- has good and marketable title to its properties and material assets owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. Any real property and facilities held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries. Section 4.13. Insurance. The Company and each of its subsidiaries are --------- insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its subsidiaries are engaged. Neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition, financial or otherwise, or the earnings, business or operations of the Company and its subsidiaries, taken as a whole. Section 4.14. Regulatory Permits. The Company and its subsidiaries possess ------------------ all material certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit. Section 4.15. Internal Accounting Controls. The Company and each of its ------------------------------ subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Section 4.16. No Material Adverse Breaches, etc. Except as set forth in the --------------------------------- SEC Documents, neither the Company nor any of its subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Except as set forth in the SEC Documents, neither the Company nor any of its subsidiaries is in breach of any contract or agreement which breach, in the judgment of the Company's officers, has or is expected to have a Material Adverse Effect on the business, properties, operations, financial condition, results of operations or prospects of the Company or its subsidiaries. Section 4.17. Absence of Litigation. Except as set forth in the SEC ----------------------- Documents, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending against or affecting the Company, the Common Stock or any of the Company's subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have a Material Adverse Effect on the transactions contemplated hereby (ii) adversely affect the validity or enforceability of, or the authority or ability of the Company to perform its obligations under, this Agreement or any of the documents contemplated herein, or (iii) except as expressly disclosed in the SEC Documents, have a Material Adverse Effect on the business, operations, properties, financial condition or results of operation of the Company and its subsidiaries taken as a whole. Section 4.18. Subsidiaries. Except as disclosed in the SEC Documents, ------------ the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. Section 4.19. Tax Status. Except as disclosed in the SEC Documents, the ----------- Company and each of its subsidiaries has made or filed all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject and (unless and only to the extent that the Company and each of its subsidiaries has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. Section 4.20. Certain Transactions. Except as set forth in the SEC --------------------- Documents none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner. Section 4.21. Fees and Rights of First Refusal. The Company is not ------------------------------------- obligated to offer the securities offered hereunder on a right of first refusal basis or otherwise to any third parties including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties. Section 4.22. Use of Proceeds. The Company represents that the net proceeds --------------- from this offering will be used for general corporate purposes. However, in no event shall the net proceeds from this offering be used by the Company for the payment (or loaned to any such person for the payment) of any judgment, or other liability, incurred by any executive officer, officer, director or employee of the Company, except for any liability owed to such person for services rendered, or if any judgment or other liability is incurred by such person originating from services rendered to the Company, or the Company has indemnified such person from liability. Section 4.23. Further Representation and Warranties of the Company. For so ---------------------------------------------------- long as any securities issuable hereunder held by the Investor remain outstanding, the Company acknowledges, represents, warrants and agrees that it will maintain the listing of its Common Stock on the Principal Market. Section 4.24. Opinion of Counsel. Investor shall receive an opinion letter ------------------ from Kirkpatrick & Lockhart, LLP, counsel to the Company, on the date hereof. Section 4.25. Opinion of Counsel. The Company will obtain for the Investor, ------------------ at the Company's expense, any and all opinions of counsel which may be reasonably required in order to sell the securities issuable hereunder without restriction. Section 4.26. Dilution. The Company is aware and acknowledges that issuance -------- of shares of the Company's Common Stock could cause dilution to existing shareholders and could significantly increase the outstanding number of shares of Common Stock. ARTICLE V. INDEMNIFICATION The Investor and the Company represent to the other the following with respect to itself: Section 5.1. Indemnification. --------------- (a) In consideration of the Investor's execution and delivery of this Agreement, and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless the Investor, and all of its officers, directors, partners, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Investor -------- Indemnitees") from and against any and all actions, causes of action, suits, - ----------- claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether any such Investor Indemnitee is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "Indemnified ----------- Liabilities"), incurred by the Investor Indemnitees or any of them as a result - ----------- of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement or the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against such Investor Indemnitee not arising out of any action or inaction of an Investor Indemnitee, and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Investor Indemnitees. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. (b) In consideration of the Company's execution and delivery of this Agreement, and in addition to all of the Investor's other obligations under this Agreement, the Investor shall defend, protect, indemnify and hold harmless the Company and all of its officers, directors, shareholders, employees and agents (including, without limitation, those retained in connection with the transactions contemplated by this Agreement) (collectively, the "Company ------- Indemnitees") from and against any and all Indemnified Liabilities incurred by - ----------- the Company Indemnitees or any of them as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Investor in this Agreement, the Registration Rights Agreement, or any instrument or document contemplated hereby or thereby executed by the Investor, (b) any breach of any covenant, agreement or obligation of the Investor(s) contained in this Agreement, the Registration Rights Agreement or any other certificate, instrument or document contemplated hereby or thereby executed by the Investor, or (c) any cause of action, suit or claim brought or made against such Company Indemnitee based on misrepresentations or due to a breach by the Investor and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by any of the Company Indemnitees. To the extent that the foregoing undertaking by the Investor may be unenforceable for any reason, the Investor shall make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities, which is permissible under applicable law. (c) The obligations of the parties to indemnify or make contribution under this Section 5.1 shall survive termination. ARTICLE VI. COVENANTS OF THE COMPANY Section 6.1. Registration Rights. The Company shall cause the -------------------- Registration Rights Agreement to remain in full force and effect and the Company shall comply in all material respects with the terms thereof. Section 6.2. Listing of Common Stock. The Company shall maintain the Common ----------------------- Stock's authorization for quotation on the National Association of Securities Dealers Inc.'s Over the Counter Bulletin Board. Section 6.3. Exchange Act Registration. The Company will cause its Common -------------------------- Stock to continue to be registered under Section 12(g) of the Exchange Act, will file in a timely manner all reports and other documents required of it as a reporting company under the Exchange Act and will not take any action or file any document (whether or not permitted by Exchange Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Exchange Act. Section 6.4. Transfer Agent Instructions. Not later than two (2) business ---------------------------- days after each Advance Notice Date and prior to each Closing and the effectiveness of the Registration Statement and resale of the Common Stock by the Investor, the Company will deliver instructions to its transfer agent to issue shares of Common Stock free of restrictive legends. Section 6.5. Corporate Existence. The Company will take all steps necessary ------------------- to preserve and continue the corporate existence of the Company. Section 6.6. Notice of Certain Events Affecting Registration; Suspension of -------------------------------------------------------------- Right to Make an Advance. The Company will immediately notify the Investor upon - ------------------------ its becoming aware of the occurrence of any of the following events in respect of a registration statement or related prospectus relating to an offering of Registrable Securities: (i) receipt of any request for additional information by the SEC or any other Federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the registration statement or related prospectus; (ii) the issuance by the SEC or any other Federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) receipt of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (iv) the happening of any event that makes any statement made in the Registration Statement or related prospectus of any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires the making of any changes in the Registration Statement, related prospectus or documents so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the related prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and (v) the Company's reasonable determination that a post-effective amendment to the Registration Statement would be appropriate; and the Company will promptly make available to the Investor any such supplement or amendment to the related prospectus. The Company shall not deliver to the Investor any Advance Notice during the continuation of any of the foregoing events. Section 6.7. Expectations Regarding Advance Notices. Within ten (10) days --------------------------------------- after the commencement of each calendar quarter occurring subsequent to the commencement of the Commitment Period, the Company must notify the Investor, in writing, as to its reasonable expectations as to the dollar amount it intends to raise during such calendar quarter, if any, through the issuance of Advance Notices. Such notification shall constitute only the Company's good faith estimate and shall in no way obligate the Company to raise such amount, or any amount, or otherwise limit its ability to deliver Advance Notices. The failure by the Company to comply with this provision can be cured by the Company's notifying the Investor, in writing, at any time as to its reasonable expectations with respect to the current calendar quarter. Section 6.8. Restriction on Sale of Capital Stock. During the Commitment -------------------------------------- Period, the Company shall not issue or sell (i) any Common Stock or Preferred Stock without consideration or for a consideration per share less than the bid price of the Common Stock determined immediately prior to its issuance, (ii) issue or sell any Preferred Stock warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire Common Stock without consideration or for a consideration per share less than such Common Stock's Bid Price determined immediately prior to its issuance, or (iii) file any registration statement on Form S-8. Section 6.9. Consolidation; Merger. The Company shall not, at any time ---------------------- after the date hereof, effect any merger or consolidation of the Company with or into, or a transfer of all or substantially all the assets of the Company to another entity (a "Consolidation Event") unless the resulting successor or -------------------- acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Investor such shares of stock and/or securities as the Investor is entitled to receive pursuant to this Agreement. Section 6.10. Issuance of the Company's Common Stock. The sale of the -------------------------------------------- shares of Common Stock shall be made in accordance with the provisions and requirements of Regulation D and any applicable state securities law. ARTICLE VII. CONDITIONS FOR ADVANCE AND CONDITIONS TO CLOSING Section 7.1. Conditions Precedent to the Obligations of the Company. --------------------------------------------------------- The obligation hereunder of the Company to issue and sell the shares of Common Stock to the Investor incident to each Closing is subject to the satisfaction, or waiver by the Company, at or before each such Closing, of each of the conditions set forth below. (a) Accuracy of the Investor's Representations and Warranties. The ------------------------------------------------------------- representations and warranties of the Investor shall be true and correct in all material respects. (b) Performance by the Investor. The Investor shall have performed, ------------------------------ satisfied and complied in all respects with all covenants, agreements and conditions required by this Agreement and the Registration Rights Agreement to be performed, satisfied or complied with by the Investor at or prior to such Closing. Section 7.2. Conditions Precedent to the Right of the Company to ----------------------------------------------------------- Deliver an Advance Notice and the Obligation of the Investor to Purchase Shares - -------------------------------------------------------------------------------- of Common Stock. The right of the Company to deliver an Advance Notice and the - ---------------- obligation of the Investor hereunder to acquire and pay for shares of the Company's Common Stock incident to a Closing is subject to the fulfillment by the Company, on (i) the date of delivery of such Advance Notice and (ii) the applicable Advance Date (each a "Condition Satisfaction Date"), of each of the --------------------------- following conditions: (a) Registration of the Common Stock with the SEC. The Company shall ----------------------------------------------- have filed with the SEC a Registration Statement with respect to the resale of the Registrable Securities in accordance with the terms of the Registration Rights Agreement. As set forth in the Registration Rights Agreement, the Registration Statement shall have previously become effective and shall remain effective on each Condition Satisfaction Date and (i) neither the Company nor the Investor shall have received notice that the SEC has issued or intends to issue a stop order with respect to the Registration Statement or that the SEC otherwise has suspended or withdrawn the effectiveness of the Registration Statement, either temporarily or permanently, or intends or has threatened to do so (unless the SEC's concerns have been addressed and the Investor is reasonably satisfied that the SEC no longer is considering or intends to take such action), and (ii) no other suspension of the use or withdrawal of the effectiveness of the Registration Statement or related prospectus shall exist. The Registration Statement must have been declared effective by the SEC prior to the first Advance Notice Date. (b) Authority. The Company shall have obtained all permits and --------- qualifications required by any applicable state in accordance with the Registration Rights Agreement for the offer and sale of the shares of Common Stock, or shall have the availability of exemptions therefrom. The sale and issuance of the shares of Common Stock shall be legally permitted by all laws and regulations to which the Company is subject. (c) Fundamental Changes. There shall not exist any fundamental changes -------------------- to the information set forth in the Registration Statement which would require the Company to file a post-effective amendment to the Registration Statement. (d) Performance by the Company. The Company shall have performed, --------------------------- satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement (including, without limitation, the conditions specified in Section 2.5 hereof) and the Registration Rights Agreement to be performed, satisfied or complied with by the Company at or prior to each Condition Satisfaction Date. (e) No Injunction. No statute, rule, regulation, executive order, -------------- decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits or directly and adversely affects any of the transactions contemplated by this Agreement, and no proceeding shall have been commenced that may have the effect of prohibiting or adversely affecting any of the transactions contemplated by this Agreement. (f) No Suspension of Trading in or Delisting of Common Stock. The -------------------------------------------------------------- trading of the Common Stock is not suspended by the SEC or the Principal Market (if the Common Stock is traded on a Principal Market). The issuance of shares of Common Stock with respect to the applicable Closing, if any, shall not violate the shareholder approval requirements of the Principal Market (if the Common Stock is traded on a Principal Market). The Company shall not have received any notice threatening the continued listing of the Common Stock on the Principal Market (if the Common Stock is traded on a Principal Market). (g) Maximum Advance Amount. The amount of an Advance requested by ------------------------ the Company shall not exceed the Maximum Advance Amount. In addition, in no event shall the number of shares issuable to the Investor pursuant to an Advance cause the Investor to own in excess of nine and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company. (h) No Knowledge. The Company has no knowledge of any event which ------------- would be more likely than not to have the effect of causing such Registration Statement to be suspended or otherwise ineffective. (i) Other. On each Condition Satisfaction Date, the Investor shall ----- have received the certificate executed by an officer of the Company in the form of Exhibit A attached hereto. ---------- ARTICLE VIII. DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION Section 8.1. Due Diligence Review. Prior to the filing of the ---------------------- Registration Statement the Company shall make available for inspection and review by the Investor, its advisors and representatives, and any underwriter participating in any disposition of the Registrable Securities on behalf of the Investor pursuant to the Registration Statement, any such registration statement or amendment or supplement thereto or any blue sky, NASD or other filing, all financial and other records, all SEC Documents and other filings with the SEC, and all other corporate documents and properties of the Company as may be reasonably necessary for the purpose of such review, and cause the Company's officers, directors and employees to supply all such information reasonably requested by the Investor or any such representative, advisor or underwriter in connection with such Registration Statement (including, without limitation, in response to all questions and other inquiries reasonably made or submitted by any of them), prior to and from time to time after the filing and effectiveness of the Registration Statement for the sole purpose of enabling the Investor and such representatives, advisors and underwriters and their respective accountants and attorneys to conduct initial and ongoing due diligence with respect to the Company and the accuracy of the Registration Statement. Section 8.2. Non-Disclosure of Non-Public Information. ------------------------------------------- (a) The Company shall not disclose non-public information to the Investor, its advisors, or its representatives, unless prior to disclosure of such information the Company identifies such information as being non-public information and provides the Investor, such advisors and representatives with the opportunity to accept or refuse to accept such non-public information for review. The Company may, as a condition to disclosing any non-public information hereunder, require the Investor's advisors and representatives to enter into a confidentiality agreement in form reasonably satisfactory to the Company and the Investor. (b) Nothing herein shall require the Company to disclose non-public information to the Investor or its advisors or representatives, and the Company represents that it does not disseminate non-public information to any investors who purchase stock in the Company in a public offering, to money managers or to securities analysts, provided, however, that notwithstanding anything herein to the contrary, the Company will, as hereinabove provided, immediately notify the advisors and representatives of the Investor and, if any, underwriters, of any event or the existence of any circumstance (without any obligation to disclose the specific event or circumstance) of which it becomes aware, constituting non-public information (whether or not requested of the Company specifically or generally during the course of due diligence by such persons or entities), which, if not disclosed in the prospectus included in the Registration Statement would cause such prospectus to include a material misstatement or to omit a material fact required to be stated therein in order to make the statements, therein, in light of the circumstances in which they were made, not misleading. Nothing contained in this Section 8.2 shall be construed to mean that such persons or entities other than the Investor (without the written consent of the Investor prior to disclosure of such information) may not obtain non-public information in the course of conducting due diligence in accordance with the terms of this Agreement and nothing herein shall prevent any such persons or entities from notifying the Company of their opinion that based on such due diligence by such persons or entities, that the Registration Statement contains an untrue statement of material fact or omits a material fact required to be stated in the Registration Statement or necessary to make the statements contained therein, in light of the circumstances in which they were made, not misleading. ARTICLE IX. CHOICE OF LAW/JURISDICTION Section 9.1. Governing Law. This Agreement shall be governed by and -------------- interpreted in accordance with the laws of the State of _________ without regard to the principles of conflict of laws. The parties further agree that any action between them shall be heard in Hudson County, New Jersey, and expressly consent to the jurisdiction and venue of the Superior Court of New Jersey, sitting in Hudson County, New Jersey and the United States District Court of New Jersey, sitting in Newark, New Jersey, for the adjudication of any civil action asserted pursuant to this paragraph. ARTICLE X. ASSIGNMENT; TERMINATION Section 10.1. Assignment. Neither this Agreement nor any rights of the ---------- Company hereunder may be assigned to any other Person. Section 10.2. Termination. The obligations of the Investor to make Advances ----------- under Article II hereof shall terminate twenty-four (24) months after the Effective Date. ARTICLE XI. NOTICES Section 11.1. Notices. Any notices, consents, waivers, or other ------- communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: China World Trade Corporation With a copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard - Suite 2000 Miami, FL 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3300 Facsimile: (305) 358-7095 If to the Investor(s): Cornell Capital Partners, LP 101 Hudson Street -Suite 3700 Jersey City, NJ 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With a Copy to: David Gonzalez, Esq. 101 Hudson Street - Suite 3700 Jersey City, NJ 07302 Telephone: (201) 985-8300 Facsimile: (201) 985-8266 Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. ARTICLE XII. MISCELLANEOUS Section 12.1. Counterparts. This Agreement may be executed in two or ------------ more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. In the event any signature page is delivered by facsimile transmission, the party using such means of delivery shall cause four (4) additional original executed signature pages to be physically delivered to the other party within five (5) days of the execution and delivery hereof, though failure to deliver such copies shall not affect the validity of this Agreement. Section 12.2. Entire Agreement; Amendments. This Agreement supersedes all ----------------------------- other prior oral or written agreements between the Investor, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor the Investor makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement. Section 12.3. Reporting Entity for the Common Stock. The reporting entity -------------------------------------- relied upon for the determination of the trading price or trading volume of the Common Stock on any given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of the Investor and the Company shall be required to employ any other reporting entity. Section 12.4. Fees and Expenses. The Company hereby agrees to pay the ------------------- following fees: (a) Structuring Fees. Each of the parties shall pay its own fees and ---- expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby, except that upon the execution of this Agreement the Company will pay a structuring fee of Fifteen Thousand Dollars ($15,000) to Yorkville Advisors Management, LLC. Subsequently on each advance date, the Company will pay to Yorkville Advisors Management, LLC a structuring fee of of Five Hundred Dollars ($500) and any outstanding fees of Kirkpatrick & Lockhart, LLP directly out the proceeds of any Advances hereunder. (b) Commitment Fees. ---------------- (i) On each Advance Date the Company shall pay to the Investor, directly from the gross proceeds held in escrow, an amount equal to four percent (4%) of the amount of each Advance. The Company hereby agrees that if such payment, as is described above, is not made by the Company on the Advance Date, such payment will be made at the direction of the Investor as outlined and mandated by Section 2.3 of this Agreement. (ii) Upon the execution of this Agreement the Company shall issue to the Investor Two Hundred Twenty Thousand (225,000) shares of the Company's Common Stock (the "Investor's Shares"). ------------------ (iii)Fully Earned. The Investor's Shares shall be deemed fully earned as ------------- of the date hereof. (iv) Registration Rights. The Investor's Shares will have "piggy-back" -------------------- registration rights. (v) Restrictions. For a period of ninety (90) calendar days from the date ------------ hereof, both the Investor shall not sell the Investor's Shares if the volume weighted average price of the Company's Common Stock, as quoted by Bloomberg, LP, is less than One Dollar and Fifty Cents ($1.50). Thereafter the Investor shall be entitled to sell the Investor's Shares free of any limitation other than as outlined herein. In addition, for a period of twelve (12) months following the declaration of effectiveness of the Registration Statement by the United States Securities and Exchange Commission, the Investor shall not sell more than twenty five percent (25%) of the Investor's shares every thirty (30) calendar days if the VWAP of the Company's Common Stock is less than Two Dollars and Fifty Cents ($2.50). If the VWAP of the Company's Common Stock is higher than Two Dollars and Fifty Cents ($2.50) the Investor shall be entitled to sell the Investor's Shares free of any limitation. Section 12.5. Brokerage. Each of the parties hereto represents that it --------- has had no dealings in connection with this transaction with any finder or broker who will demand payment of any fee or commission from the other party. The Company on the one hand, and the Investor, on the other hand, agree to indemnify the other against and hold the other harmless from any and all liabilities to any person claiming brokerage commissions or finder's fees on account of services purported to have been rendered on behalf of the indemnifying party in connection with this Agreement or the transactions contemplated hereby. Section 12.6. Confidentiality. If for any reason the transactions --------------- contemplated by this Agreement are not consummated, each of the parties hereto shall keep confidential any information obtained from any other party (except information publicly available or in such party's domain prior to the date hereof, and except as required by court order) and shall promptly return to the other parties all schedules, documents, instruments, work papers or other written information without retaining copies thereof, previously furnished by it as a result of this Agreement or in connection herein. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have caused this Standby Equity Distribution Agreement to be executed by the undersigned, thereunto duly authorized, as of the date first set forth above. COMPANY: CHINA WORLD TRADE CORPORATION By: /s/ John Hui ------------- Name: John Hui Title: CEO & Vice Chairman INVESTOR: CORNELL CAPITAL PARTNERS, LP BY: YORKVILLE ADVISORS, LLC ITS: GENERAL PARTNER By: /s/ Mark Angelo ---------------- Name: Mark Angelo Title: Portfolio Manager EXHIBIT A --------- ADVANCE NOTICE/COMPLIANCE CERTIFICATE ------------------------------------- CHINA WORLD TRADE CORPORATION ----------------------------- The undersigned, John Hui hereby certifies, with respect to the sale of shares of Common Stock of CHINA WORLD TRADE CORPORATION (the "Company"), ------- issuable in connection with this Advance Notice and Compliance Certificate dated ___________________ (the "Notice"), delivered pursuant to the Standby Equity ------ Distribution Agreement (the "Agreement"), as follows: --------- 1. The undersigned is the duly elected CEO & Vice Chairman of the Company. 2. There are no fundamental changes to the information set forth in the Registration Statement which would require the Company to file a post effective amendment to the Registration Statement. 3. The Company has performed in all material respects all covenants and agreements to be performed by the Company on or prior to the Advance Date related to the Notice and has complied in all material respects with all obligations and conditions contained in the Agreement. 4. The undersigned hereby represents, warrants and covenants that it has made all filings ("SEC Filings") required to be made by it pursuant to ------------ applicable securities laws (including, without limitation, all filings required under the Securities Exchange Act of 1934, which include Forms 10-Q, 10-K, 8-K, etc. All SEC Filings and other public disclosures made by the Company, including, without limitation, all press releases, analysts meetings and calls, etc. (collectively, the "Public Disclosures"), have been reviewed and approved ------------------ for release by the Company's attorneys and, if containing financial information, the Company's independent certified public accountants. None of the Company's Public Disclosures contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 5. The Advance requested is _____________________. The undersigned has executed this Certificate this ____ day of ________________. CHINA WORLD TRADE CORPORATION By: John Hui --------- Name: John Hui Title: CEO & Vice Chairman SCHEDULE 2.6 ------------ CHINA WORLD TRADE CORPORATION ----------------------------- The undersigned hereby agrees that for a period commencing on the date hereof and expiring on the termination of the Agreement dated October __, 2004 between China World Trade Corporation, (the "Company"), and Cornell Capital ------- Partners, LP, (the "Investor") (the "Lock-up Period"), he, she or it will not, -------- -------------- directly or indirectly, without the prior written consent of the Investor, issue, offer, agree or offer to sell, sell, grant an option for the purchase or sale of, transfer, pledge, assign, hypothecate, distribute or otherwise encumber or dispose of except pursuant to Rule 144 of the General Rules and Regulations under the Securities Act of 1933, any securities of the Company, including common stock or options, rights, warrants or other securities underlying, convertible into, exchangeable or exercisable for or evidencing any right to purchase or subscribe for any common stock (whether or not beneficially owned by the undersigned), or any beneficial interest therein (collectively, the "Securities"). ---------- In order to enable the aforesaid covenants to be enforced, the undersigned hereby consents to the placing of legends and/or stop-transfer orders with the transfer agent of the Company's securities with respect to any of the Securities registered in the name of the undersigned or beneficially owned by the undersigned, and the undersigned hereby confirms the undersigned's investment in the Company. Dated: _______________, 2004 Signature _________________________________________________ Address: _______________________________________ City, State, Zip Code: ______________________ _________________________________________________ Print Social Security Number or Taxpayer I.D. Number EX-10.2 4 doc4.txt REGISTRATION RIGHTS AGREEMENT EX-10.2 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of October ___, --------- 2004 by and between CHINA WORLD TRADE CORPORATION, a Nevada corporation, with its principal office located at _______________________ (the "Company"), and ------- CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"). -------- WHEREAS: A. In connection with the Standby Equity Distribution Agreement by and between the parties hereto of even date herewith (the "Standby Equity --------------- Distribution Agreement"), the Company has agreed, upon the terms and subject to - ----------------------- the conditions of the Standby Equity Distribution Agreement, to issue and sell to the Investor that number of shares of the Company's common stock, par value US$_____ per share (the "Common Stock"), which can be purchased pursuant to the ------------ terms of the Standby Equity Distribution Agreement for an aggregate purchase price of up to Thirty Million U.S. Dollars ($30,000,000). Capitalized terms not defined herein shall have the meaning ascribed to them in the Standby Equity Distribution Agreement. B. To induce the Investor to execute and deliver the Standby Equity Distribution Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "1933 Act"), and applicable state securities laws. --------- NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Investor hereby agree as follows: 1. DEFINITIONS. ----------- As used in this Agreement, the following terms shall have the following meanings: a. "Person" means a corporation, a limited liability company, an ------ association, a partnership, an organization, a business, an individual, a governmental or political subdivision thereof or a governmental agency. b. "Register," "registered," and "registration" refer to a registration -------- ---------- ------------ effected by preparing and filing one or more Registration Statements (as defined below) in compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor rule providing for offering securities on a continuous or delayed basis ("Rule 415"), and the declaration or ordering of effectiveness of -------- such Registration Statement(s) by the United States Securities and Exchange Commission (the "SEC"). --- c. "Registrable Securities" means the Investor's Shares, as defined in the ----------------------- Standby Equity Distribution Agreement and shares of Common Stock issuable to Investors pursuant to the Standby Equity Distribution Agreement. d. "Registration Statement" means a registration statement under the 1933 ----------------------- Act which covers the Registrable Securities. 2. REGISTRATION. ------------ a. Mandatory Registration. The Company shall prepare and file with the SEC ----------------------- a Registration Statement on Form S-1, SB-2 or on such other form as is available. The Company shall cause such Registration Statement to be declared effective by the SEC prior to the first sale to the Investor of the Company's Common Stock pursuant to the Standby Equity Distribution Agreement. b. Sufficient Number of Shares Registered. In the event the number of ------------------------------------------ shares available under a Registration Statement filed pursuant to Section 2(a) is insufficient to cover all of the Registrable Securities which the Investor has purchased pursuant to the Standby Equity Distribution Agreement, the Company shall amend the Registration Statement, or file a new Registration Statement (on the short form available therefore, if applicable), or both, so as to cover all of such Registrable Securities which the Investor has purchased pursuant to the Standby Equity Distribution Agreement as soon as practicable, but in any event not later than fifteen (15) days after the necessity therefore arises. The Company shall use it best efforts to cause such amendment and/or new Registration Statement to become effective as soon as practicable following the filing thereof. For purposes of the foregoing provision, the number of shares available under a Registration Statement shall be deemed "insufficient to cover all of the Registrable Securities" if at any time the number of Registrable Securities issuable on an Advance Notice Date is greater than the number of shares available for resale under such Registration Statement. 3. RELATED OBLIGATIONS. -------------------- a. The Company shall keep the Registration Statement effective pursuant to Rule 415 at all times until the date on which the Investor shall have sold all the Registrable Securities covered by such Registration Statement (the "Registration Period"), which Registration Statement (including any amendments -------------------- or supplements thereto and prospectuses contained therein) shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. b. The Company shall prepare and file with the SEC such amendments (including post-effective amendments) and supplements to a Registration Statement and the prospectus used in connection with such Registration Statement, which prospectus is to be filed pursuant to Rule 424 promulgated under the 1933 Act, as may be necessary to keep such Registration Statement effective at all times during the Registration Period, and, during such period, comply with the provisions of the 1933 Act with respect to the disposition of all Registrable Securities of the Company covered by such Registration Statement until such time as all of such Registrable Securities shall have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in such Registration Statement. In the case of amendments and supplements to a Registration Statement which are required to be filed pursuant to this Agreement (including pursuant to this Section 3(b)) by reason of the Company's filing a report on Form 10-KSB, Form 10-QSB or Form 8-K or any analogous report under the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Company shall have incorporated such report by reference --------- into the Registration Statement, if applicable, or shall file such amendments or supplements with the SEC on the same day on which the 1934 Act report is filed which created the requirement for the Company to amend or supplement the Registration Statement. c. The Company shall furnish to the Investor without charge, (i) at least one copy of such Registration Statement as declared effective by the SEC and any amendment(s) thereto, including financial statements and schedules, all documents incorporated therein by reference, all exhibits and each preliminary prospectus, (ii) ten (10) copies of the final prospectus included in such Registration Statement and all amendments and supplements thereto (or such other number of copies as such Investor may reasonably request) and (iii) such other documents as such Investor may reasonably request from time to time in order to facilitate the disposition of the Registrable Securities owned by such Investor. d. The Company shall use its best efforts to (i) register and qualify the Registrable Securities covered by a Registration Statement under such other securities or "blue sky" laws of such jurisdictions in the United States as the Investor reasonably requests, (ii) prepare and file in those jurisdictions, such amendments (including post-effective amendments) and supplements to such registrations and qualifications as may be necessary to maintain the effectiveness thereof during the Registration Period, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times during the Registration Period, and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Company shall not be required in connection therewith or as a condition thereto to (w) make any change to its certificate of incorporation or by-laws, (x) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (y) subject itself to general taxation in any such jurisdiction, or (z) file a general consent to service of process in any such jurisdiction. The Company shall promptly notify the Investor of the receipt by the Company of any notification with respect to the suspension of the registration or qualification of any of the Registrable Securities for sale under the securities or "blue sky" laws of any jurisdiction in the United States or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. e. As promptly as practicable after becoming aware of such event or development, the Company shall notify the Investor in writing of the happening of any event as a result of which the prospectus included in a Registration Statement, as then in effect, includes an untrue statement of a material fact or omission to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (provided that in no event shall such notice contain any material, nonpublic information), and promptly prepare a supplement or amendment to such Registration Statement to correct such untrue statement or omission, and deliver ten (10) copies of such supplement or amendment to each Investor. The Company shall also promptly notify the Investor in writing (i) when a prospectus or any prospectus supplement or post-effective amendment has been filed, and when a Registration Statement or any post-effective amendment has become effective (notification of such effectiveness shall be delivered to the Investor by facsimile on the same day of such effectiveness), (ii) of any request by the SEC for amendments or supplements to a Registration Statement or related prospectus or related information, and (iii) of the Company's reasonable determination that a post-effective amendment to a Registration Statement would be appropriate. f. The Company shall use its best efforts to prevent the issuance of any stop order or other suspension of effectiveness of a Registration Statement, or the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction within the United States of America and, if such an order or suspension is issued, to obtain the withdrawal of such order or suspension at the earliest possible moment and to notify the Investor of the issuance of such order and the resolution thereof or its receipt of actual notice of the initiation or threat of any proceeding for such purpose. g. At the reasonable request of the Investor, the Company shall furnish to the Investor, on the date of the effectiveness of the Registration Statement and thereafter from time to time on such dates as the Investor may reasonably request (i) a letter, dated such date, from the Company's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, and (ii) an opinion, dated as of such date, of counsel representing the Company for purposes of such Registration Statement, in form, scope and substance as is customarily given in an underwritten public offering, addressed to the Investor. h. The Company shall make available for inspection by (i) the Investor and (ii) one firm of accountants or other agents retained by the Investor (collectively, the "Inspectors") all pertinent financial and other records, and ---------- pertinent corporate documents and properties of the Company (collectively, the "Records"), as shall be reasonably deemed necessary by each Inspector, and cause ------- the Company's officers, directors and employees to supply all information which any Inspector may reasonably request; provided, however, that each Inspector shall agree, and the Investor hereby agrees, to hold in strict confidence and shall not make any disclosure (except to an Investor) or use of any Record or other information which the Company determines in good faith to be confidential, and of which determination the Inspectors are so notified, unless (a) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement or is otherwise required under the 1933 Act, (b) the release of such Records is ordered pursuant to a final, non-appealable subpoena or order from a court or government body of competent jurisdiction, or (c) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement of which the Inspector and the Investor has knowledge. The Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Company and allow the Company, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. i. The Company shall hold in confidence and not make any disclosure of information concerning the Investor provided to the Company unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other final, non-appealable order from a court or governmental body of competent jurisdiction, or (iv) such information has been made generally available to the public other than by disclosure in violation of this Agreement or any other agreement. The Company agrees that it shall, upon learning that disclosure of such information concerning the Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt written notice to the Investor and allow the Investor, at the Investor's expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information. j. The Company shall use its best efforts either to cause all the Registrable Securities covered by a Registration Statement (i) to be listed on each securities exchange on which securities of the same class or series issued by the Company are then listed, if any, if the listing of such Registrable Securities is then permitted under the rules of such exchange or to secure the inclusion for quotation on the National Association of Securities Dealers, Inc. OTC Bulletin Board for such Registrable Securities. The Company shall pay all fees and expenses in connection with satisfying its obligation under this Section 3(j). k. The Company shall cooperate with the Investor to the extent applicable, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legend) representing the Registrable Securities to be offered pursuant to a Registration Statement and enable such certificates to be in such denominations or amounts, as the case may be, as the Investor may reasonably request and registered in such names as the Investor may request. l. The Company shall use its best efforts to cause the Registrable Securities covered by the applicable Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to consummate the disposition of such Registrable Securities. m. The Company shall make generally available to its security holders as soon as practical, but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the 1933 Act) covering a twelve-month period beginning not later than the first day of the Company's fiscal quarter next following the effective date of the Registration Statement. n. The Company shall otherwise use its best efforts to comply with all applicable rules and regulations of the SEC in connection with any registration hereunder. o. Within two (2) business days after a Registration Statement which covers Registrable Securities is ordered effective by the SEC, the Company shall deliver, and shall cause legal counsel for the Company to deliver, to the transfer agent for such Registrable Securities (with copies to the Investor) confirmation that such Registration Statement has been declared effective by the SEC in the form attached hereto as Exhibit A. ---------- p. The Company shall take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of Registrable Securities pursuant to a Registration Statement. 4. OBLIGATIONS OF THE INVESTOR. ------------------------------ The Investor agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e), the Investor will immediately discontinue disposition of Registrable Securities pursuant to any Registration Statement(s) covering such Registrable Securities until the Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(e) or receipt of notice that no supplement or amendment is required. Notwithstanding anything to the contrary, the Company shall cause its transfer agent to deliver unlegended certificates for shares of Common Stock to a transferee of the Investor in accordance with the terms of the Standby Equity Distribution Agreement in connection with any sale of Registrable Securities with respect to which the Investor has entered into a contract for sale prior to the Investor's receipt of a notice from the Company of the happening of any event of the kind described in Section 3(f) or the first sentence of 3(e) and for which the Investor has not yet settled. 5. EXPENSES OF REGISTRATION. -------------------------- All expenses incurred in connection with registrations, filings or qualifications pursuant to Sections 2 and 3, including, without limitation, all registration, listing and qualifications fees, printers, legal and accounting fees shall be paid by the Company. 6. INDEMNIFICATION. --------------- With respect to Registrable Securities which are included in a Registration Statement under this Agreement: a. To the fullest extent permitted by law, the Company will, and hereby does, indemnify, hold harmless and defend the Investor, the directors, officers, partners, employees, agents, representatives of, and each Person, if any, who controls the Investor within the meaning of the 1933 Act or the 1934 Act (each, an "Indemnified Person"), against any losses, claims, damages, liabilities, ------------------- judgments, fines, penalties, charges, costs, reasonable attorneys' fees, amounts paid in settlement or expenses, joint or several (collectively, "Claims") ------ incurred in investigating, preparing or defending any action, claim, suit, inquiry, proceeding, investigation or appeal taken from the foregoing by or before any court or governmental, administrative or other regulatory agency, body or the SEC, whether pending or threatened, whether or not an indemnified party is or may be a party thereto ("Indemnified Damages"), to which any of them ------------------- may become subject insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact in a Registration Statement or any post-effective amendment thereto or in any filing made in connection with the qualification of the offering under the securities or other "blue sky" laws of any jurisdiction in which Registrable Securities are offered ("Blue Sky Filing"), or the omission or alleged omission to state a ----------------- material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any final prospectus (as amended or supplemented, if the Company files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading; or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any other law, including, without limitation, any state securities law, or any rule or regulation there under relating to the offer or sale of the Registrable Securities pursuant to a Registration Statement (the matters in the foregoing clauses (i) through (iii) being, collectively, "Violations"). The Company shall ---------- reimburse the Investor and each such controlling person promptly as such expenses are incurred and are due and payable, for any legal fees or disbursements or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a): (x) shall not apply to a Claim by an Indemnified Person arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Company by such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto; (y) shall not be available to the extent such Claim is based on a failure of the Investor to deliver or to cause to be delivered the prospectus made available by the Company, if such prospectus was timely made available by the Company pursuant to Section 3(e); and (z) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Person. b. In connection with a Registration Statement, the Investor agrees to indemnify, hold harmless and defend, to the same extent and in the same manner as is set forth in Section 6(a), the Company, each of its directors, each of its officers who signs the Registration Statement and each Person, if any, who controls the Company within the meaning of the 1933 Act or the 1934 Act (each an "Indemnified Party"), against any Claim or Indemnified Damages to which any of ------------------ them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or is based upon any Violation, in each case to the extent, and only to the extent, that such Violation occurs in reliance upon and in conformity with written information furnished to the Company by the Investor expressly for use in connection with such Registration Statement; and, subject to Section 6(d), the Investor will reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) and the agreement with respect to contribution contained in Section 7 shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Investor, which consent shall not be unreasonably withheld; provided, further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim or Indemnified Damages as does not exceed the net proceeds to the Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the prospectus was corrected and such new prospectus was delivered to the Investor prior to the Investor's use of the prospectus to which the Claim relates. c. Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying party and the Indemnified Person or the Indemnified Party, as the case may be; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel with the fees and expenses of not more than one counsel for such Indemnified Person or Indemnified Party to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and any other party represented by such counsel in such proceeding. The Indemnified Party or Indemnified Person shall cooperate fully with the indemnifying party in connection with any negotiation or defense of any such action or claim by the indemnifying party and shall furnish to the indemnifying party all information reasonably available to the Indemnified Party or Indemnified Person which relates to such action or claim. The indemnifying party shall keep the Indemnified Party or Indemnified Person fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. No indemnifying party shall be liable for any settlement of any action, claim or proceeding effected without its prior written consent, provided, however, that the indemnifying party shall not unreasonably withhold, delay or condition its consent. No indemnifying party shall, without the prior written consent of the Indemnified Party or Indemnified Person, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party or Indemnified Person of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the indemnifying party shall be subrogated to all rights of the Indemnified Party or Indemnified Person with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. d. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnified Damages are incurred. e. The indemnity agreements contained herein shall be in addition to (i) any cause of action or similar right of the Indemnified Party or Indemnified Person against the indemnifying party or others, and (ii) any liabilities the indemnifying party may be subject to pursuant to the law. 7. CONTRIBUTION. ------------ To the extent any indemnification by an indemnifying party is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that: (i) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of fraudulent misrepresentation; and (ii) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. REPORTS UNDER THE 1934 ACT. ------------------------------ With a view to making available to the Investor the benefits of Rule 144 promulgated under the 1933 Act or any similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Company to the public without registration ("Rule 144") the Company agrees to: --------- a. make and keep public information available, as those terms are understood and defined in Rule 144; b. file with the SEC in a timely manner all reports and other documents required of the Company under the 1933 Act and the 1934 Act so long as the Company remains subject to such requirements (it being understood that nothing herein shall limit the Company's obligations under Section 6.3 of the Standby Equity Distribution Agreement) and the filing of such reports and other documents is required for the applicable provisions of Rule 144; and c. furnish to the Investor so long as the Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested to permit the Investor to sell such securities pursuant to Rule 144 without registration. 9. AMENDMENT OF REGISTRATION RIGHTS. ----------------------------------- Provisions of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only by a written agreement between the Company and the Investor. Any amendment or waiver effected in accordance with this Section 9 shall be binding upon the Investor and the Company. No consideration shall be offered or paid to any Person to amend or consent to a waiver or modification of any provision of any of this Agreement unless the same consideration also is offered to all of the parties to this Agreement. 10. MISCELLANEOUS. ------------- a. A Person is deemed to be a holder of Registrable Securities whenever such Person owns or is deemed to own of record such Registrable Securities. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. b. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party); or (iii) one business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company, to: China World Trade Corporation With a copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard - Suite 2000 Miami, FL 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3300 Facsimile: (305) 358-7095 If to the Investor, to: Cornell Capital Partners, LP 101 Hudson Street - Suite 3700 Jersey City, New Jersey 07302 Attention: Mark Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With a copy to: David Gonzalez, Esq. 101 Hudson Street - Suite 3700 Jersey City, NJ 07302 Telephone: (201) 985-8300 Facsimile: (201) 985-8266 Any party may change its address by providing written notice to the other parties hereto at least five days prior to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or other communication, (B) mechanically or electronically generated by the sender's facsimile machine containing the time, date, recipient facsimile number and an image of the first page of such transmission or (C) provided by a courier or overnight courier service shall be rebuttable evidence of personal service, receipt by facsimile or receipt from a nationally recognized overnight delivery service in accordance with clause (i), (ii) or (iii) above, respectively. c. Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. d. The corporate laws of the State of _______ shall govern all issues concerning the relative rights of the Company and the Investor. All other questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New Jersey, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of New Jersey or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of New Jersey. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the Superior Courts of the State of New Jersey, sitting in Hudson County, New Jersey and the Federal District Court for the District of New Jersey sitting in Newark, New Jersey, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. e. This Agreement, the Standby Equity Distribution Agreement, the Escrow Agreement, and the Placement Agent Agreement constitute the entire agreement among the parties hereto with respect to the subject matter hereof and thereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein and therein. This Agreement, the Standby Equity Distribution Agreement, the Escrow Agreement, and the Placement Agent Agreement supersede all prior agreements and understandings among the parties hereto with respect to the subject matter hereof and thereof. f. This Agreement shall inure to the benefit of and be binding upon the permitted successors and assigns of each of the parties hereto. g. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. h. This Agreement may be executed in identical counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. i. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. j. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent and no rules of strict construction will be applied against any party. k. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of day and year first above written. COMPANY: CHINA WORLD TRADE CORPORATION By: /s/ John Hui -------------- Name: John Hui Title: CEO & Vice Chairman INVESTOR: CORNELL CAPITAL PARTNERS, LP BY: YORKVILLE ADVISORS, LLC ITS: GENERAL PARTNER By: /s/ Mark Angelo ----------------- Name: Mark Angelo Title: Portfolio Manager EXHIBIT A FORM OF NOTICE OF EFFECTIVENESS OF REGISTRATION STATEMENT Attention: Re: CHINA WORLD TRADE CORPORATION -------------------------------- Ladies and Gentlemen: We are counsel to China World Trade Corporation, a Nevada corporation (the "Company"), and have represented the Company in connection with that certain ------- Standby Equity Distribution Agreement (the "Standby Equity Distribution ----------------------------- Agreement") entered into by and between the Company and Cornell Capital - --------- Partners, LP (the "Investor") pursuant to which the Company issued to the -------- Investor shares of its Common Stock, par value US$_____ per share (the "Common ------ Stock"). Pursuant to the Standby Equity Distribution Agreement, the Company - ----- also has entered into a Registration Rights Agreement with the Investor (the "Registration Rights Agreement") pursuant to which the Company agreed, among ------------------------------- other things, to register the Registrable Securities (as defined in the Registration Rights Agreement) under the Securities Act of 1933, as amended (the "1933 Act"). In connection with the Company's obligations under the --------- Registration Rights Agreement, on ____________ ____, the Company filed a Registration Statement on Form ________ (File No. 333-_____________) (the "Registration Statement") with the Securities and Exchange Commission (the ----------------------- "SEC") relating to the Registrable Securities which names the Investor as a --- selling stockholder thereunder. In connection with the foregoing, we advise you that a member of the SEC's staff has advised us by telephone that the SEC has entered an order declaring the Registration Statement effective under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a member of the SEC's staff, that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC and the Registrable Securities are available for resale under the 1933 Act pursuant to the Registration Statement. Very truly yours, By: _______________________ cc: CORNELL CAPITAL PARTNERS, LP EX-10.3 5 doc5.txt PLACEMENT AGENT AGREEMENT EX-10.3 CHINA WORLD TRADE CORPORATION PLACEMENT AGENT AGREEMENT Dated as of: October __, 2004 Duncan Capital Group Ladies and Gentlemen: The undersigned, China World Trade Corporation, a Nevada corporation (the "Company"), hereby agrees with Duncan Capital Group (the "Placement Agent") and ------- --------------- Cornell Capital Partners, LP, a Delaware Limited Partnership (the "Investor"), -------- as follows: 1. Offering. The Company hereby engages the Placement Agent to act as its -------- exclusive placement agent in connection with the Standby Equity Distribution Agreement dated the date hereof (the "Standby Equity Distribution Agreement"), ------------------------------------- pursuant to which the Company shall issue and sell to the Investor, from time to time, and the Investor shall purchase from the Company (the "Offering") up -------- to Thirty Million U.S. Dollars ($30,000,000) of the Company's common stock (the "Commitment Amount"), par value US$____ per share (the "Common Stock"), at ----------------- ------------ price per share equal to the Purchase Price, as that term is defined in the Standby Equity Distribution Agreement. The Placement Agent services shall consist of reviewing the terms of the Standby Equity Distribution Agreement and advising the Company with respect to those terms. All capitalized terms used herein and not otherwise defined herein shall have the same meaning ascribed to them as in the Standby Equity Distribution Agreement. The Investor will be granted certain registration rights with respect to the Common Stock as more fully set forth in the Registration Rights Agreement between the Company and the Investor dated the date hereof (the "Registration Rights Agreement"). The documents to be executed and delivered in ----------------------------- connection with the Offering, including, but not limited, to the Company's latest Quarterly Report on Form 10-QSB as filed with the United States Securities and Exchange Commission, this Agreement, the Standby Equity Distribution Agreement, the Registration Rights Agreement, and the Escrow Agreement dated the date hereof (the "Escrow Agreement"), are referred to ----------------- sometimes hereinafter collectively as the "Offering Materials". The Company's ------------------ Common Stock purchased by the Investor hereunder or to be issued in connection with the conversion of any debentures are sometimes referred to hereinafter as the "Securities." The Placement Agent shall not be obligated to sell any ---------- Securities. 2. Compensation. ------------ Upon the execution of this Agreement, the Company shall issue to the Placement Agent or its designee One Hundred Fifty Thousand (150,000) shares of the Company's Common Stock (the "Placement Agent's Shares"). The Placement Agent ------------------------ shall be entitled to "piggy-back" registration rights, which shall be triggered upon registration of any shares of Common Stock by the Investor with respect to the Placement Agent's Shares pursuant to the Registration Rights Agreement dated the date hereof. For a period of ninety (90) calendar days following the date hereof, the Placement Agent shall not sell the Placement Agent Shares if the volume weighted average price of the Company's Common Stock as quoted Bloomberg, LP (the "VWAP") is less than One Dollar and Fifty Cents ($1.50). Thereafter the ---- Placement Agent shall be entitled to sell the Placement Agent Shares free of any limitation other than as outlined herein. In addition, for a period of twelve (12) months following the declaration of effectiveness of the Registration Statement by the United States Securities and Exchange Commission, the Placement Agent shall not sell more than twenty five percent (25%) of the Placement Agent Shares every thirty (30) calendar days if the VWAP of the Company's Common Stock is less than Two Dollars and Fifty Cents ($2.50). If the VWAP of the Company's Common Stock is higher than Two Dollars and Fifty Cents ($2.50) the Placement Agent shall be entitled to sell the Placement Agent Shares free of any limitation. On each Advance Date pursuant to the Standby Equity Distribution Agreement the Company shall pay to the Placement Agent, directly from the gross proceeds held in escrow, an amount equal to four percent (4%) of the amount of each Advance. 3. Representations, Warranties and Covenants of the Placement Agent. ------------------------------------------------------------------------ A. The Placement Agent represents, warrants and covenants as follows: (i) The Placement Agent has the necessary power to enter into this Agreement and to consummate the transactions contemplated hereby. (ii) The execution and delivery by the Placement Agent of this Agreement and the consummation of the transactions contemplated herein will not result in any violation of, or be in conflict with, or constitute a default under, any agreement or instrument to which the Placement Agent is a party or by which the Placement Agent or its properties are bound, or any judgment, decree, order or, to the Placement Agent's knowledge, any statute, rule or regulation applicable to the Placement Agent. This Agreement when executed and delivered by the Placement Agent, will constitute the legal, valid and binding obligations of the Placement Agent, enforceable in accordance with their respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity, or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. (iii)Upon receipt and execution of this Agreement, the Placement Agent will promptly forward copies of this Agreement to the Company or its counsel and the Investor or its counsel. (iv) The Placement Agent will not intentionally take any action that it reasonably believes would cause the Offering to violate the provisions of the Securities Act of 1933, as amended (the "1933 Act"), the Securities -------- Exchange Act of 1934 (the "1934 Act"), the respective rules and regulations -------- promulgated thereunder (the "Rules and Regulations") or applicable "Blue --------------------- Sky" laws of any state or jurisdiction. (v) The Placement Agent is a member of the National Association of Securities Dealers, Inc., and is a broker-dealer registered as such under the 1934 Act and under the securities laws of the states in which the Securities will be offered or sold by the Placement Agent unless an exemption for such state registration is available to the Placement Agent. The Placement Agent is in material compliance with the rules and regulations applicable to the Placement Agent generally and applicable to the Placement Agent's participation in the Offering. 4. Representations and Warranties of the Company. -------------------------------------------------- A. The Company represents and warrants as follows: (i) The execution, delivery and performance of each of this Agreement, the Standby Equity Distribution Agreement, the Escrow Agreement, and the Registration Rights Agreement has been or will be duly and validly authorized by the Company and is, or with respect to this Agreement, the Standby Equity Distribution Agreement, the Escrow Agreement, and the Registration Rights Agreement, will be a valid and binding agreement of the Company, enforceable in accordance with its respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. The Securities to be issued pursuant to the transactions contemplated by this Agreement and the Standby Equity Distribution Agreement have been duly authorized and, when issued and paid for in accordance with this Agreement, the Standby Equity Distribution Agreement and the certificates/instruments representing such Securities, will be valid and binding obligations of the Company, enforceable in accordance with their respective terms, except to the extent that (1) the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, and (2) the enforceability thereof is subject to general principles of equity. All corporate action required to be taken for the authorization, issuance and sale of the Securities has been duly and validly taken by the Company. (ii) The Company has a duly authorized, issued and outstanding capitalization as set forth herein and in the Standby Equity Distribution Agreement. The Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the agreements described herein and as described in the Standby Equity Distribution Agreement, dated the date hereof and the agreements described therein. All issued and outstanding securities of the Company, have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission or preemptive rights with respect thereto and are not subject to personal liability solely by reason of being security holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company. (iii)The Common Stock to be issued in accordance with this Agreement and the Standby Equity Distribution Agreement has been duly authorized and, when issued and paid for in accordance with this Agreement, the Standby Equity Distribution Agreement and the Compensation Debenture, the certificates/instruments representing such Common Stock will be validly issued, fully-paid and non-assessable; the holders thereof will not be subject to personal liability solely by reason of being such holders; such Securities are not and will not be subject to the preemptive rights of any holder of any security of the Company. (iv) The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property necessary to conduct its business (including, without limitation, any real or personal property stated in the Offering Materials to be owned or leased by the Company), free and clear of all liens, encumbrances, claims, security interests and defects of any material nature whatsoever, other than those set forth in the Offering Materials and liens for taxes not yet due and payable. (v) There is no litigation or governmental proceeding pending or, to the best of the Company's knowledge, threatened against, or involving the properties or business of the Company, except as set forth in the Offering Materials. (vi) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Nevada. Except as set forth in the Offering Materials, the Company does not own or control, directly or indirectly, an interest in any other corporation, partnership, trust, joint venture or other business entity. The Company is duly qualified or licensed and in good standing as a foreign corporation in each jurisdiction in which the character of its operations requires such qualification or licensing and where failure to so qualify would have a material adverse effect on the Company. The Company has all requisite corporate power and authority, and all material and necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies (domestic and foreign) to conduct its businesses (and proposed business) as described in the Offering Materials. Any disclosures in the Offering Materials concerning the effects of foreign, federal, state and local regulation on the Company's businesses as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact. The Company has all corporate power and authority to enter into this Agreement, the Standby Equity Distribution Agreement, the Registration Rights Agreement, and the Escrow Agreement, to carry out the provisions and conditions hereof and thereof, and all consents, authorizations, approvals and orders required in connection herewith and therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required by the Company for the issuance of the Securities or execution and delivery of the Offering Materials except for applicable federal and state securities laws. The Company, since its inception, has not incurred any liability arising under or as a result of the application of any of the provisions of the 1933 Act, the 1934 Act or the Rules and Regulations. (vii)There has been no material adverse change in the condition or prospects of the Company, financial or otherwise, from the latest dates as of which such condition or prospects, respectively, are set forth in the Offering Materials, and the outstanding debt, the property and the business of the Company conform in all material respects to the descriptions thereof contained in the Offering Materials. (viii)Except as set forth in the Offering Materials, the Company is not in breach of, or in default under, any term or provision of any material indenture, mortgage, deed of trust, lease, note, loan or Standby Equity Distribution Agreement or any other material agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which it is a party or by which it or any of its properties may be bound or affected. The Company is not in violation of any provision of its charter or by-laws or in violation of any franchise, license, permit, judgment, decree or order, or in violation of any material statute, rule or regulation. Neither the execution and delivery of the Offering Materials nor the issuance and sale or delivery of the Securities, nor the consummation of any of the transactions contemplated in the Offering Materials nor the compliance by the Company with the terms and provisions hereof or thereof, has conflicted with or will conflict with, or has resulted in or will result in a breach of, any of the terms and provisions of, or has constituted or will constitute a default under, or has resulted in or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or pursuant to the terms of any indenture, mortgage, deed of trust, note, loan or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company may be bound or to which any of the property or assets of the Company is subject except (a) where such default, lien, charge or encumbrance would not have a material adverse effect on the Company and (b) as described in the Offering Materials; nor will such action result in any violation of the provisions of the charter or the by-laws of the Company or, assuming the due performance by the Placement Agent of its obligations hereunder, any material statute or any material order, rule or regulation applicable to the Company of any court or of any foreign, federal, state or other regulatory authority or other government body having jurisdiction over the Company. (ix) Subsequent to the dates as of which information is given in the Offering Materials, and except as may otherwise be indicated or contemplated herein or therein and the securities offered pursuant to the Securities Purchase Agreement dated the date hereof, the Company has not (a) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, or (b) entered into any transaction other than in the ordinary course of business, or (c) declared or paid any dividend or made any other distribution on or in respect of its capital stock. Except as described in the Offering Materials, the Company has no outstanding obligations to any officer or director of the Company. (x) There are no claims for services in the nature of a finder's or origination fee with respect to the sale of the Common Stock or any other arrangements, agreements or understandings that may affect the Placement Agent's compensation, as determined by the National Association of Securities Dealers, Inc. (xi) The Company owns or possesses, free and clear of all liens or encumbrances and rights thereto or therein by third parties, the requisite licenses or other rights to use all trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses necessary to conduct its business (including, without limitation, any such licenses or rights described in the Offering Materials as being owned or possessed by the Company) and, except as set forth in the Offering Materials, there is no claim or action by any person pertaining to, or proceeding, pending or threatened, which challenges the exclusive rights of the Company with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses used in the conduct of the Company's businesses (including, without limitation, any such licenses or rights described in the Offering Materials as being owned or possessed by the Company) except any claim or action that would not have a material adverse effect on the Company; the Company's current products, services or processes do not infringe or will not infringe on the patents currently held by any third party. (xii)Except as described in the Offering Materials, the Company is not under any obligation to pay royalties or fees of any kind whatsoever to any third party with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications, licenses or technology it has developed, uses, employs or intends to use or employ, other than to their respective licensors. (xiii)Subject to the performance by the Placement Agent of its obligations hereunder the offer and sale of the Securities complies, and will continue to comply, in all material respects with the requirements of Rule 506 of Regulation D promulgated by the SEC pursuant to the 1933 Act and any other applicable federal and state laws, rules, regulations and executive orders. Neither the Offering Materials nor any amendment or supplement thereto nor any documents prepared by the Company in connection with the Offering will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All statements of material facts in the Offering Materials are true and correct as of the date of the Offering Materials. (xiv)All material taxes which are due and payable from the Company have been paid in full or adequate provision has been made for such taxes on the books of the Company, except for those taxes disputed in good faith by the Company (xv) None of the Company nor any of its officers, directors, employees or agents, nor any other person acting on behalf of the Company, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who is or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) which (A) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, or (B) if not given in the past, might have had a materially adverse effect on the assets, business or operations of the Company as reflected in any of the financial statements contained in the Offering Materials, or (C) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company in the future. 5. Representations, Warranties and Covenants of the Investor. --------------------------------------------------------------- A. The Investor represents, warrants and covenants as follows: (i) The Investor has the necessary power to enter into this Agreement and to consummate the transactions contemplated hereby. (ii) The execution and delivery by the Investor of this Agreement and the consummation of the transactions contemplated herein will not result in any violation of, or be in conflict with, or constitute a default under, any agreement or instrument to which the Investor is a party or by which the Investor or its properties are bound, or any judgment, decree, order or, to the Investor's knowledge, any statute, rule or regulation applicable to the Investor. This Agreement when executed and delivered by the Investor, will constitute the legal, valid and binding obligations of the Investor, enforceable in accordance with their respective terms, except to the extent that (a) the enforceability hereof or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect and affecting the rights of creditors generally, (b) the enforceability hereof or thereof is subject to general principles of equity, or (c) the indemnification provisions hereof or thereof may be held to be in violation of public policy. (iii)The Investor will promptly forward copies of any and all due diligence questionnaires compiled by the Investor to the Placement Agent. (iv) The Investor is an Accredited Investor (as defined under the 1933 Act). (v) The Investor is acquiring the Securities for the Inventor's own account as principal, not as a nominee or agent, for investment purposes only, and not with a view to, or for, resale, distribution or fractionalization thereof in whole or in part and no other person has a direct or indirect beneficial interest in such Securities. Further, the Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities. (vi) The Investor acknowledges the Investor's understanding that the offering and sale of the Securities is intended to be exempt from registration under the 1933 Act by virtue of Section 3(b) of the 1933 Act and the provisions of Regulation D promulgated thereunder ("Regulation D"). In furtherance ------------ thereof, the Investor represents and warrants as follows: (a) The Investor has the financial ability to bear the economic risk of the Investor's investment, has adequate means for providing for the Inventor's current needs and personal contingencies and has no need for liquidity with respect to the Investor's investment in the Company; and (b) The Investor has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of the prospective investment. The Inventor also represents it has not been organized for the purpose of acquiring the Securities. (vii)The Investor has been given the opportunity for a reasonable time prior to the date hereof to ask questions of, and receive answers from, the Company or its representatives concerning the terms and conditions of the Offering, and other matters pertaining to this investment, and has been given the opportunity for a reasonable time prior to the date hereof to obtain such additional information in connection with the Company in order for the Investor to evaluate the merits and risks of purchase of the Securities, to the extent the Company possesses such information or can acquire it without unreasonable effort or expense. The Investor is not relying on the Placement Agent or any of its affiliates with respect to the accuracy or completeness of the Offering Materials or for any economic considerations involved in this investment. 6. Certain Covenants and Agreements of the Company. ----------------------------------------------------- The Company covenants and agrees at its expense and without any expense to the Placement Agent as follows: A. To advise the Placement Agent and the Investor of any material adverse change in the Company's financial condition, prospects or business or of any development materially affecting the Company or rendering untrue or misleading any material statement in the Offering Materials occurring at any time as soon as the Company is either informed or becomes aware thereof. B. To use its commercially reasonable efforts to cause the Common Stock issuable in connection with the Standby Equity Distribution Agreement to be qualified or registered for sale on terms consistent with those stated in the Registration Rights Agreement and under the securities laws of such jurisdictions as the Placement Agent and the Investor shall reasonably request. Qualification, registration and exemption charges and fees shall be at the sole cost and expense of the Company. C. Upon written request, to provide and continue to provide the Placement Agent and the Investor copies of all quarterly financial statements and audited annual financial statements prepared by or on behalf of the Company, other reports prepared by or on behalf of the Company for public disclosure and all documents delivered to the Company's stockholders. D. To deliver, during the registration period of the Standby Equity Distribution Agreement, to the Investor upon the Investor's request, within forty five (45) days, a statement of its income for each such quarterly period, and its balance sheet and a statement of changes in stockholders' equity as of the end of such quarterly period, all in reasonable detail, certified by its principal financial or accounting officer; (ii) within ninety (90) days after the close of each fiscal year, its balance sheet as of the close of such fiscal year, together with a statement of income, a statement of changes in stockholders' equity and a statement of cash flow for such fiscal year, such balance sheet, statement of income, statement of changes in stockholders' equity and statement of cash flow to be in reasonable detail and accompanied by a copy of the certificate or report thereon of independent auditors if audited financial statements are prepared; and (iii) a copy of all documents, reports and information furnished to its stockholders at the time that such documents, reports and information are furnished to its stockholders. E. To comply with the terms of the Offering Materials. F. To ensure that any transactions between or among the Company, or any of its officers, directors and affiliates be on terms and conditions that are no less favorable to the Company, than the terms and conditions that would be available in an "arm's length" transaction with an independent third party. 7. Indemnification and Limitation of Liability. ----------------------------------------------- A. The Company hereby agrees that it will indemnify and hold the Placement Agent and each officer, director, shareholder, employee or representative of the Placement Agent and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the SEC's Rules and Regulations promulgated thereunder (the "Rules and Regulations"), harmless from and against any and all --------------------- loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Placement Agent or such indemnified person of the Placement Agent may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in (a) Section 4 of this Agreement, (b) the Offering Materials (except those written statements relating to the Placement Agent given by the Placement Agent for inclusion therein), (c) any application or other document or written communication executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Common Stock under the securities laws thereof, or any state securities commission or agency; (ii) the omission or alleged omission from documents described in clauses (a), (b) or (c) above of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iii) the breach of any representation, warranty, covenant or agreement made by the Company in this Agreement. The Company further agrees that upon demand by an indemnified person, at any time or from time to time, it will promptly reimburse such indemnified person for any loss, claim, damage, liability, cost or expense actually and reasonably paid by the indemnified person as to which the Company has indemnified such person pursuant hereto. Notwithstanding the foregoing provisions of this Paragraph 7(A), any such payment or reimbursement by the Company of fees, expenses or disbursements incurred by an indemnified person in any proceeding in which a final judgment by a court of competent jurisdiction (after all appeals or the expiration of time to appeal) is entered against the Placement Agent or such indemnified person based upon specific finding of fact that the Placement Agent or such indemnified person's gross negligence or willful misfeasance will be promptly repaid to the Company. B. The Placement Agent hereby agrees that it will indemnify and hold the Company and each officer, director, shareholder, employee or representative of the Company, and each person controlling, controlled by or under common control with the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Company or such indemnified person of the Company may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) the material breach of any representation, warranty, covenant or agreement made by the Placement Agent in this Agreement, or (ii) any false or misleading information provided to the Company in writing by one of the Placement Agent's indemnified persons specifically for inclusion in the Offering Materials. C. The Investor hereby agrees that it will indemnify and hold the Placement Agent and each officer, director, shareholder, employee or representative of the Placement Agent, and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Placement Agent or such indemnified person of the Placement Agent may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon (i) the conduct of the Investor or its officers, employees or representatives in its acting as the Investor for the Offering, (ii) the material breach of any representation, warranty, covenant or agreement made by the Investor in the Offering Materials, or (iii) any false or misleading information provided to the Placement Agent by one of the Investor's indemnified persons. D. The Placement Agent hereby agrees that it will indemnify and hold the Investor and each officer, director, shareholder, employee or representative of the Investor, and each person controlling, controlled by or under common control with the Investor within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless from and against any and all loss, claim, damage, liability, cost or expense whatsoever (including, but not limited to, any and all reasonable legal fees and other expenses and disbursements incurred in connection with investigating, preparing to defend or defending any action, suit or proceeding, including any inquiry or investigation, commenced or threatened, or any claim whatsoever or in appearing or preparing for appearance as a witness in any action, suit or proceeding, including any inquiry, investigation or pretrial proceeding such as a deposition) to which the Investor or such indemnified person of the Investor may become subject under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other federal or state law or regulation, common law or otherwise, arising out of or based upon the material breach of any representation, warranty, covenant or agreement made by the Placement Agent in this Agreement. E. Promptly after receipt by an indemnified party of notice of commencement of any action covered by Section 7(A), (B), (C) or (D), the party to be indemnified shall, within five (5) business days, notify the indemnifying party of the commencement thereof; the omission by one (1) indemnified party to so notify the indemnifying party shall not relieve the indemnifying party of its obligation to indemnify any other indemnified party that has given such notice and shall not relieve the indemnifying party of any liability outside of this indemnification if not materially prejudiced thereby. In the event that any action is brought against the indemnified party, the indemnifying party will be entitled to participate therein and, to the extent it may desire, to assume and control the defense thereof with counsel chosen by it which is reasonably acceptable to the indemnified party. After notice from the indemnifying party to such indemnified party of its election to so assume the defense thereof, the indemnifying party will not be liable to such indemnified party under such Section 7(A), (B), (C), or (D) for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, but the indemnified party may, at its own expense, participate in such defense by counsel chosen by it, without, however, impairing the indemnifying party's control of the defense. Subject to the proviso of this sentence and notwithstanding any other statement to the contrary contained herein, the indemnified party or parties shall have the right to choose its or their own counsel and control the defense of any action, all at the expense of the indemnifying party if (i) the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action at the expense of the indemnifying party, or (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses of one additional counsel shall be borne by the indemnifying party; provided, however, that the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstance, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all such indemnified parties. No settlement of any action or proceeding against an indemnified party shall be made without the consent of the indemnifying party. F. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 7(A) or 7(B) is due in accordance with its terms but is for any reason held by a court to be unavailable on grounds of policy or otherwise, the Company and the Placement Agent shall contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with the investigation or defense of same) which the other may incur in such proportion so that the Placement Agent shall be responsible for such percent of the aggregate of such losses, claims, damages and liabilities as shall equal the percentage of the gross proceeds paid to the Placement Agent and the Company shall be responsible for the balance; provided, however, that no person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the 1933 Act shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7(F), any person controlling, controlled by or under common control with the Placement Agent, or any partner, director, officer, employee, representative or any agent of any thereof, shall have the same rights to contribution as the Placement Agent and each person controlling, controlled by or under common control with the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each officer of the Company and each director of the Company shall have the same rights to contribution as the Company. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against the other party under this Section 7(D), notify such party from whom contribution may be sought, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any obligation they may have hereunder or otherwise if the party from whom contribution may be sought is not materially prejudiced thereby. G. The indemnity and contribution agreements contained in this Section 7 shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified person or any termination of this Agreement. H. The Company hereby waives, to the fullest extent permitted by law, any right to or claim of any punitive, exemplary, incidental, indirect, special, consequential or other damages (including, without limitation, loss of profits) against the Placement Agent and each officer, director, shareholder, employee or representative of the placement agent and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations arising out of any cause whatsoever (whether such cause be based in contract, negligence, strict liability, other tort or otherwise). Notwithstanding anything to the contrary contained herein, the aggregate liability of the Placement Agent and each officer, director, shareholder, employee or representative of the Placement Agent and each person controlling, controlled by or under common control with the Placement Agent within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and Regulations shall not exceed the compensation received by the Placement Agent pursuant to Section 2 hereof. This limitation of liability shall apply regardless of the cause of action, whether contract, tort (including, without limitation, negligence) or breach of statute or any other legal or equitable obligation. 8. Payment of Expenses. --------------------- The Company hereby agrees to bear all of the expenses in connection with the Offering, including, but not limited to the following: filing fees, printing and duplicating costs, advertisements, postage and mailing expenses with respect to the transmission of Offering Materials, registrar and transfer agent fees, escrow agent fees and expenses, fees of the Company's counsel and accountants, issue and transfer taxes, if any. 9. Conditions of Closing. ----------------------- The Closing shall be held at the offices of the Investor or its counsel. The obligations of the Placement Agent hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company and the Investor herein as of the date hereof and as of the Date of Closing (the "Closing Date") with respect to the Company or the Investor, as the case may be, ------------ as if it had been made on and as of such Closing Date; the accuracy on and as of the Closing Date of the statements of the officers of the Company made pursuant to the provisions hereof; and the performance by the Company and the Investor on and as of the Closing Date of its covenants and obligations hereunder and to the following further conditions: A. Upon the effectiveness of a registration statement covering the Standby Equity Distribution Agreement, the Investor and the Placement Agent shall receive the opinion of Counsel to the Company, dated as of the date thereof, which opinion shall be in form and substance reasonably satisfactory to the Investor, their counsel and the Placement Agent. B. At or prior to the Closing, the Investor and the Placement Agent shall have been furnished such documents, certificates and opinions as it may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in this Agreement and the Offering Materials, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. C. At and prior to the Closing, (i) there shall have been no material adverse change nor development involving a prospective change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Offering Materials; (ii) there shall have been no transaction, not in the ordinary course of business except the transactions pursuant to the Securities Purchase Agreement entered into by the Company on the date hereof which has not been disclosed in the Offering Materials or to the Placement Agent in writing; (iii) except as set forth in the Offering Materials, the Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness for which a waiver or extension has not been otherwise received; (iv) except as set forth in the Offering Materials, the Company shall not have issued any securities (other than those to be issued as provided in the Offering Materials) or declared or paid any dividend or made any distribution of its capital stock of any class and there shall not have been any change in the indebtedness (long or short term) or liabilities or obligations of the Company (contingent or otherwise) and trade payable debt; (v) no material amount of the assets of the Company shall have been pledged or mortgaged, except as indicated in the Offering Materials; and (v) no action, suit or proceeding, at law or in equity, against the Company or affecting any of its properties or businesses shall be pending or threatened before or by any court or federal or state commission, board or other administrative agency, domestic or foreign, wherein an unfavorable decision, ruling or finding could materially adversely affect the businesses, prospects or financial condition or income of the Company, except as set forth in the Offering Materials. D. If requested at Closing the Investor and the Placement Agent shall receive a certificate of the Company signed by an executive officer and chief financial officer, dated as of the applicable Closing, to the effect that the conditions set forth in subparagraph (C) above have been satisfied and that, as of the applicable closing, the representations and warranties of the Company set forth herein are true and correct. E. The Placement Agent shall have no obligation to insure that (x) any check, note, draft or other means of payment for the Common Stock will be honored, paid or enforceable against the Investor in accordance with its terms, or (y) subject to the performance of the Placement Agent's obligations and the accuracy of the Placement Agent's representations and warranties hereunder, (1) the Offering is exempt from the registration requirements of the 1933 Act or any applicable state "Blue Sky" law or (2) the Investor is an Accredited Investor. 10. Termination. ----------- This Agreement shall be co-terminus with, and terminate upon the same terms and conditions as those set forth in, the Standby Equity Distribution Agreement. The rights of the Investor and the obligations of the Company under the Registration Rights Agreement, and the rights of the Placement Agent and the obligations of the Company shall survive the termination of this Agreement unabridged. 11. Miscellaneous. ------------- A. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all which shall be deemed to be one and the same instrument. B. Any notice required or permitted to be given hereunder shall be given in writing and shall be deemed effective when deposited in the United States mail, postage prepaid, or when received if personally delivered or faxed (upon confirmation of receipt received by the sending party), addressed as follows to such other address of which written notice is given to the others): If to Placement Agent, to: Duncan Capital Group Attention: Telephone: Facsimile: If to the Company, to: China World Trade Corporation With a copy to: Kirkpatrick & Lockhart LLP 201 South Biscayne Boulevard - Suite 2000 Miami, Florida 33131-2399 Attention: Clayton E. Parker, Esq. Telephone: (305) 539-3300 Facsimile: (305) 358-7095 If to the Investor: Cornell Capital Partners, LP 101 Hudson Street - Suite 3700 Jersey City, New Jersey 07302 Attention: Mark A. Angelo Portfolio Manager Telephone: (201) 985-8300 Facsimile: (201) 985-8266 With copies to: David Gonzalez, Esq. 101 Hudson Street - Suite 3700 Jersey City, NJ 07302 Facsimile: (201) 985-8266 C. This Agreement shall be governed by and construed in all respects under the laws of the State of ____, without reference to its conflict of laws rules or principles. Any suit, action, proceeding or litigation arising out of or relating to this Agreement shall be brought and prosecuted in such federal or state court or courts located within the State of New Jersey as provided by law. The parties hereby irrevocably and unconditionally consent to the jurisdiction of each such court or courts located within the State of New Jersey and to service of process by registered or certified mail, return receipt requested, or by any other manner provided by applicable law, and hereby irrevocably and unconditionally waive any right to claim that any suit, action, proceeding or litigation so commenced has been commenced in an inconvenient forum. D. This Agreement and the other agreements referenced herein contain the entire understanding between the parties hereto and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. E. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. COMPANY: CHINA WORLD TRADE CORPORATION By: /s/ John Hui -------------- Name: John Hui Title: CEO & Vice Chairman PLACEMENT AGENT: DUNCAN CAPITAL GROUP By: Name: Title: INVESTOR: CORNELL CAPITAL PARTNERS, LP BY: YORKVILLE ADVISORS, LLC ITS: GENERAL PARTNER By: /s/ Mark A. Angelo --------------------- Name: Mark A. Angelo Title: Portfolio Manager EX-10.4 6 doc6.txt SECURITIES PURCHASE AGREEMENT EX-10.4 SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (this "AGREEMENT") is dated as of August --------- __, 2004, by and among China World Trade Corporation (the "COMPANY"), and the ------- purchasers listed on SCHEDULE 1 hereto (each a "PURCHASER" and collectively, the ---------- --------- "PURCHASERS"). ---------- WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(2) of the Securities Act (as defined below), and Rule 506 promulgated thereunder, the Company desires to issue and sell to the Purchasers, and the Purchasers, severally and not jointly, desire to purchase from the Company the (i) number of shares of Common Stock, and (ii) Series A Warrants set forth opposite each Purchaser's name on SCHEDULE 1 hereto (collectively, the ---------- "SERIES A") subject to an option in favor of the Purchasers to purchase --------- additional shares and receive additional warrants. NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and each Purchaser agrees as follows: ARTICLE I. DEFINITIONS 1.1 Definitions. In addition to the terms defined elsewhere in this ----------- Agreement, for all purposes of this Agreement, the following terms have the meanings indicated in this Section 1.1: "ACTION" shall have the meaning ascribed to such term in Section 3.1(j). ------ -------------- "AGENT SHARES" shall have the meaning ascribed to such term in ------------- Section 2.6 of this Agreement. - ----------- "AGENT WARRANT AGREEMENT" shall mean the Placement Agent's Warrant ------------------------- Agreement dated as of the Closing Date. "AGENT WARRANTS" shall have the meaning ascribed to such term in --------------- Section 2.6 of this Agreement. - ----------- "AFFILIATE" means any Person that, directly or indirectly through one or --------- more intermediaries, controls or is controlled by or is under common control with a Person as such terms are used in and construed under Rule 144. With respect to a Purchaser, any investment fund or managed account that is managed on a discretionary basis by the same investment manager as such Purchaser will be deemed to be an Affiliate of such Purchaser. "BUSINESS DAY" means any day except Saturday, Sunday and any day which ------------- shall be a federal legal holiday or a day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close. "CLOSING" means the closing of the purchase and sale of the Firm Shares ------- and the Series A Warrants pursuant to Section 2.1 on August __, 2004, or such ----------- other date as agreed to by the parties. "CLOSING DATE" means the date of the Closing. ------------- "COMMISSION" means the Securities and Exchange Commission. ---------- "COMMON STOCK" means the Common stock of the Company, par value $.001 per ------------- share, and any securities into which such Common stock may hereafter be reclassified. "COMMON STOCK EQUIVALENTS" means any securities of the Company or the -------------------------- Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock. "COMPANY COUNSEL" means The Law Offices of Harold Martin, P.A. ---------------- "DISCLOSURE SCHEDULES" means the Disclosure Schedules attached hereto. --------------------- "EFFECTIVE DATE" means the date that the Registration Statement is first --------------- declared effective by the Commission. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. ------------- "FIRM SHARES" means the Shares issued pursuant to Section 2.1. ------------ "INDEMNIFIED PARTY" shall have the meaning ascribed to such term Section ------------------ 5.16(b). "INDEMNIFYING PARTY" shall have the meaning ascribed to such term in ------------------- Section 5.16(b). "INTELLECTUAL PROPERTY RIGHTS" shall have the meaning ascribed to such term ---------------------------- in Section 3.1(o). "INVESTOR SECURITIES" means the Shares, the Warrants and the Warrant -------------------- Shares. "LIENS" means a lien, charge, security interest, encumbrance, right of ----- first refusal or other restriction. "MATERIAL ADVERSE EFFECT" shall have the meaning ascribed to such term in ------------------------- Section 3.1(b). - --------------- "MATERIAL PERMITS" shall have the meaning ascribed to such term in Section ----------------- ------- 3.1(m). - ------ "OPTION" shall have the meaning ascribed to such term in Section 2.8. ------ ----------- "OPTION CLOSING DATE" means the date of the closing of the purchase and --------------------- sale of the Option Shares and the Series B Warrants. "OPTION PER SHARE PURCHASE PRICE" means $3.00, subject to adjustment for ---------------------------------- reverse or forward stock splits, stock dividends, stock combinations and other similar transactions relating to the common stock that occur after the date of this Agreement and before the Option Closing Date. "OPTION SHARES" means the Shares issued pursuant to Section 2.8. -------------- ------------ "PER SHARE PURCHASE PRICE" means $1.50, subject to adjustment for reverse -------------------------- or forward stock splits, stock dividends, stock combinations and other similar transactions relating to the Common Stock that occur after the date of this Agreement and before the Closing. "PERSON" means an individual or corporation, partnership, trust, ------ incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind. "PLACEMENT AGENT" means Duncan Capital LLC. ---------------- "REGISTRATION STATEMENT" means a registration statement meeting the ----------------------- requirements set forth in the Registration Rights Agreement and covering the resale by the Purchasers of the Shares and the Warrant Shares and by the Placement Agent of the Agent Shares. "REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement, ------------------------------- dated as of the date of this Agreement, among the Company and each Purchaser, in the form of EXHIBIT A hereto. ---------- "RULE 144" means Rule 144 promulgated by the Commission pursuant to the --------- Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "SEC REPORTS" shall have the meaning ascribed to such term in ------------ Section 3.1(h). - --------------- "SECURITIES ACT" means the Securities Act of 1933, as amended. --------------- "SERIES A WARRANTS" means the common stock purchase warrants in the form of ----------------- EXHIBIT B-1 hereto issuable to each Purchaser at Closing; such Series A Warrants - ----------- are exercisable to purchase up to the number of shares of Common Stock equal to 50% of the aggregate number of Shares to be issued to such Purchaser at the Closing, which shall have an exercise price equal to $2.50 per share and be exercisable for a period of five years. "SERIES A WARRANT SHARES" means the shares of Common Stock issuable upon -------------------------- the exercise of the Series A Warrants. "SERIES B WARRANTS" means the common stock purchase warrants in the form of ----------------- EXHIBIT B-2 hereto issuable to each Purchaser at the Option Closing Date; such - ------------ Series B Warrants are exercisable to purchase up to the number of shares of Common Stock equal to 50% of the aggregate number of Shares to be issued to such Purchaser at the Option Closing Date which shall have an exercise price equal to $4.00 per share (subject to adjustment for reverse or forward splits, stock dividends, stock combinations and similar transactions relating to the common stock ussuable upon exercise of the Series B Warrants) and be exercisable for a period of five years commencing on the Option Closing Date. "SERIES B WARRANT SHARES" means the shares of Common Stock issuable upon -------------------------- the exercise of the Series B Warrants. "SHARES" means the shares of Common Stock purchased by the Purchasers ------ pursuant to this Agreement consisting of the Firm Shares and, if applicable, the Option Shares. "SUBSCRIPTION AMOUNT" means as to each Purchaser, the amount set forth -------------------- below such Purchaser's signature block on the Signature Page of this Agreement in United States Dollars and in immediately available funds. "SUBSIDIARY" shall have the meaning ascribed to such term in Section ---------- ------- 3.1(a). - ------ "TRADING DAY" means (i) a day on which the Common Stock is traded on a ------------ Trading Market, or (ii) if the Common Stock is not quoted on a Trading Market, a day on which the Common Stock is quoted in the over-the-counter market as reported by the National Quotation Bureau Incorporated (or any similar organization or agency succeeding to its functions of reporting price); provided, that in the event that the Common Stock is not listed or quoted as set forth in (i), and (ii) hereof, then Trading Day shall mean a Business Day. "TRADING MARKET" means the following markets or exchanges on which the --------------- Common Stock is listed or quoted for trading on the date in question: the OTC Bulletin Board, the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap Market. "TRANSACTION DOCUMENTS" means this Agreement, the Registration Rights ---------------------- Agreement, the Warrants, the Placement Agent Warrant Agreement, the Agent Warrant(s) and any and all other documents or agreements executed in connection with the transactions contemplated hereunder. "TRANSACTION SECURITIES" means the Shares, the Warrants, the Warrant ----------------------- Shares, the Agent Warrants and the Agent Shares. "WARRANTS" means collectively the Series A Warrants and Series B Warrants -------- issuable to each Purchaser at Closing. "WARRANT SHARES" means the shares of Common Stock issuable upon exercise of -------------- the Series A Warrants and, if applicable, the Series B Warrants collectively. ARTICLE II. PURCHASE AND SALE 2.1 Closing. On the terms and subject to the conditions set forth in this ------- Agreement, at the Closing, the Company shall sell and issue to each Purchaser and each Purchaser shall purchase from the Company subject to Section 2.3, (i) ----------- the number of Firm Shares set forth opposite such Purchaser's name on SCHEDULE I hereto, and (ii) a Series A Warrant for the corresponding number of Series A Warrant Shares. Each Purchaser shall purchase from the Company, and the Company shall issue and sell to each Purchaser, a number of Firm Shares equal to such Purchaser's Subscription Amount divided by the Per Share Purchase Price. The Series A Warrants shall be issued, without additional consideration, on the basis of one Series A Warrant for each two Shares purchased. Upon satisfaction of the conditions set forth in Section 2.2, the Closing shall occur at the offices of Placement Agent, located at 830 Third Avenue, 14th Floor, New York, New York 10022, or such other location as the parties shall mutually agree. 2.2 Closing Conditions. -------------------- (a) At the Closing, as a condition to the Purchaser's obligations hereunder, the Company shall deliver or cause to be delivered to: (i) each Purchaser, an irrevocable instruction letter to the Company's transfer agent authorizing the issuance of a restricted stock certificate for such number of Firm Shares set forth next to such Purchaser's name on SCHEDULE 1 ---------- hereto purchased by each Purchaser; (ii) subject to Section 2.3, each Purchaser, a Series A Warrant, registered in ----------- the name of such Purchaser, as duly executed by the Company, entitling such Purchaser to purchase such amount of Warrant Shares as are set forth next to such Purchaser's name on SCHEDULE 1 hereto; ----------- (iii)each Purchaser, the Registration Rights Agreement duly executed by the Company; (iv) each Purchaser, this Agreement duly executed by the Company; (v) each Purchaser and the Placement Agent, a legal opinion from Company Counsel in form and substance reasonably satisfactory to the Purchasers and Placement Agent; (vi) the Placement Agent, a certificate of the Chief Executive Officer of the Company stating, among other things, that (i) all the conditions set forth in Section 2.2 of this Agreement have been satisfied in all, (ii) except as ----------- set forth in any Schedule to this Agreement, since December 31, 2003, there has been no event, condition or circumstance that has had or could reasonably be expected to have a Material Adverse Effect, and (iii) the Company has complied in all material respects with all its covenants and agreements set forth in the Transaction Documents; (vii)the Placement Agent, a certificate of the Secretary of the Company containing, among other items true and complete copies of the resolutions of the Board of Directors of the Company approving Transaction Documents, Placement Agent compensation, the Offering and all documents and matters relating thereto; And (viii)evidence satisfactory to the Placement Agent that the Company has completed the acquisition of 51% of the equity of Guangdong New Generation Commercial Management Co. Ltd. (b) at the Closing, as a condition to the Company's obligations hereunder, each Purchaser shall deliver or cause to be delivered to the Company the following: (i) this Agreement duly executed by such Purchaser; (ii) such Purchaser's payment for the Firm Shares and Series A Warrants being purchased from the escrow account by wire transfer; and (iii)the Registration Rights Agreement duly executed by such Purchaser. (c) at the Closing, as a condition to each party's obligations hereunder, all representations and warranties of each of the parties herein shall remain true and correct in all material respects as of the Closing Date. (d) as of the Closing Date, as a condition to the Purchasers' obligations hereunder, there shall have been no Material Adverse Effect with respect to the Company since the date hereof. (e) from the date hereof to the Closing Date, and as a condition to the Purchaser's obligations, (i) trading in the Common Stock shall not have been suspended by the Commission (except for any suspension of trading of limited duration agreed to by the Company, which suspension shall be terminated prior to Closing); (ii) trading in securities generally shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on any Trading Market; and (iii) no banking moratorium shall have been declared either by the United States or New York State authorities. 2.3 Escrow Provisions. Pending the sale of the Firm Shares and the Series A ----------------- Warrants, all funds paid hereunder shall be deposited by the Company in escrow with Continental Stock Transfer & Trust Company (the "ESCROW AGENT") pursuant to ------------ an escrow agreement by and among the Escrow Agent, the Company, and the Placement Agent (the "ESCROW AGREEMENT"). On the Closing Date, the Escrow Agent ---------------- shall deliver to the Purchasers the Firm Shares, Series A Warrants and the net Purchase Price proceeds to the Company. The Escrow Agent shall also act as the escrow agent in connection with the closing, if any, of the Option. 2.4 Certificates. Subject to Section 2.3 each Purchaser hereby authorizes ------------ ----------- and directs the Company, upon the Closing, to deliver certificates representing the Firm Shares and Series A Warrants to be issued to such Purchaser pursuant to this Agreement to each Purchaser's address indicated in this Agreement. 2.5 Return of Funds. Each Purchaser hereby authorizes and directs the ----------------- Company and the Placement Agent to return any funds for purchases not accepted by the Company to the same account from which the funds were drawn. 2.6 Expenses; Fees. Simultaneously with payment for and delivery of the --------------- Shares and Warrants, at the Closing and the Option Closing Date, as the case may be, the Company shall: (i) pay to the Placement Agent a cash fee equal to ten (10%) percent of the aggregate purchase price of the Shares and Warrants as and when delivered by the Escrow Agent to the Purchasers (the "CASH FEE"); (ii) -------- reimburse the Placement Agent for its actual out-of-pocket expenses incurred in connection with the Offering, including, without limitation, the reasonable fees and expenses of its legal counsel, not to exceed legal fees of $20,000; (iii) pay all expenses in connection with the qualification of the Transaction Securities under the blue sky laws of the states which the Placement Agent shall designate, including filing fees and disbursements in connection with such blue sky matters; (iv) pay certain fees to the Escrow Agent for acting as escrow agent; and (v) issue to the Placement Agent five year non-cashless exercised provisioned warrants (the "AGENT WARRANTS") to purchase such number of shares of -------------- Common Stock (the "AGENT SHARES") as shall equal ten (10%) percent of the ------------- aggregate number of (a) Shares sold in the Offering, and (b) Warrant Shares issuable upon exercise of the Warrants as of the Closing, at a per share exercise price equal to $2.50. The Company also agrees to pay the Placement Agent a Cash Fee upon its receipt of proceeds, if any, upon the exercise of the Series A Warrants and Series B Warrants by Purchasers. 2.7 Placement Agent. The Investor Securities are being offered on a ---------------- "best-effort" basis by the Placement Agent. The Placement Agreement reserves the right, but is under no obligation, to sell to its affiliates Shares and Warrants on the terms provided herein. 2.8 Option. (a) The Company hereby grants each Purchaser an option (the ------ "Option") to purchase that number of Option Shares equal to the number of Firm ------ Shares received by such Purchaser on the Closing Date. Upon exercise of the Option, the Purchaser shall receive without additional consideration, Series B Warrants to purchase 50% of the Firm Shares. The Option may be exercised during the period commencing on the date when the Registration Statement has been declared effective or such condition has been waived, as the case may be, and expiring 180 calendar days thereafter. The Option may be exercised, from time to time, by sending the Notice of Option Exercise attached hereto as Exhibit B-3 to the Company and the deposit with the Escrow Agent of an amount equal to the Option Per Share Purchase Price multiplied by the number of Option Shares being purchased. ARTICLE III. REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of the Company. Except as set forth -------------------------------------------------- under the corresponding section of the Disclosure Schedules delivered concurrently herewith, the Company hereby makes the following representations and warranties as of the date hereof and as of the Closing Date to each Purchaser: (a) Subsidiaries. Other than as disclosed in the SEC Reports, the Company ------------ has no direct or indirect operating subsidiaries (a "SUBSIDIARY" and ---------- collectively, the "SUBSIDIARIES"). The Company owns, directly or indirectly, all ------------ or the majority of the capital stock of each Subsidiary free and clear of any Liens, and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights. (b) Organization and Qualification. Each of the Company and the Subsidiaries ------------------------------ is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with the requisite corporate power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary (as applicable), except where the failure to be so qualified or in good standing (as applicable), as the case may be, would not result in (i) a material adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business or financial condition of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company's ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a "MATERIAL ADVERSE EFFECT"). ------------------------- (c) Authorization; Enforcement; Validity. The Company has the requisite -------------------------------------- corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents and otherwise to carry out its obligations thereunder. The execution and delivery of each of the Transaction Documents by the Company and the consummation by it of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Company and no further corporate action is required by the Company in connection therewith. Each Transaction Document has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors' rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies, and (iii) with respect to the indemnification provisions set forth in the Registration Rights Agreement, as limited by public policy. (d) No Conflicts. The execution, delivery and performance of the Transaction ------------ Documents by the Company and the consummation by the Company of the transactions contemplated thereby, do not and will not (i) conflict with or violate any provision of the Company's or any Subsidiary's certificate or articles of incorporation, certificates of designation (or similar document related to preferred stock), bylaws and/or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise), or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected, except in the case of each of clauses (ii) and (iii), such as would not result in a Material Adverse Effect. (e) Filings, Consents and Approvals. The Company is not required to obtain --------------------------------- any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than the filing with the Commission of the Registration Statement, the application(s) and approvals to each Trading Market for the listing of the Shares, Warrant Shares and the Agent Shares for trading thereon in the time and manner required thereby, applicable Blue Sky filings, and the filing of a current report on Form 8-K under the Exchange Act. (f) Issuance of the Securities. All of the Transaction Securities have been --------------------------- duly authorized and, when issued and paid for in accordance with the Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens. The Company has reserved from its duly authorized capital stock such number of shares of Common Stock so as to permit the issuance of the Shares, the Warrant Shares and the Agent Shares. (g) Capitalization. Except as set forth in the SEC Reports, the -------------- capitalization of the Company is as described in the Company's most recent periodic report filed with the Commission. Except as set forth in the SEC Reports, the Company has not issued any capital stock since such filing other than pursuant to the exercise of employee stock options under the Company's stock option plans and pursuant to the conversion or exercise of Common Stock Equivalents outstanding on the date hereof. No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities, for employee stock options under the Company's stock option plans, or otherwise as reflected in the SEC Reports, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. The issue and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under such securities. (h) SEC Reports; Financial Statements. The Company has filed all reports ------------------------------------ required to be filed by it under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or Section 15(d) of the Exchange Act, for ------------- ------------- the two (2) years preceding the date hereof (or such shorter period as the Company was required by law to file such material) (the foregoing materials, including the exhibits thereto, being collectively referred to herein as the "SEC REPORTS" and, together with the Disclosure Schedules to this Agreement, the ----------- "DISCLOSURE MATERIALS"). As of their respective dates, the SEC Reports complied -------------------- in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Commission promulgated thereunder, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the Commission with respect thereto as in effect at the time of filing. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved ("GAAP"), except as may be otherwise specified in such ---- financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments. (i) Material Changes. Since the date of the latest audited financial ----------------- statements included within the SEC Reports, except as disclosed in the SEC Reports, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any material liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company's financial statements pursuant to GAAP or required to be disclosed in filings made with the Commission, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its holders of Common Stock or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to the usual and ordinary course of business and the existing Company stock option plans. The Company does not have pending before the Commission any request for confidential treatment of information. (j) Litigation. Except as disclosed in the SEC Reports or on Schedule 3.1(j) ---------- hereto, there is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency and/or regulatory authority (federal, state, county, local or foreign) (collectively, an "ACTION") which (i) adversely affects or challenges the legality, validity or ------ enforceability of any of the Transaction Documents and/or the Transaction Securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor, to the knowledge of the Company, any director or officer thereof, except as disclosed in the SEC Reports, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty could result in a Material Adverse Effect. Except as disclosed in the SEC Reports, to the knowledge of the Company, there is not pending or contemplated any investigation by the Commission and/or other entity involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act. (k) Labor Relations. No material labor dispute exists or, to the knowledge ---------------- of the Company, is imminent with respect to any of the employees of the Company which could reasonably be expected to result in a Material Adverse Effect. (l) Compliance. Except as disclosed in the SEC Reports, neither the Company ---------- nor any Subsidiary (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any order of any court, arbitrator or governmental body, or (iii) is or has been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws applicable to its business, except in the case of clauses (i), (ii) and (iii) as would not result in a Material Adverse Effect. (m) Regulatory Permits. The Company and the Subsidiaries possess all ------------------- certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits would not have or reasonably be expected to result in a Material Adverse Effect ("MATERIAL PERMITS"), and neither the Company nor any ---------------- Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit. (n) Title to Assets. The Company and the Subsidiaries have good and ----------------- marketable title in fee simple to all real property owned by them that is material to the business of the Company and the Subsidiaries, taken as a whole, and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, taken as a whole, in each case free and clear of all Liens, except for Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries and Liens for the payment of federal, state or other taxes, the payment of which is neither delinquent nor subject to penalties. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with which the Company and the Subsidiaries are in material compliance. (o) Patents and Trademarks. To the knowledge of the Company and each ------------------------ Subsidiary, the Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as described in the SEC Reports and which the failure to so have would result in a Material Adverse Effect (collectively, the "INTELLECTUAL PROPERTY RIGHTS"). Neither the ---------------------------- Company nor any Subsidiary has received a written notice that the Intellectual Property Rights used by the Company or any Subsidiary violates or infringes the rights of any Person. To the knowledge of the Company, all such Intellectual Property Rights are enforceable. (p) Transactions With Affiliates and Employees. Except as set forth in the -------------------------------------------- SEC Reports, none of the officers, directors and/or employees of the Company and the Subsidiaries are, to the knowledge of the Company, a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $60,000 other than (a) for payment of salary or consulting fees for services rendered, (b) reimbursement for expenses incurred on behalf of the Company and (c) for other employee benefits, including stock option agreements under any stock option plan of the Company. (q) Internal Accounting Controls. The Company and each of its subsidiaries ----------------------------- maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Company and designed such disclosure controls and procedures to ensure that material information relating to the Company, including its Subsidiaries, is made known to the certifying officers by others within those entities, particularly during the period in which the Company's Form 10-K or 10-Q, as the case may be, is being prepared. (r) Certain Fees. Except for payments payable to the Placement Agent by the ------------- Company and a 3% finder's fee payable to V3 Consulting, Inc., the Company has not entered into an agreement to pay any brokerage or finder's fees or commissions to any person including, but not limited to, any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement, except to the extent a Purchaser made an agreement to make any such payment. (s) Private Placement. Assuming the accuracy of the Purchasers ------------------ representations and warranties set forth in Section 3.2, no registration under ----------- the Securities Act is required for the offer and sale of the Investor Securities by the Company to the Purchasers as contemplated hereby. The issuance and sale of the Transaction Securities hereunder does not contravene the rules and regulations of the Trading Market. (t) Investment Company. The Company is not, and is not an Affiliate of, an ------------------- "investment company" within the meaning of the Investment Company Act of 1940, as amended. (u) Listing and Maintenance Requirements. The Company has applied for --------------------------------------- listing of its Common Stock, including all of the Transaction Securities on the American Stock Exchange and has received no notice from the American Stock Exchange that such Exchange does not intend to list such securities. The Company has not, in the twelve (12) months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market, other than a letter from the Trading Market on which the Common Stock is or has been listed or quoted notifying the Company that its securities would be delisted if the trading price did not increase above One Dollar ($1.00) per share. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements, other than potential trading price issues concerning such Trading Market's rules and regulations. (v) Application of Takeover Protections. The Company and its Board of -------------------------------------- Directors have taken all necessary action, if any is available, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company's Certificate of Incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation the Company's issuance of the Transaction Securities and the Purchasers' ownership of the Investor Securities. (w) No General Solicitation. Neither the Company, its Subsidiaries, any of -------------------------- their affiliates nor any person acting on their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the Transaction Securities. (x) No Integrated Offering. Neither the Company, its Subsidiaries, any of ------------------------- their affiliates nor any person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Transaction Securities under the Securities Act or cause the Offering to be integrated with prior offerings by the Company for purposes of the Securities Act or any applicable stockholder approval provisions, including without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated. None of the Company, its Subsidiaries, their affiliates and any person acting on their behalf will take any action or steps referred to in the preceding sentence that would require registration of any of the Transaction Securities under the Securities Act or cause the Offering to be integrated with other offerings. (y) Registration Rights. Except with respect to Purchasers and the --------------------- Placement Agent and except as provided on Schedule 3.1(y) hereto, no person has --------------- any right to cause the Company to effect the registration under the Securities Act of any securities of the Company. (z) Right of First Refusal. Except with regard to the Placement Agreement, ------------------------- no person, firm or other business entity is a party to any agreement, contract or understanding, written or oral entitling such party to a right of first refusal with respect to offerings of securities by the Company. (aa) Disclosure. The Company confirms that, neither the Company nor any ---------- other Person acting on its behalf has provided any of the Purchasers or their agents or counsel with any information that constitutes or might constitute material, non-public information. The Company understands and confirms that the Purchasers will rely on the foregoing representations and covenants in effecting transactions in securities of the Company. All disclosure provided to the Purchasers regarding the Company, its business and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, furnished by or on behalf of the Company are true and correct and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. (bb) Insurance. Each of the Company and its Subsidiaries maintain insurance --------- of the types and in the amounts deemed adequate for its business, including, but not limited to, product liability insurance, insurance covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (cc) Conduct of Business. Since December 31, 2003 and except as otherwise --------------------- stated in the SEC Reports, the Company has not (a) incurred any debts, obligations or liabilities, absolute, accrued, contingent or otherwise, whether due or to become due, except current liabilities incurred in the usual and ordinary course of business, having a Material Adverse Effect, (b) made or suffered any changes in its contingent obligations by way of guaranty, endorsement (other than the endorsement of checks for deposit in the usual and ordinary course of business), indemnity, warranty or otherwise, (c) discharged or satisfied any liens other than those securing, or paid any obligation or liability other than, current liabilities shown on the balance sheet dated as at December 31, 2003 and forming part of the SEC Reports, and current liabilities incurred since December 31, 2003, in each case in the usual and ordinary course of business, (d) mortgaged, pledged or subjected to lien any of its assets, tangible or intangible, (e) sold, transferred or leased any of its assets except in the usual and ordinary course of business, (f) cancelled or compromised any debt or claim, or waived or released any right, of material value, (g) suffered any physical damage, destruction or loss (whether or not covered by insurance) adversely affecting the properties or business of the Company, (h) entered into any transaction other than in the usual and ordinary course of business except for this Agreement and the related agreements referred to herein, (i) encountered any labor difficulties or labor union organizing activities, (j) made or granted any wage or salary increase or entered into any employment agreement, (k) issued or sold any shares of capital stock or other securities or granted any options with respect thereto, or modified any equity security of the Company, (l) declared or paid any dividends on or made any other distributions with respect to, or purchased or redeemed, any of its outstanding equity securities, (m) suffered or experienced any change in, or condition affecting, its condition (financial or otherwise), properties, assets, liabilities, business operations or results of operations other than changes, events or conditions in the usual and ordinary course of its business, having (either by itself or in conjunction with all such other changes, events and conditions) a Material Adverse Effect, (n) made any change in the accounting principles, methods or practices followed by it or depreciation or amortization policies or rates theretofore adopted, or (o) entered into any agreement or otherwise obligated itself, to do any of the foregoing. 3.2 Representations and Warranties of the Purchasers. Each Purchaser hereby, ------------------------------------------------ for itself and for no other Purchaser, represents and warrants as of the date hereof and as of the Closing Date to the Company, acknowledging that the Company is relying upon the accuracy and completeness of the representations and warranties set forth herein to, among other things, ensure that registration under Section 5 of the Securities Act is not required in connection with the sale of the Securities hereby, as follows: (a) Organization; Authority. Such Purchaser, if not a natural person, is an ------------------------ entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with full right, corporate or partnership power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations thereunder. The execution, delivery and performance by such Purchaser of the transactions contemplated by this Agreement has been duly authorized by all necessary corporate or similar action on the part of such Purchaser. Each Transaction Document to which it is a party has been duly executed by such Purchaser, and when delivered by such Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms. (b) Investment Intent. Such Purchaser understands that the Investor ------------------ Securities are "restricted securities" and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Investor Securities as principal for its own account for investment purposes. (c) Purchaser Status. At the time such Purchaser was offered the Shares and ----------------- Warrants, it was, and at the date hereof it is an "accredited investor" as defined in Rule 501(a) under the Securities Act. Such Purchaser is not, and is not required to be, registered as a broker-dealer under Section 15 of the Exchange Act. In making an investment decision as to whether to purchase the Shares and Warrants offered hereby, each Purchaser has relied solely upon the SEC Reports and the representation and warranties of the Company contained herein. Each Purchaser has had the opportunity to ask questions of, and receive answers from, representatives of the Company concerning the Company and the officers and all such questions have been asked and answered by the Company to the satisfaction of the Purchaser. (d) Experience of Such Purchaser. Each Purchaser, either alone or together ------------------------------ with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Investor Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Investor Securities and, at the present time, is able to afford a complete loss of such investment. (e) General Solicitation. Such Purchaser is not purchasing the Shares and --------------------- Warrants as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement. (f) Compliance with the Securities Laws. Such Purchaser agrees to comply --------------------------------------- with the requirements of Regulation M, if applicable, with respect to the resale of the Shares by the Purchaser. Such Purchaser hereby confirms its understanding that it may not cover short sales made prior to the Effective Date with shares of Common Stock registered for resale on the Registration Statement. (g) No Conflicts. Neither the execution and delivery of this Agreement ------------- and/or any Transaction Document, nor the consummation of the Transactions contemplated hereby, will violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Purchaser is subject or any provision of its organizational documents or other similar governing instruments. (h) No Advice. Purchaser understands that nothing in this Agreement or any ---------- other materials presented to Purchaser in connection with the purchase and sale of the Investor Securities constitutes legal, tax or investment advice. Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Investor Securities. (i) No Litigation, Etc. There is no action, suit, proceeding, judgment, -------------------- claim or investigation pending or, to the knowledge of the Purchaser, threatened against the Purchaser which could reasonably be expected in any manner to challenge or seek to prevent, enjoin, alter or materially delay any of the transactions contemplated by the Transaction Documents. (j) Approvals. The execution, delivery and performance by the Purchaser of --------- this Agreement and the Transaction Documents to which it is a party, and the consummation of the transactions set forth herein require no material action by or in respect of, or material filing with, any governmental body, agency, official or authority, by the Purchaser other than (i) any filings, authorizations, consents and approvals as may be required under the Hart-Scott-Rodino Improvements Act of 1976, as amended; (ii) the filing by the Purchaser with the Commission of such reports under the Exchange Act as may be required in connection with this Agreement, the Transaction Documents and the transactions contemplated hereby, and (iii) any filings required by the securities or blue sky laws of the various states. (k) Placement Agent. Each Purchaser agrees that neither the Placement Agent ----------------- nor any of its respective directors, officers, affiliates, employees or agents shall be liable to the Purchaser for any action taken or omitted to be taken by it in connection therewith, except for willful misconduct or gross negligence. The Company acknowledges and agrees that each Purchaser does not make or has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in this Section 3.2 ----------- and Section 4.1. ------------ ARTICLE IV. OTHER AGREEMENTS OF THE PARTIES 4.1 Transfer Restrictions. ----------------------- (a) The Investor Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Investor Securities other than pursuant to an effective registration statement, pursuant to Rule 144(k), pursuant to Rule 144 (if customary documentation is provided satisfactory to legal counsel to the Company), or in connection with a pledge as contemplated in Section 4.1(b) hereof, the Company may require the transferor --------------- thereof to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred Investor Securities under the Securities Act. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights of a Purchaser under this Agreement and the Registration Rights Agreement. (b) The Purchasers agree to the imprinting, so long as is required by this Section 4.1(b), of a legend on any of the Investor Securities in the following - --------------- form: THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT -------------- TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT. The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Investor Securities to a financial institution that is an "accredited investor" as defined in Rule 501(a) under the Securities Act and, if required under the terms of such arrangement, such Purchaser may transfer pledged or secured Investor Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection with the grant of the pledge. Further, no notice shall be required of grant of the pledge. At the appropriate Purchaser's expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Transaction Securities may reasonably request in connection with a pledge or transfer of the Investor Securities, including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) under the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder. Notwithstanding anything to the contrary, any such pledgee shall not be entitled to any rights under any of the Transaction Documents unless and until such pledgee executes a written agreement to be bound by Purchasers' obligations under the Transaction Documents. (c) Subject to compliance with all laws, rules and regulations including, but not limited to, the Securities Act and the Exchange Act, certificates evidencing the Shares and Warrant Shares shall not contain any legend (including the legend set forth in Section 4.1(b)), (i) following any sale of the -------------- Shares or Warrant Shares pursuant to a registration statement (including the Registration Statement) covering the resale of such security, or (ii) following any sale of the Shares or Warrant Shares pursuant to Rule 144, or (iii) if such Shares or Warrant Shares are eligible for sale under Rule 144(k) and appropriate documentation is provided satisfactory to legal counsel to the Company, or (iv) if such legend is not required under applicable regulation of the Securities Act (including judicial interpretations and pronouncements issued by the Staff of the Commission). Subject to compliance with all laws, rules and regulations including, but not limited to, the Securities Act and the Exchange Act, the Company shall cause its counsel to issue a legal opinion to the Company's transfer agent promptly after the Effective Date if required by the Company's transfer agent to effect the removal of the legend hereunder. If all or any portion of a Warrant is exercised at a time when there is an effective registration statement to cover the resale of the Warrant Shares, such Warrant Shares shall be issued free of all legends. The Company agrees that at such time as such legend is no longer required under and pursuant to this Section ------- 4.1(c), it will, upon written request from the Purchaser and following the - ----- submission to the Company counsel of such materials as shall be reasonably requested by such counsel therefore, no later than four (4) Trading Days following the delivery by a Purchaser to the Company or the Company's transfer agent of a certificate representing Shares and/or Warrant Shares, as the case may be, issued with a restrictive legend, deliver or cause to be delivered to such Purchaser (i) a certificate representing such securities that is free from all restrictive and other legends, or (ii) in lieu of delivering physical certificates representing the Shares and/or Warrant Shares, and provided that the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer (or FAST) program, upon request of --- the Purchaser, the Company shall use its reasonable commercial efforts to cause its transfer agent to electronically transmit the Shares and/or Warrant Shares by crediting the account of the Purchaser's prime broker with DTC through its Deposit Withdrawal Agent Commission (or DWAC) system. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section. (d) Each Purchaser severally and not jointly agrees that the removal of the restrictive legend from certificates representing the Shares and the Warrant Shares as set forth in this Section 4.1 is predicated upon the Company's ------------ reliance that the Purchaser will sell any Investor Securities pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom. 4.2 Furnishing of Information. Until the date no Purchaser owns any --------------------------- Investor Securities, the Company covenants and agrees to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act. Upon the request of any such holder of Investor Securities, the Company shall deliver to such holder a written certification of a duly authorized officer as to whether it has complied with the preceding sentence. Until the date no Purchaser owns any Investor Securities, if the Company is not required to file reports pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and make publicly available in accordance with Rule 144(c) such information as is required for the Purchasers to sell any Shares and Warrant Shares under Rule 144. The Company further covenants and agrees that it will take such further action as any holder of Investor Securities may reasonably request, all to the extent required from time to time to enable such person to sell any Shares and Warrant Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144. 4.3 Integration. The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of any of the Transaction Securities in a manner that would require the registration under the Securities Act of the sale of the Investor Securities to the Purchasers or that would be integrated with the offer or sale of the Investor Securities for purposes of the rules and regulations of any Trading Market. 4.4 Securities Laws Disclosure; Publicity. The Company shall use its best efforts to by 9:00 a.m., Eastern Daylight Time, on the first Business following this Agreement issue a press release (which shall be followed by a Form 8-K filing within one (1) Business Day of the Closing) and, in any event, by the end of business on the Business Day following the Closing issue a press release (which shall be followed by a Form 8-K filing within two (2) Business Days thereafter), in either case disclosing the transactions contemplated hereby and make such other filings and notices in the manner and time required by the Commission. The Company and the Placement Agent shall consult with each other in issuing any press releases with respect to the transactions contemplated hereby, and neither the Company nor the Placement Agentshall issue any such press release or otherwise make any such public statement without the prior consent of the Company, with respect to any press release of the Placement Agent, or without the prior consent of the Placement Agent, with respect to any press release of the Company, which consent shall not unreasonably be withheld or delayed, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission or any regulatory agency or Trading Market, without the prior written consent of such Purchaser, except (i) as required by federal securities law in connection with the registration statement contemplated by the Registration Rights Agreement and (ii) to the extent such disclosure is required by law or Trading Market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure permitted under subclause (i) or (ii). 4.5 Shareholders Rights Plan. No claim will be made or enforced by the Company or any other Person that any Purchaser is an "Acquiring Person" under any shareholders rights plan or similar plan or arrangement in effect or hereafter adopted by the Company, or that any Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Investor Securities under the Transaction Documents or under any other agreement between the Company and the Purchasers. 4.6 Non-Public Information.The Company covenants and agrees that neither it nor any other Person acting on its behalf will provide any Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto such Purchaser shall have executed a written agreement regarding the confidentiality and use of such information. The Company understands and confirms that each Purchaser shall be relying on the foregoing representations in effecting transactions in securities of the Company. 4.7 Use of Proceeds. The Company covenants and agrees that all of the net proceeds that it receives from the sale of the Shares and Warrants pursuant to this Agreement, although distributed, allocated and expended by the Company in its sole discretion, shall be used for general working capital and corporate purposes. 4.8 Reimbursement. If any Purchaser becomes involved in any capacity in any ------------- Proceeding by or against any Person who is a stockholder of the Company (except as a result of sales, pledges, margin sales and similar transactions by such Purchaser to or with any current stockholder), solely as a result of such Purchaser's acquisition of the Securities under this Agreement, and provided any such person has complied with all laws, rules and regulations and is not in breach of any of its representations, warranties, or agreements made in any of the Transaction Documents, the Company will reimburse such Purchaser for its reasonable legal and other expenses (including the cost of any investigation preparation and travel in connection therewith) incurred in connection therewith, as such expenses are incurred. The reimbursement obligations of the Company under this paragraph shall be in addition to any liability which the Company may otherwise have, shall extend upon the same terms and conditions to any Affiliates of the Purchasers who are actually named in such action, proceeding or investigation, and partners, directors, agents, employees and controlling persons (if any), as the case may be, of the Purchasers and any such Affiliate, and shall be binding upon and inure to the benefit of any successors, assigns, heirs and personal representatives of the Company, the Purchasers and any such Affiliate and any such Person. The Company also agrees that neither the Purchasers nor any such Affiliates, partners, directors, agents, employees or controlling persons shall have any liability to the Company or any Person asserting claims on behalf of or in right of the Company solely as a result of acquiring the Securities under this Agreement, provided such person has complied with all laws, rules and regulations and is not in breach of any of its representations, warranties and agreements made in any of the Transaction Documents. 4.9 Form D and Blue Sky. The Company shall file a Form D with respect to the ------------------- Transaction Securities as required under Regulation D under the Securities Act and, upon written request, provide a copy thereof to the Placement Agent for distribution to the Purchasers promptly after such filing. The Company shall, on or before the Closing, take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify any Transaction Securities for sale to the Purchasers and/or the Placement Agent pursuant to this Agreement under applicable securities or "Blue Sky" laws of the states of the United States, and shall provide evidence of any such action so taken to the Purchasers on or prior to the Closing by providing copies of such filings to the Placement Agent. The Company shall make all filings and reports relating to the offer and sale of the Transaction Securities required under applicable securities or "Blue Sky" laws of the states of the United States following the Closing. 4.10 Reservation of Common Stock. As of the date hereof, the Company has ------------------------------ reserved and the Company shall continue to reserve and keep available at all times, free of preemptive rights, a sufficient number of shares of Common Stock for the purpose of enabling the Company to issue the Shares, the Warrant Shares and the Agent Shares. 4.11 Listing of Common Stock. The Company hereby agrees to use its best -------------------------- efforts to maintain the listing of the Common Stock on its current Trading Market, and promptly file with the Trading Market to list the applicable Shares, Warrant Shares and Agent Shares on the Trading Market. The Company further agrees, if the Company applies to have the Common Stock traded on any other Trading Market, it will include in such application the Shares, Warrant Shares and Agent Shares and will take such other action as is necessary or desirable in the opinion of the Purchasers to cause the Shares, Warrant Shares and Agent Shares to be listed on such other Trading Market as promptly as possible. The Company will take all action reasonably necessary to continue the listing and trading of its Common Stock on its current Trading Market and will use its best efforts to comply in all material respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Trading Market. 4.12 Indemnification by the Purchasers. Each of the Purchasers severally and --------------------------------- not jointly agrees to indemnify and hold harmless the Company and its officers, directors, agents, representatives, shareholders and employees and each of their respective affiliates, from and against any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys' fees and costs of investigation that any such party may suffer or incur which are caused by or arise out of (i) any material misrepresentation or material breach or default in the performance by it of any covenant or agreement made by it in this Agreement or in any of the Transaction Documents; (ii) any material misrepresentation or material breach of warranty or representation made by it in this Agreement or in any of the Transaction Documents or, (iii) any cause of action, suit or claim brought or made against such Indemnified Party and arising out of or resulting from the execution, delivery, performance or enforcement of the Transaction Documents executed pursuant hereto by any of the Indemnified Parties. Notwithstanding anything to the contrary provided herein or elsewhere, the liability of each Purchaser under this Section 4.10 shall be limited to the ------------ amount paid by the Purchaser pursuant hereto to purchase the Investor Securities, and the procedures and timing for indemnification by the Purchasers under this Section 4.10 shall follow the procedures and provisions of Sections ------------ -------- 5.16(b) and (c), mutatis mutandis, with respect to indemnification by the ---------------- ------- -------- Company of the Purchasers. 4.13 Reporting Obligations. So long as any Purchaser beneficially owns any ----------------------- Investor Securities, the Company shall continue to file or furnish pursuant to the Exchange Act or the Securities Act, and the Company shall use commercially reasonable best efforts to maintain its status as an issuer required to file such reports under the Exchange Act. In addition, during such same period if the Company's Common Stock is traded on the American Stock Exchange or any other national exchange, the Company shall take all actions necessary to continue to meet the "registrant eligibility" requirements set forth in the general instructions to Form S-3 or any successor form thereto, to continue to be eligible to register the resale of the Shares, the Warrant Shares and the Agent Shares under the Securities Act on such Form. 4.14 Purchase Price Adjustment. --------------------------- (a) FirmShares. Other than the Excepted Issuances, defined below, if at any ---------- time from the Closing Date until the first anniversary thereof, the Company shall offer, issue or agree to issue any shares of common stock to any person or entity at a price per share which shall be less than the Per Share Purchase Price, without the consent of each Purchaser holding Shares, the Company shall issue, for each such occasion, additional shares of Common Stock to each Purchaser so that the average Per Share Purchase Price of the shares of Common Stock issued to the Purchaser (only if the Common Stock is still owned by the Purchaser) is equal to such other lower price per share. (b) OptionShares. If a Purchaser has exercised the Option, then at any time ------------ after from Closing Date Closing Date until the first anniversary thereof, the Company shall offer, issue or agree to issue any shares of common stock, other than Excepted Issuances, to any person or entity at a price per share which is greater than the Per Share Purchase Price but less than the Option Per Share Purchase Price, without the consent of each Option Purchaser holding Option Shares, the Company shall issue, for each such occasion, additional shares of Common Stock to each Purchaser so that the average Option Per Share Purchase Price of the shares of Common Stock issued to the Option Purchaser (only if the Common Stock is still owned by the Purchaser) is equal to such other lower price per share. If the Company shall offer, issue or agree to issue any shares of common stock, other than Excepted Issuances, to any person or entity at a price per share which is less than the Per Share Purchase Price, without the consent of each Option Purchaser holding Option Shares, the Company shall issue, for each such occasion, additional shares of Common Stock to each Purchaser so that the average Option Per Share Purchase Price of the shares of Common Stock issued to the Option Purchaser (only if the Common Stock is still owned by the Purchaser) is equal to the percentage reduction between the Per Share Purchase Price and such other lower price per share. For example, if the Company issued shares at $.75, the percentage reduction between the Per Share Purchase Price ($1.50) and the new lower price would be 50%. Accordingly, the Option Purchaser would receive that number of additional shares of Common Stock so that the average Option Per Share Purchase Price of the shares of Common Stock issued to the Option Purchaser would equal $2.00 per share from the initial per share price of $4.00. (c) Option PriceAdjustment. If a Purchaser has not exercised the Option, ----------------------- then at any time after from Closing Date until the first anniversary thereof, the Company shall offer, issue or agree to issue any shares of common stock, other than Excepted Issuances, to any person or entity at a price per share which is greater than the Per Share Purchase Price but less than the Option Per Share Purchase Price, without the consent of each Purchaser, the Option Per Share Purchase Price shall be adjusted to equal to such other lower price per share. If the Company shall offer, issue or agree to issue any shares of common stock, other than Excepted Issuances, to any person or entity at a price per share which is less than the Per Share Purchase Price, without the consent of each Purchaser, the Company shall issue, the Option Per Share Purchase Price shall be adjusted to equal to the percentage reduction between the Per Share Purchase Price and such other lower price per share. (d) Maximum Exercise of Rights. In the event the exercise of the rights ----------------------------- described in this Section 14.4 would result in the issuance to the Purchaser of an amount of common stock of the Company that would cause the Purchaser's beneficially ownership in the Company to exceed 4.99% after giving effect to such issuance, the issuance of such additional shares of common stock of the Company to such Purchaser shall be, at each such Purchaser's discretion, deferred in whole or in part until such time as such Purchaser is able to beneficially own such shares of common stock without exceeding 4.99% of the then issued and outstanding common stock of the Company from the initially set $4.00 per share. (e) Registration Rights. All shares issued pursuant to this Section 4.14 -------------------- which are issued prior to the effective date of the Registration Statement shall have the mandatory registration rights set forth in Section 2 the Registration Rights Agreement. All shares issued pursuant to this Section 4.14 which are issued after the effective date of the Registration Statement shall have the piggyback registration rights set forth in Section 6(e) of the Registration Rights Agreement. For purposes of this Section 14.4 "EXCEPTED ISSUANCES" shall mean the sale or issuance of common stock except in connection with (i) the granting of options to employees, officers, directors or consultants of the Company pursuant to any stock option plan or other written compensatory agreement, or (ii) the exercise of any security issued by the Company in connection with the offer and sale of the Company's securities pursuant to the Purchase Agreement (including any securities issued as compensation in connection therewith), or (iii) the exercise of or conversion of any convertible securities, options or warrants issued and outstanding on the date hereof, provided such securities have not been amended since the date hereof, or (iv) the issuance of securities in connection with acquisitions, joint ventures, arrangements related to the Company's operations and strategic relationships, or other strategic investments, the primary purpose of which is not to raise capital. The delivery to the Purchaser of the additional shares of Common Stock shall be not later than the closing date of the transaction giving rise to the requirement to issue additional shares of Common Stock. ARTICLE V. MISCELLANEOUS 5.1 Fees and Expenses. Except as otherwise set forth in this Agreement, each ----------------- party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement; provided, however, that the Company shall pay a maximum of $20,000 for the aggregate fees and expenses of counsel to the Placement Agent. The Company shall pay all stamp and other taxes and duties levied in connection with the sale of the Securities. 5.2 Entire Agreement. The Transaction Documents, together with the exhibits ----------------- and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. 5.3 Notices. Any and all notices or other communications or deliveries ------- required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on (a) the next Business Day, if sent by U.S. nationally recognized overnight courier service for next day priority delivery, or (b) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications to the Company shall be as set forth below and for each Purchaser shall be as set forth on the signature pages attached hereto. If to the Company: China World Trade Corporation 4th Floor, Goldilcon Digital Network Center 138 Tiyu Road East, Tianhe Guanzhou 510620 People's Republic of China Facsimile: 8620-3878-1515 Attn: John Hui With a copy to: Bernard Chan Rm 1217 12th Floor The Metropolis Tower 10 Metropolis Drive Hong Kong Facsimile: 852-2333-8844 5.4 Amendments; Waivers. No provision of this Agreement may be waived or -------------------- amended except in a written instrument signed, in the case of an amendment, by the Company and each Purchaser or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right. 5.5 Construction. The headings herein are for convenience only, do not ------------ constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party. 5.6 Successors and Assigns. This Agreement shall be binding upon and inure ----------------------- to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of each Purchaser. Any Purchaser, however, may assign any or all of its Investor Securities and/or rights under this Agreement to any Person, provided such transferee agrees in writing to be bound, with respect to the transferred Investor Securities and otherwise, by the provisions hereof that apply to the "Purchasers." 5.7 No Third-Party Beneficiaries. This Agreement is intended for the ------------------------------ benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. 5.8 Governing Law. This Agreement shall be governed by and construed in -------------- accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York City. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements. 5.9 Survival. The representations, warranties, agreements and covenants -------- contained herein shall survive the Closing and delivery of the Shares and Warrants for a period of twelve (12) months. 5.10 Execution. This Agreement may be executed in two or more counterparts, --------- all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof. 5.11 Severability. If any provision of this Agreement is held to be invalid ------------ or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 5.12 Replacement of Investor Securities. If any certificate or instrument ------------------------------------- evidencing any Investor Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Investor Securities. 5.13 Remedies. In addition to being entitled to exercise all rights provided -------- herein or granted by law, including recovery of damages, each of the Purchasers and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate. 5.14 Payment Set Aside. To the extent that the Company makes a payment or ------------------- payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall, to the extent permissible under applicable law, be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred. 5.15 Independent Nature of Purchasers' Obligations and Rights. The -------------------------------------------------------------- obligations of each Purchaser under any Transaction Document are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser under any Transaction Document. Nothing contained herein or in any Transaction Document, and no action taken by any Purchaser pursuant thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Document. Each Purchaser shall be entitled to independently protect and enforce its rights, including without limitation, the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. Each Purchaser represents that it has been represented by its own separate legal counsel in their review and negotiation of the Transaction Documents. The Company has elected to provide all Purchasers with the same terms and Transaction Documents for the convenience of the Company and not because it was required or requested to do so by the Purchasers. 5.16 Indemnification by the Company. --------------------------------- (a) The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Purchaser, the officers, directors, agents and employees of each of them, each Person who controls any such Purchaser (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable attorneys' fees) and expenses (including the cost (including without limitation, reasonable attorneys' fees) and expenses relating to an Indemnified Party's (as defined below) actions to enforce the provisions of this Section 5.16) (collectively, "LOSSES"), as incurred, to the ------------ ------ extent arising out of or relating to (i) any material misrepresentation or material breach of any representation or warranty made by the Company in the Transaction Documents, or, (ii) any material breach of any covenant, agreement or obligation of the Company contained in the Transaction Documents, or (iii) any cause of action, suit or claim brought or made against such Indemnified Party and arising out of or resulting from the execution, delivery, performance or enforcement of the Transaction Documents executed pursuant hereto by any of the Indemnified Parties. If the indemnification provided for in this Section ------- 5.16 is held by a court of competent jurisdiction to be unavailable to an - ---- Indemnified Party with respect to any Losses, then the Indemnifying Party (as defined below), in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of Losses in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the actions or omissions that resulted in such Losses as well as any other relevant equitable considerations. The Company shall notify the Purchasers promptly of the institution, threat or assertion of any proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (b) Conduct of Indemnification Proceedings. If any proceeding shall be ----------------------------------------- brought or asserted against any Person entitled to indemnity hereunder (an "INDEMNIFIED PARTY"), such Indemnified Party shall promptly notify the Company ------------------ (the "INDEMNIFYING PARTY") in writing, and the Indemnifying Party shall have the ------------------ right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, however, that -------- ------- the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally judicially determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have materially and adversely prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such proceeding; or (3) the named parties to any such proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of one separate counsel for all Indemnified Parties in any matters related on a factual basis shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such proceeding affected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such proceeding. (c) Timing of Payments. All reasonable fees and expenses of the Indemnified ------------------ Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such proceeding in a manner not inconsistent with this Section 5.16 shall be paid to the Indemnified Party, ------------ as incurred, within ten (10) Trading Days of written notice thereof to the Indemnifying Party; provided, however, that the Indemnified Party shall promptly -------- ------- reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is not entitled to indemnification hereunder, determined based upon the relative faults of the parties. (Remainder of Page Intentionally Left Blank) IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above. CHINA WORLD TRADE CORPORATION By: /s/ John H.W. Hui --------------- John H.W. Hui Chief Executive Officer and Vice Chairman PURCHASERS SIGNATURE PAGE ________________________________________ By:_____________________________________ Name: Title: ________________________________________ Address ________________________________________ Facsimile Number ________________________________________ Tax Id #: SUBSCRIPTION AMOUNT:$__________________ ________________________________________ By:_____________________________________ Name: Title: ________________________________________ Address ________________________________________ Facsimile Number ________________________________________ Tax Id #: SUBSCRIPTION AMOUNT:$__________________ ________________________________________ By:_____________________________________ Name: Title: ________________________________________ Address ________________________________________ Facsimile Number ________________________________________ Tax Id #: SUBSCRIPTION AMOUNT:$__________________ INDEX OF EXHIBITS AND SCHEDULES ------------------------------- EXHIBITS -------- Exhibit A - Form of Registration Rights Agreement - ------------ Exhibit B-1 - Form of Series A Warrant - ------------ Exhibit B-2 Form of Series B Warrant - ------------ Exhibit B-3 Notice of Option Exercise - ------------ SCHEDULES --------- Schedule 1 - List of Purchasers and Amounts - ----------- Schedule 3.1(j) - Litigation - ---------------- Schedule 3.1(y) Form SB-2 Selling Stockholders - ---------------- EXHIBIT A --------- FORM OF REGISTRATION RIGHTS AGREEMENT ------------------------------------- EXHIBIT B-1 ----------- FORM OF SERIES A WARRANT ------------------------ EXHIBIT B-2 ----------- FORM OF SERIES B WARRANT ------------------------ EXHIBIT B-3 ----------- NOTICE OF OPTION EXERCISE ------------------------- To: China World Trade Corporation 1. The undersigned hereby elects to exercise the Option to purchase ________ additional Firm Shares of China World Trade Corporation pursuant to the terms of the Securities Purchase Agreement, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. 2. Payment shall take the form of (check applicable box) in lawful money of the United States; or The Firm Shares and the Series B Warrant shall be delivered to the following: 3. Accredited Investor. The undersigned is an "accredited investor" as -------------------- defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By:________________________________________ Name: Title: SCHEDULE 1 ---------- LIST OF PURCHASERS AND AMOUNTS ------------------------------ Name of Purchaser Amount of Shares and Warrant Shares - ------------------- ---------------------------------------- Purchased - --------- 1.__________________________ _____ Shares ______ Series A Warrant Shares ______ 2.__________________________ _____ Shares ______Series A Warrant Shares ______ 3.__________________________ _____ Shares ______Series A Warrant Shares ______ 4.__________________________ _____ Shares ______Series A Warrant Shares ______ 5.__________________________ _____ Shares ______Series A Warrant Shares ______ 6.__________________________ _____ Shares ______Series A Warrant Shares ______ 7.__________________________ _____ Shares ______Series A Warrant Shares ______ 8.__________________________ _____ Shares ______Series A Warrant Shares ______ - ------ SCHEDULE 3.1 (Y) ---------------- FORM SB-2 SELLING STOCKHOLDERS ------------------------------ SCHEDULE 3.1 (J) ---------------- LITIGATION [TO COME FROM HAROLD] EX-10.5 7 doc7.txt REGISTRATION RIGHTS AGREEMENT EX-10.5 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "AGREEMENT") is made and entered --------- into as of August __, 2004, by and among China World Trade Corporation (the "COMPANY"), and the investors signatory hereto (each a "PURCHASER" and ------- --------- collectively, the "PURCHASERS"). ---------- This Agreement is made pursuant to the Securities Purchase Agreement, dated as of the date hereof among the Company and the Purchasers (the "PURCHASE -------- AGREEMENT"). - --------- The Company and the Purchasers hereby agree as follows: 1. Definitions. Capitalized terms used and not otherwise defined herein that ----------- are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. As used in this Agreement, the following terms shall have the following meanings: "EFFECTIVENESS PERIOD" shall have the meaning set forth in Section 2(a). --------------------- "ESCROW DATE" means the date that funds are released by the Escrow Agent to ----------- the Company. "FILING DATE" means, with respect to the Registration Statement required to ----------- be filed hereunder, forty five (45) days following the Escrow Date. "HOLDER" or "HOLDERS" means the holder or holders, as the case may be, from ------ ------- time to time of Registrable Securities (including any permitted assignee). "INDEMNIFIED PARTY" shall have the meaning set forth in Section 5(c). ------------------ "INDEMNIFYING PARTY" shall have the meaning set forth in Section 5(c). --------------------- "LOSSES" shall have the meaning set forth in Section 5(a). ------ "PROCEEDING" means an action, claim, suit, investigation or proceeding ---------- (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened. "PROSPECTUS" means the prospectus included in the Registration Statement ---------- (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus. "REGISTRABLE SECURITIES" means the Firm Shares, Option Shares, Agent Shares ---------------------- and the Warrant Shares together with any shares of Common Stock issued or issuable upon any stock split, dividend or other distribution, recapitalization or similar event with respect to the foregoing or in connection with any anti-dilution provisions in the applicable Warrant. "REGISTRATION STATEMENT" means the registration statements required to be ----------------------- filed hereunder, including (in each case) the Prospectus, amendments and supplements to the registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in the registration statement. "RULE 415" means Rule 415 promulgated by the Commission pursuant to the --------- Securities Act, as such Rule may be amended from time to time, or any similar Rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "RULE 424" means Rule 424 promulgated by the Commission pursuant to the --------- Securities Act, as such Rule may be amended from time to time, or any similar Rule or regulation hereafter adopted by the Commission having substantially the same effect as such Rule. "WARRANTS" means the Common Stock purchase warrants issued to the -------- Purchasers and the Agent pursuant to the Purchase Agreement. "SECURITIES ACT" means the Securities Act of 1933, as amended. --------------- 2. Mandatory Registration. ----------------------- (a) On or prior to the Filing Date, the Company shall prepare and file with the Commission the Registration Statement covering the resale of all of the Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement required hereunder shall be on Form SB-2 (except if the Company is not then eligible to register for resale the Registrable Securities on Form SB-2, in which case the Registration shall be on another appropriate form in accordance herewith). The Registration Statement required hereunder shall contain (except if otherwise directed by the Holders) the "PLAN OF DISTRIBUTION" attached hereto as ANNEX A. The Company shall cause --------------------- ------- the Registration Statement to become effective and remain effective as provided herein. The Company shall use its commercially reasonable efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof and shall use its commercially reasonable efforts to keep the Registration Statement continuously effective under the Securities Act until the date when all Registrable Securities covered by the Registration Statement (a) have been sold pursuant to the Registration Statement or an exemption from the registration requirements of the Securities Act or (b) may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company's transfer agent and the affected Holders (the "EFFECTIVENESS PERIOD"). --------------------- (b) If a Registration Statement is not filed on or prior to sixty (60) days from the Escrow Date, then in addition to any other rights the Holders may have hereunder or under applicable law, the Company shall pay to each Holder an amount in cash until the date a Registration Statement is filed, as liquidated damages and not as a penalty, equal to (i) one (1%) percent of the aggregate purchase price paid by such Holder pursuant to the Purchase Agreement for the first thirty (30) days or any part thereof, and each thirty (30) day period subsequent thereto, such payment(s) to be made within seven (7) days after the initial date of each such failure to file. (c) If (1) a Registration Statement is not declared effective on or prior to one hundred twenty (120) days from the Escrow Date, or (2) a Registration Statement has been declared effective and subsequent thereto is not effective (or does not permit the resale of the Registrable Securities thereby) for a period of more than thirty (30) days consecutively until the Shares may be sold pursuant to Rule 144(k) (an "EFFECTIVENESS DEFAULT"), then in addition to any --------------------- other rights the Holders may have hereunder or under applicable law, the Company shall pay to each Holder an amount in cash until the date a Registration Statement is declared effective and/or the Registrable Securities may be sold pursuant to Rule 144(k) pursuant to subprovision (1) above, or if previously declared effective then in the situation covered by subprovision (2) above until the date the Registration Statement becomes effective again or otherwise permits the resale of the Registrable Securities covered thereby, as liquidated damages and not as a penalty, equal to one (1%) percent of the aggregate purchase price paid by such Holder pursuant to the Purchase Agreement for the first thirty (30) days or any part thereof, and for each thirty (30) day period subsequent thereto, such payment(s) to be made within seven (7) days after the date of each such Effectiveness Default. 3. Registration Procedures. In connection with the Company's registration ------------------------ obligations hereunder, the Company shall: (a) Not less than three (3) Trading Days, which shall not be included in the calculation of time period for the purposes of the Company's obligations under this Agreement or under the Purchase Agreement, prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto, the Company shall, (i) furnish to the Holders copies of all such documents proposed to be filed (including documents incorporated or deemed incorporated by reference to the extent requested by such Person) which documents will be subject to the review of such Holders, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to conduct a reasonable investigation within the meaning of the Securities Act. (b) Prepare and file with the Commission such amendments, including post-effective amendments, to the Registration Statement and the Prospectus used in connection therewith as may be necessary to keep the Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement, and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to the Registration Statement or any amendment thereto and, as promptly as reasonably possible, upon request, provide the Holders true and complete copies of all correspondence from and to the Commission relating to the Registration Statement; and (iv) comply in all material respects with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by the Registration Statement during the applicable period in accordance with the intended methods of disposition by the Holders thereof set forth in the Registration Statement as so amended or in such Prospectus as so supplemented. (c) Notify the Holders of Registrable Securities to be sold as promptly as reasonably possible (and, in the case of (i)(A) below, not less than two (2) Trading Days prior to such filing) and (if requested by any such Person) confirm such notice in writing promptly following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a "review" of the Registration Statement and whenever the Commission comments in writing on the Registration Statement (the Company shall upon request provide true and complete copies thereof and all written responses thereto to each of the Holders); and (C) with respect to the Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; and (v) of the occurrence of any event or passage of time that makes the financial statements included in the Registration Statement ineligible for inclusion therein or any statement made in the Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to the Registration Statement, Prospectus or other documents so that, in the case of the Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) Use its commercially reasonable efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment. (e) Furnish to each Holder, without charge, at least one conformed copy of the Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference to the extent requested by such Person, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission. (f) Promptly deliver to each Holder, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request in connection with resales by the Holder of Registrable Securities. The Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto, except after the giving of any notice pursuant to Section 3(c). (g) Prior to any resale of Registrable Securities by a Holder, use its commercially reasonable efforts to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from the registration or qualification) of such Registrable Securities for the resale by the Holder under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder reasonably requests in writing, to keep such registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by the Registration Statement; provided, that -------- the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction. (h) If requested by the Holders, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to the Registration Statement, which certificates shall be free, to the extent permitted by the Purchase Agreement, of all restrictive legends, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request. (i) Upon the occurrence of any event contemplated by Section 3(c)(v), as promptly as reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to the Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (j) Comply with all applicable rules and regulations of the Commission. (k) The Company may require each selling Holder to furnish to the Company a certified statement as to the number of shares of Common Stock beneficially owned by such Holder and, if required by the Commission, the person thereof that has voting and dispositive control over the shares. Each Holder agrees to reasonably cooperate with the Company in the preparation of the Registration Statement and response by the Company to any comments by the Commission. 4. Registration Expenses. All fees and expenses incident to the performance ---------------------- of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the Trading Market on which the Common Stock is then listed for trading, and (B) in compliance with applicable state securities or Blue Sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. 5. Indemnification --------------- (a) Indemnification by the Company. The Company shall, notwithstanding --------------------------------- any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable attorneys' fees) and expenses (including the cost (including without limitation, reasonable attorneys' fees) and expenses relating to an Indemnified Party's actions to enforce the provisions of this Section 5) (collectively, "Losses"), as incurred, ------ to the extent arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by or on behalf of such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement. (b) Indemnification by Holders. Each Holder shall, severally and not ---------------------------- jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, to the extent arising out of or based upon: (x) such Holder's failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading (i) to the extent, but only to the extent, that such untrue statement or omission is contained in any information so furnished in writing by or on behalf of such Holder to the Company specifically for inclusion in the Registration Statement or such Prospectus or (ii) to the extent that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by or on behalf of such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder's proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto, or (2) in the case of an occurrence of an event of the type specified in Section 3(c)(ii)-(v), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the gross proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. (c) Conduct of Indemnification Proceedings. If any Proceeding shall be ----------------------------------------- brought or asserted against any Person entitled to indemnity hereunder (an "Indemnified Party"), such Indemnified Party shall promptly notify the Person ------------------ from whom indemnity is sought (the "Indemnifying Party") in writing, and the ------------------ Indemnifying Party shall have the right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice -------- shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have materially prejudiced the Indemnifying Party. An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall have been advised by counsel that a conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of one separate counsel for all Indemnified Parties in any matters related on a factual basis shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding affected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding. All reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten (10) Trading Days of written notice thereof to the Indemnifying Party; provided, that the Indemnified Party shall promptly -------- reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is not entitled to indemnification hereunder, determined based upon the relative faults of the parties. (d) Contribution. If a claim for indemnification under Section 5(a) or ------------ 5(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in Section 5(c), any reasonable attorneys' or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms. (e) The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, except in the case of fraud by such Holder. The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties. 6. Miscellaneous. ------------- (a) Remedies. In the event of a breach by the Company or by a Holder, -------- of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) No Piggyback on Registrations. Except as set forth on Schedule 6(b)(i), ----------------------------- neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in a Registration Statement filed pursuant to Section 2 hereof other than the Registrable Securities. Except as set forth on Schedule 6(b)(ii) or as set forth in the SEC Reports, no Person has any right to cause the Company to effect a registration under the Securities Act of any securities of the Company. Other than a Registration Statement on Form S-8, the Company shall not and will not file any other registration statement until after the Effective Date. (c) Compliance. Each Holder covenants and agrees that it will comply with ---------- the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement. (d) Discontinued Disposition. Each Holder agrees by its acquisition of such ------------------------- Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(c), such Holder will forthwith discontinue disposition of such Registrable Securities under the Registration Statement until such Holder's receipt of the copies of the supplemented Prospectus and/or amended Registration Statement or until it is advised in writing (the "Advice") by the Company that the use of the applicable ------ Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce the provisions of this paragraph. (e) Piggyback Registrations. If at any time during the Effectiveness Period ------------------------ there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, then the Company shall send to each Holder a written notice of such determination and, if within fifteen (15) days after the date of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such Holder requests to be registered, subject to customary underwriter cutbacks applicable to all holders of "piggyback" registration rights; provided, however, -------- ------- that (i) if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company determines for any reason not to proceed with such registration, the Company may, at its election, given written notice of such determination to the Holders and, thereupon, will be relieved of its obligation to register any Registrable Securities in connection with such registration, and (ii) in case of a determination by the Company to delay registration of its securities, the Company will be permitted to delay the registration of Registrable Securities for the same period as the delay in registering such other securities. Notwithstanding the foregoing, nothing in this paragraph (e) shall permit the Company to file a registration statement in contravention of the restrictions in Section 6(b) (f) Amendments and Waivers. The provisions of this Agreement, including the ----------------------- provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and each Holder of the then outstanding Registrable Securities. (g) Notices. Any and all notices or other communications or deliveries ------- required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number provided for below prior to 5:00 p.m. (New York City time) on a Trading Day, (ii) the Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number provided for below later than 5:00 p.m. (New York City time) on any date, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be delivered and addressed as set forth in the Purchase Agreement (h) Successors and Assigns. This Agreement shall inure to the benefit of and ---------------------- be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. Each Holder may assign their respective rights hereunder in the manner and to the Persons as permitted under the Purchase Agreement. (i) Execution and Counterparts. This Agreement may be executed in any number -------------------------- of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof. (j) Governing Law. This Agreement shall be governed by and construed in -------------- accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York City. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements in an amount judicially determined. (k) Cumulative Remedies. The remedies provided herein are cumulative and not ------------------- exclusive of any remedies provided by law. (l) Severability. If any term, provision, covenant or restriction of this ------------ Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (m) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. (n) Independent Nature of Purchasers' Obligations and Rights. The -------------------------------------------------------------- obligations of each Purchaser hereunder is several and not joint with the obligations of any other Purchaser hereunder, and no Purchaser shall be responsible in any way for the performance of the obligations of any other Purchaser hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the Purchasers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Purchasers are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Purchaser shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Purchaser to be joined as an additional party in any proceeding for such purpose. (o) Obligation of Holders to Furnish Information. The Company's obligation ---------------------------------------------- to cause any Registration Statement to be filed and/or become effective in connection with distribution of any Registrable Securities pursuant to this Agreement is contingent upon each Holder, with reasonable promptness, furnishing to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities, as is required pursuant to Regulation S-K or S-B, as the case may be, promulgated under the Securities Act, to effect the registration of the Registrable Securities. Each Holder agrees, by acquisition of the Registration Securities, that it shall not be entitled to sell any of such Registrable Securities pursuant to the Registration Statement or to receive a Prospectus relating thereto, unless such Holder has furnished the Company with all information required to be disclosed in order to make any information regarding such Holder previously furnished to the Company by such Holder, and any other information regarding such Holder and the distribution of such Holder's Registrable Securities as the Company may from time to time reasonably request, not misleading in a material respect. Any sale of any Registrable Securities by any Holder shall constitute a representation and warranty by such Holder that the information relating to such Holder and its plan of distribution is as set forth in the prospectus delivered by such Holder in connection with such disposition, that such Prospectus does not as of the time of such sale contain any untrue statement of a material fact relating to or provided by such Holder or relating to its plan of distribution and that such Prospectus does not as of the time of such sale omit to state any material fact relating to or provided by such Holder or relating to its plan of distribution necessary to make the statements in such Prospectus, in light of the circumstances under which they were made, not misleading. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above. CHINA WORLD TRADE CORPORATION By: /s/ John H.W. Hui --------------- John H.W. Hui Chief Executive Officer and Vice Chairman (PURCHASERS SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT) [ ] - ------------------------------------ By: Name: Title: [ ] - ------------------------------------ By: Name: Title: [ ] - ------------------------------------ By: Name: Title: ANNEX A ------- Plan of Distribution The Selling Stockholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling shares: - ordinary brokerage transactions and transactions in which the broker/dealer solicits purchasers; - block trades in which the broker/dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; - purchases by a broker/dealer as principal and resale by the broker/dealer for its account; - an exchange distribution in accordance with the Rules of the applicable exchange; - privately negotiated transactions; - settlement of short sales; - broker/dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share; - a combination of any such methods of sale; and - any other method permitted pursuant to applicable law. The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. Broker/dealers engaged by the Selling Stockholders may arrange for other brokers/dealers to participate in sales. Broker/dealers may receive commissions from the Selling Stockholders (or, if any broker/dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The Selling Stockholders do not expect these commissions to exceed what is customary in the types of transactions involved. The Selling Stockholders may from time to time pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933 amending the list of Selling Stockholders to include the pledgee, transferee or other successors in interest as Selling Stockholders under this prospectus. The Selling Stockholders and any broker/dealers or agents that are involved in selling the shares are deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker/dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions under the Securities Act. The Selling Stockholders have informed the Company that it does not have any agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. The Company is required to pay all fees and expenses incident to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act. SCHEDULE 6(B)(II) NAME SHARES __________________ _________________ __________________ _________________ __________________ _________________ EX-10.6 8 doc8.txt BRIDGES & PIPES LLC SERIES A WARRENT EX-10.6 NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ---------- ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN - --- EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES CHINA WORLD TRADE CORPORATION SERIES A WARRANT TO PURCHASE 166,667 SHARES OF COMMON STOCK (SUBJECT TO ADJUSTMENT) (VOID AFTER AUGUST 26, 2009) PPW - - ------ THIS SERIES A COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, Bridges & PIPES, LLC (the "HOLDER"), is entitled, upon the terms and ------ subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the "INITIALEXERCISE DATE")or prior to -------------------- the close of business on August 26, 2004 (the "TERMINATION DATE") but not ---------------- thereafter, to subscribe for and purchase from China World Trade Corporation, a Nevada corporation (the "COMPANY"), up to 166,667 shares (the "WARRANT SHARES") ------- -------------- of Common Stock, $.001 par value per share, of the Company (the "COMMON STOCK"). ------------ The purchase price of one share of Common Stock (the "EXERCISE PRICE") under -------------- this Warrant shall be $2.50, subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT DATED AS OF AUGUST 26, 2004, BETWEEN THE COMPANY AND THE PURCHASERS SET FORTH ON SCHEDULE 1 THERETO(THE "PURCHASE AGREEMENT"). ------------------ ------------------ 1. Title to Warrant. Prior to the Termination Date and subject to ------------------ compliance with applicable laws and Section 7 of this Warrant, this Warrant and --------- all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. 2. Authorization of Shares. The Company covenants that all Warrant Shares ------------------------- which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. --------------------- (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company), and upon payment of the Exercise Price of the Warrant Shares thereby purchased by wire transfer or cashier's check drawn on a United States bank or internationally recognized bank, the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for Warrant Shares purchased hereunder shall be delivered to the Holder within seven (7) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been properly exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 have been paid. If such conditions by the Holder have been met, and --------- the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the close of ------------ business on the 7th Trading Day after the date of such conditions being met by the Holder, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to a proper exercise, and all conditions being met by the Holder, by the close of business on the 10th Trading Day after the date of exercise, and if after such 10th Trading Day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the ------ Company shall (1) pay in immediately available funds to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Warrant Shares so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $100 to cover a Buy-In with respect to an attempted exercise of Warrant Shares with an aggregate sale price giving rise to such purchase obligation of $80, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $20. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing Warrant Shares as required pursuant to the terms hereof. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. (c) The Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent that after giving effect to ------------ such issuance after exercise, the Holder (together with the Holder's Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.9% of the number of shares of the Common Stock issued and outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(c), beneficial ownership ------------ shall be calculated in accordance with Section 13(d) of the Exchange Act. For ------------- purposes of this Section 3(c), in determining the number of outstanding shares ------------ of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within four Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Company Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 3(c) may be waived by ------------ the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(c) shall continue to ------------ apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The Holder is solely responsible for all calculations required in this Section 3(c). The Company shall have no ------------- liability for any issuances of Warrant Shares that exceed the 5% amount and the Company is entitled to rely on all calculations by the Holder and/or its agents. The Holder's exercise notice shall be deemed a representation of the Holder that the number of Warrant Shares to be acquired pursuant to such exercise notice shall be in compliance with the provisions of this Section 3(c). (d) If, but only if, at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the Closing Price on the Trading Day preceding the date of such election; (B) = the Exercise Price of the Warrants, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing ----------------------------- fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares ---------------------------- shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for -------- ------- Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Closing of Books. The Company will not close its stockholder books or ------------------ records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. 7. Transfer, Division and Combination. ------------------------------------- (a) Subject to compliance with any applicable securities laws and the conditions set forth in Section 1 and Section 7(e) hereof and to the provisions --------- ---- of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder ----------- are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such ------------ division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. --------- (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. (e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act. 8. No Rights as Shareholder Until Exercise. This Warrant does not entitle ------------------------------------------ the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants -------------------------------------------------- that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the ---------------------------------- taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday in the State of New York, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of New York. 11. Adjustments to Exercise Price and Number of Warrant Shares. ------------------------------------------------------------------ For purposes of this Section 11, references to Common Stock shall include ---------- shares of Common Stock, par value $.0001 of the Company (and any other classes of common stock issued by the Company). (a) Stock Splits, Etc. The number and kind of securities purchasable upon ------------------- the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder pursuant to this Section 11(a), the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Anti-Dilution Provisions. From the Initial Exercise Date until one year ------------------------ following the Closing Date, the Exercise Price and the number of Warrant Shares issuable hereunder and for which this Warrant is then exercisable pursuant to Section 1 hereof shall be subject to adjustment from time to time as provided in - --------- this Section 11(b). In the event that any adjustment of the Exercise Price as -------------- required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent. (i) Effect on Exercise Price of Certain Events. For purposes of determining ------------------------------------------ the adjusted Exercise Price under Section 11(b) hereof, the following will -------------- be applicable: (A) If at any time from Closing Date until the first anniversary thereof, the Company shall grant any warrants to any person or entity with an exercise price which shall be less than the Exercise Price, without the consent of each Holder, the Exercise Price (of the Warrants which have not been exercised) shall be adjusted to equal to such lower exercise price (B) Exceptions to Adjustment of Exercise Price. Notwithstanding anything to ------------------------------------------- the contrary herein, this Section 11(b) shall not apply to the following (1) the ------------- granting of warrants to employees, officers, directors or consultants of the Company pursuant to any stock option plan or other written compensatory agreement, or (2) the issuance of warrants in connection with acquisitions, joint ventures, arrangements related to the Company's operations and strategic relationships, or other strategic investments, the primary purpose of which is not to raise capital. (ii) Minimum Adjustment of Exercise Price. No adjustment of the Exercise ---------------------------------------- Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. 12. Reorganization, Reclassification, Merger, Consolidation or Disposition ------------------------------------------------------------------------- of Assets. In case the Company shall reorganize its capital, reclassify its - ----------- capital stock (other than as set forth in Section 11), consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to any class of common stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed -------------- to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, "COMMON STOCK OF THE SUCCESSOR OR - ----------- ---------- -------------------------------- ACQUIRING CORPORATION" shall include stock of such corporation of any class - ---------------------- which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive ----------- reorganizations, reclassifications, mergers, consolidations or disposition of assets. 13. Voluntary Adjustment by the Company. The Company may at any time during ------------------------------------ the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or -------------------- kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 15. Notice of Corporate Action. If at any time: ----------------------------- (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). -------------- 16. Authorized Shares. The Company covenants that during the period the ------------------ Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the principal Trading Market upon which the Common Stock may be listed. (a) Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefore upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (b) Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 17. Miscellaneous. ------------- (a) Jurisdiction. This Agreement shall be governed by and construed in ------------ accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York City. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements in an amount judicially determined. (b) Restrictions. The Holder acknowledges that the Warrant Shares acquired ------------ upon the exercise of this Warrant, if not registered for resale under the Securities Act, will have legends imprinted upon any stock certificates evidencing such Warrant Shares and the Company will notify its transfer agent of restrictions upon resale imposed by the applicable state and federal securities laws. (c) Nonwaiver and Expenses. No course of dealing or any delay or failure to ----------------------- exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (d) Notices. Any notice, request or other document required or permitted to ------- be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement; provided, upon -------- any permitted assignment of this Warrant, the assignee shall promptly provide the Company with its contact information. (e) Limitation of Liability. No provision hereof, in the absence of any ------------------------- affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (f) Remedies. Holder, in addition to being entitled to exercise all rights -------- granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (g) Successors and Assigns. Subject to applicable securities laws, this ------------------------ Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (h) Amendment. This Warrant may be modified or amended or the provisions --------- hereof waived with the written consent of the Company and the Holder. (i) Severability. Wherever possible, each provision of this Warrant shall be ------------ interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (j) Headings. The headings used in this Warrant are for the convenience of -------- reference only and shall not, for any purpose, be deemed a part of this Warrant. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: August 26, 2004 CHINA WORLD TRADE CORPORATION By: /s/ John H.W. Hui -------------------- Name: John H.W. Hui Title: Chief Executive Officer and Vice Chairman HOLDER By: ------------------ Name: Title: NOTICE OF EXERCISE To: China World Trade Corporation 1. The undersigned hereby elects to purchase ________ Series A Warrant Shares of China World Trade Corporation pursuant to the terms of the attached Series A Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. 2. Payment shall take the form of in lawful money of the United States; or 3. Please issue a certificate or certificates representing said Series A Warrant Shares in the name of the undersigned or in such other name as is specified below: --------------------------- The Series A Warrant Shares shall be delivered to the following: --------------------------- 4. Accredited Investor. The undersigned is an "accredited investor" as -------------------- defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By: ------------------------ Name: Title: ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Series A Warrant and all rights evidenced thereby are hereby assigned to ____________________________, whose address is: _________________________________________________ _________________________________________________ Dated:________________, 200_ Holder's Signature:______________________ Holder's Address:________________________ Signature Guaranteed:____________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Series A Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Series A Warrant. NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ---------- ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES CHINA WORLD TRADE CORPORATION SERIES A WARRANT TO PURCHASE 83,334 SHARES OF COMMON STOCK (SUBJECT TO ADJUSTMENT) (VOID AFTER DECEMBER 3, 2009) PPW - - ------ THIS SERIES A COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, Bridges & PIPES, LLC (the "HOLDER"), is entitled, upon the terms and ------ subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the "INITIALEXERCISE DATE")or prior to -------------------- the close of business on December 3, 2009 (the "TERMINATION DATE") but not ---------------- thereafter, to subscribe for and purchase from China World Trade Corporation, a Nevada corporation (the "COMPANY"), up to 83,334 shares (the "WARRANT SHARES") ------- -------------- of Common Stock, $.001 par value per share, of the Company (the "COMMON STOCK"). ------------ The purchase price of one share of Common Stock (the "EXERCISE PRICE") under -------------- this Warrant shall be $2.50, subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT DATED AS OF AUGUST 26, 2004, BETWEEN THE COMPANY AND THE PURCHASERS SET FORTH ON SCHEDULE 1 THERETO(THE "PURCHASE AGREEMENT"). ------------------ ------------------ 12. Title to Warrant. Prior to the Termination Date and subject to ------------------ compliance with applicable laws and Section 7 of this Warrant, this Warrant and --------- all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. 13. Authorization of Shares. The Company covenants that all Warrant Shares ------------------------- which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 14. Exercise of Warrant. --------------------- (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company), and upon payment of the Exercise Price of the Warrant Shares thereby purchased by wire transfer or cashier's check drawn on a United States bank or internationally recognized bank, the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for Warrant Shares purchased hereunder shall be delivered to the Holder within seven (7) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been properly exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 have been paid. If such conditions by the Holder have been met, and --------- the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the close of ------------ business on the 7th Trading Day after the date of such conditions being met by the Holder, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to a proper exercise, and all conditions being met by the Holder, by the close of business on the 10th Trading Day after the date of exercise, and if after such 10th Trading Day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the ------ Company shall (1) pay in immediately available funds to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Warrant Shares so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $100 to cover a Buy-In with respect to an attempted exercise of Warrant Shares with an aggregate sale price giving rise to such purchase obligation of $80, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $20. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing Warrant Shares as required pursuant to the terms hereof. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. (c) The Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent that after giving effect to ------------ such issuance after exercise, the Holder (together with the Holder's Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.9% of the number of shares of the Common Stock issued and outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(c), beneficial ownership ------------ shall be calculated in accordance with Section 13(d) of the Exchange Act. For ------------- purposes of this Section 3(c), in determining the number of outstanding shares ------------ of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within four Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Company Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 3(c) may be waived by ------------ the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(c) shall continue to ------------ apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The Holder is solely responsible for all calculations required in this Section 3(c). The Company shall have no ------------- liability for any issuances of Warrant Shares that exceed the 5% amount and the Company is entitled to rely on all calculations by the Holder and/or its agents. The Holder's exercise notice shall be deemed a representation of the Holder that the number of Warrant Shares to be acquired pursuant to such exercise notice shall be in compliance with the provisions of this Section 3(c). (d) If, but only if, at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the Closing Price on the Trading Day preceding the date of such election; (B) = the Exercise Price of the Warrants, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant. 15. No Fractional Shares or Scrip. No fractional shares or scrip --------------------------------- representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 16. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares --------------------------- shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for -------- ------- Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 17. Closing of Books. The Company will not close its stockholder books or ------------------ records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. 18. Transfer, Division and Combination. ------------------------------------- (a) Subject to compliance with any applicable securities laws and the conditions set forth in Section 1 and Section 7(e) hereof and to the provisions --------- ---- of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder ----------- are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such ------------ division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. --------- (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. (e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effectiveregistration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act. 19. No Rights as Shareholder Until Exercise. This Warrant does not entitle ----------------------------------------- the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 20. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants ------------------------------------------------- that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 21. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the ---------------------------------- taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday in the State of New York, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of New York. 22. Adjustments to Exercise Price and Number of Warrant Shares. ------------------------------------------------------------------ For purposes of this Section 11, references to Common Stock shall include ---------- shares of Common Stock, par value $.0001 of the Company (and any other classes of common stock issued by the Company). (a) Stock Splits, Etc. The number and kind of securities purchasable upon ------------------- the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder pursuant to this Section 11(a), the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Anti-Dilution Provisions. From the Initial Exercise Date until one year ------------------------ following the Closing Date, the Exercise Price and the number of Warrant Shares issuable hereunder and for which this Warrant is then exercisable pursuant to Section 1 hereof shall be subject to adjustment from time to time as provided in - --------- this Section 11(b). In the event that any adjustment of the Exercise Price as -------------- required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent. (i) Effect on Exercise Price of Certain Events. For purposes of determining ------------------------------------------ the adjusted Exercise Price under Section 11(b) hereof, the following will ------------- be applicable: (A) If at any time from Closing Date until the first anniversary thereof, the Company shall grant any warrants to any person or entity with an exercise price which shall be less than the Exercise Price, without the consent of each Holder, the Exercise Price (of the Warrants which have not been exercised) shall be adjusted to equal to such lower exercise price (B) Exceptions to Adjustment of Exercise Price. Notwithstanding anything to ------------------------------------------- the contrary herein, this Section 11(b) shall not apply to the following (1) the ------------- granting of warrants to employees, officers, directors or consultants of the Company pursuant to any stock option plan or other written compensatory agreement, or (2) the issuance of warrants in connection with acquisitions, joint ventures, arrangements related to the Company's operations and strategic relationships, or other strategic investments, the primary purpose of which is not to raise capital. (ii) Minimum Adjustment of Exercise Price. No adjustment of the Exercise ---------------------------------------- Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. 17. Reorganization, Reclassification, Merger, Consolidation or Disposition ------------------------------------------------------------------------- of Assets. In case the Company shall reorganize its capital, reclassify its - --------- capital stock (other than as set forth in Section 11), consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to any class of common stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed -------------- to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, "COMMON STOCK OF THE SUCCESSOR OR - ----------- ---------- -------------------------------- ACQUIRING CORPORATION" shall include stock of such corporation of any class - ---------------------- which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive ----------- reorganizations, reclassifications, mergers, consolidations or disposition of assets. 18. Voluntary Adjustment by the Company. The Company may at any time during ------------------------------------ the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 19. Notice of Adjustment. Whenever the number of Warrant Shares or number or -------------------- kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 20. Notice of Corporate Action. If at any time: ----------------------------- (d) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (e) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (f) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). -------------- 21. Authorized Shares. The Company covenants that during the period the ------------------ Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the principal Trading Market upon which the Common Stock may be listed. (c) Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefore upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (d) Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 18. Miscellaneous. ------------- (k) Jurisdiction. This Agreement shall be governed by and construed in ------------ accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York City. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements in an amount judicially determined. (l) Restrictions. The Holder acknowledges that the Warrant Shares acquired ------------ upon the exercise of this Warrant, if not registered for resale under the Securities Act, will have legends imprinted upon any stock certificates evidencing such Warrant Shares and the Company will notify its transfer agent of restrictions upon resale imposed by the applicable state and federal securities laws. (m) Nonwaiver and Expenses. No course of dealing or any delay or failure to ----------------------- exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (n) Notices. Any notice, request or other document required or permitted to ------- be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement; provided, upon -------- any permitted assignment of this Warrant, the assignee shall promptly provide the Company with its contact information. (o) Limitation of Liability. No provision hereof, in the absence of any ------------------------- affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (p) Remedies. Holder, in addition to being entitled to exercise all rights -------- granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (q) Successors and Assigns. Subject to applicable securities laws, this ------------------------ Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (r) Amendment. This Warrant may be modified or amended or the provisions --------- hereof waived with the written consent of the Company and the Holder. (s) Severability. Wherever possible, each provision of this Warrant shall be ------------ interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (t) Headings. The headings used in this Warrant are for the convenience of -------- reference only and shall not, for any purpose, be deemed a part of this Warrant. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: December 3, 2004 CHINA WORLD TRADE CORPORATION By: /s/ John H.W. Hui -------------------- Name: John H.W. Hui Title: Chief Executive Officer and Vice Chairman HOLDER By: -------------------- Name: Title: NOTICE OF EXERCISE To: China World Trade Corporation 5. The undersigned hereby elects to purchase ________ Series A Warrant Shares of China World Trade Corporation pursuant to the terms of the attached Series A Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. 6. Payment shall take the form of in lawful money of the United States; or 7. Please issue a certificate or certificates representing said Series A Warrant Shares in the name of the undersigned or in such other name as is specified below: ------------------------------------------ The Series A Warrant Shares shall be delivered to the following: ------------------------------------------ 8. Accredited Investor. The undersigned is an "accredited investor" as -------------------- defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By: ---------------------- Name: Title: ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Series A Warrant and all rights evidenced thereby are hereby assigned to _______________________________, whose address is: _____________________________________________________ _____________________________________________________ Dated:_______________, 200_ Holder's Signature:________________________ Holder's Address:__________________________ ____________________________________________ Signature Guaranteed:______________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Series A Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Series A Warrant. EX-10.7 9 doc9.txt TCMP3 PARTNERS SERIES A WARRENT EX-10.7 NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ---------- ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN - --- EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES CHINA WORLD TRADE CORPORATION SERIES A WARRANT TO PURCHASE 50,000 SHARES OF COMMON STOCK (SUBJECT TO ADJUSTMENT) (VOID AFTER AUGUST 26, 2009) PPW - - ------ THIS SERIES A COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, TCMP3 Partners (the "HOLDER"), is entitled, upon the terms and subject ------ to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the "INITIALEXERCISE DATE")or prior to the -------------------- close of business on August 26, 2009 (the "TERMINATION DATE") but not ----------------- thereafter, to subscribe for and purchase from China World Trade Corporation, a Nevada corporation (the "COMPANY"), up to 50,000 shares (the "WARRANT SHARES") ------- -------------- of Common Stock, $.001 par value per share, of the Company (the "COMMON STOCK"). ------------ The purchase price of one share of Common Stock (the "EXERCISE PRICE") under -------------- this Warrant shall be $2.50, subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT DATED AS OF AUGUST 26, 2004, BETWEEN THE COMPANY AND THE PURCHASERS SET FORTH ON SCHEDULE 1 THERETO(THE "PURCHASE AGREEMENT"). ------------------ ------------------ 1. Title to Warrant. Prior to the Termination Date and subject to ------------------ compliance with applicable laws and Section 7 of this Warrant, this Warrant and --------- all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. 2. Authorization of Shares. The Company covenants that all Warrant Shares ------------------------- which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. --------------------- (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company), and upon payment of the Exercise Price of the Warrant Shares thereby purchased by wire transfer or cashier's check drawn on a United States bank or internationally recognized bank, the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for Warrant Shares purchased hereunder shall be delivered to the Holder within seven (7) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been properly exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 have been paid. If such conditions by the Holder have been met, and --------- the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the close of ------------ business on the 7th Trading Day after the date of such conditions being met by the Holder, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to a proper exercise, and all conditions being met by the Holder, by the close of business on the 10th Trading Day after the date of exercise, and if after such 10th Trading Day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the ------ Company shall (1) pay in immediately available funds to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Warrant Shares so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $100 to cover a Buy-In with respect to an attempted exercise of Warrant Shares with an aggregate sale price giving rise to such purchase obligation of $80, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $20. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing Warrant Shares as required pursuant to the terms hereof. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. (c) The Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent that after giving effect to ------------ such issuance after exercise, the Holder (together with the Holder's Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.9% of the number of shares of the Common Stock issued and outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(c), beneficial ownership ------------ shall be calculated in accordance with Section 13(d) of the Exchange Act. For ------------- purposes of this Section 3(c), in determining the number of outstanding shares ------------ of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within four Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Company Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 3(c) may be waived by ------------ the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(c) shall continue to ------------ apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The Holder is solely responsible for all calculations required in this Section 3(c). The Company shall have no ------------- liability for any issuances of Warrant Shares that exceed the 5% amount and the Company is entitled to rely on all calculations by the Holder and/or its agents. The Holder's exercise notice shall be deemed a representation of the Holder that the number of Warrant Shares to be acquired pursuant to such exercise notice shall be in compliance with the provisions of this Section 3(c). (d) If, but only if, at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the Closing Price on the Trading Day preceding the date of such election; (B) = the Exercise Price of the Warrants, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing ----------------------------- fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares ---------------------------- shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for -------- ------- Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Closing of Books. The Company will not close its stockholder books or ------------------ records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. 7. Transfer, Division and Combination. ------------------------------------- (a) Subject to compliance with any applicable securities laws and the conditions set forth in Section 1 and Section 7(e) hereof and to the provisions --------- ---- of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder ----------- are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such ------------ division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. --------- (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. (e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act. 8. No Rights as Shareholder Until Exercise. This Warrant does not entitle ------------------------------------------ the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants -------------------------------------------------- that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the ---------------------------------- taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday in the State of New York, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of New York. 11. Adjustments to Exercise Price and Number of Warrant Shares. ------------------------------------------------------------------ For purposes of this Section 11, references to Common Stock shall include ---------- shares of Common Stock, par value $.0001 of the Company (and any other classes of common stock issued by the Company). (a) Stock Splits, Etc. The number and kind of securities purchasable upon ------------------- the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder pursuant to this Section 11(a), the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Anti-Dilution Provisions. From the Initial Exercise Date until one year ------------------------ following the Closing Date, the Exercise Price and the number of Warrant Shares issuable hereunder and for which this Warrant is then exercisable pursuant to Section 1 hereof shall be subject to adjustment from time to time as provided in - --------- this Section 11(b). In the event that any adjustment of the Exercise Price as -------------- required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent. (i) Effect on Exercise Price of Certain Events. For purposes of determining ------------------------------------------ the adjusted Exercise Price under Section 11(b) hereof, the following will -------------- be applicable: (A) If at any time from Closing Date until the first anniversary thereof, the Company shall grant any warrants to any person or entity with an exercise price which shall be less than the Exercise Price, without the consent of each Holder, the Exercise Price (of the Warrants which have not been exercised) shall be adjusted to equal to such lower exercise price (B) Exceptions to Adjustment of Exercise Price. Notwithstanding anything to ------------------------------------------- the contrary herein, this Section 11(b) shall not apply to the following (1) the ------------- granting of warrants to employees, officers, directors or consultants of the Company pursuant to any stock option plan or other written compensatory agreement, or (2) the issuance of warrants in connection with acquisitions, joint ventures, arrangements related to the Company's operations and strategic relationships, or other strategic investments, the primary purpose of which is not to raise capital. (ii) Minimum Adjustment of Exercise Price. No adjustment of the Exercise ---------------------------------------- Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. 12. Reorganization, Reclassification, Merger, Consolidation or Disposition ------------------------------------------------------------------------- of Assets. In case the Company shall reorganize its capital, reclassify its - ----------- capital stock (other than as set forth in Section 11), consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to any class of common stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed -------------- to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, "COMMON STOCK OF THE SUCCESSOR OR - ----------- ---------- -------------------------------- ACQUIRING CORPORATION" shall include stock of such corporation of any class - ---------------------- which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive ----------- reorganizations, reclassifications, mergers, consolidations or disposition of assets. 13. Voluntary Adjustment by the Company. The Company may at any time during ------------------------------------ the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or -------------------- kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 15. Notice of Corporate Action. If at any time: ----------------------------- (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). -------------- 16. Authorized Shares. The Company covenants that during the period the ------------------ Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the principal Trading Market upon which the Common Stock may be listed. (a) Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefore upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (b) Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 17. Miscellaneous. ------------- (a) Jurisdiction. This Agreement shall be governed by and construed in ------------ accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York City. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements in an amount judicially determined. (b) Restrictions. The Holder acknowledges that the Warrant Shares acquired ------------ upon the exercise of this Warrant, if not registered for resale under the Securities Act, will have legends imprinted upon any stock certificates evidencing such Warrant Shares and the Company will notify its transfer agent of restrictions upon resale imposed by the applicable state and federal securities laws. (c) Nonwaiver and Expenses. No course of dealing or any delay or failure to ----------------------- exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (d) Notices. Any notice, request or other document required or permitted to ------- be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement; provided, upon -------- any permitted assignment of this Warrant, the assignee shall promptly provide the Company with its contact information. (e) Limitation of Liability. No provision hereof, in the absence of any ------------------------- affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (f) Remedies. Holder, in addition to being entitled to exercise all rights -------- granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (g) Successors and Assigns. Subject to applicable securities laws, this ------------------------ Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (h) Amendment. This Warrant may be modified or amended or the provisions --------- hereof waived with the written consent of the Company and the Holder. (i) Severability. Wherever possible, each provision of this Warrant shall be ------------ interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (j) Headings. The headings used in this Warrant are for the convenience of -------- reference only and shall not, for any purpose, be deemed a part of this Warrant. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: August 26, 2004 CHINA WORLD TRADE CORPORATION By: /s/ John H.W. Hui -------------------- Name: John H.W. Hui Title: Chief Executive Officer and Vice Chairman HOLDER By: ------------------ Name: Title: NOTICE OF EXERCISE To: China World Trade Corporation 1. The undersigned hereby elects to purchase ________ Series A Warrant Shares of China World Trade Corporation pursuant to the terms of the attached Series A Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. 2. Payment shall take the form of in lawful money of the United States; or 3. Please issue a certificate or certificates representing said Series A Warrant Shares in the name of the undersigned or in such other name as is specified below: --------------------------- The Series A Warrant Shares shall be delivered to the following: --------------------------- 4. Accredited Investor. The undersigned is an "accredited investor" as -------------------- defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By: ------------------------ Name: Title: ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Series A Warrant and all rights evidenced thereby are hereby assigned to ____________________________, whose address is: _________________________________________________ _________________________________________________ Dated:________________, 200_ Holder's Signature:______________________ Holder's Address:________________________ Signature Guaranteed:____________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Series A Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Series A Warrant. NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ---------- ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN - --- EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES CHINA WORLD TRADE CORPORATION SERIES A WARRANT TO PURCHASE 25,000 SHARES OF COMMON STOCK (SUBJECT TO ADJUSTMENT) (VOID AFTER DECEMBER 3, 2009) PPW - - ------ THIS SERIES A COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, TCMP3 Partners (the "HOLDER"), is entitled, upon the terms and subject ------ to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the "INITIALEXERCISE DATE")or prior to the -------------------- close of business on December 3, 2009 (the "TERMINATION DATE") but not ----------------- thereafter, to subscribe for and purchase from China World Trade Corporation, a Nevada corporation (the "COMPANY"), up to 25,000 shares (the "WARRANT SHARES") ------- -------------- of Common Stock, $.001 par value per share, of the Company (the "COMMON STOCK"). ------------ The purchase price of one share of Common Stock (the "EXERCISE PRICE") under -------------- this Warrant shall be $2.50, subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT DATED AS OF AUGUST 26, 2004, BETWEEN THE COMPANY AND THE PURCHASERS SET FORTH ON SCHEDULE 1 THERETO(THE "PURCHASE AGREEMENT"). ------------------ ------------------ 12. Title to Warrant. Prior to the Termination Date and subject to ------------------ compliance with applicable laws and Section 7 of this Warrant, this Warrant and --------- all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. 13. Authorization of Shares. The Company covenants that all Warrant Shares ------------------------- which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 14. Exercise of Warrant. --------------------- (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company), and upon payment of the Exercise Price of the Warrant Shares thereby purchased by wire transfer or cashier's check drawn on a United States bank or internationally recognized bank, the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for Warrant Shares purchased hereunder shall be delivered to the Holder within seven (7) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been properly exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 have been paid. If such conditions by the Holder have been met, and --------- the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the close of ------------ business on the 7th Trading Day after the date of such conditions being met by the Holder, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to a proper exercise, and all conditions being met by the Holder, by the close of business on the 10th Trading Day after the date of exercise, and if after such 10th Trading Day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the ------ Company shall (1) pay in immediately available funds to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Warrant Shares so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $100 to cover a Buy-In with respect to an attempted exercise of Warrant Shares with an aggregate sale price giving rise to such purchase obligation of $80, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $20. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing Warrant Shares as required pursuant to the terms hereof. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. (c) The Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent that after giving effect to ------------ such issuance after exercise, the Holder (together with the Holder's Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.9% of the number of shares of the Common Stock issued and outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(c), beneficial ownership ------------ shall be calculated in accordance with Section 13(d) of the Exchange Act. For ------------- purposes of this Section 3(c), in determining the number of outstanding shares ------------ of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within four Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Company Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 3(c) may be waived by ------------ the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(c) shall continue to ------------ apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The Holder is solely responsible for all calculations required in this Section 3(c). The Company shall have no ------------- liability for any issuances of Warrant Shares that exceed the 5% amount and the Company is entitled to rely on all calculations by the Holder and/or its agents. The Holder's exercise notice shall be deemed a representation of the Holder that the number of Warrant Shares to be acquired pursuant to such exercise notice shall be in compliance with the provisions of this Section 3(c). (d) If, but only if, at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the Closing Price on the Trading Day preceding the date of such election; (B) = the Exercise Price of the Warrants, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant. 15. No Fractional Shares or Scrip. No fractional shares or scrip --------------------------------- representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 16. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares --------------------------- shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for -------- ------- Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 17. Closing of Books. The Company will not close its stockholder books or ------------------ records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. 18. Transfer, Division and Combination. ------------------------------------- (a) Subject to compliance with any applicable securities laws and the conditions set forth in Section 1 and Section 7(e) hereof and to the provisions --------- ---- of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder ----------- are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such ------------ division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. --------- (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. (e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effectiveregistration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act. 19. No Rights as Shareholder Until Exercise. This Warrant does not entitle ----------------------------------------- the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 20. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants ------------------------------------------------- that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 21. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the ---------------------------------- taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday in the State of New York, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of New York. 22. Adjustments to Exercise Price and Number of Warrant Shares. ------------------------------------------------------------------ For purposes of this Section 11, references to Common Stock shall include ---------- shares of Common Stock, par value $.0001 of the Company (and any other classes of common stock issued by the Company). (a) Stock Splits, Etc. The number and kind of securities purchasable upon ------------------- the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder pursuant to this Section 11(a), the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Anti-Dilution Provisions. From the Initial Exercise Date until one year ------------------------ following the Closing Date, the Exercise Price and the number of Warrant Shares issuable hereunder and for which this Warrant is then exercisable pursuant to Section 1 hereof shall be subject to adjustment from time to time as provided in - --------- this Section 11(b). In the event that any adjustment of the Exercise Price as -------------- required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent. (i) Effect on Exercise Price of Certain Events. For purposes of determining ------------------------------------------ the adjusted Exercise Price under Section 11(b) hereof, the following will ------------- be applicable: (A) If at any time from Closing Date until the first anniversary thereof, the Company shall grant any warrants to any person or entity with an exercise price which shall be less than the Exercise Price, without the consent of each Holder, the Exercise Price (of the Warrants which have not been exercised) shall be adjusted to equal to such lower exercise price (B) Exceptions to Adjustment of Exercise Price. Notwithstanding anything to ------------------------------------------- the contrary herein, this Section 11(b) shall not apply to the following (1) the ------------- granting of warrants to employees, officers, directors or consultants of the Company pursuant to any stock option plan or other written compensatory agreement, or (2) the issuance of warrants in connection with acquisitions, joint ventures, arrangements related to the Company's operations and strategic relationships, or other strategic investments, the primary purpose of which is not to raise capital. (ii) Minimum Adjustment of Exercise Price. No adjustment of the Exercise ---------------------------------------- Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. 17. Reorganization, Reclassification, Merger, Consolidation or Disposition ------------------------------------------------------------------------- of Assets. In case the Company shall reorganize its capital, reclassify its - --------- capital stock (other than as set forth in Section 11), consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to any class of common stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed -------------- to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, "COMMON STOCK OF THE SUCCESSOR OR - ----------- ---------- -------------------------------- ACQUIRING CORPORATION" shall include stock of such corporation of any class - ---------------------- which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive ----------- reorganizations, reclassifications, mergers, consolidations or disposition of assets. 18. Voluntary Adjustment by the Company. The Company may at any time during ------------------------------------ the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 19. Notice of Adjustment. Whenever the number of Warrant Shares or number or -------------------- kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 20. Notice of Corporate Action. If at any time: ----------------------------- (d) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (e) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (f) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). -------------- 21. Authorized Shares. The Company covenants that during the period the ------------------ Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the principal Trading Market upon which the Common Stock may be listed. (c) Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefore upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (d) Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 18. Miscellaneous. ------------- (k) Jurisdiction. This Agreement shall be governed by and construed in ------------ accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York City. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements in an amount judicially determined. (l) Restrictions. The Holder acknowledges that the Warrant Shares acquired ------------ upon the exercise of this Warrant, if not registered for resale under the Securities Act, will have legends imprinted upon any stock certificates evidencing such Warrant Shares and the Company will notify its transfer agent of restrictions upon resale imposed by the applicable state and federal securities laws. (m) Nonwaiver and Expenses. No course of dealing or any delay or failure to ----------------------- exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (n) Notices. Any notice, request or other document required or permitted to ------- be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement; provided, upon -------- any permitted assignment of this Warrant, the assignee shall promptly provide the Company with its contact information. (o) Limitation of Liability. No provision hereof, in the absence of any ------------------------- affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (p) Remedies. Holder, in addition to being entitled to exercise all rights -------- granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (q) Successors and Assigns. Subject to applicable securities laws, this ------------------------ Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (r) Amendment. This Warrant may be modified or amended or the provisions --------- hereof waived with the written consent of the Company and the Holder. (s) Severability. Wherever possible, each provision of this Warrant shall be ------------ interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (t) Headings. The headings used in this Warrant are for the convenience of -------- reference only and shall not, for any purpose, be deemed a part of this Warrant. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: December 3, 2004 CHINA WORLD TRADE CORPORATION By: /s/ John H.W. Hui -------------------- Name: John H.W. Hui Title: Chief Executive Officer and Vice Chairman HOLDER By: -------------------- Name: Title: NOTICE OF EXERCISE To: China World Trade Corporation 5. The undersigned hereby elects to purchase ________ Series A Warrant Shares of China World Trade Corporation pursuant to the terms of the attached Series A Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. 6. Payment shall take the form of in lawful money of the United States; or 7. Please issue a certificate or certificates representing said Series A Warrant Shares in the name of the undersigned or in such other name as is specified below: ------------------------------------------ The Series A Warrant Shares shall be delivered to the following: ------------------------------------------ 8. Accredited Investor. The undersigned is an "accredited investor" as -------------------- defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By: ---------------------- Name: Title: ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Series A Warrant and all rights evidenced thereby are hereby assigned to _______________________________, whose address is: _____________________________________________________ _____________________________________________________ Dated:_______________, 200_ Holder's Signature:________________________ Holder's Address:__________________________ ____________________________________________ Signature Guaranteed:______________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Series A Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Series A Warrant. EX-10.8 10 doc10.txt CORNELL CAPITAL PARTNERS EX-10.8 NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ---------- ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN - --- EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES CHINA WORLD TRADE CORPORATION SERIES A WARRANT TO PURCHASE 450,000 SHARES OF COMMON STOCK (SUBJECT TO ADJUSTMENT) (VOID AFTER DECEMBER 3, 2009) PPW - - ------ THIS SERIES A COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, CORNELL CAPITAL PARTNERS, LP (the "HOLDER"), is entitled, upon the ------ terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the "INITIALEXERCISE DATE") -------------------- or prior to the close of business on December 3, 2009 (the "TERMINATION DATE") ---------------- but not thereafter, to subscribe for and purchase from China World Trade Corporation., a Nevada corporation (the "COMPANY"), up to 450,000 shares (the ------- "WARRANT SHARES") of Common Stock, $.001 par value per share, of the Company --------------- (the "COMMON STOCK"). The purchase price of one share of Common Stock (the ------------- "EXERCISE PRICE") under this Warrant shall be $2.50, subject to adjustment --------------- hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT DATED AS OF AUGUST 26, 2004, BETWEEN THE COMPANY AND THE PURCHASERS SET FORTH ON SCHEDULE 1 THERETO(THE ------------------ "PURCHASE AGREEMENT"). ------------------- 1. Title to Warrant. Prior to the Termination Date and subject to ------------------ compliance with applicable laws and Section 7 of this Warrant, this Warrant and --------- all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. 2. Authorization of Shares. The Company covenants that all Warrant Shares ------------------------- which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. --------------------- (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company), and upon payment of the Exercise Price of the Warrant Shares thereby purchased by wire transfer or cashier's check drawn on a United States bank or internationally recognized bank, the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for Warrant Shares purchased hereunder shall be delivered to the Holder within seven (7) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been properly exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 have been paid. If such conditions by the Holder have been met, and --------- the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the close of ------------ business on the 7th Trading Day after the date of such conditions being met by the Holder, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to a proper exercise, and all conditions being met by the Holder, by the close of business on the 10th Trading Day after the date of exercise, and if after such 10th Trading Day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the ------ Company shall (1) pay in immediately available funds to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Warrant Shares so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $100 to cover a Buy-In with respect to an attempted exercise of Warrant Shares with an aggregate sale price giving rise to such purchase obligation of $80, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $20. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing Warrant Shares as required pursuant to the terms hereof. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. (c) The Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent that after giving effect to ------------ such issuance after exercise, the Holder (together with the Holder's Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.9% of the number of shares of the Common Stock issued and outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(c), beneficial ownership ------------ shall be calculated in accordance with Section 13(d) of the Exchange Act. For ------------- purposes of this Section 3(c), in determining the number of outstanding shares ------------ of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within four Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Company Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 3(c) may be waived by ------------ the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(c) shall continue to ------------ apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The Holder is solely responsible for all calculations required in this Section 3(c). The Company shall have no ------------- liability for any issuances of Warrant Shares that exceed the 5% amount and the Company is entitled to rely on all calculations by the Holder and/or its agents. The Holder's exercise notice shall be deemed a representation of the Holder that the number of Warrant Shares to be acquired pursuant to such exercise notice shall be in compliance with the provisions of this Section 3(c). (d) If, but only if, at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the Closing Price on the Trading Day preceding the date of such election; (B) = the Exercise Price of the Warrants, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing ----------------------------- fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares ---------------------------- shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for -------- ------- Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Closing of Books. The Company will not close its stockholder books or ------------------ records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. 7. Transfer, Division and Combination. ------------------------------------- (a) Subject to compliance with any applicable securities laws and the conditions set forth in Section 1 and Section 7(e) hereof and to the provisions --------- ---- of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder ----------- are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such ------------ division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. --------- (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. (e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effectiveregistration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act. 8. No Rights as Shareholder Until Exercise. This Warrant does not entitle ------------------------------------------ the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the ---------------------------------- taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday in the State of New York, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of New York. 11. Adjustments to Exercise Price and Number of Warrant Shares. ------------------------------------------------------------------ For purposes of this Section 11, references to Common Stock shall include ---------- shares of Common Stock, par value $.0001 of the Company (and any other classes of common stock issued by the Company). (a) Stock Splits, Etc. The number and kind of securities purchasable upon ------------------- the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder pursuant to this Section 11(a), the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Anti-Dilution Provisions. From the Initial Exercise Date until one year ------------------------ following the Closing Date, the Exercise Price and the number of Warrant Shares issuable hereunder and for which this Warrant is then exercisable pursuant to Section 1 hereof shall be subject to adjustment from time to time as provided in - --------- this Section 11(b). In the event that any adjustment of the Exercise Price as -------------- required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent. (i) Effect on Exercise Price of Certain Events. For purposes of determining ------------------------------------------ the adjusted Exercise Price under Section 11(b) hereof, the following will -------------- be applicable: (A) If at any time from Closing Date until the first anniversary thereof, the Company shall grant any warrants to any person or entity with an exercise price which shall be less than the Exercise Price, without the consent of each Holder, the Exercise Price (of the Warrants which have not been exercised) shall be adjusted to equal to such lower exercise price (B) Exceptions to Adjustment of Exercise Price. Notwithstanding anything to ------------------------------------------- the contrary herein, this Section 11(b) shall not apply to the following (1) the ------------- granting of warrants to employees, officers, directors or consultants of the Company pursuant to any stock option plan or other written compensatory agreement, or (2) the issuance of warrants in connection with acquisitions, joint ventures, arrangements related to the Company's operations and strategic relationships, or other strategic investments, the primary purpose of which is not to raise capital. (ii) Minimum Adjustment of Exercise Price. No adjustment of the Exercise ---------------------------------------- Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. 12. Reorganization, Reclassification, Merger, Consolidation or Disposition ------------------------------------------------------------------------- of Assets. In case the Company shall reorganize its capital, reclassify its - ----------- capital stock (other than as set forth in Section 11), consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to any class of common stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed -------------- to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, "COMMON STOCK OF THE SUCCESSOR OR ---------- ---------- -------------------------------- ACQUIRING CORPORATION" shall include stock of such corporation of any class - ---------------------- which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive ----------- reorganizations, reclassifications, mergers, consolidations or disposition of assets. 13. Voluntary Adjustment by the Company. The Company may at any time during ------------------------------------ the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or -------------------- kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 15. Notice of Corporate Action. If at any time: ----------------------------- (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). -------------- 16. Authorized Shares. The Company covenants that during the period the ------------------ Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the principal Trading Market upon which the Common Stock may be listed. (a) Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefore upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (b) Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 17. Miscellaneous. ------------- (a) Jurisdiction. This Agreement shall be governed by and construed in ------------ accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York City. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements in an amount judicially determined. (b) Restrictions. The Holder acknowledges that the Warrant Shares acquired ------------ upon the exercise of this Warrant, if not registered for resale under the Securities Act, will have legends imprinted upon any stock certificates evidencing such Warrant Shares and the Company will notify its transfer agent of restrictions upon resale imposed by the applicable state and federal securities laws. (c) Nonwaiver and Expenses. No course of dealing or any delay or failure to ----------------------- exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (d) Notices. Any notice, request or other document required or permitted to ------- be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement; provided, upon -------- any permitted assignment of this Warrant, the assignee shall promptly provide the Company with its contact information. (e) Limitation of Liability. No provision hereof, in the absence of any ------------------------- affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (f) Remedies. Holder, in addition to being entitled to exercise all rights -------- granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (g) Successors and Assigns. Subject to applicable securities laws, this ------------------------ Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (h) Amendment. This Warrant may be modified or amended or the provisions --------- hereof waived with the written consent of the Company and the Holder. (i) Severability. Wherever possible, each provision of this Warrant shall be ------------ interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (j) Headings. The headings used in this Warrant are for the convenience of -------- reference only and shall not, for any purpose, be deemed a part of this Warrant. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: December 3, 2004 CHINA WORLD TRADE CORPORATION By: /s/ John Hui -------------- Name: John Hui Title: Chief Executive Officer and Vice Chairman HOLDER By: ------------------------ Name: Title: NOTICE OF EXERCISE To: China World Trade Corporation 1. The undersigned hereby elects to purchase ________ Series A Warrant Shares of China World Trade Corporation pursuant to the terms of the attached Series A Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. 2. Payment shall take the form of in lawful money of the United States; or 3. Please issue a certificate or certificates representing said Series A Warrant Shares in the name of the undersigned or in such other name as is specified below: -------------------------------- The Series A Warrant Shares shall be delivered to the following: -------------------------------- 4. Accredited Investor. The undersigned is an "accredited investor" as -------------------- defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By: ------------------------ Name: Title: ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Series A Warrant and all rights evidenced thereby are hereby assigned to ____________________________, whose address is: _________________________________________________ _________________________________________________ Dated:________________, 200_ Holder's Signature:______________________ Holder's Address:________________________ Signature Guaranteed:____________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Series A Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Series A Warrant. EX-10.9 11 doc11.txt STEALTH CAPITAL, LLC SERIES EX-10.9 NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ---------- ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN - --- EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES CHINA WORLD TRADE CORPORATION SERIES A WARRANT TO PURCHASE 33,334 SHARES OF COMMON STOCK (SUBJECT TO ADJUSTMENT) (VOID AFTER DECEMBER 3, 2009) PPW - - ------ THIS SERIES A COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, STEALTH CAPITAL, LLC (the "HOLDER"), is entitled, upon the terms and ------ subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the "INITIALEXERCISE DATE") or prior to -------------------- the close of business on December 3, 2009 (the "TERMINATION DATE") but not ---------------- thereafter, to subscribe for and purchase from China World Trade Corporation., a Nevada corporation (the "COMPANY"), up to 33,334 shares (the "WARRANT SHARES") ------- -------------- of Common Stock, $.001 par value per share, of the Company (the "COMMON STOCK"). ------------ The purchase price of one share of Common Stock (the "EXERCISE PRICE") under -------------- this Warrant shall be $2.50, subject to adjustment hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT DATED AS OF AUGUST 26, 2004, BETWEEN THE COMPANY AND THE PURCHASERS SET FORTH ON SCHEDULE 1 THERETO(THE "PURCHASE AGREEMENT"). ------------------ ------------------ 1. Title to Warrant. Prior to the Termination Date and subject to ------------------ compliance with applicable laws and Section 7 of this Warrant, this Warrant and --------- all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. 2. Authorization of Shares. The Company covenants that all Warrant Shares ------------------------- which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. --------------------- (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company), and upon payment of the Exercise Price of the Warrant Shares thereby purchased by wire transfer or cashier's check drawn on a United States bank or internationally recognized bank, the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for Warrant Shares purchased hereunder shall be delivered to the Holder within seven (7) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been properly exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 have been paid. If such conditions by the Holder have been met, and --------- the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the close of ------------ business on the 7th Trading Day after the date of such conditions being met by the Holder, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to a proper exercise, and all conditions being met by the Holder, by the close of business on the 10th Trading Day after the date of exercise, and if after such 10th Trading Day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the ------ Company shall (1) pay in immediately available funds to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Warrant Shares so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $100 to cover a Buy-In with respect to an attempted exercise of Warrant Shares with an aggregate sale price giving rise to such purchase obligation of $80, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $20. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing Warrant Shares as required pursuant to the terms hereof. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. (c) The Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent that after giving effect to ------------ such issuance after exercise, the Holder (together with the Holder's Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.9% of the number of shares of the Common Stock issued and outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(c), beneficial ownership ------------ shall be calculated in accordance with Section 13(d) of the Exchange Act. For ------------- purposes of this Section 3(c), in determining the number of outstanding shares ------------ of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within four Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Company Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 3(c) may be waived by ------------ the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(c) shall continue to ------------ apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The Holder is solely responsible for all calculations required in this Section 3(c). The Company shall have no ------------- liability for any issuances of Warrant Shares that exceed the 5% amount and the Company is entitled to rely on all calculations by the Holder and/or its agents. The Holder's exercise notice shall be deemed a representation of the Holder that the number of Warrant Shares to be acquired pursuant to such exercise notice shall be in compliance with the provisions of this Section 3(c). (d) If, but only if, at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the Closing Price on the Trading Day preceding the date of such election; (B) = the Exercise Price of the Warrants, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing ----------------------------- fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares ---------------------------- shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for -------- ------- Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Closing of Books. The Company will not close its stockholder books or ------------------ records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. 7. Transfer, Division and Combination. ------------------------------------- (a) Subject to compliance with any applicable securities laws and the conditions set forth in Section 1 and Section 7(e) hereof and to the provisions --------- ---- of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder ----------- are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such ------------ division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. --------- (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. (e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effectiveregistration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act. 8. No Rights as Shareholder Until Exercise. This Warrant does not entitle ------------------------------------------ the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the ---------------------------------- taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday in the State of New York, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of New York. 11. Adjustments to Exercise Price and Number of Warrant Shares. ------------------------------------------------------------------ For purposes of this Section 11, references to Common Stock shall include ---------- shares of Common Stock, par value $.0001 of the Company (and any other classes of common stock issued by the Company). (a) Stock Splits, Etc. The number and kind of securities purchasable upon ------------------- the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder pursuant to this Section 11(a), the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Anti-Dilution Provisions. From the Initial Exercise Date until one year ------------------------ following the Closing Date, the Exercise Price and the number of Warrant Shares issuable hereunder and for which this Warrant is then exercisable pursuant to Section 1 hereof shall be subject to adjustment from time to time as provided in - --------- this Section 11(b). In the event that any adjustment of the Exercise Price as -------------- required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent. (i) Effect on Exercise Price of Certain Events. For purposes of determining ------------------------------------------ the adjusted Exercise Price under Section 11(b) hereof, the following will -------------- be applicable: (A) If at any time from Closing Date until the first anniversary thereof, the Company shall grant any warrants to any person or entity with an exercise price which shall be less than the Exercise Price, without the consent of each Holder, the Exercise Price (of the Warrants which have not been exercised) shall be adjusted to equal to such lower exercise price (B) Exceptions to Adjustment of Exercise Price. Notwithstanding anything to ------------------------------------------- the contrary herein, this Section 11(b) shall not apply to the following (1) the ------------- granting of warrants to employees, officers, directors or consultants of the Company pursuant to any stock option plan or other written compensatory agreement, or (2) the issuance of warrants in connection with acquisitions, joint ventures, arrangements related to the Company's operations and strategic relationships, or other strategic investments, the primary purpose of which is not to raise capital. (ii) Minimum Adjustment of Exercise Price. No adjustment of the Exercise ---------------------------------------- Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. 12. Reorganization, Reclassification, Merger, Consolidation or Disposition ------------------------------------------------------------------------- of Assets. In case the Company shall reorganize its capital, reclassify its - ----------- capital stock (other than as set forth in Section 11), consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to any class of common stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed -------------- to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, "COMMON STOCK OF THE SUCCESSOR OR ---------- ---------- -------------------------------- ACQUIRING CORPORATION" shall include stock of such corporation of any class - ---------------------- which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive ----------- reorganizations, reclassifications, mergers, consolidations or disposition of assets. 13. Voluntary Adjustment by the Company. The Company may at any time during ------------------------------------ the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or -------------------- kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 15. Notice of Corporate Action. If at any time: ----------------------------- (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). -------------- 16. Authorized Shares. The Company covenants that during the period the ------------------ Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the principal Trading Market upon which the Common Stock may be listed. (a) Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefore upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (b) Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 17. Miscellaneous. ------------- (a) Jurisdiction. This Agreement shall be governed by and construed in ------------ accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York City. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements in an amount judicially determined. (b) Restrictions. The Holder acknowledges that the Warrant Shares acquired ------------ upon the exercise of this Warrant, if not registered for resale under the Securities Act, will have legends imprinted upon any stock certificates evidencing such Warrant Shares and the Company will notify its transfer agent of restrictions upon resale imposed by the applicable state and federal securities laws. (c) Nonwaiver and Expenses. No course of dealing or any delay or failure to ----------------------- exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (d) Notices. Any notice, request or other document required or permitted to ------- be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement; provided, upon -------- any permitted assignment of this Warrant, the assignee shall promptly provide the Company with its contact information. (e) Limitation of Liability. No provision hereof, in the absence of any ------------------------- affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (f) Remedies. Holder, in addition to being entitled to exercise all rights -------- granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (g) Successors and Assigns. Subject to applicable securities laws, this ------------------------ Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (h) Amendment. This Warrant may be modified or amended or the provisions --------- hereof waived with the written consent of the Company and the Holder. (i) Severability. Wherever possible, each provision of this Warrant shall be ------------ interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (j) Headings. The headings used in this Warrant are for the convenience of -------- reference only and shall not, for any purpose, be deemed a part of this Warrant. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: December 3, 2004 CHINA WORLD TRADE CORPORATION By: /s/ John Hui -------------- Name: John Hui Title: Chief Executive Officer and Vice Chairman HOLDER By: ------------------------ Name: Title: NOTICE OF EXERCISE To: China World Trade Corporation 1. The undersigned hereby elects to purchase ________ Series A Warrant Shares of China World Trade Corporation pursuant to the terms of the attached Series A Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. 2. Payment shall take the form of in lawful money of the United States; or 3. Please issue a certificate or certificates representing said Series A Warrant Shares in the name of the undersigned or in such other name as is specified below: -------------------------------- The Series A Warrant Shares shall be delivered to the following: -------------------------------- 4. Accredited Investor. The undersigned is an "accredited investor" as -------------------- defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By: ------------------------ Name: Title: ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Series A Warrant and all rights evidenced thereby are hereby assigned to ____________________________, whose address is: _________________________________________________ _________________________________________________ Dated:________________, 200_ Holder's Signature:______________________ Holder's Address:________________________ Signature Guaranteed:____________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Series A Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Series A Warrant. EX-10.10 12 doc12.txt PLACEMENT'S AGENT'S WARRANT EX-10.10 NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ---------- ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN - --- EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES CHINA WORLD TRADE CORPORATION PLACEMENT AGENT'S WARRANT TO PURCHASE 43,000 SHARES OF COMMON STOCK (SUBJECT TO ADJUSTMENT) (VOID AFTER AUGUST 26, 2009) PPW - - ------ THIS COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, DUNCAN CAPITAL, LLC (the "HOLDER"), is entitled, upon the terms and subject to ------ the limitations on exercise and the conditions hereinafter set forth, at any time on or after on or prior to the close of business on August 26, 2009 (the "TERMINATION DATE") but not thereafter, to subscribe for and purchase from China --------------- World Trade Corporation, a Nevada corporation (the "COMPANY"), up to 43,000 ------- shares (the "WARRANT SHARES") of Common Stock, $.001 par value per share, of the -------------- Company (the "COMMON STOCK"). The purchase price of one share of Common Stock ------------- (the "EXERCISE PRICE") under this Warrant shall be $2.50, subject to adjustment -------------- hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT DATED AS OF AUGUST 26, 2004, BETWEEN THE COMPANY AND THE PURCHASERS SET FORTH ON SCHEDULE 1 THERETO(THE ------------------ "PURCHASE AGREEMENT"). ------------------- 1. Title to Warrant. Prior to the Termination Date and subject to ------------------ compliance with applicable laws and Section 7 of this Warrant, this Warrant and --------- all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. 2. Authorization of Shares. The Company covenants that all Warrant Shares ------------------------- which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 3. Exercise of Warrant. --------------------- (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company), and upon payment of the Exercise Price of the Warrant Shares thereby purchased by wire transfer or cashier's check drawn on a United States bank or internationally recognized bank, the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for Warrant Shares purchased hereunder shall be delivered to the Holder within seven (7) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been properly exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 have been paid. If such conditions by the Holder have been met, and --------- the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the close of ------------ business on the 7th Trading Day after the date of such conditions being met by the Holder, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to a proper exercise, and all conditions being met by the Holder, by the close of business on the 10th Trading Day after the date of exercise, and if after such 10th Trading Day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the ------ Company shall (1) pay in immediately available funds to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Warrant Shares so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $100 to cover a Buy-In with respect to an attempted exercise of Warrant Shares with an aggregate sale price giving rise to such purchase obligation of $80, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $20. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing Warrant Shares as required pursuant to the terms hereof. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. (c) The Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent that after giving effect to ------------ such issuance after exercise, the Holder (together with the Holder's Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.9% of the number of shares of the Common Stock issued and outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(c), beneficial ownership ------------ shall be calculated in accordance with Section 13(d) of the Exchange Act. For ------------- purposes of this Section 3(c), in determining the number of outstanding shares ------------ of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within four Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Company Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 3(c) may be waived by ------------ the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(c) shall continue to ------------ apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The Holder is solely responsible for all calculations required in this Section 3(c). The Company shall have no ------------- liability for any issuances of Warrant Shares that exceed the 5% amount and the Company is entitled to rely on all calculations by the Holder and/or its agents. The Holder's exercise notice shall be deemed a representation of the Holder that the number of Warrant Shares to be acquired pursuant to such exercise notice shall be in compliance with the provisions of this Section 3(c). (d) If, but only if, at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the Closing Price on the Trading Day preceding the date of such election; (B) = the Exercise Price of the Warrants, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant. 4. No Fractional Shares or Scrip. No fractional shares or scrip representing ----------------------------- fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 5. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares ---------------------------- shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for -------- ------- Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 6. Closing of Books. The Company will not close its stockholder books or ------------------ records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. 7. Transfer, Division and Combination. ------------------------------------- (a) Subject to compliance with any applicable securities laws and the conditions set forth in Section 1 and Section 7(e) hereof and to the provisions --------- ---- of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder ----------- are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such ------------ division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. --------- (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. (e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act. 8. No Rights as Shareholder Until Exercise. This Warrant does not entitle ------------------------------------------ the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 9. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants -------------------------------------------------- that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the ---------------------------------- taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday in the State of New York, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of New York. 11. Adjustments to Exercise Price and Number of Warrant Shares. ------------------------------------------------------------------ For purposes of this Section 11, references to Common Stock shall include ---------- shares of Common Stock, par value $.0001 of the Company (and any other classes of common stock issued by the Company). (a) Stock Splits, Etc. The number and kind of securities purchasable upon ------------------- the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder pursuant to this Section 11(a), the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Anti-Dilution Provisions. From the Initial Exercise Date until one year ------------------------ following the Closing Date, the Exercise Price and the number of Warrant Shares issuable hereunder and for which this Warrant is then exercisable pursuant to Section 1 hereof shall be subject to adjustment from time to time as provided in - --------- this Section 11(b). In the event that any adjustment of the Exercise Price as -------------- required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent. (i) Effect on Exercise Price of Certain Events. For purposes of determining ------------------------------------------ the adjusted Exercise Price under Section 11(b) hereof, the following will -------------- be applicable: (A) If at any time from Closing Date until the first anniversary thereof, the Company shall grant any warrants to any person or entity with an exercise price which shall be less than the Exercise Price, without the consent of each Holder, the Exercise Price (of the Warrants which have not been exercised) shall be adjusted to equal to such lower exercise price (B) Exceptions to Adjustment of Exercise Price. Notwithstanding anything to ------------------------------------------- the contrary herein, this Section 11(b) shall not apply to the following (1) the ------------- granting of warrants to employees, officers, directors or consultants of the Company pursuant to any stock option plan or other written compensatory agreement, or (2) the issuance of warrants in connection with acquisitions, joint ventures, arrangements related to the Company's operations and strategic relationships, or other strategic investments, the primary purpose of which is not to raise capital. (ii) Minimum Adjustment of Exercise Price. No adjustment of the Exercise ---------------------------------------- Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. 12. Reorganization, Reclassification, Merger, Consolidation or Disposition ------------------------------------------------------------------------- of Assets. In case the Company shall reorganize its capital, reclassify its - ----------- capital stock (other than as set forth in Section 11), consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to any class of common stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed -------------- to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, "COMMON STOCK OF THE SUCCESSOR OR - ----------- ---------- -------------------------------- ACQUIRING CORPORATION" shall include stock of such corporation of any class - ---------------------- which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive ----------- reorganizations, reclassifications, mergers, consolidations or disposition of assets. 13. Voluntary Adjustment by the Company. The Company may at any time during ------------------------------------ the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 14. Notice of Adjustment. Whenever the number of Warrant Shares or number or -------------------- kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 15. Notice of Corporate Action. If at any time: ----------------------------- (a) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (b) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (c) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). -------------- 16. Authorized Shares. The Company covenants that during the period the ------------------ Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the principal Trading Market upon which the Common Stock may be listed. (a) Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefore upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (b) Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 17. Miscellaneous. ------------- (a) Jurisdiction. This Agreement shall be governed by and construed in ------------ accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York City. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements in an amount judicially determined. (b) Restrictions. The Holder acknowledges that the Warrant Shares acquired ------------ upon the exercise of this Warrant, if not registered for resale under the Securities Act, will have legends imprinted upon any stock certificates evidencing such Warrant Shares and the Company will notify its transfer agent of restrictions upon resale imposed by the applicable state and federal securities laws. (c) Nonwaiver and Expenses. No course of dealing or any delay or failure to ----------------------- exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (d) Notices. Any notice, request or other document required or permitted to ------- be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement; provided, upon -------- any permitted assignment of this Warrant, the assignee shall promptly provide the Company with its contact information. (e) Limitation of Liability. No provision hereof, in the absence of any ------------------------- affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (f) Remedies. Holder, in addition to being entitled to exercise all rights -------- granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (g) Successors and Assigns. Subject to applicable securities laws, this ------------------------ Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (h) Amendment. This Warrant may be modified or amended or the provisions --------- hereof waived with the written consent of the Company and the Holder. (i) Severability. Wherever possible, each provision of this Warrant shall be ------------ interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (j) Headings. The headings used in this Warrant are for the convenience of -------- reference only and shall not, for any purpose, be deemed a part of this Warrant. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: August 26, 2004 CHINA WORLD TRADE CORPORATION By: /s/ John Hui -------------- Name: John Hui Title: Chief Executive Officer and Vice Chairman DUNCAN CAPITAL, LLC By: /s/ David Fuchs ----------------- Name: David Fuchs Title: Managing Member NOTICE OF EXERCISE To: China World Trade Corporation 1. The undersigned hereby elects to purchase ________ Placement Agent's Warrant Shares of China World Trade Corporation pursuant to the terms of the attached Placement Agent's Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. 2. Payment shall take the form of in lawful money of the United States; or 3. Please issue a certificate or certificates representing said Placement Agent's Warrant Shares in the name of the undersigned or in such other name as is specified below: -------------------------- The Placement Agent's Warrant Shares shall be delivered to the following: -------------------------- 4. Accredited Investor. The undersigned is an "accredited investor" as -------------------- defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By: ------------------------- Name: Title: ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Placement Agent's Warrant and all rights evidenced thereby are hereby assigned to , whose address is: ___________________________________ _________________________________________________________ _________________________________________________________ Dated: , 200_ _______________ Holder's Signature: ___________________________ Holder's Address: _____________________________ Signature Guaranteed: _________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Placement Agent's Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Placement Agent's Warrant. NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ---------- ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN - --- EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES CHINA WORLD TRADE CORPORATION PLACEMENT AGENT'S WARRANT TO PURCHASE 69,667 SHARES OF COMMON STOCK (SUBJECT TO ADJUSTMENT) (VOID AFTER DECEMBER 3, 2009) PPW - - ------ THIS COMMON STOCK PURCHASE WARRANT CERTIFIES that, for value received, DUNCAN CAPITAL, LLC (the "HOLDER"), is entitled, upon the terms and subject to ------ the limitations on exercise and the conditions hereinafter set forth, at any time on or after on or prior to the close of business on December 3, 2009 (the "TERMINATION DATE") but not thereafter, to subscribe for and purchase from China ---------------- World Trade Corporation, a Nevada corporation (the "COMPANY"), up to 69,667 ------- shares (the "WARRANT SHARES") of Common Stock, $.001 par value per share, of the -------------- Company (the "COMMON STOCK"). The purchase price of one share of Common Stock ------------- (the "EXERCISE PRICE") under this Warrant shall be $2.50, subject to adjustment -------------- hereunder. The Exercise Price and the number of Warrant Shares for which the Warrant is exercisable shall be subject to adjustment as provided herein. CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT DATED AS OF AUGUST 26, 2004, BETWEEN THE COMPANY AND THE PURCHASERS SET FORTH ON SCHEDULE 1 THERETO(THE ------------------ "PURCHASE AGREEMENT"). ------------------- 12. Title to Warrant. Prior to the Termination Date and subject to ------------------ compliance with applicable laws and Section 7 of this Warrant, this Warrant and --------- all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the Holder in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed. The transferee shall sign an investment letter in form and substance reasonably satisfactory to the Company. 13. Authorization of Shares. The Company covenants that all Warrant Shares ------------------------- which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). 14. Exercise of Warrant. --------------------- (a) Exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date and on or before the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of such Holder appearing on the books of the Company), and upon payment of the Exercise Price of the Warrant Shares thereby purchased by wire transfer or cashier's check drawn on a United States bank or internationally recognized bank, the Holder shall be entitled to receive a certificate for the number of Warrant Shares so purchased. Certificates for Warrant Shares purchased hereunder shall be delivered to the Holder within seven (7) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and the Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been properly exercised by payment to the Company of the Exercise Price and all taxes required to be paid by the Holder, if any, pursuant to Section 5 have been paid. If such conditions by the Holder have been met, and --------- the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section 3(a) by the close of ------------ business on the 7th Trading Day after the date of such conditions being met by the Holder, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to a proper exercise, and all conditions being met by the Holder, by the close of business on the 10th Trading Day after the date of exercise, and if after such 10th Trading Day the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the ------ Company shall (1) pay in immediately available funds to the Holder the amount by which (x) the Holder's total purchase price (including brokerage commissions, if any) for the Warrant Shares so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $100 to cover a Buy-In with respect to an attempted exercise of Warrant Shares with an aggregate sale price giving rise to such purchase obligation of $80, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $20. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder's right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company's failure to timely deliver certificates representing Warrant Shares as required pursuant to the terms hereof. (b) If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant. (c) The Company shall not effect any exercise of this Warrant, and the Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 3(a) or otherwise, to the extent that after giving effect to ------------ such issuance after exercise, the Holder (together with the Holder's Affiliates), as set forth on the applicable Notice of Exercise, would beneficially own in excess of 4.9% of the number of shares of the Common Stock issued and outstanding immediately after giving effect to such issuance. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (A) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Warrants) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 3(c), beneficial ownership ------------ shall be calculated in accordance with Section 13(d) of the Exchange Act. For ------------- purposes of this Section 3(c), in determining the number of outstanding shares ------------ of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company's most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company's transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within four Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Company Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The provisions of this Section 3(c) may be waived by ------------ the Holder upon, at the election of the Holder, not less than 61 days' prior notice to the Company, and the provisions of this Section 3(c) shall continue to ------------ apply until such 61st day (or such later date, as determined by the Holder, as may be specified in such notice of waiver). The Holder is solely responsible for all calculations required in this Section 3(c). The Company shall have no ------------- liability for any issuances of Warrant Shares that exceed the 5% amount and the Company is entitled to rely on all calculations by the Holder and/or its agents. The Holder's exercise notice shall be deemed a representation of the Holder that the number of Warrant Shares to be acquired pursuant to such exercise notice shall be in compliance with the provisions of this Section 3(c). (d) If, but only if, at any time after one year from the date of issuance of this Warrant there is no effective Registration Statement registering the resale of the Warrant Shares by the Holder, this Warrant may also be exercised at such time by means of a "cashless exercise" in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where: (A) = the Closing Price on the Trading Day preceding the date of such election; (B) = the Exercise Price of the Warrants, as adjusted; and (X) = the number of Warrant Shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant. 15. No Fractional Shares or Scrip. No fractional shares or scrip --------------------------------- representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price. 16. Charges, Taxes and Expenses. Issuance of certificates for Warrant Shares --------------------------- shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event certificates for -------- ------- Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. 17. Closing of Books. The Company will not close its stockholder books or ------------------ records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof. 18. Transfer, Division and Combination. ------------------------------------- (a) Subject to compliance with any applicable securities laws and the conditions set forth in Section 1 and Section 7(e) hereof and to the provisions --------- ---- of Section 4.1 of the Purchase Agreement, this Warrant and all rights hereunder ----------- are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A Warrant, if properly assigned, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued. (b) This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 7(a), as to any transfer which may be involved in such ------------ division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. (c) The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7. --------- (d) The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants. (e) If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be registered pursuant to an effectiveregistration statement under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such transfer (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that such transfer may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the holder or transferee execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act. 19. No Rights as Shareholder Until Exercise. This Warrant does not entitle ----------------------------------------- the Holder to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof. Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such Holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment. 20. Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants ------------------------------------------------- that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate. 21. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the ---------------------------------- taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday in the State of New York, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday in the State of New York. 22. Adjustments to Exercise Price and Number of Warrant Shares. ------------------------------------------------------------------ For purposes of this Section 11, references to Common Stock shall include ---------- shares of Common Stock, par value $.0001 of the Company (and any other classes of common stock issued by the Company). (a) Stock Splits, Etc. The number and kind of securities purchasable upon ------------------- the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following. In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, or (iv) issue any shares of its capital stock in a reclassification of the Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the Holder shall be entitled to receive the kind and number of Warrant Shares or other securities of the Company which it would have owned or have been entitled to receive had such Warrant been exercised in advance thereof. Upon each such adjustment of the kind and number of Warrant Shares or other securities of the Company which are purchasable hereunder pursuant to this Section 11(a), the Holder shall thereafter be entitled to purchase the number of Warrant Shares or other securities resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares or other securities of the Company resulting from such adjustment. An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) Anti-Dilution Provisions. From the Initial Exercise Date until one year ------------------------ following the Closing Date, the Exercise Price and the number of Warrant Shares issuable hereunder and for which this Warrant is then exercisable pursuant to Section 1 hereof shall be subject to adjustment from time to time as provided in - --------- this Section 11(b). In the event that any adjustment of the Exercise Price as -------------- required herein results in a fraction of a cent, such Exercise Price shall be rounded up or down to the nearest cent. (i) Effect on Exercise Price of Certain Events. For purposes of determining ------------------------------------------ the adjusted Exercise Price under Section 11(b) hereof, the following will ------------- be applicable: (A) If at any time from Closing Date until the first anniversary thereof, the Company shall grant any warrants to any person or entity with an exercise price which shall be less than the Exercise Price, without the consent of each Holder, the Exercise Price (of the Warrants which have not been exercised) shall be adjusted to equal to such lower exercise price (B) Exceptions to Adjustment of Exercise Price. Notwithstanding anything to ------------------------------------------- the contrary herein, this Section 11(b) shall not apply to the following (1) the ------------- granting of warrants to employees, officers, directors or consultants of the Company pursuant to any stock option plan or other written compensatory agreement, or (2) the issuance of warrants in connection with acquisitions, joint ventures, arrangements related to the Company's operations and strategic relationships, or other strategic investments, the primary purpose of which is not to raise capital. (ii) Minimum Adjustment of Exercise Price. No adjustment of the Exercise ---------------------------------------- Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price. 17. Reorganization, Reclassification, Merger, Consolidation or Disposition ------------------------------------------------------------------------- of Assets. In case the Company shall reorganize its capital, reclassify its - --------- capital stock (other than as set forth in Section 11), consolidate or merge with or into another corporation (where the Company is not the surviving corporation or where there is a change in or distribution with respect to any class of common stock of the Company), or sell, transfer or otherwise dispose of all or substantially all its property, assets or business to another corporation and, pursuant to the terms of such reorganization, reclassification, merger, consolidation or disposition of assets, shares of common stock of the successor or acquiring corporation, or any cash, shares of stock or other securities or property of any nature whatsoever (including warrants or other subscription or purchase rights) in addition to or in lieu of common stock of the successor or acquiring corporation ("OTHER PROPERTY"), are to be received by or distributed -------------- to the holders of Common Stock of the Company, then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and Other Property receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event. In case of any such reorganization, reclassification, merger, consolidation or disposition of assets, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of Warrant Shares for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 12. For purposes of this Section 12, "COMMON STOCK OF THE SUCCESSOR OR - ----------- ---------- -------------------------------- ACQUIRING CORPORATION" shall include stock of such corporation of any class - ---------------------- which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock. The foregoing provisions of this Section 12 shall similarly apply to successive ----------- reorganizations, reclassifications, mergers, consolidations or disposition of assets. 18. Voluntary Adjustment by the Company. The Company may at any time during ------------------------------------ the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 19. Notice of Adjustment. Whenever the number of Warrant Shares or number or -------------------- kind of securities or other property purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall give notice thereof to the Holder, which notice shall state the number of Warrant Shares (and other securities or property) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (and other securities or property) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. 20. Notice of Corporate Action. If at any time: ----------------------------- (d) the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or (e) there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or, (f) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days' prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days' prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such dividend, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their Warrant Shares for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up. Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 17(d). -------------- 21. Authorized Shares. The Company covenants that during the period the ------------------ Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the principal Trading Market upon which the Common Stock may be listed. (c) Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (a) not increase the par value of any Warrant Shares above the amount payable therefore upon such exercise immediately prior to such increase in par value, (b) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. (d) Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof. 18. Miscellaneous. ------------- (k) Jurisdiction. This Agreement shall be governed by and construed in ------------ accordance with the internal laws of the State of New York without regard to the conflicts of laws principles thereof. The parties hereto hereby irrevocably agree that any suit or proceeding arising directly and/or indirectly pursuant to or under this Agreement, shall be brought solely in a federal or state court located in the City, County and State of New York. By its execution hereof, the parties hereby covenant and irrevocably submit to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York and agree that any process in any such action may be served upon any of them personally, or by certified mail or registered mail upon them or their agent, return receipt requested, with the same full force and effect as if personally served upon them in New York City. The parties hereto waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense or lack of in personam jurisdiction with respect thereto. In the event of any such action or proceeding, the party prevailing therein shall be entitled to payment from the other party hereto of its reasonable counsel fees and disbursements in an amount judicially determined. (l) Restrictions. The Holder acknowledges that the Warrant Shares acquired ------------ upon the exercise of this Warrant, if not registered for resale under the Securities Act, will have legends imprinted upon any stock certificates evidencing such Warrant Shares and the Company will notify its transfer agent of restrictions upon resale imposed by the applicable state and federal securities laws. (m) Nonwaiver and Expenses. No course of dealing or any delay or failure to ----------------------- exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder's rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys' fees, including those of appellate proceedings, incurred by Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder. (n) Notices. Any notice, request or other document required or permitted to ------- be given or delivered to the Holder by the Company shall be delivered in accordance with the notice provisions of the Purchase Agreement; provided, upon -------- any permitted assignment of this Warrant, the assignee shall promptly provide the Company with its contact information. (o) Limitation of Liability. No provision hereof, in the absence of any ------------------------- affirmative action by Holder to exercise this Warrant or purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company. (p) Remedies. Holder, in addition to being entitled to exercise all rights -------- granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. (q) Successors and Assigns. Subject to applicable securities laws, this ------------------------ Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares. (r) Amendment. This Warrant may be modified or amended or the provisions --------- hereof waived with the written consent of the Company and the Holder. (s) Severability. Wherever possible, each provision of this Warrant shall be ------------ interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant. (t) Headings. The headings used in this Warrant are for the convenience of -------- reference only and shall not, for any purpose, be deemed a part of this Warrant. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: December 3, 2004 CHINA WORLD TRADE CORPORATION By: /s/ John Hui -------------- Name: John Hui Title: Chief Executive Officer and Vice Chairman DUNCAN CAPITAL, LLC By: /s/ David Fuchs ----------------- Name: David Fuchs Title: Managing Member NOTICE OF EXERCISE To: China World Trade Corporation 5. The undersigned hereby elects to purchase ________ Placement Agent's Warrant Shares of China World Trade Corporation pursuant to the terms of the attached Placement Agent's Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any. 6. Payment shall take the form of in lawful money of the United States; or 7. Please issue a certificate or certificates representing said Placement Agent's Warrant Shares in the name of the undersigned or in such other name as is specified below: ---------------------------- The Placement Agent's Warrant Shares shall be delivered to the following: ---------------------------- 8. Accredited Investor. The undersigned is an "accredited investor" as -------------------- defined in Regulation D promulgated under the Securities Act of 1933, as amended. [PURCHASER] By: ------------------------- Name: Title: ASSIGNMENT FORM (To assign the foregoing warrant, execute this form and supply required information. Do not use this form to exercise the warrant.) FOR VALUE RECEIVED, the foregoing Placement Agent's Warrant and all rights evidenced thereby are hereby assigned to , whose address is: ___________________________________ Dated: _____________ , 200_ Holder's Signature:______________________________ Holder's Address:________________________________ __________________________________________________ Signature Guaranteed:____________________________ NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Placement Agent's Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Placement Agent's Warrant. EX-10.13 13 doc15.txt CONSULTING AGREEMENT EX-10.13 GREENTREE FINANCIAL GROUP, INC. ------------------------------- November 12, 2003 PERSONAL AND CONFIDENTIAL - --------------------------- China World Trade Corporation Goldlion Digital Network Center 4th Floor 138 Tiyu Road East Tianhe, Guangzhou, P.R.China Attn: John H.W. Hui President and Chief Executive Officer Dear Mr. Hui: This letter agreement ("Agreement") confirms the terms and conditions of the exclusive engagement of Greentree Financial Group, Inc. ("Greentree") by World Trade Center Club Guangzhou (the "Company") to render certain financial advisory services to the Company in connection with the Company's strategic and financial alternatives in the United States capital markets. 1. Services. Greentree agrees to perform the following services: -------- (a) Assist with the "up listing" from the OTC Bulletin Board to either of the NASDAQ or the American Stock Exchange in the U.S. public markets; (b) Assist with the preparation of the business plan in a format generally acceptable in the U.S. public markets; (c) Assist with the preparation of marketing materials for presentations, this will include a power point presentation alongside any additional materials or information we see will be a benefit to interested investors in the Company; (d) Advise and assist the Company as to the financial aspects and capital structure of any Financing opportunities; (e) Assist the Company with introductions to the Bank of America, etc. for purposes of its credit card business in partnership and cooperation with the Agricultural Bank of China ; (f) Prepare three quarterly reports on Form 10-QSB and one annual report on Form 10-KSB, including related EDGARization; (g) Preparation of non-qualified compensatory plan for employees, advisors and consultants, including related EDGARization; (h) Perform such other services as the Company and Greentree shall mutually agree to in writing. 2. Fees. The Company agrees to pay Greentree for its services with a ---- financial advisory fee ("Advisory Fee") of 180,000 shares of free-trading common stock during the Term payable as follows: A payment of 100,000 shares shall be made upon signing this agreement. The final payment of 80,000 shares shall be made within 45 days. The Company is making the payments in free trading common stock based on an opening share price of $.60 after the up listing to the OTCBB from the pink sheets. 3. Term. The term of this Agreement shall commence on November 12, 2003 and ---- end on the 90 day anniversary of the date hereof (the "Term"), with the exception of the SEC quarterly and annual reports which will be prepared in accordance with their respective due dates. This Agreement may be renewed upon mutual written agreement of the parties hereto with the additional services and fees to be mutually agreed upon. This agreement may be terminated by the Company with 45 days prior written notice to Greentree. If the Company terminates this Agreement prior to the expiration of the Term, the Company shall pay to Greentree all reasonable expenses incurred, in accordance with Paragraph 5 hereof. Any obligation pursuant to this Paragraph 3, and pursuant to Paragraphs 2, 4, 5, 6 and 8 hereof, shall survive the termination or expiration of this Agreement. 4. Expenses. The Company agrees to reimburse Greentree for all of its -------- reasonable out-of-pocket fees, expenses and costs (including, but not limited to, legal, accounting, travel, accommodations, telephone, translation, computer, courier and supplies) in connection with the performance of its services under this Agreement, upon prior written approval. All such fees, expenses and costs will be billed at any time by Greentree and are payable by the Company when invoiced. Upon expiration of the Agreement any unreimbursed fees and expenses will be immediately due and payable. 5. Indemnification. In addition to the payment of fees and reimbursement of --------------- fees and expenses provided for above, the Company agrees to indemnify Greentree and its affiliates with regard to the matters contemplated herein, as set forth in Exhibit A, attached hereto, which is incorporated by reference as if fully set forth herein. 6. Matters Relating to Engagement. The Company acknowledges that Greentree ------------------------------ has been retained solely to provide the services set forth in this Agreement. In rendering such services, Greentree shall act as an independent contractor, and any duties of Greentree arising out of its engagement hereunder shall be owed solely to the Company. The Company further acknowledges that Greentree may perform certain of the services described herein through one or more of its affiliates. The Company acknowledges that Greentree is a consulting firm that is engaged in providing financial advisory services. The Company acknowledges and agrees that in connection with the performance of Greentree's services hereunder (or any other services) that neither Greentree nor any of its employees will be providing the Company with legal, tax or accounting advice or guidance (and no advice or guidance provided by Greentree or its employees to the Company should be construed as such) and that neither Greentree nor its employees hold itself or themselves out to be advisors as to legal, tax, accounting or regulatory matters in any jurisdiction. The Company shall consult with its own legal, tax, accounting and other advisors concerning all matters and advice rendered by Greentree to the Company and the Company shall be responsible for making its own independent investigation and appraisal of the risks, benefits and suitability of the advice and guidance given by Greentree to the Company and the transactions contemplated by this Agreement. Neither Greentree nor its employees shall have any responsibility or liability whatsoever to the Company or its affiliates with respect thereto. The Company recognizes and confirms that in performing its duties pursuant to this Agreement, Greentree will be using and relying on data, material, and other information (the "Information") furnished by the Company or their respective employees and representatives. The Company will cooperate with Greentree and will furnish Greentree with all Information concerning the Company and any Transaction, Alternate Transaction or Financing which Greentree deems appropriate and will provide Greentree with access to the Company's officers, directors, employees, independent accountants and legal counsel for the purpose of performing Greentree's obligations pursuant to this Agreement. The Company hereby agrees and represents that all Information furnished to Greentree pursuant to this Agreement shall be accurate and complete in all material respects at the time provided, and that, if the Information becomes materially inaccurate, incomplete or misleading during the term of Greentree's engagement hereunder, the Company shall promptly advise Greentree in writing. Accordingly, Greentree assumes no responsibility for the accuracy and completeness of the Information. In rendering its services, Greentree will be using and relying upon the Information without independent verification evaluation thereof. 7. Governing Law. This Agreement shall be governed by and construed in -------------- accordance with the laws of the State of Florida without regard to the conflict of laws provisions thereof. 8. No Brokers. The Company represents and warrants to Greentree that there ----------- are no brokers, representatives or other persons which have an interest in compensation due to Greentree from any services contemplated herein. 9. Authorization. The Company and Greentree represent and warrant that each ------------- has all requisite power and authority, and all necessary authorizations, to enter into and carry out the terms and provisions of this Agreement and the execution, delivery and performance of this Agreement does not breach or conflict with any agreement, document or instrument to which it is a party or bound. 10. Miscellaneous. This Agreement constitutes the entire understanding and ------------- agreement between the Company and Greentree with respect to the subject matter hereof and supersedes all prior understanding or agreements between the parties with respect thereto, whether oral or written, express or implied. Any amendments or modifications must be executed in writing by both parties. This Agreement and all rights, liabilities and obligations hereunder shall be binding upon and insure to the benefit of each party's successors but may not be assigned without the prior written approval of the other party. If any provision of this Agreement shall be held or made invalid by a statute, rule, regulation, decision of a tribunal or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable. This Agreement may be executed in any number of counterparts, each of which, shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument. The descriptive headings of the Paragraphs of this Agreement are inserted for convenience only, do not constitute a part of this Agreement and shall not affect in anyway the meaning or interpretation of this Agreement. THIS SPACE WAS INTENTIONALLY LEFT BLANK Please confirm that the foregoing correctly sets forth our agreement by signing below in the space provided and returning this Agreement to Greentree for execution, which shall constitute a binding agreement as of the date first above written. Thank you. We look forward to a mutually rewarding relationship. GREENTREE FINANCIAL GROUP, INC. By: /s/ Michael J. Bongiovanni ---------------------------- Name: Michael J. Bongiovanni, CPA Title: President and Chief Executive Officer AGREED TO AND ACCEPTED AS OF NOVEMBER 12, 2003: CHINA WORLD TRADE CORPORATION By: /s/ John H. W. Hui --------------------- Name: John H. W. Hui Title: President and Chief Executive Officer EXHIBIT A: INDEMNIFICATION The Company agrees to indemnify Greentree, its employees, directors, officers, agents, affiliates, and each person, if any, who controls it within the meaning of either Section 20 of the Securities Exchange Act of 1934 or Section 15 of the Securities Act of 1933 (each such person, including Greentree is referred to as "Indemnified Party") from and against any losses, claims, damages and liabilities, joint or several (including all legal or other expenses reasonably incurred by an Indemnified Party in connection with the preparation for or defense of any threatened or pending claim, action or proceeding, whether or not resulting in any liability) ("Damages"), to which such Indemnified Party, in connection with providing its services or arising out of its engagement hereunder, may become subject under any applicable Federal or state law or otherwise, including but not limited to liability or loss (i) caused by or arising out of an untrue statement or an alleged untrue statement of a material fact or omission or alleged omission to state a material fact necessary in order to make a statement not misleading in light of the circumstances under which it was made, (ii) caused by or arising out of any act or failure to act, or (iii) arising out of Greentree's engagement or the rendering by any Indemnified Party of its services under this Agreement; provided, however, that the Company will not be liable to the Indemnified Party hereunder to the extent that any Damages are found in a final non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the Indemnified Party seeking indemnification hereunder. These indemnification provisions shall be in addition to any liability which the Company may otherwise have to any Indemnified Party. If for any reason, other than a final non-appealable judgment finding an Indemnified Party liable for Damages for its gross negligence or willful misconduct the foregoing indemnity is unavailable to an Indemnified Party or insufficient to hold an Indemnified Party harmless, then the Company shall contribute to the amount paid or payable by an Indemnified Party as a result of such Damages in such proportion as is appropriate to reflect not only the relative benefits received by the Company and its shareholders on the one hand and the Indemnified Party on the other, but also the relative fault of the Company and the Indemnified Party as well as any relevant equitable considerations. Promptly after receipt by the Indemnified Party of notice of any claim or of the commencement of any action in respect of which indemnity may be sought, the Indemnified Party will notify the Company in writing of the receipt or commencement thereof and the Company shall have the right to assume the defense of such claim or action (including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of fees and expenses of such counsel), provided that the Indemnified Party shall have the right to control its defense if, in the opinion of its counsel, the Indemnified Party's defense is unique or separate to it as the case may be, as opposed to a defense pertaining to the Company. In any event, the Indemnified Party shall have the right to retain counsel reasonably satisfactory to the Company, at the Company's sole expense, to represent it in any claim or action in respect of which indemnity may be sought and agrees to cooperate with the Company and the Company's counsel in the defense of such claim or action. In the event that the Company does not promptly assume the defense of a claim or action, the Indemnified Party shall have the right to employ counsel to defend such claim or action. Any obligation pursuant to this Annex shall survive the termination or expiration of the Agreement. EX-23.2 14 doc19.txt CONSENT OF MOORES EX-23.2 January 14, 2005 The Board of Directors China World Trade Corporation 3rd Floor, Goldlion Digital Network Center 138 Tiyu Road East, Tianhe Guangzhou, People's Republic of China Re: China World Trade Corporation - Form SB-2 Dear Sir/Madam: As independent chartered accountants, we hereby consent to the incorporation by reference in China World Trade Corporation's Registration Statement on Form SB-2 of our (i) report dated January 13, 2004 on China World Trade Corporation's audited financial statements for the year ended September 30, 2003, (ii) report dated August 12, 2004 on Guangdong New Generation Commercial Management Limited's audited financial statements for the periods/years ended March 31, 2004, December 31, 2003 and December 31, 2002, and (iii) report dated August 12, 2004 on Guangdong Hauhao Insurance Agency Limited's audited financial statements for the periods/years ended March 31, 2004, December 31, 2003 and December 31, 2002, and to all references to our firm included in this Registration Statement. Sincerely, /s/ MOORES ROWLAND MAZARS Chartered Accountants Certified Public Accountants Hong Kong -----END PRIVACY-ENHANCED MESSAGE-----