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