Filed with the Commission on January 18, 2006
333-_________________
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------------------------------
FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933, AS AMENDED
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CHINA DIRECT TRADING CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 84-1047159
(State or other jurisdiction (I.R.S. Employer ID. No.)
of incorporation or organization)
10400 Griffin Road, Suite 109
Cooper City, Florida 33328
Telephone: (954) 252-3440
(Address of Principal Executive Offices)
2005 Consultants and Legal Services Plan
(Full Title of Plan)
Howard Ullman, Chief Executive Officer and President
China Direct Trading Corporation
10400 Griffin Road, Suite 109
Cooper City, Florida 33328
Telephone: (954) 252-3440
(Name, Address and Telephone Number of Agent for
Service of Process)
CALCULATION OF REGISTRATION FEE
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Title of Proposed Maximum Proposed
Securities to Amount to be Offering Price Aggregate Maximum
be Registered Registered (1)(3) Per Share(2) Offering Price(2) Amount of
Fee(2)
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Common Stock, 2,200,000 $ 0.025 $55,000 $6.96
$0.0001 par value
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(1) The shares registered under this Registration Statement are to be issued for
consulting or legal services rendered to the Issuer under a written consulting
or legal services agreement for professional services by consultants or lawyers.
The Company typically uses or requires certain standard terms and conditions in
each agreement with consultants or other professional advisors. Each agreement
is one (1) year or less in duration. The consulting agreement or retainer
agreement may be renewed only by the mutual written agreement of the Company and
professional advisor. The Company or the consultant or lawyer may terminate the
services agreement at any time by written notice to the other party. The
consulting agreement or retainer agreement qualifies as an Employee Benefit Plan
as defined under Rule 405 of Regulation C.
(2) Estimated solely for the purposes of determining the registration fee
pursuant to Rule 457. On January 18, 2006, the fair market value of the
Company's common stock, determined from its closing price on the
Over-the-Counter Bulletin Board was $0.025 per share. On this basis, the maximum
aggregate offering price for the shares being registered hereunder is $55,000
and this is the basis for computing the filing fee in accordance with Rule
457(h) and at a rate of the aggregate offering price multiplied by .0001267. (3)
A separate prospectus covering resales of shares of Company common stock issued
under the Plan is included in this Registration Statement immediately after this
Prospectus.
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EXPLANATORY NOTES
China Direct Trading Corporation (the "Company" or "CHDT") has prepared
this registration statement in accordance with the requirements of Form S-8
under the Securities Act of 1933, as amended (the "Securities Act"), to register
shares of our common stock, par value $0.0001 per share, issuable under our 2005
Consultants and Legal Services Plan, which we refer to as the "Plan".
This Form S-8 includes a re-offer prospectus. The re-offer prospectus
may be utilized for re-offers and resales of shares of our common stock acquired
pursuant to the Plan and consulting agreements, by selling stockholders who
received stock prior to or with the filing of this registration statement.
PART I
INFORMATION REQUIRED IN THE SECTION 10(a) PROSPECTUS
We will provide documents containing the information specified in
Part I of this Registration Statement on Form S-8 to persons eligible to
participate in the Plan as specified by Rule 428(b)(1) under the Securities Act.
We will file prospectuses and prospectus supplements to this registration
statement pursuant to and as required by Rule 424 under the Securities Act.
PROSPECTUS
CHINA DIRECT TRADING CORPORATION
2,200,000 SHARES OF COMMON STOCK
TO BE OFFERED BY SELLING SHAREHOLDERS
ANY INVESTMENT IN OUR COMMON STOCK IS "HIGHLY RISKY"
AND SHOULD ONLY BE CONSIDERED BY INVESTORS WHO CAN AFFORD TO LOSE
THEIR ENTIRE INVESTMENT IN THE COMMON STOCK
This prospectus covers the resale of up to 2,200,000 shares of Common
Stock, $0.0001 par value per share, of China Direct Trading Corporation that
have been issued to certain consultants and outside legal counsel (named below
under "Selling Shareholders") (the "Selling Shareholders") pursuant to the 2005
Consultants and Legal Services Plan ("Plan").
The Selling Shareholders may sell all or a portion of their shares of
Company Common Stock, $0.0001 par value per share, from time to time in
negotiated transactions, brokers' transactions or a combination of such methods
of sale at prevailing market prices, or at negotiated prices. See "Plan of
Distribution." We will not receive any proceeds from sale of the shares by the
Selling Shareholder.
The Company's stock is quoted on the Over-the-Counter Bulletin Bard under
the symbol "CHDT.OB." On January 18, 2006, the last reported sale price (Bid)
was $0.025 per share. Brokers or dealers effecting transactions in these shares
should confirm that the shares are registered under applicable state law or that
an exemption from registration is available.
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THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 11 below.
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 18, 2006
GLOSSARY
References to "China" refer to the Peoples' Republic of China, its
provinces and territories, various ministries, agencies, and commissions.
References to the "Far East" refer to the nations of Eastern Asia, including
Southeast Asia and South Asia, primarily China, India, South Korea, Thailand,
Philippines, and Japan.
References to "Common Stock" are to the Common Stock, $0.0001 par value, of
China Direct Trading Corporation.
References to "Company", "China Direct", "CHDT", "Company", "we", and "our"
are to China Direct Trading Corporation, and include, unless the context
requires or indicates otherwise, the operations of its subsidiaries.
References to "CBQ" are to CBQ, Inc., the name of China Direct Trading
Corporation's predecessor and include, unless the context requires otherwise,
the operations of its subsidiaries
References to the "Plan" mean the Company's 2005 Consultants and Legal
Services Plan, as adopted by a majority of the Company's voting power by a
written consents on April 28, 2005.
References to "SDI" are to Souvenir Direct, Inc., a Florida corporation
that is a wholly owned subsidiary of China Direct Trading Corporation.
References to "Selling Shareholders" shall mean the persons or companies
selling shares of Common Stock that were issued under the 2005 Consultants and
Legal Services Plan.
References to "China Pathfinder Fund" are to China Pathfinder Funds, LLC, a
Florida limited liability company organized in February 2004 by China Direct
Trading Corporation.
A reference to the "SEC" or the "Commission" means the U.S. Securities and
Exchange Commission.
FORWARD LOOKING STATEMENTS
Except for historical and current information, all the information in this
prospectus is considered to be "forward looking" statements. Specifically, all
statements (other than statements of historical and current information)
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regarding financial and business strategy and the performance objectives of
management for future operations are forward-looking statements. These
forward-looking statements are based on the beliefs of management, as well as
assumptions made by and information currently available to them. These
statements involve known risks such as lack of capital to fully support our
business or any expansion of our business; the risks inherent in any effort to
expand product lines to products that the Company may have no prior experience
in selling; the reliance of the Company on funding expansion from sales of its
"penny stock" securities; the impact of terrorism, global conflict or political
or trade tensions between the United States and China on trade and commercial
relationships between those nations and our business, which relies on open trade
between United States and China; the continued ability of China to support its
growing manufacturing industries, which produce most of our products; the threat
of our North American clients developing direct commercial relationships with
Chinese or other manufacturers, which might result in the loss of or reduction
of business to the Company from those clients; general economic conditions in
the United States and China; the need to develop new products to remain
competitive in the souvenir, promotional and gift industry; and other risk
factors are set forth in our current and future filings with the Commission.
When we use the words "anticipate," "believe," "estimate," "expect," "may,"
"will," "should," "continue," "intend" and similar words or phrases, we are
identifying forward-looking statements (also known as "cautionary statements"
because you should be cautious in evaluating such statements in the context of
all the information in this prospectus). These statements reflect our current
views with respect to future events. However, the merit or validity of current
views is subject to the realization in fact of assumptions we have made. What we
now think will happen may turn out much different, and our assumptions may prove
to have been inaccurate or incomplete.
The investment risks discussed under "Risk Factors" specifically address
the material factors that may influence future operating results and financial
performance. The investment risks are not "boiler plate" and they are intended
to tell you about the uncertainties and risks inherent in our business at the
present time which you need to evaluate carefully before making an investment
decision. Additional Risk Factors may arise, which Risk Factors may be described
in the Company's current and future filings with the Commission.
RECENT DEVELOPMENTS
On September 28, 2005, the Company relocated its principal executive
offices from 12535 Orange Drive, Suite 613, Davie, Florida 33330, to 10400
Griffin Road, Suite 109, Cooper City, Florida 33328.
On or about September 30, 2005, the Company entered into a marketing
and sales agreement ("Agreement") with Xiangtan Electric Import & Export Co.,
Ltd., (XEI), a Chinese company and an export-import distributor for Xiangtan
Electrical Manufacturing Co., Ltd. (XEIM), a Chinese manufacturer of small and
medium sized electrical generators, whereby the Company will have a one-year
exclusive marketing and sales arrangement for XEIM's 50 Kilo Watt diesel,
gasoline, kerosene, natural gas and LPG electrical generators (collectively, the
"products") in the United States. There are no orders for the products as of the
date of this Report.
The Company must attain $3 million in annual U.S. sales of the products
in order to maintain its exclusive arrangement past year one of the Agreement.
4
If the Company fails to reach that sales goal, then XEI may cancel the
exclusivity enjoyed by the Company during the first year of the Agreement for
the United States market and use other companies to market the products. Since
the approval of Underwriters Laboratories, Inc. of "UL" is required by many
distributors, local governments, and other possible U.S. buyers for the
products, XEI is currently seeking UL approval for the products. While the
Company is not aware of any reason why the products would not be eligible for UL
approval, the lack of UL approval for the products would substantially reduce,
if not effectively eliminate, the potential market for the products in the
United States. There can be no assurances that XEI or XEIM will obtain
UL-approval for the products.
On September 27, 2005, the Company entered into an exclusive marketing
agreement for selling LPG generators in the U.S. ("Yiwu Agreement") with Yiwu
Generating Equipment Co., Ltd. ("Yiwu"), a Chinese manufacturer of generators
and a subsidiary of Zhejiang YiWu Huafeng Industry (Multinational) Co., Ltd.,
which is a large, ISO 9001 certified, industrial Chinese conglomerate. China
Direct has exclusive marketing rights for Yiwu's LPG-fueled electrical
generators in the United States for one year. China Direct must sell US$3
million a year of the generators to maintain its exclusivity for Yiwu
LPG-generators in the United States market. The Yiwu Agreement runs from October
1, 2005 till September 30, 2006. Yiwu is one of the sources of generators that
China Direct intends to use as a source for any US generator orders. Yiwu is
seeking UL approval of its generators and China Direct is assisting in this
process.
As is the case with any marketing agreement, there can be no assurances
that the Agreement or the relationship will result in any sales of LPG-fueled or
other Yiwu generators in the United States by China Direct Based on current
marketing feedback from potential customers or distributors of generators, China
Direct believes that there is strong demand for generators to temporarily
restore power to, and to power the heavy equipment needed to repair, recent
damage in the Gulf Coast region of the U.S. The market for generators in that
market is extremely competitive and China Direct is competing against many
larger companies with considerable greater marketing and sales resources and
with established market brand names and established customer bases and
distribution networks in Gulf Coast. China Direct believes that its market
opportunity may be a short-term period where demand for generators exceeds
available domestic supplies and there will be a resulting demand for foreign
generators. China Direct does not have sufficient information as of the date of
this Report Prospectus to verify the accuracy of its assumption about the
existence of this short-term marketing and sales opportunity for Chinese-made
generators. Even if this marketing and sales opportunity does exist, one
possible obstacle to the sale of Chinese-made generators in the United States is
that many local building codes or ordinances require UL-approval, and many
distributors require UL-approval for generators, which Chinese-made generators
typically lack because UL-approval is not required in their traditional Asian
markets for generators. China Direct believes that obtaining UL-approval for
Yiwu generators in short order is critical to the prospects of selling Yiwu
generators in the U.S.
"UL" is a registered trade mark of Underwriters Laboratories, Inc.
On September 21, 2005, the Company entered into an exclusive agency and
distribution agreement (the "CPS Agreement") with Complete Power Solutions, LLC
("CPS"), a Florida limited liability company with its principal place of
business at 4100 North Powerline Road, Building G, Unit 3, Pompano Beach,
Florida 33073. Under the CPS Agreement, China Direct will provide up to 600
UL-approved Chinese-manufactured electrical generators to CPS from time to time
and as requested by CPS. CPS will resell the electrical generators to retail
operations as well as end users like businesses or governmental entities in
North America.
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On September 23, 2005, China Direct received a purchase order from CPS
for delivery of up to 600 gasoline fueled, Chinese-manufactured electrical
generators over the next 12 months. CPS has placed its initial order under that
purchase order on September 23, 2005, for 100 generators, which generators must
be UL approved under the terms of the CPS Agreement before shipment and
purchase. Until UL approval is obtained, the initial order for 100 generators
cannot be shipped. Such approval has been requested by the Chinese manufacturer.
UL approval may take 2 to 4 months, or more, to obtain. While China Direct does
not know of any reason why UL approval will not be obtained, there can be no
assurances that the generators will be UL approved. The average purchase price
of generators covered by CPS commitment ranges from $5,000 to $8,000 per
generator.
The Company entered into a Share Purchase Agreement ("BHOA Agreement"),
dated as of April 26, 2005, with Beijng Huawei Ouya Architectural Decoration and
Engineering Co., Ltd. ("BHOA"), a limited company organized and existing under
the laws of China located at Lai Guang Ying Village, Lai Guang Ying County, Chao
Yang District, PRC. Under the Agreement, the Company was to purchase 40% of the
issued and outstanding shares of BHOA (the "Shares") for $5,000,000 cash plus
the issuance of a numbers of shares of Common tock based on a current valuation
of BHOA. The Company received an auditors' report on BHOA in late May 2005.
Based on the Company's analysis of the auditors' report, the current valuation
of BHOA did not support the issuance of 30 million shares of Common Stock to
BHOA's shareholders as part of the purchase of the Shares. The Company and BHOA
unsuccessfully attempted to negotiate an adjustment on the stock-portion of the
consideration to be paid for the Shares.
On July 20, 2005, the Company announced the termination of this
agreement because BHOA failed to satisfy one of the conditions to consummation
of the acquisition. The termination was with the mutual consent of the Company
and BHOA. The condition in question was that there would be no material change
in the financial condition of BHOA from the date of the March 18, 2005 agreement
and the date of an independent audit. The audit showed that BHOA had
substantially less cash assets as of the date of the audit than on the date of
the agreement. Most of the cash had apparently been distributed as loans or
compensation.
On January 18, 2006, BHOA shareholders surrendered the 30 million
shares of Stock issued to them under the BHOA Agreement for cancellation. These
30 million shares should be cancelled on January 19, 2006, which cancellation
shall reduce our issued and outstanding shares of Common Stock by 30 million.
REPRESENTATIONS ABOUT THIS OFFERING
We have not authorized anyone to provide you with information
different from that contained in this prospectus. This prospectus is not an
offer to sell nor does it seek an offer to buy the shares in any jurisdiction
where this offer or sale is not permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus (or any
supplement), regardless of when it is delivered or when any shares are sold.
6
WHERE TO FIND MORE INFORMATION ABOUT US
Our common stock is registered with the Commission under section
12(g) of the Securities Exchange Act of 1934 (the "1934 Act"). Under the 1934
Act, we file with the Commission periodic reports on Forms 10-KSB, 10-QSB and
8-K, and proxy statements, and our officers and directors file reports of stock
ownership on Forms 3, 4 and 5. These filings also may be viewed and downloaded
from the Commission's Internet website. Also, we will provide copies of these
documents and any exhibits to them, without charge to prospective investors upon
request addressed to China Direct Trading Corporation, 10400 Griffin Road, Suite
109, Cooper City, Florida 33328, Attention: Howard Ullman, Chief Executive
Officer and President. We refer you to this registration statement and exhibits
which may be inspected and copied at the Public Reference Department of the
Commission, 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates.
You can contact the Commission's Public Reference Department at (800) SEC-0330.
The registration statement and exhibits also are available for viewing at and
downloading from the Commission's Internet Website (http://www.sec.gov); go to
"Search for Company Filings" and then enter the Company's names in the
appropriate box.
TABLE OF CONTENTS
PAGE NO.
Glossary.....................................................................3
Forward Looking Statements ..................................................4
Recent Developments .........................................................4
Representations about this Offering .........................................6
Where You Can Find Information about the
Company......................................................................7
The Company and Business.....................................................8
Properties
..............................................................................10
Prospectus Summary...........................................................11
Risk Factors
..............................................................................11
Risk Factors Involving This Offering. .......................................12
Financing Transactions.......................................................19
Use of
Proceeds.....................................................................20
Market for Common Stock and Related Shareholder Matters......................21
Management's Discussion and Analysis of
Financial Condition and Results of Operations................................21
Management...................................................................24
Directors and
Officers.....................................................................24
Executive Compensation............................... ..................27
Agreements with Consultants ........................ ..................30
Security Ownership of Certain Beneficial Owners and
Management...................................................................31
Certain Relationships and Related Transactions...............................33
Selling
Shareholders.................................................................33
Plan of
Distribution.................................................................34
Dilution of Existing Shareholders............................................36
Description of Securities....................................................36
Disclosure of Commission Position on
Indemnification for Securities Act Liabilities...............................37
Legal
Proceedings..................................................................40
Interest of Certain Named Experts and Counsel ............................40
Legal
Matters......................................................................40
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THE COMPANY AND BUSINESS
We are a public holding company that conducts business through two
wholly-owned operating subsidiaries: Souvenir Direct, Inc. ("SDI"), a Florida
corporation that we acquired on December 1, 2003, in a stock-for-stock exchange
and China Pathfinder Fund, LLC ("CPF"), a Florida limited liability company,
that we formed in February 2004. SDI is the sole source of operating revenues as
of the date of this Prospectus. CPF has not generated any significant revenues
to date. The Company had no operations for most of calendar year 2003 due to the
closing of its computer value added reseller operations and system development
operations in 2001 and 2002. CPF is in the process of changing its name to
Overseas Building Supply, LLC ("OBS").
BUSINESS. SDI was incorporated on September 9, 2002 under the laws of the
State of Florida. Howard Ullman is the founder and has been the Chief Executive
Officer, President and Chairman of the Board of SDI from its inception to date.
SDI is a trading company that sells souvenir, promotional and gift items that
are mostly made in China for the Company. The Company markets these products
through a hardcopy catalog, distributors, contract marketing firms, the Internet
and trade shows. Most of SDI's customers are theme park companies, other
distributors and retailers in North America. SDI sells products through another
company to Wal-Mart Stores, Inc., the largest retailer in the world. A typical
SDI product would be a metal keychain with the customer's logo or trademark. SDI
is exploring diversifying its product line by selling items like poker products
with client logos or trade names. Such efforts have not produced any significant
revenues to date.
CPF is a start-up company organized on February 25, 2004 by the Company
and engaged in the business of trying to commercially exploit the experience and
business contacts of our officers and directors in U.S.-Chinese trade and
commercial relationships. CPF's focus is on helping U.S. or Chinese companies as
a consultant or agent to establish businesses or commercial relationships in
China or the U.S.; to find funding sources in the U.S. or China; to find merger
or acquisition candidates in the U.S. or China for customers; and to provide
general advice to customers trying to do or doing business in China or the U.S.
CPF relies on the services of Howard Ullman, Chief Executive Officer and
President of the Company and SDI; Company consultant Cora Wong: director Jeffrey
Postal; Bart Fisher, a shareholder of the company and a former officer and
director of the company; and Susan Xu, a director of the Company. Until CPF
generates enough regular gross revenues, these individuals will only receive
compensation from CPF revenues that they each generate through providing
consulting and other services to CPF customers or from fees paid for consummated
mergers, acquisitions, asset sales, funding or financing transactions or similar
transactions that they introduce and/or help close for CPF customers. CPF has
only generated minimal consulting revenues of $5,000 to date from a single
customer - a company seeking to manufacture diapers in China.
HISTORY. We started as a "blank check" company, that is a company that
went public without a business other than to use the proceeds from the initial
public offering to attempt to acquire existing businesses. China Direct Trading
Corporation (formerly "CBQ, Inc."), a Florida corporation, was initially
incorporated September 18, 1986 in the State of Delaware under the name
"Yorkshire Leveraged Group, Incorporated", and then changed its situs to
Colorado in 1989 by merging into a Colorado corporation, named "Freedom Funding,
Inc.". Freedom Funding, Inc. then changed its name to "CBQ, Inc." by amendment
of its Articles of Incorporation on November 25, 1998.
On November 19, 1998, we entered into a reorganization agreement
("Reorganization Agreement") with CyberQuest, Inc., a Colorado corporation
8
("CyberQuest"), and the shareholders of CyberQuest pursuant to which the Company
acquired all of the outstanding proprietary interest of CyberQuest in a
stock-for-stock exchange which resulted in CyberQuest becoming a wholly owned
subsidiary of the Company and the shareholders of CyberQuest acquiring control
of the Company through their stock ownership. The Reorganization Agreement
called for the immediate change of the name of the Company to "CBQ, Inc.", and
the immediate effectuation of a reverse one for four (1:4) common share split.
The Company completed this process during December, 1998.
With the acquisition of Cyberquest and the acquisition of three
other private companies in 1999, the Company, through its operating
subsidiaries, started business operations in the customized software development
for businesses industry, or "system development" business, and in the resale of
value-added third-party computer hardware and software products, or "VAR"
business. The Company continued to acquire existing systems developers and
computer hardware resellers in 2000 and 2001. By September 2001, the Company was
forced to close all of its operations except CBQ Technet Computer Services
Corporation, a systems developer, due to lack of revenues and lack of funding to
sustain those other operations. CBQ Technet Computer Services Corporation ceased
operations in the first four to six months of 2002 due to insufficient revenues,
no technical employees or marketing resources, and no cash or funding to sustain
operations. With the closing of CBQ Technet Computer Services, the Company had
no operations and remained without a business from mid-2002 until December 1,
2003.
The Company believes that the failure of the various companies
acquired from 1999 through 2001 was the result of the lack of adequate, reliable
and ongoing financing or funding, the inability of the Company to integrate
operations and reduce duplicative overhead, the Company's inability to develop
or fund an effective marketing effort for its operations, the resort to
factoring financing in the case of CBQ Networkland, Inc. (a VAR), the use of
revenues and funding to pay off or pay down existing debts of the Company and
its subsidiaries (both operating and closed operations) and the growing amount
of debts corresponding with the loss of revenues as each subsidiary ceased
operations before paying off its liabilities. By mid 2002, the Company was
without any business operations and limited activities to seeking a new business
to acquire.
On December 1, 2003, the Company acquired SDI and SDI's management,
consisting solely of Howard Ullman, assumed operational control of the Company
and SDI upon the closing of the acquisition of SDI. The Company's principal
executive offices were moved into SDI's principal executive offices in Davie,
Florida in December 2003. The single incumbent Company director, Susan Xu,
resigned on December 4, 2003, and was replaced by Mr. Ullman and three of
business associates, including his father-in-law, Laurie Holtz, a local
certified public accountant and Cora Wong, who was referral from Bart Fisher.
On May 17, 2004, Company shareholders approved a resolution and plan
of merger whereby the Company would reincorporate from Colorado to Florida and
change its name to "China Direct Trading Corporation". The reincorporation was
effected as of May 25, 2004. The Company reincorporated because most of its
business relationships, its base of operations, its officers and offices and its
source of client leads are in Florida and the Company had no clients or other
business affiliations in Colorado. Further, most of its customers are outside of
the Mountain States area.
BUSINESS GOALS. The Company's current strategy has been seeking
investment or acquisition or merger opportunities with one or more companies
that can potentially enhance our sales revenues and net worth as well as
possibly contribute a positive cash flow and enhance shareholder value beyond
the capability of our current core business line. As such, we are interested in
9
investing in or acquiring companies that could benefit from exploiting the
Company's financial and contacts with Chinese manufacturing firms. Our strategic
plan has traditionally been to remain a trading company with low overhead and
focused on exploiting its contacts with Chinese manufacturers to meet our
customers' needs. We have concluded that ownership of or investment in companies
that are established distributors in the U.S. and potential distribution
channels of Chinese-made products in the U.S. should be considered as part of
the overall strategy to exploit our contacts with over 30 Chinese manufacturing
companies.
We have received in early January 2006, a credit line commitment of
$500,000 from its chief executive officer and president, Howard Ullman, and
three Company directors, Jeffrey Postal, Lorenzo Lamadrid and Laurie Holtz
(collectively, the "lenders"). The credit line is to be used solely to fund the
cash portion of any acquisition or investment by the Company. The Company
intends to aggressively pursue one or more acquisitions or investments
consistent with its strategic vision, as set forth below, in Fiscal Year 2006.
Under the credit line, The Company has 4 years to repay any advances of credit,
which repayment shall be made in calendar quarterly interest-only payments for
the first 24 months of the term and equal calendar quarterly principal and
interest installment payments for the last 24 months of the term. The interest
rate is 8.5% per annum. Upon demand, any lender may convert all or a portion of
any unpaid principal or interest into "restricted" shares (as defined in Rule
144 of the Securities Act of 1933, as amended) of a new class of the Company
preferred stock ("Preferred Stock"). The rights, designations and privileges of
the Preferred Stock will be negotiated between the Company and the lenders;
provided, however, that the Preferred Stock is convertible into "restricted"
shares of Company Common Stock, $0.0001 par value per share, ("Common Stock") at
a conversion ratio that entitles the lenders to receive an aggregate of
33,333,333 "restricted" shares of Common Stock (to be adjusted for any future
stock split or recapitalization). The conversion ratio is based on the principal
amount of the debt ($500,000) divided by $0.015 per share of Common Stock. Any
shares of Common Stock issued in a conversion of the Preferred Stock have
piggyback registration rights under the agreement between the Company and the
lenders for the credit line.
As previously reported, the Company entered into the financing arrangement with
Dutchess Fund to finance the planned growth our business through new SDI product
lines and acquiring new, existing businesses, but the Company did not seek to
receive any money from the equity-line financing offered by Dutchess Fund before
it's the termination of the financing arrangement in 2005. Since the Company
lacks hard assets, it will probably have to sell shares of Common Stock to raise
working capital and the sale of shares of Common Stock will only increase the
problem of diluting current shareholders as well as increasing the Company's
already substantial public float of shares of Common Stock.
The Company believes that one of its principal assets is Mr.
Ullman's and certain other directors' commercial relations and understanding of
how to do business in and with China. CPF was founded as a vehicle for Mr.
Ullman and the other directors to provide management consulting services to U.S.
and Chinese businesses seeking to do business in one another's nations, to find
merger, acquisition or asset purchase candidates for CPF customers; and to find
U.S. or Chinese sources of funding for CPF customers. CPF has not generated any
revenues to date, and there are no current revenue-generating opportunities
before CPF as of the date of this registration statement.
The principal executive offices of the Company, SDI and CPF are
located in the same office space at 10400 Griffin Road, Suite 109, Cooper City,
Florida 33328, Telephone: (954) 252-3440, Fax: (954) 252-3442.
10
PROPERTIES
Neither the Company nor its operating subsidiaries own any properties
or facilities. As of September 28, 2005, the Company's principal executive
offices were located to 10400 Griffin Road, Suite 109, Cooper City, Florida
33328. The Company's former address was 12535 Orange Drive, Suite 613, Davie,
Florida 33330 until September 27, 2005 With respect to the new office space, the
Company has approximately 1,400 square feet of rentable space and pays a monthly
lease payment of $1,825. The term of the lease for the new office space is one
year with an option to renew. CPF shares office space in Beijing, China with
another company. CPF has no lease for the office space and does not pay rent for
the office space.
PROSPECTUS SUMMARY: THE OFFERING
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS AND DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. BECAUSE THIS IS A SUMMARY, IT MAY NOT CONTAIN ALL OF THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THIS PROSPECTUS
CAREFULLY AND SHOULD CONSIDER, AMONG OTHER THINGS, THE MATTERS DESCRIBED UNDER
"RISK FACTORS" BEGINNING ON PAGE 11 BELOW BEFORE MAKING AN INVESTMENT DECISION.
UNLESS THE CONTEXT REQUIRES OTHERWISE, REFERENCES IN THIS PROSPECTUS TO "THE
COMPANY," "OUR COMPANY," "WE," "OUR," "US" AND SIMILAR EXPRESSIONS REFER TO
CHINA DIRECT TRADING CORPORATION, AND ITS PREDECESSORS AND ITS SUBSIDARIES.
This offering relates to the sale of shares of Common Stock issued to a
investor relation's consultant and two outside legal counsel for services
rendered to the Company and in lieu of cash compensation.
Securities Outstanding 573,122,027 99/100 shares of Common Stock.
(547,122,027 99/100 shares of Common Stock
upon cancellation of 26 million shares
issued under BHOA Agreement)
Securities To Be Outstanding 573,122,027 99/100 shares
of Common Stock (547,122,027 99/100 shares
of Common Stock upon cancellation of 26
million shares issued under BHOA Agreement)
Securities Offered: Up to 2,200,000 shares of Common Stock that
may be sold to Dutchess Fund under by
certain Selling Shareholders.
Use of Proceeds Not applicable.
Plan of Distribution The offering is made by the Selling
Shareholders. Sales may be made in the open
market or in private negotiated
transactions, at fixed or negotiated prices.
See "Plan of Distribution."
11
Risk Factors The securities offered hereby involve a high
degree of risk. See "Risk Factors."
Trading Symbol CHDT.OB (Over-the Counter Bulletin Board)
for the shares of Common Stock.
RISK FACTORS
PENNY STOCK. As a "penny stock" company with no primary market
makers and no institutional support of our Common Stock in the public securities
markets, an investment in our Common Stock is highly speculative in nature and
involves a high degree of risk. You should carefully consider the following
risks and the other information in this prospectus (including the information
incorporated by reference) before investing in our Common Stock. Further, our
operations do not generate enough cash flow to fund our strategic plan for
growth of company revenues and net income as well as diversification of our
business lines through mergers and acquisitions. The Company believes that the
funding and implementation of the current business plan is essential to growing
the Company to the point where the Company is no longer a "penny stock" company,
has institutional or primary market maker support for our Common Stock and has
cash flow sufficient to fund all aspects of its operations. As such, the Company
will have to finance the implementation of the business plan, probably through
the sale of shares of Common Stock which the financing source can resell in the
public market. Such reselling may further and substantially depress the value of
our Common Stock, may cause a collapse in the market value of the Company's
common stock, and continue to handicap the ability of the Company to obtain
financing on commercially reasonable terms. Management does not believe any
other form of financing or funding is available based on the Company's failure
in the past 12 months to obtain alternative financing or funding.
FAILED BUSINESS OPERATIONS. The Company has a history of failed
operations and business start-ups and an inability to generate cash flow from
operations to fund operations and expansion efforts, or to obtain adequate,
affordable and sustained funding or financing of operations and efforts to
expand business lines or sales of existing businesses. The Company is also a
small business and is typically unable to effectively compete against numerous,
larger competitors with superior resources and market share.
INSOLVENCY FROM ADVERSE OUTCOME OF PENDING LITIGATION. The Company
is a defendant in a lawsuit, CELESTE TRUST REG., ESQUIRE TRADE, ET AL. V. CBQ,
INC. (Case# 03 Civ. 9650 RMB; US District Court, SDNY, 12/4/2003), and if the
Plaintiffs in this case prevail and receive a money judgment in the amounts
claimed, that adverse outcome would render the Company insolvent. The Company
does not have the resources or cash flow to pay such damages, either in lump sum
amount or on commercially reasonable terms. The Company is aggressively
defending against the complaint in this litigation and has filed a motion to
dismiss the Plaintiffs' complaint. The Company is uncertain when the Court will
rule on the motion to dismiss or on the Plaintiffs' motion for a default
judgment against certain defendants (other than the Company).
12
RISK FACTORS AFFECTING THIS OFFERING
COMPANY HAS A HISTORY OF LOSSES AND FAILED BUSINESS OPERATIONS. We
started as a "blank check" company in 1986 with no or minimal cash and few
funding sources. Since 1999, we have been a public holding company that conducts
business through operating subsidiaries that we have acquired in stock-for-stock
exchanges. We have had minimal sources of operating revenues, chronically
undercapitalized operations, no reliable, ongoing source of affordable financing
and senior management that proved unable to integrate and manage our operations
on a profitable basis. We have also suffered from frequent changes in senior
management and the business focus and from economic downturns in our
then-selected industries, which downturns were fatal to same. SDI has small
revenues and has limited sources of funding to rely upon in case of a downturn
in its business. We have historically operated at a loss or small net profit. We
do not anticipate a change in this pattern in the foreseeable future absent a
merger, acquisition or development of a new business line. While Howard Ullman
has loaned money to the Company from time to time on a short-term basis, there
is no obligation on his part to continue to do so and there can be no assurances
that he will or will be able to do so in the future.
For the years ended December 31, 2004 and 2003, the Company had a net
loss from operations of approximately $270,000 and $201,000, respectively. For
the years ended December 31, 2004 and 2003, the Company had total sales of
approximately $1,062,000 and $615,000 respectively, for an increase of
approximately $447,000. The increase in revenues is due to an increase in
operations.
Costs and Expenses - For the years ended December 31, 2004, the Company
had cost of sales of approximately $759,000 and $435,000, respectively. As a
percentage of sales, cost of sales was the same in 2004 as compared to 2003. The
increase in the cost of sales in 2004 as compared to 2003 is due to an increase
in operations. General and administrative expenses increased approximately
$433,000, from $106,940 in 2003 to $540,072 in 2004. This increase is
attributable primarily to an increase in officer compensation as well as an
increase in legal and professional fees. The cost of rent and other general and
administrative costs also increased in 20046 as compared to 20035 due to an
increase in operations.
Liquidity and Capital Reserves. Historically, the Company has not
generated enough cash flow from operations to cover its overhead costs and the
cost of growth. The inadequacy of cash flow and the inability of the Company to
consistently obtain funding and ongoing funding on commercially reasonable terms
have undermined the former business operations of the Company and forced the
Company to obtain funding from management and through the sale of Company
securities.
As a small business and a penny stock company, the Company
will continue to face difficulty in obtaining financing or funding on
commercially reasonable terms or at all. The Company expects future development
and expansion will be financed through cash flow from operations and other forms
of financing such as the sale of additional equity and debt securities, capital
leases and other credit facilities. There are no assurances that such financing
will be available on terms acceptable or favorable to the Company. Further, the
increase in the number of shares of common stock in the public markets may
reduce the ability or appeal of the Company to future sources of possible
financing or funding.
We currently have operating cash flow from SDI's revenues to support
existing business operations, but it is insufficient to fund the expansion by
diversification of product lines of SDI's business or the acquisition of new
companies. If we are unable to obtain needed and affordable capital from outside
sources, we will be forced to reduce or curtail the expansion of our current
businesses and the acquisition of new businesses.
13
Attaining these objectives will require readily available,
affordable capital, which, since the Company has limited assets to use as
collateral for debt financing, the Company will have to obtain principally by
selling its Common Stock. We have entered into the financing arrangement with
Dutchess Fund to raise the necessary capital to fund our current growth and
expansion plans, but you should note that even if we raise the capital, there is
no assurance that our efforts to expand and grow our businesses will succeed or
that the funding raised will be sufficient to fully fund those expansion and
growth efforts.
COMPANY HAS A HISTORY OF DIVERSIFYING INTO NEW BUSINESSES WITHOUT
ADEQUATE WORKING CAPITAL OR FUNDING AND WITHOUT SUFFICIENT INFRASTRUCTURE OR
MANAGEMENT EXPERTISE TO SUPPORT SUCH NEW BUSINESS LINES. The Company has a
history of diversifying into new business lines, either by acquiring new
existing businesses or developing a new business line as a start-up concern, and
lacking sufficient working capital or funding and lacking sufficient management
expertise, labor and strategic planning. Most of the Company's new business
lines over the history of the Company have failed. The Company believes that the
lack of working capital or funding and the lack of adequate infrastructure
contributed to the relatively quick failures of those new business lines.
The Company and CPF have focused on marketing Chinese-made
generators in the United States during the last quarter of 2005 and the first
quarter of 2006. The Company has devoted two new hires to focus on marketing the
generators. While the Company does not purchase the generators until a letter of
credit funded by the end user customer pays the purchase price for the
generator, and the Company is not responsible for service or installation of the
generators, and its overall financial risk in the sales of generators is limited
to loss of sales and related sales costs, the Company's current operations do
not generate enough cash flow to fund any sustained sales efforts in generators
or to fund an increase staff or manpower in response to increased demand for
generators much beyond current levels. As such, the Company may be unable to
fund the necessary sales force and infrastructure to support any sustained
demand for generators or to support a sales force until demand for generators
reaches a level where such sales generate enough cash flow to support that sales
force. As a "penny stock" company with no significant assets, the Company must
usually sell its stock to fund any sustained or unprofitable sales force beyond
a limited initial effort - typically less than 3 to 6 months in duration. The
sale of stock to fund operations dilutes shareholders, depresses the market
value of the stock (and, consequently, making it more expensive for the Company
to raise money) and undermines the stability of the market for the Company's
Common Stock.
Any long-term success in the Company's new venture in the sale of
Chinese-made generators will require the generator sales to generate sufficient
cash flow in the near future to support its own sales staff and infrastructure.
Further, the Chinese-manufactured generators marketed by the Company need
UL-approval in order to satisfy local building codes and be eligible for sale in
those localities. While such approval is being sought, and the Company is not
aware of any reason that the Chinese-manufactured generators will not receive UL
approval, the inability of the Chinese-manufactured generators to obtain UL
approval would dramatically reduce the market potential of those generators in
North America.
14
LOSS OF HOWARD ULLMAN'S SERVICES COULD BE FATAL TO OUR BUSINESS; NO
KEY MAN INSURANCE. We rely upon Howard Ullman to manage and conduct the
Company's and its subsidiaries' operations. If he resigns, dies or becomes
disabled, we do not have any other executive or non-executive operating officers
or persons to replace Mr. Ullman, or the financial resources or key man life
insurance to fund the hiring of a suitable replacement for Mr. Ullman. The loss
of Mr. Ullman's services would probably result in the failure of the Company and
its SDI operations. We doubt that we could find a replacement for Mr. Ullman who
could sustain SDI's operations on a profitable basis. We have no junior
management or other personnel capable of running the company or its subsidiaries
if Mr. Ullman was not able or willing to continue as our and SDI's chief
executive officer and president. Further, most of our directors are business
associates or relatives of Mr. Ullman and it is not certain that they would
continue as directors or accept management responsibilities if Mr. Ullman was
unable or unwilling to manage our operations.
WE ARE SUBJECT TO GOVERNMENT REGULATION IN CHINA AND THE U.S. THAT
MAY BE COSTLY AND MAY INTERFERE WITH OUR ABILITY TO CONDUCT BUSINESS, INCLUDING
THE UNCERTAINTY OF COMMERCIAL REGULATION IN CHINA. Changes in regulatory or
political policy could adversely affect our business in the United States, China
or other countries where we obtain products or conduct business and could result
in changes to laws affecting trade between the U.S. and China, and the ability
and willingness of U.S. companies to conduct business in China. The adoption of
any additional laws or regulations in China or the U.S. may interfere in our
ability to obtain products for SDI, our principal business. While SDI has other
manufacturing sources for its products outside of China, China is and has been
the principal source of SDI products because of the ability of Chinese
manufacturing businesses to quickly produce quality products at affordable
prices. Further, China continues to be governed by a centralized communist
government which is capable of imposing new laws that could seriously hamper the
ability of SDI to obtain products from China or the ability of CPF to conduct
business in China. The uncertainty created in conducting business in and with
China by the continued control of the economy by a centralized communist regime
is a risk to SDI's and CPF's business and could seriously harm our ability to
continue operating. The continued domination of China by a centralized communist
regime may also cause some U.S. customers of SDI or CPF to be reluctant or
opposed to purchasing products made in China or conducting other business in or
with China.
NO RESOURCES TO WITHSTAND DOWNURNS IN BUSINESS. We do not have
adequate cash reserves or access to immediate, committed funding. As such, a
sustained downturn in SDI's business for more than one or two quarters, and
either through low demand or loss of major customer account, could prove fatal
to us as an ongoing concern.
WE HAVE LIMITED SALES AND MARKETING CAPABILITIES, AND MAY NOT BE
SUCCESSFUL IN SELLING OR MARKETING OUR PRODUCT IN THE FUTURE. The creation of
infrastructure to commercialize products is a difficult, expensive and
time-consuming process. We currently have very limited sales and marketing
capabilities, which capabilities are limited to Howard Ullman's sales and
marketing efforts, the sales and marketing efforts of Susan Xu and her staff in
Beijing and a limited number of contract salesmen or distributors. We would need
to rely upon third parties to perform more extensive sales and marketing work.
To the extent that we enter into co-promotion agreements, any revenues to be
received by us will be dependent on the efforts of third parties if we do not
undertake to expand and develop our own sales and marketing capabilities. The
efforts of third parties may not be successful. We may not be able to establish
direct or indirect sales and distribution capabilities or be successful in
gaining market acceptance for our products or for other products. Our failure to
establish more extensive marketing and distribution capabilities or to enter
into marketing and distribution arrangements with third parties could have a
material adverse effect on our revenue and cash flows.
15
WE ARE DEPENDENT ON OUTSIDE MANUFACTURERS FOR THE MANUFACTURE OF OUR
PRODUCTS. THEREFORE WE WILL HAVE LIMITED CONTROL OF THE MANUFACTURING PROCESS
AND RELATED COSTS. We sell products that require third-party manufacturing in
China or other foreign countries. The efforts of those third parties to date
have been successful, but may not be successful in the future. We may not be
able to maintain relationships with third-parties to manufacture our products in
the event of any serious political, trade or economic disputes between the U.S.
and China.
THE THREAT OF E-COMMERCE TO SDI. As China, the main source of our
products, becomes increasing sophisticated and integrated into the world
economy, our Chinese and other foreign manufacturing sources may start to
conduct business internationally over e-commerce Web Sites on the Internet. Such
a development might enable our customers to order SDI's products directly over
the Internet SDI's manufacturing sources in China or other competing
manufacturing sources, which would eliminate or reduce the need of SDI customers
to use SDI to obtain products. SDI has not to date been able to contractually
restrict its Chinese and other manufacturing sources from selling directly to
the U.S. Even if SDI obtained such restrictions, there are other manufacturing
sources in China and other countries that do not conduct business with SDI but
are capable to producing the same products as SDI's products. SDI is exploring
developing its own e-commerce resources to attract North American customers who
want to buy on line in order to reduce purchasing and inventory overhead, but
SDI does not have the funding capabilities at this time to implement its
e-commerce strategy.
TERMS OF SUBSEQUENT FINANCINGS MAY ADVERSELY IMPACT YOUR INVESTMENT.
We will have to raise equity, debt or preferred stock financing in the future.
Your rights and the value of your investment in the common stock could be
reduced. For example, if we have to issue secured debt securities, the holders
of the debt would have a claim to our assets that would be prior to the rights
of stockholders until the debt is paid. Interest on these debt securities would
increase costs and negatively impact operating results. Preferred stock could be
issued in series from time to time with such designations, rights, preferences,
and limitations as needed to raise capital. The terms of preferred stock could
be more advantageous to those investors than you as holders of common stock. In
addition, if we need to raise more equity capital from sale of common stock,
institutional or other investors may negotiate terms at least and possibly more
favorable than the terms of this offering. More common stock could be sold under
these circumstances at prices lower than offered under this prospectus, which
could result in dilution of the book value of shares bought in this offering.
EVEN IF WE SUCCESSFULLY EXECUTE OUR NEW BUSINESS PLAN, WE CANNOT
ASSURE YOU THAT WE WILL ACHIEVE PROFITABILITY. Since SDI was acquired on
December 1, 2003, we have been pursuing a business plan to expand our businesses
and increase our revenues and profits. This plan calls for diversifying SDI's
product lines, acquisition of or investment in new existing businesses and
making CPF and any other new businesses profitable and self-sustaining. The
current focus of this strategy is to acquire or invest in companies that can
increase the marketing, sales and distribution of Chinese-manufactured products.
We lack the cash flow and profit margins to fund such a plan from revenues from
existing businesses. If we are unable to manage our operating expenses and
increase our gross margins, without experiencing significant deterioration in
our projected sales volumes, we may be unable to achieve positive operating cash
flow in the future. Further, we cannot guarantee that we will be able to
maintain SDI customer purchase activity and general brand awareness that we have
had in the past with our current marketing budget. Our ability to achieve our
annual and quarterly revenue and gross margin goals could also be negatively
impacted by the softening business demand for SDI products or the appeal of
doing business in China, as well as any renewed weakening general economic
conditions.
16
Our new operating plan reflects management's expectations as of the
date of this prospectus, and is based on currently available information, as
well as significant assumptions made by management regarding various revenue,
gross margin and operating expense items. We cannot guarantee that the
assumptions that we have relied upon in developing our operating plan will be
accurate, or that future events or results will conform to our expectations or
assumptions. If our assumptions are inaccurate, or our expectations prove to be
erroneous in light of future events, or if we are unable to maintain the support
of our vendors, distributors, third party advertisers and other key corporate
relationships regardless of the success of our new operating plan, we will need
to raise additional working capital before we achieve positive operating cash
flow. If adequate funds are not available on acceptable terms, we may not be
able to fund our operations and our business could fail.
WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO MANAGE GROWTH OF OUR
BUSINESS. Our growth strategy includes growing our customer base both through
our own marketing efforts, as well as through the acquisition of or investment
in other businesses. If we are unable to manage growth effectively, it could
have material adverse effects on our results of operations, financial condition,
or business. We cannot guarantee that we will successfully expand our customer
base or that any expansion will enhance our profitability. We expect our planned
growth will place a significant strain on our management, which consists of one
executive/manager, and operations. Our future growth will depend in part on the
ability of our officer and other key employees to implement and expand financial
control systems and to expand, train, and manage our employee base and provide
support to an expanded customer base. Also, our future growth will depend on
whether our management can handle growth. While we intend to add management and
systems for any future growth, we do not currently possess or have in place the
financial and management systems and controls and personnel required of a
successful business. This makes us extremely vulnerable to failure resulting
from the inability to manage growth and expansion of our business.
IN LIGHT OF CERTAIN PERCEPTIONS REGARDING OUR STATUS AS A "PENNY
STOCK" COMPANY AND OUR FINANCIAL CONDITION, OUR CUSTOMERS, DISTRIBUTORS AND
VENDOR PARTNERS MAY DECIDE NOT TO DO BUSINESS WITH US. As a small, penny stock
company, our financial condition and our perceived ability to fulfill our
financial and other obligations, our customers, distributors, vendor partners
and other corporate partners and service providers may decide not to conduct
business with us, or may conduct business with us on terms that are less
favorable than those customarily extended by them. For example, our distributors
could seek to limit our credit terms or otherwise reduce their support of our
business, forcing us to leverage our operating cash.
IN LIGHT OF CERTAIN PERCEPTIONS REGARDING OUR FINANCIAL CONDITION,
OURCUSTOMERS, DISTRIBUTORS AND VENDOR PARTNERS MAY DECIDE NOT TO DO BUSINESS
WITH US. Due to concerns regarding our financial condition as a small "penny
stock" business with a history of operating losses and failed operations, and
our perceived ability to fulfill any expanded financial and other obligations,
our customers, distributors, vendor partners and other corporate partners and
service providers may decide not to conduct business with us, or may conduct
business with us on terms that are less favorable than those customarily
extended by them. For example, our manufacturing sources could seek to limit our
credit terms or otherwise reduce their support of our business, forcing us to
leverage our operating cash by increasing the security required for our secured
credit lines. Also, if our customers and vendor partners choose to do less
business with us, our net sales would decrease and our gross profits would be
significantly impacted by reduced sales volumes.
17
MARKET RISKS. THE MARKET PRICE OF OUR COMMON STOCK ON THE OTC BULLETIN
BOARD MAY FLUCTUATE SIGNIFICANTLY WHICH MAY CAUSE CERTAIN INVESTORS TO AVOID
PURCHASING OUR SHARES.
The market price of our Common Stock traded on OTC Bulletin Board may
fluctuate significantly in response to factors, some of which are beyond our
control, such as:
o announcement of new products or product enhancements by us or our
competitors;
o developments concerning intellectual property rights and regulatory
approvals and concerns;
o quarterly variations in our and our competitors' results of operations;
o if any, changes in earnings estimates or recommendations by securities
analysts - currently, no analysts follow or report on the Company;
o developments in our industry; and
o general market conditions and other factors, including factors
unrelated to our own operating performance.
BECAUSE THE COMPANY WENT FROM A PUBLIC SHELL COMPANY TO ONE WITH AN
OPERATION BY MEANS OF THE ACQUISITION OF SDI, A SMALL PRIVATE COMPANY, WE MAY
NOT BE ABLE TO ATTRACT THE ATTENTION OF MAJOR BROKERAGE FIRMS OR INSTITUTIONAL
BUYERS WHICH FOLLOW MORE MARKET ESTABLISHED COMPANIES. Additional risks may
exist because the Company went from a public shell company with no operations to
a company with an operation by means of the acquisition of SDI, which is a small
business concern. Security analysts of major brokerage firms and securities
institutions may not cover us since there is no incentive to brokerage firms to
recommend the purchase of our common stock. No assurance can be given that
established brokerage firms will want to conduct any financings for us in the
future.
THERE IS ONLY A VOLATILE LIMITED MARKET FOR OUR COMMON STOCK THAT MAY ACCELERATE
PRICE SWINGS. OUR STOCK TRADES TYPICALLY BELOW THREE CENTS PER SHARE. Recent
history relating to the market prices of public companies indicates that, from
time to time, there may be periods of extreme volatility in the market price of
our securities because of factors unrelated to the operating performance of, or
announcements concerning, the issuers of the affected stock, and especially for
stock traded on the OTC Bulletin Board. Our common stock is not actively traded,
and the bid and asked prices for our common stock have fluctuated significantly.
In the past two fiscal years, the common stock traded on the OTC Bulletin Board
from a high of $0.10 to a low of $0.01 per share, and since the acquisition of
SDI the market prices have ranged from $0.01 to $0.08. See "Market For Our
Common Stock." General market price declines, market volatility, especially for
low priced securities, or factors related to the general economy or to us in the
future could adversely affect the price of the common stock.
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK
PRICE AND OUR ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS. Sales of our common
stock in the public market following this offering could lower the market price
18
of our common stock, which is, as of January18, 2006, under three cents per
share on the bid. Sales may also make it more difficult for the Company to sell
equity securities or equity-related securities in the future at a time and price
that our management deems acceptable, or at all. Of the 573,122,027 99/100
shares of Common Stock outstanding on January 18, 2006, approximately
373,526,766 shares could be sold under Rule 144 or become free tradable by
removal of restrictions under Rule 144(k). Thirty million shares issued under
the BHOA Agreement were surrendered to the Company for cancellation on January
18, 2006, which cancellation will reduce the issued and outstanding shares of
Stock by 26 million within the next week.
BECAUSE THE COMPANY'S COMMON SHARES ARE "PENNY STOCK," CERTAIN RULES
MAY IMPEDE THE DEVELOPMENT OF INCREASED TRADING ACTIVITY AND COULD AFFECT THE
LIQUIDITY FOR STOCKHOLDERS. The shares offered by this prospectus constitute
penny stock under the '34 Act. The shares will remain penny stocks for the
foreseeable future. The classification of penny stock makes it more difficult
for a broker-dealer to sell the stock into a secondary market, which makes it
more difficult for a purchaser to liquidate his/her investment. Any
broker-dealer engaged by the purchaser for the purpose of selling his or her
shares in us will be subject to Rules 15g-1 through 15g-10 of the Securities and
Exchange Act. Rather than creating a need to comply with those rules, some
broker-dealers will refuse to attempt to sell penny stock.
The SEC has adopted rules that regulate broker-dealer practices in
connection with transactions in "penny stocks." Penny stocks generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). Penny
stock rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from those rules, to deliver a standardized risk disclosure
document prepared by the SEC, which specifies information about penny stocks and
the nature and significance of risks of the penny stock market. A broker-dealer
must also provide the customer with bid and offer quotations for the penny
stock, the compensation of the broker-dealer, and sales person in the
transaction, and monthly account statements indicating the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
require that, prior to a transaction in a penny stock not otherwise exempt from
those rules, the broker-dealer must 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. These disclosure requirements
may have the effect of reducing the trading activity in the secondary market for
stock that becomes subject to those penny stock rules.
Our securities are subject to the SEC's "penny stock rules" that
impose additional sales practice requirements on broker-dealers who sell penny
stock securities to persons other than established customers and accredited
investors (generally those with assets in excess of $1,000,000 or annual income
exceeding $200,000 or $300,000 together with their spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchase of penny stock securities and have received the
purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
"penny stock rules" require the delivery, prior to the transaction, of a
disclosure schedule relating to the penny stock market. The `broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Monthly
statements must be sent disclosing recent price information on the limited
market in penny stocks. These rules may restrict the ability of broker-dealers
to sell our securities and may have the effect of reducing the level of trading
activity of our common stock in the secondary market.
19
Specifically, the penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from those rules, to deliver a
standardized risk disclosure document prepared by the Commission, which:
-- contains a description of the nature and level of risk in the market
for penny stocks in both public offerings and secondary trading;
-- contains a description of the broker's or dealer's duties to the
customer and of the rights and remedies available to the customer with respect
to a violation to such duties or other requirements of the Securities Act of
1934, as amended;
-- contains a brief, clear, narrative description of a dealer market,
including "bid" and "ask" prices for penny stocks and the significance of the
spread between the bid and ask price;
-- contains a toll-free telephone number for inquiries on disciplinary
actions;
-- defines significant terms in the disclosure document or in the
conduct of trading penny stocks; and
-- contains such other information and is in such form (including
language, type, size and format) as the SEC shall require by rule or regulation;
The broker-dealer also must provide, prior to effecting any transaction
in a penny stock, to the customer:
- the bid and offer quotations for the penny stock;
- the compensation of the broker-dealer and its salesperson in the
transaction;
- the number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market for such stock; and
- monthly account statements showing the market value of each penny
stock held in the customer's account.
THE COMPANY DOES NOT HAVE A FULL-TIME CHIEF FINANCIAL OFFICER. The
position of chief financial officer of the Company is filled by Howard Ullman,
the Chief Executive Officer and President of the Company. Mr. Ullman does not
have prior experience as a chief financial officer. The absence of a permanent,
full-time chief financial officer and the types of financial controls and
procedures, which will be required of public companies, leave investors in our
common stock without these protections until they are remedied. We are searching
for a qualified part-time chief financial officer on a consultancy basis,
however, we have not retained a long-term chief financial officer. The
responsibilities of the principal accounting and financial officer are currently
being handled by Mr. Ullman. We have on our board of directors a qualified
financial expert as described in the Sarbanes-Oxley Act.
20
The Sarbanes-Oxley Act requires public companies to maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in reports filed with the SEC is recorded, processed, summarized
and reported within the time required. This includes controls and procedures to
ensure that such information is accumulated and communicated to management,
including the chief executive and financial officers, so as to allow timely
decisions regarding required disclosure of such information. The Sarbanes-Oxley
Act also requires documentation of internal control procedures, remediation as
needed, and periodic testing of the controls. We are in the process of reviewing
our internal controls with a view toward documenting the required controls and
procedures and adopting a testing plan. This process is in the initial stages
beginning with the review of procurement and inventory functions. We plan on
completing the documentation, testing and remediation as required during fiscal
ear 2005 to be compliant under Section 404 of the Sarbanes-Oxley Act.
USE OF PROCEEDS
We will not receive proceeds from the Selling Shareholder's sales of
shares of Common Stock.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The stock is traded on the Over-the-Counter Bulletin Board under the symbol
"CHDT.OB".
The following shows the high and low market quotation for the shares for
the last three years. Quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions, and do not necessarily represent actual
transactions.
Low High
2005
Fourth Quarter $ 0.01 $ 0.2
Third Quarter $ 0.01 $ 0.02
Second Quarter $ 0.01 $ 0.02
First Quarter $ 0.03 $ 0.05
2004:
First Quarter 2004: $ 0.03 $ 0.09
Second Quarter 2004: 0.03 0.08
Third Quarter 2004 0.03 0.07
Fourth Quarter $ 0.04 0.08
2003:
First Quarter $ 0.01 $ 0.01
Second Quarter 0.05 0.01
Third Quarter 0.05 0.02
Fourth Quarter 0.09 0.02
The Company has never declared or paid any cash dividends. It is the present
policy of the Company to retain earnings to finance the growth and development
of the business and, therefore, the Company does not anticipate paying dividends
on its Common Stock in the foreseeable future.
21
The known number of shareholders of record of the Company's Common
Stock as of January 18, 2006, was approximately 274, excluding shareholders
holding their shares of Company's Common Stock in "street name". The known
number of shareholders of the Company's Series A Preferred Stock is 8. The stock
transfer agent is Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South,
Suite 430, Denver, Colorado 80209, Telephone (303) 282-4800, Fax (303) 282-5200.
MANAGEMENT'S DISCUSSION AND ANALYSIS,
AND PLAN OF OPERATIONS
Factors that might cause such differences include, but are not limited to,
our history of unprofitability and the uncertainty of our profitability, our
ability to develop and introduce new services and products, the uncertainty of
market acceptance of those services or products, our potential reliance on
collaborative partners, our limited sales and marketing experience, the highly
competitive industry in which we operate, the impact of political, economic or
trade disputes between the United States and China on our business and ability
to operate, general economic and business conditions, lack of adequate financing
or funding, turnover in senior management, and competition from competitors with
greater resources and market share -- some or all of which may be beyond our
ability to control.
PLAN OF OPERATIONS - The Company was organized for the purpose of
creating a corporate vehicle to seek, investigate and, if such investigation
warrants, acquire an interest in one or more business opportunities presented to
it by persons or firms who or which desire to seek perceived advantages of a
publicly held corporation.
The Company may incur significant post-merger or acquisition
registration costs in the event management wishes to register a portion of their
shares for subsequent sale. The Company will also incur significant legal and
accounting costs in connection with the acquisition including the costs of
preparing post- effective amendments, Forms 8-K, agreements and related reports
and documents.
While the Company believes that SDI will be able to generate sufficient
cash flow to pay for SDI's and the Company's direct overhead costs and, with
respect to SDI, its internal planned growth in fiscal year 2006, SDI does not
generate sufficient cash flow at this time to fund an acquisition program,
development of new businesses (except ones requiring low start-up costs or which
are complementary to the Company's current low-overhead distribution
operations). The Company will not have sufficient funds (unless it is able to
raise funds in a private placement or in connection with an acquisition) to
undertake any significant business development, or extensive marketing, in terms
of scope of campaign and geographical reach, of new products. Accordingly,
following the acquisition, the Company will, in all likelihood, be required to
either seek debt or equity financing or obtain funding from third parties, in
exchange for which the Company may be required to give up a substantial portion
of its interest in the acquired product or to issue large number of shares of
its capital stock. There is no assurance that the Company will be able either to
obtain additional financing or interest third parties in providing funding for
the further development, marketing and manufacturing of any products acquired.
22
RESULTS OF OPERATIONS - The Company had no operations during 2002. On
December 1, 2003, the Company acquired all of the issued and outstanding shares
of common stock of Souvenir Direct, Inc. ("SDI"), a private Florida corporation
engaged in the business of distributing to its customers custom manufactured
souvenir, promotional and gift items manufactured in China. The financial
results for the years ended December 31, 2004 and 2003, and the financial
results for the three and nine months ended September 30, 2005 and 2004 are
reflected in the financial statements of this Report.
Prior to the spring of 2002, the Company was engaged in systems
development, the development of customized software programs for business
clients and in value-added reseller of computer hardware and software
manufactured by other companies. After the spring of 2002, the Company had no
business operations. Accordingly, comparisons with prior periods are not
meaningful.
LIQUIDITY AND CAPITAL RESOURCES. Historically, the Company has not
generated enough cash flow from operations to cover its overhead costs and the
cost of growth. The inadequacy of cash flow and the inability of the Company to
consistently obtain funding and ongoing funding on commercially reasonable terms
have undermined the former business operations of the Company and forced the
Company to obtain funding from management and through the sale of Company
distributor operation run by two persons, with no inventory of any consequence
to finance and with the ability to grow without extensive outlays of funds. The
Company is hoping that SDI will generate enough cash flow to cover the overhead
costs of the Company and SDI and to fund the expansion of SDI's business. Any
acquisitions by the Company will most likely require third-party funding of the
acquisition and the acquired operations. As a small business and a penny stock
company, the Company will continue to face difficulty in obtaining financing or
funding on reasonable commercial terms and
The Company expects future development and expansion will be financed
through cash flow from operations and other forms of financing such as the sale
of additional equity and debt securities, capital leases and other credit
facilities. There are no assurances that such financing will be available on
terms acceptable or favorable to the Company. Further, the increase in the
number of shares of common stock in the public markets may reduce the ability or
appeal of the Company to future sources of possible financing or funding.
GOVERNMENT REGULATIONS. - The Company is subject to all pertinent
Federal, State, and Local laws governing its business. The Company is subject to
licensing and regulation by a number of authorities in its State or
municipality. These may include health, safety, and fire regulations. The
Company's operations are also subject to Federal and State minimum wage laws
governing such matters as working conditions and overtime.
IMPACT OF INFLATION. To date, the Company has not experienced any
significant effect from inflation. The Company's major expenses have been the
cost of marketing its product lines to customers in North America. That effort
involves mostly Mr. Ullman traveling to make direct marketing and sales pitches
to customers and potential customers as well as showing the SDI products at
industry trade shows around North America and visiting China to maintain and
expand SDI's distribution and manufacturing relationships and channels. The
Company generally has been able to meet increase in costs by raising prices of
its products.
COUNTRY RISK. Almost all of the Company's contract manufacturing
operations and sources of products are located in China. As such, the Company is
subject to significant risks not typically faced by companies operating in or
obtaining products from North America and Western Europe. Political, economic
and trade conflicts between the United States and China, including possible
conflict over North Korea's nuclear weapons program or the independence of
23
Taiwan, could severely hinder the ability of the Company to obtain products and
fill customer orders from the Company's current Chinese manufacturing sources.
Further, Chinese commercial law is still evolving to accommodate increasing
capitalism in Chinese society, especially in terms of commercial relationships
and dealings with foreign companies, and can be unpredictable in application or
principal. The same unpredictability exists with respect to the central Chinese
government, which can unilaterally and without prior warning impose new legal,
economic and commercial laws, policies and procedures. This element of
unpredictability heightens the risk of doing business in China.
China is also under international pressure to value its currency in
a manner that would increase the value of Chinese currency in respect of other
world currencies and thereby increase the cost of Chinese goods in the world
market. The Company does not believe that such revaluation of Chinese currency
would adversely impact its business because of the low-cost nature of the
Company's products and the fact that U.S. dollars is the currency of use in all
of the Company's commercial transactions.
MANAGEMENT
DIRECTORS AND OFFICERS
The officers and directors of the Company during fiscal year 2004 and the
first fiscal quarter of 2005 are listed below. Directors are elected to hold
office until the next annual meeting of shareholders and until their successors
are elected or appointed and qualified. Officers are appointed by the board of
directors until a successor is elected and qualified or until resignation,
removal or death.
DIRECTOR'S DIRECTOR
NAME AGE OFFICE SINCE TERM EXPIRES
Howard Ullman 46 Chief Executive 2003 As director
President and 2006 annual meeting;
Chairman of the As an officer,
Board 5 year employment
agreement 2004-2009
Jeffrey Postal 47 Director 2004 2006 annual meeting
Laurie Holtz 71 Director 2004 2006 annual meeting
Susan Xu* 40 Director 2005 2006 annual meeting
Lorenzo
Lamadrid 53 Director 2005 2006 annual meeting
- -------------------
* Accepted appointment to Board to fill an existing vacancy
Set forth below is certain biographical information, present occupation
and business experience for the past five years of each director and executive
officer of the Company.
Officers of the Company are appointed by the Board of Directors and hold
office until their successors are chosen and qualified, until their death or
until they resign or have been removed from office. All corporate officers serve
at the discretion of the Board of Directors.
24
HOWARD ULLMAN is the Chief Executive Officer, President and Chairman
of the Board of Directors since December 1, 2003. He served as President and a
Director of the Company until resigning from those offices on October 27, 2003
in order to avoid any potential conflicts of interest during negotiations
between the Company and Mr. Ullman's SDI. He has spent the last seventeen years
in the souvenir, gift and promotional market with China. He founded, operated
and successfully sold (1) Magnet World, an overseas magnet retailer, in 2000.
During 1984, Mr. Ullman moved American magnet technology to China to establish a
successful joint venture manufacturing company in the Ghangzhou province of
China that has sold more than 200 million magnets to more than 400 large volume
buyers in over 75 countries. In 1997, he launched China Direct Trading Company
to leverage his Far East supplier network and to broaden his product line into
thousands of customized gift items ranging from mugs, key chains, and glassware
to hats and lapel pins. Mr. Ullman has owned and operated companies on every
level of the supply chain in these industries. Mr. Ullman earned his Bachelor's
degree in Economics from Tulane University in 1982.
LAURIE HOLTZ is a certified public accountant practicing in the
greater Miami, Florida region for over 30 years. Mr. Holtz was a pioneer in
development of forensic accounting and has worked as a forensic auditor in a
number of cases over the years. He is the father-in-law of Howard Ullman. Mr.
Holtz has served on the Board of Directors since January 2004.
JEFFREY POSTAL is a businessman and dentist in the Miami, Florida
region. Mr. Postal owns or founded: Sportacular Art, a company that is licensed
by the NFL, MLB and NHL to design and manufacture sports memorabilia for retail
distribution in the U.S.; Weston Sports Management, which arranges appearance of
athletes at major retail companies around the country; DJP Consulting, a
marketing consulting company servicing companies conducting business on the
Internet; and DataStream Card Services, which provides billing solutions for
companies conducting business on the Internet. He is also the principal of two
dental treatment cents, one being one of the largest cranio-facial pain and
trauma centers in the State of Florida. He has served on the Board of Directors
since January 2004. Mr. Postal received a DMD from Temple University in 1984.
LORENZO C. LAMADRID. Mr. Lamadrid was appointed as a director on
January 6, 2005. Mr. Lamadrid is Managing Director of the Globe Development
Group, LLC, a firm that specializes in the development of large-scale energy,
power generation, transportation and infrastructure projects in China and
provides business advisory services and investments with a particular focus on
China. Mr. Lamadrid is also a member of the International Advisory Board and the
Executive Committee of Sirocco Aerospace, an international aircraft manufacturer
and marketer. Additionally Mr. Lamadrid is a Director and founding partner of
the Fairchild Capital Group, a firm specializing in basic industries and
infrastructure investments in China.
Mr. Lamadrid was President and Chief Executive Officer of Arthur D.
Little, Inc. based in Cambridge, MA. Before joining Arthur D. Little, Mr.
Lamadrid was President of Western Resources International, Inc., a subsidiary of
Western Resources, Inc., and Managing Director of The Wing Group, a subsidiary
of Western Resources that develops large-scale international electric power
projects.
Prior to joining Western Resources, Mr. Lamadrid was a Vice President
at General Electric Company Aerospace, a $5.5 billion business, where he was
responsible for International Operations ($1.2 billion in revenues), domestic
marketing and business development activities ($4.3 billion in commercial and
government revenues), and strategy development for the overall Aerospace Group.
25
During his tenure, he led the turnaround of GE's international operations, led
the transformation of the group into a global business, and capitalized on
hidden technology capabilities through highly profitable new commercial business
activities internationally.
While at GE, Mr. Lamadrid also served as Corporate Staff Executive for
strategic planning and business development. Working closely with the office of
the CEO (early in Jack Welch's tenure as Chairman), he was responsible for
strategy development in GE's international operations, as well as for the
company's overall international corporate strategy. Mr. Lamadrid also served on
the Board of Directors of the General Electric Trading Company, GE/RCA Licensing
Operation, Toshiba Electronic Systems Company (Japan), Ltd., and the
Philadelphia World Affairs Council. Before joining GE, Mr. Lamadrid was a Senior
Manager at The Boston Consulting Group. He was also a founding investor of the
Boston Beer Company (brand name "Samuel Adams"). "Samuel Adams" is a registered
trademark of the Boston Beer Company.
Mr. Lamadrid graduated magna cum laude with a dual bachelor's degree in
Chemical Engineering and Administrative Sciences from Yale University, earned an
M.S. in Chemical Engineering from the Massachusetts Institute of Technology, and
an M.B.A. from the Harvard Business School.
SUSAN XU was appointed to Company's Board of Directors on January 6,
2005. She was previously a director of the Company from January 14, 2000 until
December 4, 2003. She resigned on December 4, 2003 from the Company's Board.
There were no disputes between Ms. Xu and the Company at the time of her
resignation. She graduated in 1983 with Bachelors degree in from Yan Jing
Overseas Chinese University. She is currently the general manager of
Asia-European Bridge Corporation, Ltd. This firm specializes in international
business transactions primarily in the high technology sector. Ms. Xu also
provides consulting to foreign businesses seeking to do business in the Chinese
market.
FORMER DIRECTORS AND OFFICERS
CORA WONG. Ms. Wong resigned as a director on January 6, 2005 because
her new employer prohibited service as a director on other company's boards.
On September 27, 2005, the Company engaged Ms. Wong as an agent to
handle the development of the Company marketing, sales and distribution efforts
in China for Chinese-made generators.
BOARD MEETINGS AND COMMITTEES
The Directors and Officers will not receive remuneration from the
Company until a subsequent offering has been successfully completed, or cash
flow from operating permits, all in the discretion of the Board of Directors.
Directors may be paid their expenses, if any, of attendance at such meeting of
the Board of Directors, and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as Director. No such
payment shall preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefor. No compensation has been paid to
the Directors. The Board of Directors may designate from among its members an
executive committee and one or more other committees.
26
The Board of Directors approved the formation of a compensation Committee
in December 2004 in order to oversee the Company's compensation policies and
practices and to oversee the Company sole stock benefit plan. The Compensation
Committee was organized in April 2005 and the current members are Lorenzo
Lamadrid as a voting director member and Paul Richter, as a non-voting advisor.
CODE OF ETHICS
The Company has adopted a Code of Ethics. A copy of the Code of Ethics will
be provided to any person, without charge, upon written request addressed to
Howard Ullman, Chief Executive Officer and President, China Direct Trading
Corporation, 10400 Griffin Road, Suite 109 Cooper City, Florida 33328, Telephone
(954) 252-3440, Fax: (954) 252-3442.
DIRECTOR AND EXECUTIVE COMPENSATION
Directors do not receive any cash compensation. We have adopted a
2005 Equity Plan, which provides for grants of options to directors.
Each of our present directors who is also an employee receives no
additional compensation for acting as a director or attending meetings of
directors. In the past, the company has not compensated outside (non-employee)
directors for service but has reimbursed them for travel costs to attend Board
meetings.
As of September 11, 2005, the Company had only two officers: Howard
Ullman, Chief Executive Officer, President and Chairman of the Board of
Directors; and Andrea Maragh, Corporate Secretary. Mr. Ullman's annual salary of
$200,000 is being deferred until the Company has a greater positive cash flow
and can afford to pay Mr. Ullman's salary. The Company will issue shares of
restricted Common Stock in lieu of cash compensation for Mr. Ullman based on the
then-current market value of the Common Stock. No other officer makes more than
$30,000. On September 6, 2005, the Company issued 6,250,000 shares of Common
Stock to Mr. Ullman in lieu of one-half of his 2005 salary as a senior officer
of the Company. On or about December 29, 2005, the Company issued 5,555,555
million shares of Common Stock to Mr. Ullman in lieu of one-half of his 2005
base annual salary. These shares were valued at $0.015 for purposes of
determining the number of shares to issue.
The following table shows selected information about the
compensation paid or accrued to or for the account of executive officers in
2005, 2004, and 2003 for services, and bonuses rendered in all capacities in
those years. In 2005, 2004 and 2003, the Company had one executive officer
(Howard Ullman).
The Company entered into an employment agreement with Mr. Ullman on
April 22, 2004. Under the proposed employment agreement, Mr. Ullman is entitled
to an annual base salary of $200,000, which compensation has been and will
continue to be delayed or paid in shares of the company common stock until the
cash flow can regularly support payment of Mr. Ullman's base salary. No salary
has been paid to Mr. Ullman to date. Mr. Ullman's employment agreement has a
"change of control" or "golden parachute provision" which provides that Mr.
Ullman will receive as severance pay a single lump-sum of that amount that
equals 2.99 multiplied by his then current annual base salary in the event his
employment is terminated as a result of a change of control of the company. A
change of control exists if the company sells or issues more than 30% of its
outstanding shares of common stock to a person who is not at the time an
officer, director or holder of more than 10% of the issued and outstanding
shares of common stock. The "change of control" provision plan.
27
Stock Option Plans. The Company's Board of Directors and
shareholders holding 75% of the issued and outstanding shares of the Common
Stock approved the following stock option plans by written consent in lieu of a
shareholders meeting in April 2005.
2005 Consultants and Legal Services Plan. As a company with limited
resources and cash flow, the Company cannot afford to pay cash compensation to
investor relations firms and lawyers that is required to implement the Company's
plans to eliminate all of the debts and claims of its predecessor, CBQ, Inc.,
and increase the markets' and investors' awareness of Company. All of these
efforts are designed to enhance Company shareholders' value. The Company
believes that the Plan will enhance shareholders' value by allowing the Company
to use stock options and stock grants to pay for certain investor relations and
legal services instead of cash, which cash is needed to fund the operations of
the Company. Ten million (10,000,000) shares of Company Common Stock are
available for issuance under the Plan.
The purposes of the Plan are to obtain services for CHDT from
independent contractors and professional advisors for services at reduced
compensation or at rates and/or on terms that are otherwise negotiated favorably
to CHDT by paying their fees or retainers in the form of shares of the Company's
Common Stock.
Under the Plan, the Company may grant shares of restricted shares of
the Company's Common Stock to qualified participants, who are typically investor
relations professionals that are helping to promote the Company and its common
stock to securities professionals, institutional investors, market makers and
business media as well as pay for certain legal services that are incurred by
the Company in resolving legal disputes or lawsuits filed by the Company to
protect its rights.
Under the Plan, "Independent Contractors" means certain third party,
including both individuals and companies, that are neither directors nor key
employees of CHDT, and who provide certain services to CHDT. Qualified
"Participants" shall mean professional advisors, consultants, independent
contractors and suppliers of the Company and any of its subsidiaries, as the
Board in its sole discretion determines to be significantly responsible for the
success and future growth and profitability of the Company and whom the Board
may designate from time to time to receive shares of Company Common Stock under
the Plan.
The Plan was unanimously approved by the Company's Board of Directors on April
11, 2005 and was approved by the holders of 75% of the issued and outstanding
shares of Common Stock entitled to vote thereon ("Majority Shareholder Action")
on April 28, 2005.
The above summary of the Plan is qualified in its entirety by reference
to the Plan, which is attached as Exhibit One to the Definitive Information
Statement filed with the Commission on April 29, 2005.
2005 Equity Plan. The 2005 Equity Plan ("Equity Plan") was unanimously
approved by the Company's Board of Directors on April 11, 2005 and by the
Majority Shareholder Action on April 22, 2005. Twenty Million shares of Common
Stock are reserved for issuance under the Equity Plan.
28
The purpose of the Plan is to provide incentives to attract, retain and
motivate eligible persons whose present and potential contributions are
important to the success of the Company and its subsidiaries by offering them an
opportunity to participate in the Company's future performance through awards of
Options, Restricted Stock, Stock Bonuses, Stock Appreciation Rights (SARs) and
Restricted Stock Units. All capitalized terms are defined in the Equity Plan's
appendix, which Equity Plan and appendix with definitions are attached as
Exhibit Two to this Information Statement.
Eligible Participants in the Equity Plan. Incentive stock options,
which have certain tax advantages, or "ISOs" may be granted only to employees
(including officers and directors who are also employees) of the Company or of a
subsidiary. All other stock option, restricted stock grants and other
stock-based awards under the Equity Plan ("Awards") may be granted to employees
(including officers and directors who are also employees), directors and
professional advisors, consultants of the Company or any subsidiary; provided
that such consultants, contractors and advisors render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. The Compensation Committee of the Company's Board of Directors or
its designee will from time to time determine and designate among the eligible
persons who will be granted one or more Awards under the Equity Plan. A person
may be granted more than one Award under the Equity Plan. However, no person
will be eligible to receive more than 2,000,000 Shares issuable under Awards
granted in any calendar year, other than new employees of the Company or of a
Subsidiary (including new employees who are also officers and directors of the
Company or any Subsidiary), who are eligible to receive up to a maximum of
3,000,000 Shares issuable under Awards granted in the calendar year in which
they commence their employment.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
- ---------------------------------------------------------------------------------------------------------------------
Name & Fiscal Salary Bonus Other
Principal Yr. Ended (US$) (US$) Annual
Position Compensation
- ---------------------------------------------------------------------------------------------------------------------
Howard Ullman 2005 $200,000(1) $-0- -0-
Chief Exec. 2004 $200,000(1) $-0- -0-
President 2003 (2) $ N/A $-0- -0-
Bart Fisher (4) 2004 (3) N/A N/A N/A
Chief Executive 2003 (3) N/A N/A N/A
Officer, President
- ---------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
STOCK OPTIONS AND STOCK-BASED COMPENSATION
Howard Ullman 2005 -0- 11,805,555 $-0- $-0-
Chief Executive Shares of Common
Officer, President Stock
2004 1,975,000 -0- $-0- $-0-
2003 -0- -0- $-0- $-0-
- ---------------------------------------------------------------------------------------------------------------------
29
Andrea Maragh 2005 -0 100,000 $-0- $-0-
Secretary Shares of
Common Stock
2004 -0- 1,000 $-0- $-0-
shares Series A
Preferred Stock
2003 (3) N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
Bart Fisher 2005 N/A N/A N/A N/A
former 2004 (3) N/A N/A N/A N/A
Chief Executive 2003 (3) N/A N/A N/A N/A
Officer and
President
- ---------------------------------------------------------------------------------------------------------------------
FOOTNOTES
(1) Annual Base Salary. Most of Mr. Ullman's annual base salary has been
deferred until the company has sufficient cash flow to pay Mr. Ullman's
annual base salary in cash from operations. Mr. Ullman is scheduled to
receive approximately 8 million shares of Common Stock in lieu of his
2004 annual salary. On September 6, 2005, Mr. Ullman received 6,250,000
shares of Common Stock in lieu of one half of his 2005 annual salary.
On or about December 29, 2005. The Company issued 5,555,555 shares of
Company Common Stock to Mr. Ullman in lieu of the second installment of
$100,000 of his 2005 annual salary. The Company also issued 1,666,666
shares of Company Common Stock to Mr. Ullman on December 29, 2005, as
repayment of a $30,000 loan made by Mr. Ullman to the Company. All
shares issued to Mr. Ullman were "restricted securities" under Rule 144
under the Act.
(2) Mr. Ullman received no compensation for services rendered in 2003 to
the Company and none was accrued or deferred on his behalf.
(3) Person was not employed by the company in the year or years specified.
(4) Ms. Maragh received 1,000 restricted shares of Series A Preferred Stock
as a bonus. The shares of preferred stock are convertible into common
stock at a ratio of one share of preferred stock to 100 shares of
Company common stock. These shares were converted to 100,000 shares of
Company Common Stock in 2005. The Company issued another 100,000 shares
of Company Common Stock to Ms. Maragh in 2005. All shares issued were
"restricted securities" under the Act.
(5) Mr. Fisher was Chief Executive Officer and President in 2002.
AGREEMENTS WITH CONSULTANTS
We enter into short-term contracts with independent contractors from time
to time to provide public relations, investor relations or business promotion
services. Such agreements are typically three to six moths in duration, pay
between $2,500 and $30,000 in cash consideration for services rendered to the
company and may provide for issuing restricted shares of company common stock to
pay for the consulting services. Often, the Company pays the fees in restricted
shares of Common Stock in order to conserve cash flow from operations.
30
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information about beneficial
ownership of our common stock as of January 18, 2006, by each officer and
director, by any person or group who is known by us to own more than 5% of our
common stock, and by the officers and directors as a group. The ownership
information for officers and directors is based on the Forms 3 and 4 they have
filed with the Securities and Exchange Commission pursuant to section 16(a) of
the Securities Exchange Act of 1934. Based on the Forms 3 and 4, the beneficial
owners have sole voting and dispositive power with respect to their shares
except as otherwise noted.
The number of shares shown as owned by the individual includes shares
issuable on exercise of any options and warrants he holds. The percentage for
each person has been determined by dividing (x) the shares owned by the
individual plus the shares the person has the right to acquire on exercise of
options and warrants by (y) the 573,122,027 99/100 shares outstanding as of
January 18, 2006, plus for each person with options and warrants, the number of
shares the person has the right to acquire on exercise thereof. The shares shown
as owned by officers and directors as a group includes shares issuable on
exercise of the options and warrants, and the percentage of shares shown as
owned by that group has been determined as if all of those options and warrants
had been exercised.
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP(1)(2)
--------------------------------------------
NUMBER OF PERCENT NUMBER OF PERCENT
NAME OF BENEFICIAL COMMON SHARES OF CLASS PREFERRED OF
OWNER SHARES CLASS
- ----------------------------- ----------- ---------- --------- ---------
Howard Ullman (3) 308,996,092 54% -0- --
Laurie Holtz (3) 3,295,000 * -0- --
Lorenzo Lamadrid 5,000,000 * -0- --
Jeffrey Postal(4) 1,000,000 * -0- 0%
Cora Wong (4) 1,000,000 * -0- 0%
All directors and executive
officers as a group, including
persons named above (4 persons) 312,068,870 56% -0- 0%
- ----------------------------
o Less than 1 Percent
(1) Except as set forth above and based solely upon reports of beneficial
ownership required to be filed with the Securities and Exchange Commission (the
"Commission") pursuant to Rule 13d-1 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), we do not believe that any other person
beneficially owned, as of October 19, 2005, greater than 5% of the outstanding
Common Stock. Mr. Ullman's ownership includes approximately 6,250,000 shares
issued to him by the Company on September 6, 2005, in lieu of one-half of his
2005 annual cash salary and 7,222,222 shares issued to him by the Company on or
about December 29, 2005, in lieu of one-half of his 2005 annual base salary.
(2) Unless otherwise noted, the indicated owner has sole voting power and sole
investment power.
(3) Total includes 1,975,000 shares of common stock that Mr. Ullman can purchase
under a warrant, dated November 11, 2001 and 1,000,000 shares that he can
purchase under a warrant, dated July 20, 2004. Exercise price is five cents per
share and three cents per share respectively. Total also includes 78,500 shares
of common stock held jointly by Mr. Ullman and his spouse, and 17,000 shares of
common stock owned by his spouse and held in IRA account.
(4) Total includes 1,000,000 shares that can be purchased upon exercise of a
warrant, dated July 20, 2004.
31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
With the exception of Lorenzo Lamadrid and Cora Wong (Ms. Wong
resigned as a director in January 2005), the current directors of the company
are either related to or are business associates of Howard Ullman, the principal
shareholder, Chief Executive Officer, President and Chairman of the Board of the
Company and SDI. Laurie Holtz, a director, is the father-in-law of Howard
Ullman. Jeffrey Postal is a business associate of Howard Ullman.
LOANS OWED TO OFFICER AND DIRECTORS
In the fourth quarter of 2005, Howard Ullman loaned the Company $30,000
for working capital. That loan was repaid on December 29, 2005, by the Company
issuing 1,666,666 restricted shares of Company Common Stock to Mr. Ullman.
CPF was organized on February 20, 2004 with the Company owning 40% of the
issued and outstanding Membership Interests and Howard Ullman, Cora Wong, Bart
S. Fisher, a principal shareholder of the company and a former senior officer
and director of the company, and Jeffrey Postal each owning 15% of the remaining
60% of CPF Membership Interests. On September 13, 2004, each of the non-company,
individual members of CPF exchanged their CPF Membership Interests for a
promissory note in the principal amount of $5,000, which was the amount invested
by each individual CPF members for all of their CPF membership interests. Each
promissory note provides for 12 equal installment payments of principal and
accrued interest (at 6.5% per annum) by CPF, commencing January 2005 and ending
December 2005. The promissory notes are not secured by any collateral. The
individual, former members of CPF exchanged their CPF membership interests for
the promissory notes in order to avoid any potential conflict of interest or
allegations of self dealing, especially since each of the former natural persons
was either a director and officer, a director or a 10% or greater owner of
company common shares. The individuals will receive fees based on services
rendered in any transaction or deal that produces revenue or any form of
consideration for the company or CPF and will receive said fees from the
revenues or consideration received from said transactions or deals.
SELLING SHAREHOLDER
This prospectus covers the resale of up to 2,200,000 shares of Common
Stock. The Selling Shareholder may sell the shares from time to time in
negotiated of sale at prevailing market prices, or at negotiated prices. See
"Plan of Distribution." The Selling Shareholders may offer shares for sale on a
continuous basis pursuant to rule 415 under the 1933 Act.
Information in the table has been provided to us by the selling
shareholders. All numbers of shares owned, and percentage ownership, are stated
on a pro forma basis to include, for each person as applicable, the number of
shares owned and shares issuable under warrants or options.
32
SELLING SHAREHOLDER (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------
NAME AND NUMBER OF NUMBER OF % OF OWNERSHIP NUMBER % OF SHARES
ADDRESS OF SHARES SHARES PRIOR TO OFFERING OF HSARES OWNED AFTER
SELLING BENEFICIALLY BEING OF SHARES AFTER OFFERING
SHAREHOLDER OWNED PRIOR TO OFFERING OFFERED OFFERING
- -------------------------------------------------------------------------------------------------------------------
DAVID HARRIS, (1)(2) 500,000 500,000 LESS THAN 1% -0- -0-
ATTORNEY
3669 POINCIANA AVE.
SUITE 3A
4OCONUT GROVE,
FLORIDA 33133
WILLIAM LUCCHETTI (1)
150 BROADHOLLOW ROAD
SUITE PH11
MELVILLE, NEW YORK 11747 1,000,000 1,000,000 LESS THAN 1% -0- 0%
STRAGLOBUS, INC., (1)(3)
A FLORIDA CORP. 200,000 200,000 LESS THAN 1% -0- 0%
7787 LEESBURG PIKE, #200
FALLS CHURCH, VIRGINIA 22043
PAUL W. RICHTER (4) 1,088,718 500,000 LESS THAN 1% 588,718 LESS THAN 1%
ATTORNEY
7759 DESIREE STREET
ALEXANDRIA,
VIRGINIA 22315
TOTAL: 3,288,718 2,200,000 LESS THAN 1% 588,718 LESS THAN 1%
- ----------------------------
(1) Assumes sale of all shares offered.
(2) Stock issued for legal services issued for legal services performed in 2005
as defense counsel in a civil lawsuit against the Company over a service
contract, totaling $33,000. (3) Stock issued for developing business plan and
financial projections for Company in 2005, approximately $13,300.
(4) Stock issued for legal services performed under a contract in 2005,
including work on securities offering documents, totaling $33,300. (5) Stock
issued for sales and marketing consulting services in 2005 in generator sales,
totaling approximately $66,000.
Resale of the shares owned or to be owned by the selling
shareholders is registered under rule 415 of the Securities and Exchange
Commission, concerning delayed and continuous offers and sales of securities. In
regard to the offer and sale of such shares, we have made certain undertakings
in Part II of the registration statement of which this prospectus is part, by
which, in general, we have committed to keep this prospectus current during any
period in which the Selling Shareholder make offers to sell the covered
securities pursuant to Rule 415.
PLAN OF DISTRIBUTION
The Selling Shareholder 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 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
33
>> privately negotiated transactions; >> settlement of short sales entered
into after the date of this prospectus (a short sale occurs when
shares, not owned by the seller, are sold in hopes of a decline in
market price so the seller can purchase in the market at a lower price
to be able to deliver the shares sold);
>> broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
>> through the writing or settlement of options or other hedging
transactions, whether through an options exchange or otherwise;
>> a combination of any such methods of sale; or
>> any other method permitted pursuant to applicable law.
>> The selling shareholders may also sell shares under Rule 144 under the
1933 Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling shareholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the selling shareholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
Broker-dealers may agree to sell a specified number of such shares at a
stipulated price per share, and, to he extent such broker-dealer is unable to do
so, acting as agent for a selling shareholder, to purchase as principal any
unsold shares at the price required to fulfill the broker-dealer commitment.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions, which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above, in the over-the-counter markets or otherwise at prices and on
terms then prevailing at the time of sale, at prices than related to the
then-current market price, or in negotiated transactions. In connection with
such resales, broker-dealers may pay to or receive from the purchasers such
share commissions as described above.
In connection with the sale of our common stock or interests
therein, the selling shareholders may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn engage in
short sales of the common stock in the course of hedging the positions they
assume. The Selling Shareholder may also sell shares short and deliver the
shares to close out their short positions, or loan or pledge the common stock to
broker-dealers that in turn may sell these securities. The selling shareholders
may also enter into option or other transactions with broker-dealers or other
financial institutions, or create one or more derivative securities which
require the delivery to such broker-dealer or other financial institution of
shares offered by this prospectus, which shares such broker-dealer or other
financial institution may resell pursuant to this prospectus (as supplemented or
amended to reflect such transaction).
The selling shareholders may also may transfer the shares of common stock
in other circumstances, in which case the transferees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The selling shareholder and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the 1933 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 or
discounts under the 1933 Act. The Selling Shareholder have informed the company
that none of them have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
34
The Company has agreed to pay all fees and expenses incurred by the company
incident to the registration of the shares.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdictions, if required, only
through registered or licensed brokers or dealers. In addition, in certain
states the shares 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.
DILUTION OF EXISTING SHAREHOLERS
DILUTION TO NEW INVESTORS
We have a net tangible book value of ($681,186) or ($0.001189) per
share. Pro Forma net tangible book value per share represents our total tangible
assets less our total liabilities divided by the number of shares of our common
stock outstanding.
Pro forma net tangible book value dilution per share represents the
difference between the amount paid per share by purchasers of common stock in
this offering and the pro forma net tangible book value per share of common
stock as adjusted to give effect to this offering. If all 2,200,000 shares are
issued, there would be a total of 573,122,027 99/100 shares issued and
outstanding. If the maximum 2,200,000 shares are issued, the net proceeds to us
would be $0, since the shares being sold are all held by third-parties, and are
already outstanding. After deducting offering costs of $8,000, net tangible book
value would be ($689,186). Dividing our net worth by the number of shares
outstanding discloses a per share book value of approximately ($0.001203) per
share. Therefore, the shareholders who are issued shares for services pursuant
to the offering will suffer an immediate dilution in the book value of their
shares of approximately $0.023797, or approximately 95.19% and the present
shareholders will receive an immediate book value decrease of approximately
$0.000014 per share.
The following table sets forth information on dilution to new
shareholders presuming 100% of the offering sold (maximum proceeds) and
presuming 60% of the offering is sold (minimum proceeds):
100% 60%
---------------------------------------
Initial public offering price per share $ 0.025000 $ 0.025000
Net tangible book value after offering $(689,186) $(689,186)
Net tangible book value per share before offering $ (0.001189) $ (0.001189)
Net tangible book value per share after offering $ (0.001203) $ (0.001203)
Decrease of net tangible book value after offering $ 0.000014 $ 0.000014
Dilution per share to new shareholders $ 0.023797 $ 0.023797
Decrease to current shareholders $ 0.000014 $ 0.000014
Percentage of dilution to new investors 95.19% 95.19%
Note: Investors should be aware that their proportionate dilution will decrease
as less shares are issued.
35
DESCRIPTION OF SECURITIES
COMMON STOCK
We are authorized to issue 600,000,000 shares of common stock ($.0001 par
value). As of October 19, 2005, the Company had 573,122,027 99/100 shares of
Stock issued and outstanding. The Company is disputing the issuance of 30
million shares of Stock to principal shareholders of Beijng Huawei Ouya
Architectural Decoration and Engineering Co., Ltd. ("BHOA"), a limited company
organized and existing under the laws of China located at Lai Guang Ying
Village, Lai Guang Ying County, Chao Yang District, PRC. On January 18, 2006,
the BHOA shareholders surrendered the 26 million shares to the Company for
cancellation. As soon as these shares can be delivered to the Company's stock
transfer agent, the 26 million shares will be removed from the calculation of
the Company's issued and outstanding shares of Stock and the new total of the
issued and outstanding shares of Stock shall be approximately 547,122,027 99/100
shares. The Company is still attempting to recover another 4 million shares of
Common Stock issued in the cancelled acquisition of 40% of BHOA's common stock
by the Company.
Holders of common stock are entitled to one vote per share on each
matter submitted to a vote at any meeting of shareholders. Cumulative voting is
not permitted in elections of directors or otherwise. The presence in person or
by proxy of the holders of a majority of the outstanding common stock is
required to constitute a quorum at any shareholders meeting. If a quorum is
present, proposals are passed if approved by the holders of a majority of the
votes present, except for substantive corporate matters (such as a merger, sale
of assets or amendment to articles of incorporation, which matters must be
approved by the holders of a majority of outstanding shares under Florida law).
A minimum of 10 days' prior written notice is required to be given for any
shareholders meeting.
Our board of directors has authority, without action by the shareholders,
to issue all or any portion of the authorized but unissued shares of common
stock, which would reduce the percentage ownership of its present shareholders
and which may dilute the book value of the common stock.
Shareholders have no pre-emptive rights to acquire additional shares of
common stock. The common stock is not subject to redemption and carries no
subscription or conversion rights. In the event of liquidation, the shares of
common stock are entitled to share equally in corporate assets after
satisfaction of all liabilities.
Holders of common stock are entitled to receive such dividends as the board
of directors may from time to time declare out of funds legally available for
the payment of dividends. We have not paid dividends and do not intend to pay
dividends in the foreseeable future.
PREFERRED STOCK
We are authorized to issue 100,000,000 shares of serial preferred stock
($.001 par value). The board of directors has authority, without action by the
shareholders, to issue preferred stock in one or more series and to determine
the voting rights, preferences as to dividends and liquidation, conversion
rights, and other rights of such series. Preferred stock may carry rights
superior to those of the common stock.
36
We have authorized 10,000,000 shares of Series A Redeemable Preferred Stock
and issued 1,100 shares of Series A Redeemable Preferred Stock.
The Series A Redeemable Preferred Stock has the following rights and terms:
(1) Dividends: The holders of the issued and outstanding Series A Redeemable
Preferred Stock shall not be entitled to receive dividends; (2) Conversion: The
holders of the Series A Redeemable Preferred Stock shall be entitled to convert
their shares into shares of common stock at the conversion ratio of 1000 shares
of common stock for each share of preferred stock; (3) Redemption. We may redeem
the Series A Preferred Stock at our sole discretion; (4) Liquidation: The Series
A Redeemable Preferred Stock shall not be entitled to preferential liquidation
rights over any other class or series of stock previously or which may
subsequently be issued by the Company; (4) Sinking Fund: The Series A Redeemable
Preferred Stock shall not be entitled to the establishment of any sinking fund
for any purpose; and (5) Voting Rights: The Series A Redeemable Preferred Stock
shall have no voting rights.
Reference is made to our articles of incorporation and by-laws which are
available for inspection at our offices or which can be viewed through the EDGAR
data base at http://www.sec.gov as exhibits to the registration statement on
Form SB-2. Reference is also made to applicable statutes of the state of Florida
for laws concerning rights of shareholders.
The Company authorized an earlier class of serial preferred stock in
connection with the November 18, 1998 acquisition of Cyberquest, Inc. in 1999.
The stock transfer agent records indicate that no shares of this earlier series
of preferred stock is issued and outstanding as of April 29, 2005 because the
holders of such shares of preferred stock had converted them into shares of
Common Stock at various times in the past. However, certain persons in Texas
have advised the Company that they hold approximately 70,000 shares of this
prior series of preferred stock. The Company is investigating this claim, but
has not reached any conclusion as of the date of this Prospectus on the merits
of the claim.
WARRANTS
As of April 29, 2005, warrants (all presently exercisable) to purchase a
total of up to 53,0975,000 shares are outstanding. The warrants expire at
various times from November 11, 2011 to August 3, 2014, and are exercisable at
various prices from $0.03 to $0.04 per share.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our bylaws provide that we shall indemnify directors provided that the
indemnification shall not eliminate or limit the liability of a director for
breach of the director's duty or loyalty to the corporation or its stockholders,
or for acts of omission not in good faith or which involve intentional
misconduct or a knowing violation of law.
Florida law permits a corporation, under specified circumstances, to
indemnify its directors, officers, employees or agents against expenses
(including attorney's fees), judgments, fines and amounts paid in settlements
actually and reasonably incurred by them in connection with any action, suit or
proceeding brought by third parties by reason of the fact that they were or are
directors, officers, employees or agents of the corporation, if these directors,
officers, employees or agents acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceedings, had no
37
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agent in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnify for such expenses despite
such adjudication of liability.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
company pursuant to the foregoing provisions, or otherwise, we have been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the 1933 Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the company of expenses incurred or paid by a director, officer or
controlling person 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, the company 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 1933 Securities Act, and will be
governed by the final adjudication of such issue.
LEGAL PROCEEDINGS
CELESTE TRUST LITIGATION.
CELESTE TRUST REG., ESQUIRE TRADE, ET AL. V. CBQ, INC. (Case# 03 Civ.
9650 RMB; US District Court, SDNY, 12/4/2003). A lawsuit filed against company
by three plaintiffs on or about December 4, 2003, but which the company did not
receive notice of until the week of February 18, 2004 or thereabouts. The
Plaintiffs purchased debentures issued by Socrates Technologies Corporation
(STC), a public Delaware corporation in 2000. When the Company purchased the
assets of two STC subsidiaries in March 2001, the plaintiffs allege that the
Company promised to issue to the Plaintiffs and others the consideration that
was to be paid to STC for the acquired assets and to so do in order to
compensate the plaintiffs for their investment in the STC debentures, which were
apparently in default at that time. The total consideration paid for the STC
subsidiaries' assets were 7.65 million shares of company Common Stock and a
Promissory Note made by the Company for $700,000 principal amount. The Company
has defended against the Plaintiffs' claims to date. If the Plaintiffs win a
judgment on their claims, the judgment, if collected, would prove potentially
ruinous the Company, unless a settlement involving no cash was arranged between
the parties to the lawsuit. The Plaintiff's claims include a claim for receipt
of the money due under the Promissory Note with a principal amount of $700,000.
The Company lacks the cash flow or cash reserves or funding resources to pay
such a claim, either in a lump sum or over time. If the Plaintiffs are awarded
the claimed damages against the Company in this lawsuit, the Company would be
unable to pay such damages, either in a lump-sum or under a schedule, and would
be insolvent.
The Plaintiff's complaint in Celeste was dismissed by the U.S.
District Court for the Southern District of New York in early 2005 for failure
to have all essential parties to the dispute as parties to the lawsuit. The
Plaintiffs filed an amended complaint prior to the March 1, 2005 deadline for
doing so. The Company currently intends to vigorously defend against the
38
Plaintiff's amended complaint, which adds two former, now defunct, subsidiaries
involved in the STC transaction as defendants. The assets of Networkland, Inc.
and Technet Computer Services Corporation were acquired by the Company on March
15, 2001 and that transaction is at the heart of the dispute in the CELESTE
case. Currently, the Company's second motion to dismiss is scheduled to be heard
by the Court on or about September 15, 2005. The Court has also heard
Plaintiff's motion for default judgment against the subsidiaries involved in the
STC transaction. The Court's decision may take several months to be issued. The
Company is uncertain at this time of the final outcome of this litigation.
SUN TRUST BANK DISPUTE. Sun Trust Bank line of credit and term note:
Prior to being acquired by the company, Quantum Technology Group had a $4
million line of credit with Crestar Bank, which was subsequently acquired by Sun
Trust. This line of credit was guaranteed by Quantum and five individual
guarantors, including Ray Kostkowski, Anne Sigman, Skip Lewis, and Anthony
Saunders. This line of credit was opened during April, 2000. On August 8, 2000,
the Company acquired all of the shares of Quantum. Sun Trust asserted that $1.3
million of the line of credit had been used, and was owing to Sun Trust, as well
as line of credit, a $200,000 term loan from Sun Trust to Quantum, approximately
$200,000 in accrued interest and $100,000 in attorney fees -- all of which
Suntrust had sought to collect from the individual guarantors. Suntrust had not
sued the company but has threatened to sue. RAS Investment, Inc., a company
affiliated with Anne Sigman, has advised the company that RAS has acquired the
Sun Trust note and has demanded payment in cash or stock. The Company is
considering or investigating all of the claims in the RAS communication to the
company. As of the date of this report, the company's position remains as
before, that is, that the company is not obligated to pay the Sun Trust debts
and any claims made to collect that debt could be defeated by several potential
defenses and counterclaims.
INTEREST OF NAMED EXPERTS AND COUNSEL
None of the experts named herein was hired on a contingent basis nor
were any such experts a promoter, underwriter, voting trustee, director, officer
or employee of the Company. Paul W. Richter, one of the Company's outside legal
counsels, beneficially owns 394,480 shares of Stock. All such shares were issued
for legal services rendered in 2001 and 2002 or in 2004 and 2005 in lieu of cash
payment for such legal services.
LEGAL MATTERS
The legality of the issuance of the shares offered hereby will be passed
upon for us by Paul w. Richter, Attorney, 7759 Desiree Street, Alexandria,
Virginia 22315. Mr. Richter owns 588,718 shares of Common Stock (all issued for
services rendered to the Company and in lieu of cash payment) and has a ten-year
option to purchase 25,000 shares of Common Stock at an exercise price of five
cents per share. Mr. Richter is also one of the selling shareholders under this
Form S-8.
EXPERTS
Our financial statements as of December 31, 2004, and for the two years
then ended, have been audited by Robison Hill & Company, Salt Lake City,
independent certified public accountants, as stated in their report on those
financial statements, which financial statements and the report thereon have
been included in this prospectus in reliance upon the authority of such firm as
experts in accounting and auditing. Robison Hill & Company will also audit the
2005 financial statements of the Company.
39
PART II
ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents, which have been filed with the Securities and
Exchange Commission (the "Commission") by the Registrant are incorporated by
reference in this registration statement: (i) the Company's Annual Report on
Form 10-KSB, for the fiscal year ended December 31, 2004; (ii) the Company's
Quarterly Report on Form 10-QSB, as amended, for the period ended March 31,
2005, June 30, 2005 and September 30, 2005, and (iii) the Company's periodic
reports on Form 8-K, dated September 28, 2005; September 27, 2005; dated
September 26, 2005; dated August 3, 2005; July 20, 2005; July 13, 2005; May 19,
2005; May 18, 2005; April 29, 2005; January 14, 2005, January 10, 2005; (iv)
Company's Form 8-K Reports filed with the Commission on May 19, 2005, May 18,
2005, April 29, 2005, February 24, 2005, February 22, 2005, January 14, 2005 and
January 10, 2005; and (iv) Information Statement filed with the Commission on
April 29, 2005; (v) Schedule 13D filed by Howard Ullman regarding change in
stock ownership in Company and filed with the Commission on February 11, 2005,
and Amendment Number One, dated September 16, 2005. All documents subsequently
filed by the Registrant pursuant to Sections 13(a), 13(c), 14 and 15(d) of the
Securities Exchange Act of 1934, shall be deemed to be incorporated by reference
in this registration statement and to be part hereof from the date of the filing
of such documents.
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Florida law and our By-Laws, we can indemnify any director,
officer, employee, or agent who was or is a party to any proceeding (other than
an action by, or in the right of, the corporation), if he or she acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. We can indemnify any director, officer, employee, or agent to any
proceeding by or in the right of the corporation to procure a judgment in its
favor if such person acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation,
except that no indemnification shall be allowed if the person is adjudged liable
by the court, unless the court finds that indemnification is available. Further,
indemnification is also dependent upon a finding that the person satisfied the
applicable standard of conduct, which determination must be made a majority vote
of the board, a majority vote of the shareholders, or by independent legal
counsel.
The bylaws provide that directors and officers shall be indemnified
by the corporation against expenses incurred in connection with the defense of
any action, suit or proceeding in which they are made parties by reason of being
or having been directors or officers of the corporation, except in relation to
matters as to which they are adjudged in such matter to be liable for negligence
or misconduct in the performance of duty. Such indemnification is not exclusive
of any other rights to which those indemnified may be entitled by agreement,
vote of stockholders, or otherwise. In addition, the Florida Corporation Act
permits indemnification of directors and officers against such expenses.
40
ITEM 8. EXHIBITS
The Exhibits required to be filed as part of this Registration Statement are
listed in the attached Index to Exhibits and incorporated herein by this
reference.
TEM 9. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
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 and 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
change in volume and price represents no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement; provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Exchange Act that are incorporated by reference in this registration statement.
(2) That for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act, (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the Securities Act
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
41
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or 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, 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 of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Paul W. Richter with full power to act without the
other, such person's true and lawful attorney-in-fact and agents, with full
power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities, to sign this Registration Statement, and any
and all amendments thereto (including post-effective amendments), and to file
the same, with exhibits and schedules thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Davie, Florida, on this 18th day of January 2006.
CHINA DIRECT TRADING CORPORATION
(Name of Registrant)
Date: January 18, 2006
By: /s/ Howard Ullman
-----------------------------------
Name: Howard Ullman
Its: CEO, President and Chairman of the Board
42
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement on Form S-8 has been signed by the following persons in the capacities
and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------ ------------------------- --------------------
* Howard Ullman Chairman of the Board January 18, 2006
of Directors,
Howard Ullman (Principal Executive
Officer)
/s/ Howard Ullman Chief Financial Officer January 18, 2006
- ------------------------------
Howard Ullman (Principal Financial
and Principal
Accounting Officer)
* Jeffrey Postal Director January 18, 2006
- ------------------------------
Jeffrey Postal
* Laurie Holtz Director January 18, 2006
- ------------------------------
Laurie Holtz
* Lorenzo Lamadrid Director January 18, 2006
- ------------------------------
Lorenzo Lamadrid
* Susan Xu Director January 18, 2006
- ------------------------------
Susan Xu
* By: Paul W. Richter
- ---------------------------
Paul W. Richter January 18, 2006
Attorney-in-fact for each
of the persons indicated
43
INDEX TO EXHIBITS
Number Description
- -------- ------------------------------
5 Legal Opinion re: legality of securities being issued
4.1 2005 Consultants and Legal Services Plan
23.1 Consent of Independent Registered Public Accounting Firm
- --------------------------------------------------------------------------------