UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14C
Amendment No. 3
Information Statement Pursuant to Section 14(c)
of the Securities Exchange Act of 1934
Check the appropriate box:
[x] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14c-5(d)(2))
[ ] Definitive Information Statement
COMET TECHNOLOGIES, INC.
--------------------------------------------------------------
(Name of Registrant As Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common stock, par value $0.001.
(2) Aggregate number of securities to which transaction applies:
18,390,000 shares of Common Stock.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
$0.75 (market price based on average bid prices as of May 14,
2004, of $0.25 after giving effect to proposed 1-for-3 reverse
split described in the Information Statement, pursuant to Section
240.0-11(c) and (a)(4)).
(4) Proposed maximum aggregate value of transaction: $13,792,500
(5) Total fee paid: $1,747.51
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
COMET TECHNOLOGIES, Inc.
10 West 100 South #610
Salt Lake City, UT 84101
INFORMATION STATEMENT PURSUANT TO SECTION 14(C)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND REGULATION 14C THEREUNDER
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY
Dear Shareholder:
The enclosed information statement is being furnished to shareholders
of record on January 20, 2005 (the "Record Date") of Comet
Technologies, Inc. ("Comet" or the "Company"), a Nevada corporation, in
connection with the following actions taken by written consent of holders of a
majority of the outstanding shares of our common stock ("Common Stock")
entitled to vote on the following proposals:
(1) To amend our Articles of Incorporation to change our name to "Town
House Holdings, Inc.," or such similar name as determined by the Board of
Directors upon effectuation of the Exchange Agreement between Comet and Town
House Land Limited, as described in this Information Statement, and to
increase the authorized number of shares of the Company from 20,000,000 to
50,000,000 shares of Common Stock, par value $0.001;
(2) To effect a one-for-three (1-for-3) reverse split of the current
issued and outstanding Common Stock of the Company;
(3) To elect a new Board of Directors consisting of five
persons, who are designees of Town House: Mr. Fang Zhong, Ms. Hu Min, Mr. Luo
Yun Fang, Mr. Fang Wei Feng, and Mr. Fang Wei Jun;
(4) To adopt the Comet 2004 Stock Incentive Plan; and
(5) To approve the appointment of Murrell, Hall, McIntosh & Co., PLLP,
independent auditors of Town House, as the independent auditors of the Company
for the fiscal year ended December 31, 2004.
SHAREHOLDERS OF RECORD AT THE CLOSE OF BUSINESS ON
JANUARY 20, 2005, SHALL BE ENTITLED TO RECEIPT
OF THIS INFORMATION STATEMENT.
BY ORDER OF THE BOARD OF DIRECTORS,
January ___, 2005 /s/ Jack M. Gertino
--------------------------------------
Jack M. Gertino, Chairman
COMET TECHNOLOGIES, Inc.
10 West 100 South #610
Salt Lake City, UT 84101
INFORMATION STATEMENT FOR SHAREHOLDERS
The Board of Directors of Comet Technologies, Inc., a Nevada corporation
(the "Company") is furnishing this Information Statement to shareholders in
connection with a Majority Action of Shareholders of the Company to be taken
by the Company in connection with the Company's acquisition of Town House Land
Limited ("Town House"), in a "reverse acquisition" (the "Acquisition").
The actions previously approved in writing by holders of a majority of
the outstanding shares of the Company are:
(a) the approval of a change in the Company's name to "Town House
Holdings, Inc.," or such similar name as determined by the Board of Directors
and the increase in the authorized number of shares of the Company from
20,000,000 to 50,000,000 shares of Common Stock, par value $0.001;
(b) the approval of a one-for-three reverse split of the outstanding
stock;
(c) the election of a new Board of Directors consisting of five
persons, who are designees of Town House: Mr. Fang Zhong, Ms. Hu Min,
Mr. Luo Yun Fang, Mr. Fang Wei Feng, and Mr. Fang Wei Jun;
(d) the approval of the Company's 2004 Stock Incentive Plan; and
(e) the approval of the appointment of Murrell, Hall, McIntosh & Co.,
PLLP, the independent auditors of Town House, as the independent auditors of
the Company for the fiscal year ending December 31, 2004.
All of the above matters have been approved by holders of approximately
55.6% of the outstanding shares of the Company in accordance with Nevada
corporate law. However, under federal law these proposals will not be
effective until at least 20 days after this Information Statement has first
been sent to shareholders.
This Information Statement is first being mailed to shareholders on or
about January ___, 2005.
TABLE OF CONTENTS
Page No.
QUESTIONS AND ANSWERS......................................................1
VOTING SECURITIES..........................................................2
GENERAL INFORMATION........................................................3
General Information Concerning the Company...............................3
Proposed Acquisition of Town House.......................................3
Outstanding Shares and Voting Rights.....................................3
Approval of the Name Change and Capitalization...........................4
Approval of the Reverse Split............................................4
Approval of the Company's 2004 Stock Incentive Plan......................5
Approval of Appointment of New Independent Auditors......................5
Record Date..............................................................5
Dissenters' Rights of Appraisal..........................................5
Expenses of Information Statement........................................5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS............................5
SUMMARY OF TRANSACTIONS CONTEMPLATED BY THE EXCHANGE AGREEMENT.............7
Reasons for Approval by Majority of Shareholders and Board of Directors..8
Accounting Treatment of the Acquisition..................................8
Summary of the Exchange Agreement........................................8
Certain Federal Income Tax Consequences.................................10
INFORMATION CONCERNING TOWN HOUSE.........................................10
Business of Town House..................................................10
Town House Land Limited.................................................11
Wuhan Pacific Real Estate Development Company Limited...................11
Property Development....................................................12
Market..................................................................13
Project Financing.......................................................13
Property Development Activities.........................................13
Construction-in-Progress................................................14
Ownership of Land.......................................................14
Government Regulation...................................................15
Employees...............................................................15
Legal Proceedings.......................................................15
Risk Factors............................................................15
FINANCIAL INFORMATION CONCERNING TOWN HOUSE...............................17
Forward-Looking Statements..............................................17
Discussion and Analysis of Town House Management........................17
Critical Accounting Estimates and Accounting Policies...................19
Results from Operations - Comparison of Years Ended December 31, 2003
and 2002...............................................................20
Results from Operations - Comparison of Six Months Ended June 30, 2004
an 2003................................................................21
Income Taxes............................................................22
Liquidity and Capital Resources.........................................22
Contractual Obligations.................................................23
AMENDMENT TO ARTICLES OF INCORPORATION....................................23
PROPOSED REVERSE STOCK SPLIT..............................................24
Principal Effects of the Reverse Split..................................24
Purposes of the Reverse Stock Split.....................................25
No Exchange of Certificates and Elimination of Fractional Share
Interests..............................................................26
Federal Income Tax Consequences of the Reverse Split....................26
APPROVAL Of the 2004 STOCK INCENTIVE PLAN.................................27
Federal Income Tax Consequences.........................................29
MANAGEMENT................................................................30
Current Management of the Company.......................................30
Proposed New Management.................................................31
EXECUTIVE COMPENSATION....................................................32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................34
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................35
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.........................36
HISTORICAL FINANCIAL INFORMATION OF COMET AND TOWN HOUSE..................36
PRO FORMA INFORMATION.....................................................36
INDEPENDENT ACCOUNTANTS...................................................36
AVAILABLE INFORMATION.....................................................37
QUESTIONS AND ANSWERS
Q: What am I being asked to approve?
A: You are not being asked to approve anything. This Information Statement
is being provided to you solely for your information. Shareholders holding a
majority of the outstanding voting Common Stock of the Company have already
agreed to approve:
. a one-for-three reverse stock split of the Company's outstanding
Common Stock;
. a change in the name of the Company to "Town House Holdings,
Inc.," or such similar name as determined by the Board of
Directors, and an increase in capitalization from 20,000,000
shares to 50,000,000 shares of Common Stock;
. the Company's 2004 Stock Incentive Plan, described in this
Information Statement;
. the election of a new Board of Directors consisting of five
persons, who are designees of Town House: Mr. Fang Zhong,
Ms. Hu Min, Mr. Luo Yun Fang, Mr. Fang Wei Feng, and Mr.
Fang Wei Jun; and
. the approval of the appointment of Murrell, Hall, McIntosh & Co.,
PLLP, the auditors of Town House, as the independent auditors of
the Company for the fiscal year ending December 31, 2004.
Q: Why have the Board of Directors and a majority of the shareholders
agreed to approve these actions?
A: All of these actions are necessary to accomplish the terms of the Stock
Exchange Agreement (the "Exchange Agreement") dated as of January 19, 2004, as
amended, between the Company, Town House and the shareholders of Town House.
Q: What are the basic terms of the transaction with Town House?
A: The shareholders of Town House will acquire control of the Company
(approximately 92% of the outstanding Common Stock at the closing of the
transaction) in exchange for all of the outstanding stock of Town House.
After the transaction is completed, Town House will be a wholly-owned
subsidiary of the Company and the Company will be controlled by the former
shareholders of Town House. You will retain all of your present stockholdings
in the Company.
Q: Are there any conditions to the transaction with Town House?
A: Yes. There are several conditions, including the following:
. Approval of a one-for-three reverse stock split of the Company's
outstanding Common Stock;
. Approval of the Company's name change and increase in
capitalization;
. Approval of the Company's new independent auditors; and
. Approval of the Company's 2004 Stock Incentive Plan.
Q: What business is conducted by Town House?
1
A: The principal business operations of Town House are conducted by and
through its subsidiary, Wuhan Pacific Real Estate Development Company Limited
("Wuhan Pacific"). Wuhan Pacific is one of the first privately owned property
developers in Wuhan City and is one of the largest property developers in
Wuhan City, in the People's Republic of China ("PRC") based on a list of top
100 property development enterprises in Wuhan City in terms of Gross Floor
Area ("GFA") sold in 2002 published by the Wuhan Statistics Bureau. It
engages principally in the development and sale of high quality commercial and
private residential properties catering to the mass residential property
market in Wuhan City.
Q: Are there risks involved in the transaction with Town House?
A: Yes. After the transaction is completed, the Company's success will be
totally dependent upon the success of Town House, and its enterprises in the
PRC. The success of Town House will depend on a number of factors, including
the growth in demand for developed properties in China; Town House's ability
to compete; the influence of the PRC on the Town House's business; the ability
to raise capital; and other factors. There are no assurances that Town
House's operations will be profitable after the closing of the transaction.
Q: When do you expect to complete the transaction with Town House?
A: Immediately following twenty days after the date of the mailing of this
Information Statement. As mentioned, there are a number of conditions to
closing the transaction.
VOTING SECURITIES
Our Articles of Incorporation presently authorize the issuance of
20,000,000 shares of Common Stock, $0.001 par value per share, of which
3,598,000 pre-split shares are issued and outstanding as of the Record Date of
January 20, 2005 . Each outstanding share is entitled to one vote.
Only shareholders of record at the close of business on the Record Date are
entitled to notice. The shares are fully paid, non-assessable, without
pre-emptive rights, and do not carry cumulative voting rights. Holders of
common shares are entitled to one vote for each share on all matters to be
voted on by the stockholders. Holders of common shares are entitled to share
ratably in dividends, if any, as may be declared by the Company from
time-to-time, from funds legally available. In the event of a liquidation,
dissolution, or winding up of the Company, the holders of shares of Common
Stock are entitled to share on a pro-rata basis all assets remaining after
payment in full of all liabilities.
The Nevada Revised Statutes, Section 78.320, permits stockholders to
approve certain actions by written consent without the necessity of a
shareholders meeting. Certain shareholders, including officers and directors,
owning approximately 55.6% of the outstanding shares, have approved, by
written consent, the actions described in this Information Statement.
2
GENERAL INFORMATION
General Information Concerning the Company
Comet Technologies, Inc. (the "Company") is a "blank check" company which
has been seeking to locate a business enterprise which it may acquire, merge
or reorganize with, or become engaged in. The Company has been unable to find
a suitable acquisition or merger candidate until January, 2004, when it
entered into an agreement with Town House Land Limited, discussed below.
Since its organization in 1986, the Company has not located any specific
business enterprise for its involvement, nor had it entered into any
arrangement or agreements with respect thereto. Since the completion of the
Company's public offering in August 1986, the Company has reviewed and
evaluated numerous business ventures for possible acquisition or participation
by the Company. To date, the Company has not acquired any business venture or
engaged in any active operations.
The Company was not engaged in business operations until January, 2004,
when the Company entered into a Stock Exchange Agreement (the "Exchange
Agreement") with Town House Land Limited ("Town House"), a company organized
in the Hong Kong Special Administrative Region in The People's Republic of
China, and the shareholders of Town House, providing for the acquisition of
Town House in a reverse acquisition. Comet is a public company whose
securities are quoted on the NASD Electronic Bulletin Board under the symbol
"CMEK." Following the completion of the acquisition, the operations of Town
House will become the principal operations of the Company.
Proposed Acquisition of Town House
The Company has entered into an Exchange Agreement with Town House and
the shareholders of Town House, providing for the acquisition of all of the
shares of Town House, in exchange for the issuance of a total of 18,390,000
post-split shares of Common Stock of the Company to the Town House
shareholders. If the transaction is consummated, Town House will become a
wholly-owned subsidiary of the Company, and the former shareholders of Town
House will then hold approximately 92% of the outstanding shares of the
Company, after issuance of all shares in connection with the transaction and
the issuance of shares to consultants. For a description of the business of
Town House, see "Information Concerning Town House," page 10.
Outstanding Shares and Voting Rights
At January 20, 2005 , the Company had 3,598,000 pre-split shares
of Common Stock, par value $0.001, outstanding. In connection with the Town
House transaction (the "Acquisition"), the Company and holders of
approximately 55.6% of the outstanding stock, have agreed to (a) amend the
Articles of Incorporation of the Company to (i) change the Company's name to
"Town House Holdings, Inc.," or such similar name as determined by the new
Board of Directors; and (ii) increase the authorized capitalization from
20,000,000 shares to 50,000,000 shares of Common Stock, par value $0.001; (b)
effect a one-for-three reverse stock split (the "Reverse Split") of the
presently issued and outstanding shares of the Company's Common Stock; (c)
approve the Company's 2004 Stock Incentive Plan; and (d) approve the
appointment of Murrell, Hall, McIntosh & Co., PLLP, as the independent
auditors of the Company for the fiscal year ending December 31, 2004.
3
Upon filing of the Amendment to the Articles of Incorporation with the
Nevada Secretary of State, the name change will be effective. On such date,
the Reverse Split is also expected to be effective, and each certificate
representing shares of Common Stock outstanding immediately prior to the
Reverse Split (the "Old Shares") will be deemed reversed automatically without
any action on the part of the shareholders on a one-for-three basis, and will
represent one-third the number of outstanding shares of Common Stock after the
Reverse Split (the "New Shares"); provided, however that no fractional New
Shares will be issued as a result of the Reverse Split. All fractional shares
will be rounded to the next highest whole number.
The Reverse Split alone will reduce the number of outstanding shares of
Common Stock to approximately 1,199,333 shares. After the issuance of a total
of 18,390,000 shares to the Town House shareholders in the Acquisition, and
the issuance of up to a total of 400,000 shares to an affiliate under a
Consulting Agreement, there will be a total of 19,989,333 shares of Common
Stock outstanding.
The Common Stock issued pursuant to the Reverse Split will be fully paid
and nonassessable. The voting and other rights that presently characterize
the Common Stock will not be altered by the Reverse Split.
Approval of the Name Change and Capitalization
The proposed change of the Company's name to "Town House Holdings, Inc.,"
or such similar name as determined by the Board of Directors, is intended to
convey more clearly a sense of the Company's business after the acquisition of
Town House. The proposed increase in capitalization of the Company from
20,000,000 to 50,000,000 shares of Common Stock, par value $0.001 is intended
to provide the Company with additional authorized capital to seek future
equity funding, and to enable the Company to make acquisitions using its
Common Stock. Approval of the name change and increase in authorized
capitalization requires the affirmative consent of at least a majority of the
outstanding shares of Common Stock of the Company. Shareholders including
officers and directors, holding a total of approximately 2,000,130 pre-split
shares of Common Stock, representing approximately 55.6% of the outstanding
shares of Common Stock, have already given such written consent.
At or shortly following the closing of the Acquisition (the "Closing"),
it is anticipated that the designees of Town House will have been elected as
members of the Board of Directors. Following such election, the current board
members will have been replaced. It is also anticipated that the officers of
Town House will be appointed as the new officers of the Company (see
"MANAGEMENT").
Approval of the Reverse Split
Approval of the Reverse Split requires the affirmative consent of at
least a majority of the outstanding shares of Common Stock. Shareholders
holding a total of 2,000,130 pre-split shares of Common Stock, representing
approximately 55.6% of the outstanding shares of Common Stock, have already
given such consent.
4
Approval of the Company's 2004 Stock Incentive Plan
Approval of the Company's 2004 Stock Incentive Plan requires the
affirmative consent of at least a majority of the outstanding shares of Common
Stock. Shareholders holding a total of 2,000,130 pre-split shares of Common
Stock, representing approximately 55.6% of the outstanding shares of Common
Stock, have already given such consent.
Approval of Appointment of New Independent Auditors
Approval of the Company's appointment of Murrell, Hall, McIntosh & Co.,
PLLP, as the new independent auditors requires the affirmative consent of at
least a majority of the outstanding shares of our Common Stock. Shareholders
holding a total of 2,000,130 pre-split shares of Common Stock, representing
approximately 55.6% of the outstanding shares of Common Stock, have already
given such consent.
Record Date
The close of business January 20, 2005 , has been fixed as the
record date for the determination of shareholders entitled to receive this
Information Statement.
Dissenters' Rights of Appraisal
Nevada Law does not provide any dissenters' rights with respect to the
matters contemplated in this Information Statement. Therefore, no dissenter's
rights of appraisal will be available in connection with these actions.
Expenses of Information Statement
The expenses of mailing this Information Statement will be borne by the
Company, including expenses in connection with the preparation and mailing of
this Information Statement and all documents that now accompany or may
hereafter supplement it. It is contemplated that brokerage houses, custodians,
nominees, and fiduciaries will be requested to forward the Information
Statement to the beneficial owners of the Common Stock held of record by such
persons and that the Company will reimburse them for their reasonable expenses
incurred in connection therewith.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information concerning the ownership of
Common Stock of the Company, after giving effect to the Reverse Split, and
immediately before and after consummation of the Acquisition of Town House,
with respect to: (a) shareholders who were known to the Company to be
beneficial owners of more than 5% of the Common Stock as of January 20,
2005 ; (b) current officers and directors as a group; (c) shareholders who
will own beneficially more than 5% of the Common Stock immediately after the
Acquisition; and (d) the individuals who it is anticipated will be the
officers and directors after the Acquisition.
Unless otherwise indicated, each beneficial owner has sole voting and
investment power with respect to such shares of Common Stock.
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BEFORE ACQUISITION AFTER ACQUISITION
-------------------------- -------------------------
NAME AND % OF % OF
ADDRESS SHARES COMMON CLASS COMMON SHARES CLASS
--------- ----------------- -------- ---------------- --------
Current Officers and Directors:
-------------------------------
Jack M. Gertino (1)
10 West 100 South #610
Salt Lake City, Utah 84101 77,727 (2) 6.41 477,727 (3) 2.39
Richard B. Stuart (1)
10 West 100 South, Suite 610
Salt Lake City, Utah 84101 81,727 (2) 6.74 481,727 (3) 2.41
All Current Executive
officers and Directors as a
Group (2 persons) (2) 159,454 (2) 13.02 559,454 2.80
Principal Shareholders:
-----------------------
The Harker Group Limited
Partnership
1717 Monte Carlo Drive
Salt Lake City, Utah 84121 138,517 11.55 138,517 *
Jack M. Gertino (1)
10 West 100 South #610
Salt Lake City, Utah 84101 -----------------------See above--------------------
Richard B. Stuart (1)
10 West 100 South, Suite 610
Salt Lake City, Utah 84101 -----------------------See above--------------------
Estate of Philip C. Gugel (4)
10 West 100 South, Suite 610
Salt Lake City, Utah 84101 66,667 5.27 66,667 *
Town House Nominees:
-------------------
Fang Zhong (5)
6/F 32 Jianghan Road
Wuhan, China 0 0 15,447,600 77.28
Lou Yun Fang (5)
6/F 32 Jianghan Road
Wuhan, China 0 0 735,600 3.68
Fang Wei Feng (5)
6/F 32 Jianghan Road
Wuhan, China 0 0 551,700 2.76
6
Fang Wei Jun (5)
6/F 32 Jianghan Road
Wuhan, China 0 0 551,700 2.76
Hu Min (5)
6/F 32 Jianghan Road
Wuhan, China 0 0 551,700 2.76
All Town House Nominees
as a Group (5 persons) 0 0 17,838,300 89.24
*Less than one (1) percent
(1) Current Officers and Directors of the Company.
(2) Mr. Gertino and Dr. Stuart each hold options to purchase a total of 66,667
post-split shares at an exercise price of $0.5625 per share, exercisable at any time
before March 10, 2009. Messrs. Gertino and Stuart have each agreed that the options to
purchase all but 12,500 shares each, will be cancelled at Closing. These figures
represent the percentage ownership of the named individuals assuming each of them alone
has exercised his options for 12,500 shares, and the percentage ownership of all officers
and directors as a group assuming all such options are exercised.
(3) Belair Consulting, LLC, an affiliate of Messrs. Gertino and Stuart, will receive
up to 400,000 post-split shares in connection with a Consulting Agreement. These figures
give effect to the issuance of these shares, and both Mr. Stuart and Mr. Gertino as
members of Belair, may be deemed to be the beneficial owners of such shares. (See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
(4) Represents options held by the estate of Philip Gugel, a former officer and
director who died in 2003, which are exercisable at any time prior to March 10, 2009.
(5) These individuals are the shareholders of Town House. It is anticipated that
these individuals will be appointed as new members of the Board of Directors at or
following Closing. (See "MANAGEMENT").
SUMMARY OF TRANSACTIONS CONTEMPLATED BY THE EXCHANGE AGREEMENT
The Board of Directors of the Company has unanimously approved the Stock
Exchange Agreement ("Exchange Agreement") dated January 19, 2004, and amended
on April 9, 2004, and May 13, 2004, among the Company, Town House and the
shareholders of Town House, which provides for or requires completion of the
following series of transactions as conditions to consummation of the
Acquisition:
. the issuance of a total of 18,390,000 post-split shares to the
shareholders of Town House;
7
. the change of the Company's name to "Town House Holdings, Inc.," or
such similar name as determined by the new Board of Directors;
. the increase in authorized capitalization from 20,000,000 shares to
50,000,000 shares of Common Stock, par value $0.001;
. the Reverse Split of the Common Stock of the Company on a
one-for-three basis;
. the election of five new directors of the Company;
. the approval of the Company's 2004 Stock Incentive Plan;
. the approval of the appointment of Murrell, Hall, McIntosh & Co.,
PLLP, as the independent auditors of the Company for the fiscal
year ending December 31, 2004; and
. the issuance of a total of 400,000 post-split shares of Common
Stock to an affiliate of two principal shareholders under a
Consulting Agreement.
A majority of the Company's shareholders have agreed by way of a majority
consent of shareholders to the actions described above.
Reasons for Approval by Majority of Shareholders and Board of Directors
The Board of Directors has given careful consideration to the
Acquisition, the existing business operations of Town House, the future
business potential and plans of Town House, the current book value of the
Common Stock of the Company, the interest of shareholders of the Company, and
the risks of the Acquisition to the existing shareholders. Based on the
foregoing considerations, the Board of Directors together with holders of a
majority of outstanding shares believe that the transactions contemplated by
the Exchange Agreement, including the Reverse Split and the name change, are
fair and in the best interests of the Company. The holders of a majority of
shares believe that the Company will benefit from the Acquisition, with an
immediate impact being the significant new operations and revenues, assets,
and shareholders' equity.
Accounting Treatment of the Acquisition
Upon Closing of the Acquisition, based upon management's consultation
with the auditors for the Company, it appears that the proper accounting
treatment is a so-called "reverse acquisition," whereby Town House will
account for the transaction as a purchase of the Company. Town House is
deemed to be the "acquirer" due to the shareholders of Town House ultimately
controlling the reorganized company.
Summary of the Exchange Agreement
The following contains, among other things, a summary of the material
features of the Exchange Agreement. This Summary does not purport to be
complete and is subject in all respects to the provisions of, and is qualified
in its entirety by reference to, the executed Exchange Agreement, as amended,
which is attached hereto as Exhibit "A."
General Terms. The Company, Town House and certain shareholders of Town
House have entered into an Exchange Agreement which provides that subject to
meeting of certain conditions, including the Reverse Split on a one-for-three
basis of the Common Stock of the Company, the Company will issue to the Town
House shareholders a total of 18,390,000 shares of Common Stock with
restrictive legend for all of the shares of Town House's capital stock. After
the Closing of the Acquisition, Town House will be a wholly-owned subsidiary
of the
8
Company and the ownership of the Company will be controlled by the former
shareholders of Town House.
The Company has entered into a Consulting Agreement with Belair
Consulting, L.L.C. ("Belair"), an affiliate of Richard B. Stuart, President,
director, and shareholder of the Company, and Jack Gertino,
Secretary/Treasurer, director, and shareholder of the Company, under the terms
of which it has agreed to issue a total of 400,000 post-split shares of
restricted Common Stock, and pay up to $130,000 in cash for consulting
services to be provided, over a period of two (2) years. (See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS").
Upon completion of the Acquisition, the ownership of the Common Stock by
(i) the current shareholders of Town House, as a group, and (ii) the current
Company shareholders, as a group, is estimated to be as follows:
Groups of Shareholders Common Stock % Owned
----------------------------------------- -------------- ---------------
Town House Shareholders 18,390,000 92.00%
Company Shareholders 1,199,333 6.00%
Belair 400,000 2.00%
-------------- ---------------
Total of All Shareholders 19,989,333 100.00%
============== ===============
Closing. Closing is scheduled to take place at such time as agreed by
the parties but in any event may not occur earlier than 20 days following
notice to shareholders under this Information Statement as prescribed by
Section 14(c) of the Securities Exchange Act of 1934 (the "Act").
Conditions for Closing. The obligation of each of the parties to
consummate the Acquisition is subject to the following conditions, among
others:
. The change of the Company's name to "Town House Holdings, Inc.," or
such similar name as determined by the new Board of Directors;
. The increase in the authorized capitalization from 20,000,000 shares
to 50,000,000 shares of Common Stock, par value $0.001;
. The designees of Town House are elected as directors;
. The 2004 Stock Incentive Plan is approved;
. The Reverse Split is completed; and
. The new independent auditors are approved.
Termination; Waivers. The Acquisition may be terminated at any time
prior to the Closing by mutual consent of the parties, or by either party if
the conditions to the obligations of such party to consummate the Acquisition
have not been satisfied, or waived. Each party may, by a written instrument,
waive or extend the time for Closing or performance of any of the obligations
of the other party pursuant to the Exchange Agreement.
Regulatory Approvals. No approvals by any governmental authority are
required in order to complete the Acquisition. Within no less than fifteen
(15) days after the date of Closing the Acquisition, the Company must file a
Current Report on Form 8-K announcing the Closing of this transaction. Within
no less than sixty (60) days of the final day to file the Current Report on
Form 8-K, the Company must file an amendment to that report, providing
financial statements for Town House, and pro forma consolidated financial
statements.
9
Certain Federal Income Tax Consequences
The Company has not sought an opinion as to the tax consequences of the
Acquisition because the Acquisition will be treated for tax purposes as an
acquisition of all of the stock of Town House in an exchange for shares of
Common Stock of the Company. The Company believes that the Acquisition will
constitute a tax-free reorganization under Section 368(a)(1)(B) of the
Internal Revenue Code of 1986, as amended (the "Code"), and accordingly, the
Company will not recognize any gain or loss on such exchange.
IRC sections 354 and 368 state that no gain or loss shall be recognized
(by the corporations) if the acquiring corporation acquires the target's stock
solely in exchange for its own voting stock and the acquiring corporation is
in control of the target immediately after the acquisition. IRC section 368(c)
defines control to represent 80% of the total combined voting power of all
classes of stock. The acquisition of Town House as a wholly-owned subsidiary
is considered to be a reverse acquisition in which the Company will acquire
control of Town House. The shares issued by the Company to be distributed to
Town House will be equivalent voting shares. The Exchange Agreement appears to
satisfy these IRC sections.
In addition to the formal requirements of the IRC, the transaction must
meet certain substantive non-statutory requirements developed through case law
and IRS regulations. These non-statutory rules may change what is in form a
reorganization into a taxable transaction. These two requirements are
"Continuity of Interest" and "Continuity of Business Enterprise." Continuity
of Interest requires that a substantial part of the value of the proprietary
interest in the target must be preserved. Again the Exchange Agreement appears
to satisfy this requirement. Continuity of Business Enterprise requires the
acquiring corporation to continue to use the target's historic business or a
significant portion of the target's historic business assets in the business.
The Company will preserve Town House's business and continue to use Town
House's assets in the wholly-owned Company subsidiary.
In addition to these considerations, the Company expects that its ability
to utilize on an annual basis its net operating loss carry-forward ("NOL")
will be eliminated entirely by the Acquisition. This is due to the fact that
the Company will not be considered during the two-year periods following the
Acquisition, to have continued the Company's historic business or to have used
a significant portion of the Company's assets.
INFORMATION CONCERNING TOWN HOUSE
Business of Town House
The principal business operations of Town House are conducted by and
through its 97% owned subsidiary, Wuhan Pacific Real Estate Development
Company Limited ("Wuhan Pacific").
Wuhan Pacific is one of the first privately owned property developers in
Wuhan City and is one of the largest property developers in Wuhan City, based
on a list of top 100 property development enterprises in Wuhan City in terms
of Gross Floor Area ("GFA") sold in 2002 published by the Wuhan Statistics
Bureau. It engages principally in the development and sale of high quality
commercial and private residential properties catering to the mass residential
property market in Wuhan City.
10
Wuhan Pacific's portfolio of properties under development are currently
all located in Wuhan City and target different segments within the mass
residential property market, including young white collar employees, middle to
senior managers in enterprises, entrepreneurs and families with young
children. These upwardly mobile people represent the emerging middle class in
Wuhan City and are a growing source of demand in the mass residential property
market.
As of December 31, 2003, Wuhan Pacific reports that it has equity
interests in six property development projects in Wuhan City, with an
approximate GFA of 200,000 square meters and an aggregate site area of
approximately 100,566 square meters. Wuhan Pacific has obtained land use
rights certificates in respect of each of these six property development
projects. In addition, Wuhan Pacific has not yet obtained land use rights
certificates in respect of, but has interest in and plans to develop a further
five projects in Wuhan City with an approximate GFA of 252,000 square meters
and an aggregate site area of approximately 70,000 square meters. Since the
relevant land use rights certificates have not yet been issued or obtained, no
commercial value has been assigned to any of these five additional projects or
in the calculation of its adjusted net tangible asset value.
In 2001, Wuhan Pacific was ranked as the top private property developer
in Wuhan City, and ninth amongst all property developers in Wuhan City, in
terms of total GFA of all properties sold, according to the list of top 100
property development enterprises in Wuhan City in terms of FGA sold in 2001
published by the Wuhan Statistics Bureau.
Wuhan Pacific aims to further solidify its position in Wuhan City, and
plans to also expand its focus on property business in Shanghai. Wuhan
Pacific also indicates that it will pursue quality business opportunities in
other fast growing cities in China such as Yi Chang, if market conditions are
appropriate.
Town House Land Limited
Town House Land Limited ("Town House") is a limited liability company
organized in 2003 in the Hong Kong Special Administrative Region in the PRC,
as a holding company.
Town House owns 97% of Wuhan Pacific which was organized in Hubei
Province in the PRC as a limited liability company in 1995. Substantially all
of the assets and operations of Town House in the PRC are conducted through
Wuhan Pacific.
Wuhan Pacific Real Estate Development Company Limited
Wuhan Pacific was organized as a limited liability company in The
People's Republic of China ("PRC") on December 18, 1995. The primary purpose
of Wuhan Pacific was real estate development including apartments, retail and
commercial facilities, and mixed use buildings. The principal executive
office of Wuhan Pacific is located at No. 250 Jianghan Road, 32 Diamond
Mansion, Jiang'an District, Wuhan City, Hubei Province in the PRC.
11
Property Development
Wuhan Pacific is principally engaged in the design and construction of
luxury apartment buildings and mixed use buildings in the City of Wuhan in the
PRC. The apartments are primarily held for sale to middle income to upper
level income customers. Certain properties developed by Wuhan Pacific are
mixed-use properties that also include retail and commercial floors on the
lower levels of the buildings.
Information Concerning Wuhan City
Wuhan City, located in inland China, has played an important role of
connecting the east with the west, the south with the north in the PRC. Wuhan
City, with an urban population of approximately 4 million, ranks as the sixth
city among the top 25 cities in the PRC with favorable development potential.
In 2001, the GDP of the city reached 134.8 billion Yuan (US$0.12 per one
Yuan), or 12% higher than 2000; and the annual income of citizens of Wuhan
City was 7,304 Yuan, or an increase of 8% over 2000.
Located at the middle reaches of the Yangtze River, Wuhan is a
thoroughfare to nine provinces in the PRC. The Beijing-Guangzhou Railway and
the Yangtze River intersect in Wuhan City. The Beijing-Kowloon Railway and
Wuhan-Guangzhou Railway also connect in the city. The Beijing-Zhuhai and
Shanghai-Chengdu super highway also cross at Wuhan City. In addition, a
high-speed railway along the Yangtze River is in the process of being
constructed. These high-speed road, railway and river transportation methods
make Wuhan a transportation hub.
Wuhan is the largest logistics and commercial enter in inland China.
Commodities can easily be transported to 5 provinces around Wuhan, such as
Hunan, Jiangxi, Anhui, Henan and Sichuan, which have a combined population of
nearly 400 million. There are presently more than 10,000 commercial
organizations, 105,000 business branches, and 8 department stores in Wuhan
City.
As an important industrial base in China, Wuhan City has a very solid
foundation in either high-tech industry or traditional manufacturing. Along
the 88 kilometer ring of the city, a series of industrial zones have been
established, such as China Optical Valley, Sino-Citroen Automobile City,
Taiwan Business Zone and Yangluo Development Zone. With 33 different sectors
and more than 30,000 industrial enterprises, Wuhan City has businesses
encompassing all industries, including iron and steel, automobile, machinery,
petrochemical, optical telecom, Chinese and western medicine, biology
engineering, textile, garment, food industry, etc.
Wuhan City is a technology research and education center, with its
research and education capacity ranked third in the country, behind Beijing
and Shanghai. There are 35 universities in the city, serving approximately
300,000 students. There are 736 science research institutes and 10 national
labs in Wuhan City.
In recent years, Wuhan Municipal Government has focused on policies
favoring an open business environment and environmental renovation, and the
investment environment of Wuhan City has been continuously improved. A series
of important infrastructure projects have been finished, such as Wuhan
International Airport, Airport Super Highway, No. 1 Yangtze River Bridge, No.
3 Yangtze River Bridge, an extensive telephone system, a water plant, a power
plant and a waste water treatment plant.
12
Market
The principal market of Town House for its real estate development
activities has been in the City of Wuhan in the PRC.
The City of Wuhan is an ancient city and is the capital of Hubei Province
in central China. Wuhan is the sixth largest city in the PRC with a
population of approximately 8,000,000. Wuhan is an important transportation
center on the Jianhan Plain, sitting at the confluence of the Yangtze River,
the Hanjiang River, and its longest branch - the Hansui River. The City of
Wuhan is comprised of three cities: Hanyang, Wuchang and Hankou.
Because of the significant economic growth and development of central
China, the City of Wuhan has experienced increasing demand for luxury
residential properties and for retail and commercial space. The concept of
mixed use buildings with retail and commercial space on the street level and
the lowest floors with luxury apartment units on the higher floors has become
increasingly popular in the PRC. As a result, recent building activity of
Town House has been designed with the mixed use concept as principal
objective.
Town House is in competition with other real estate development companies
in the City of Wuhan, some of which are larger and have greater financial
resources than Town House.
Project Financing
The real estate projects of Wuhan Pacific have been financed primarily by
secured bank loans and by loans from Mr. Fang Zhong, the largest stockholder,
a director, Chief Executive Officer and President of Town House.
To facilitate the sale of its apartments, Town House has entered into
corporate guarantees to secure mortgage loans to its property buyers.
Property Development Activities
General. During the three year period ended December 31, 2003, Wuhan
Pacific has designed, constructed and developed the following residential
apartment and retail/commercial properties in the City of Wuhan in the PRC:
Name Property Type Area in Square Feet
----- -------------- -------------------
1. Gutian Apartments Residential apartments 130,508 sq. ft. (5 floors- 112 units)
2. Garden of Eden
Apartments Residential apartments 185,997 sq. ft. (6 floors- 138 units)
3. General Gardens
Phase I Residential apartments 652,476 sq. ft. (8 floors- 936 units)
Phase II Residential apartments 580,534 sq. ft. (8 floors- 667 units)
4. Diamond Mansion
Phase I Residential apartments 186,502 sq. ft. (6-17th floors)
Retail and commercial 72,890 sq. ft. (basement-5th floors)
13
1. Gutian Apartments. The Gutian Apartments consists of 112 apartment
units ranging from 1,435 square feet to 2,037 square feet. The Gutian
Apartments are located close to a retail and commercial area in the City of
Wuhan
2. The Garden of Eden. The Garden of Eden apartment complex is composed
of three apartment buildings that have 138 apartment units ranging from 1,245
square feet to 2,408 square feet. The Garden of Eden has a European style,
and is conveniently located near a retail and commercial area also located in
the City of Wuhan.
3. General Gardens - Phase I. The General Gardens-Phase I consists of
buildings that have 936 apartment units ranging from 514 square feet to 1,170
square feet.
General Gardens - Phase II. The General Gardens - Phase II is
composed of apartment buildings that have 667 apartment units ranging from 595
square feet to 1,887 square feet.
4. Diamond Mansion - Phase I. The Diamond Mansion - Phase I is an 18
story building located on a significant retail and commercial thoroughfare
which is blocked from vehicle traffic. The first five floors have been sold
for retail and commercial operations. The sixth through seventeenth floors
are comprised of residential apartments, of which approximately 66% have been
sold. The basement and the 18th floor is presently used for storage but are
held for sale.
Construction-in-Progress
Sanyang Apartments. During 2003, Wuhan Pacific acquired land use rights
to a 153,000 square foot property situated on Sanyang Road in an upscale area
of Hankou in the City of Wuhan for $1,539,855. Construction of a combined
commercial and residential apartment complex is to be called the Sanyang
Apartments began during 2003.
Jing Qi. The Jing Qi project is a combined commercial residential
apartment complex which is expected to commence construction during 2004.
Construction has been temporarily halted on this project until the City
of Wuhan completes its construction of a road to the complex which is being
paid for by the City of Wuhan.
Diamond Mansion - Phase II. The Diamond Mansion - Phase II project has
commenced construction. It is a retail/commercial building adjacent to
Diamond Mansion - Phase I which has been previously completed.
Ownership of Land
There is no private ownership of land in the PRC, and all land ownership
is held by the government of the PRC, its agencies and collectives.
However, land use rights can be obtained from the government for periods
ranging from 40 to 70 years, and are typically renewable. Land use rights can
be transferred and these transfers account for most of the business activity
in the primary real estate market in the PRC upon approval by the land
administrative authorities of the PRC (State Land Administration Bureau) upon
payment of the required land transfer fees.
14
Properties may under certain circumstances be sold in advance of the
completion of the actual full development of a property. Apartments can be
purchased by customers by payment-in-full, payment by installment, or payment
by mortgaged property loans.
Government Regulation
Wuhan Pacific's projects are subject to various laws and governmental
regulations, such as zoning regulations, relating to its business operations
and project developments. It must obtain and keep current various licenses,
permits and regulatory approvals for its development projects. Wuhan Pacific
believes that its is in compliance with all laws, rules and regulations
applicable to its projects and that such laws, rules and regulations do not
currently have a material impact on its operations. Due to the increasing
levels of development in the areas of China where it currently operates, it is
possible that new laws, rules and/or regulations may be adopted that could
affect Wuhan Pacific's projects or proposed projects. The enactment of such
laws, rules or regulations in the future could have a negative impact on its
projected growth or profitability, which could decrease its projected revenues
or increase its costs of doing business.
Employees
As of December 31, 2003, Town House and Wuhan Pacific had approximately
150 employees. No employee group is covered under a collective bargaining
agreement. Town House and Wuhan Pacific believe their relationship with their
employees is good.
Legal Proceedings
Town House and its subsidiaries are not a party to, nor are any of our
respective properties the subject of, any material pending legal or
arbitration proceedings.
Risk Factors
The business of Town House is subject to a number of risk factors,
described below.
Change in Political and Economic Conditions
Since Town House's main country of business operations is the PRC, Town
House's business operations and financial position are subject, to a
significant degree, to the economic, political and legal developments in the
PRC.
The PRC government started implementing its economic reform policy in
1978, which has enabled the PRC economy to gradually transform from a "planned
economy" to a "socialist market economy." In 1993, the concept of the
socialist market economy was introduced into the Constitution of the PRC, and
the country has since accelerated development of a market economy. A
noteworthy phenomenon in the recent development of the PRC economy is that
non-state owned enterprises such as private enterprises play an increasingly
important role in the PRC economy and the degree of direct control by the PRC
government over the economy is gradually declining.
15
The PRC government has been taking macro-economic austerity measures to
suppress inflation and curb the pace of economic growth since July 1993.
These measures include raising interest rates, tightening credit supply,
delaying implementation of certain reform policies on pricing, enhancing
financial supervision as well as tightening control on the granting of
approval for property and infrastructure projects. However, since 1998, there
has been deflation in the PRC economy and the current economic policies of the
PRC mainly focus on stimulating consumption and expansion of domestic demand.
While the PRC government has not stopped its economic reform policy since
1978, any significant adverse changes in the social, political and economic
conditions of the PRC, may have fundamental changes in the PRC economic reform
policies and thus Town House's operations and profits may be adversely
affected.
Change in Tax Laws and Regulations in the PRC
Various tax reform policies have been implemented in the PRC in recent
years. Interpretation of certain tax policies is still awaiting guidance from
the PRC government. Moreover, there can be no assurance that the existing tax
laws and regulations will not be revised or amended in the future.
Change in PRC Legal System
The PRC legal system is based on statutory law. Unlike the common law
system, statutory law is based on written statutes. Prior court decisions may
be cited as persuasive authority but do not have binding effect. Since 1979,
the PRC government has been promulgating and amending the laws and regulations
regarding economic matters, such as corporate organization and governance,
foreign investment, commerce, taxation and trade. However, the PRC legal
system is still not as fully developed as those western countries with a
common law legal system.
Changes in Currency Conversion Policies in the PRC
Renminbi (Yuan) is not a freely exchangeable currency. Since 1998, the
State Administration of Foreign Exchange of China has promulgated a series of
circulars and rules in order to further enhance the verification of the
truthfulness of foreign exchange payments under the current account items of a
PRC enterprise and has imposed strict requirements in respect of borrowings
and repayments of foreign exchange debts from and to foreign creditors under
the capital account items and creation of foreign security in favor of foreign
creditors.
This may cause complicated procedures in foreign exchange payments to
foreign creditors under the current account items and thus will affect the
restrictions on borrowing of international commercial loans, creation of
foreign security and borrowing of Renminbi loans under guarantees in foreign
currencies. (The majority of the income from the Town House entities is in
Renminbi). Furthermore, the value of Renminbi (Yuan) may become subject to
supply and demand, which could be largely affected by the international
economic and political environment and any fluctuations in the exchange rate
of Renminbi could have an adverse effect on the operational and financial
condition of Town House entities.
16
FINANCIAL INFORMATION CONCERNING TOWN HOUSE
Included in this Information Statement, beginning with page F-1, are the
audited consolidated financial statements of Town House and its subsidiary,
Wuhan Pacific, for the two fiscal years ended December 31, 2003 and 2002,
together with the report of Murrell, Hall, McIntosh & Co., PLLP, independent
auditors, and the unaudited condensed consolidated financial statements of
Town House for the nine months ended September 30, 2004 and September 30,
2003.
Forward-Looking Statements
The foregoing discussion of Town House and Wuhan Pacific, and the
financial statements of Town House included in this Information Statement,
contain "forward-looking statements," within the meaning of Section 27A of the
Securities Act. All statements, other than statements of historical fact,
included in the business discussion or the financial statements that address
activities, events or developments that Town House expects, projects,
believes, or anticipates will or may occur in the future, including matters
having to do with expected and future property sales, Town House's ability to
fund its operations and repay debt, business strategies, expansion and growth
of operations and other such matters, are forward looking statements. These
statements are based on certain assumptions and analyses made by Town House
management in light of its experience and its perception of historical trends,
current conditions, expected future developments, and other factors it
believes are appropriate in the circumstances. These statements are subject
to a number of assumptions, risks and uncertainties, including general
economic and business conditions, the business opportunities (or lack thereof)
that may be presented to and pursued by Town House, Town House's performance
on its current projects and its success in obtaining new projects, Town
House's ability to attract and retain qualified employees, and other factors,
many of which are beyond Town House's control. You are cautioned that these
forward-looking statements are not guarantees of future performance and actual
results or developments may differ materially from those projected in such
statements.
Discussion and Analysis of Town House Management
------------------------------------------------
Business Overview
Town House Land Limited (formerly: Hong Kong Window of the World Apparel
Co., Limited) was incorporated in Hong Kong, as a private limited liability
company on August 13, 2001 with an authorized capital of $64,103 (HK$500,000)
divided into 500,000 ordinary shares of par value $0.12 (HK$1.00) each. Town
House Land Limited ("Town House") changed to its present name on August 13,
2003. On August 15, 2003, Town House acquired 97% of the outstanding
registered capital of Wuhan Pacific Real Estate Development Company Limited
("Wuhan Pacific"). Terms of the transaction call for Town House to pay
$1,602,564 in cash plus the contribution of an additional $5,857,488 in share
capital in Town House as consideration for the acquisition of the 97% interest
in Wuhan Pacific's registered capital. For financial reporting purposes, Wuhan
Pacific was considered to be the acquiring entity and the additional cash
consideration paid was treated as a distribution to members.
Wuhan Pacific Real Estate Development Company Limited ("Wuhan Pacific")
was registered as a formal third level property company in Hubei Province, in
the People's Republic of China as a limited liability company on December 18,
1995 with a registered capital of $1,207,729 (Rmb.10,000,000) and a defined
period of existence of 14 years to December 18, 2009. Subsequent
recapitalizations during 2000 increased Wuhan Pacific's registered capital to
17
$6,038,647 and changed is classification to a second level property company.
On August 15, 2003, Wuhan Pacific entered into a reverse merger agreement with
Town House Land Limited. At June 30, 2004 Town House held 97% of the
registered capital of Wuhan Pacific. Collectively hereinafter, Town House and
Wuhan Pacific are referred to as "Town House".
On October 10, 2003 Wuhan City Foreign Investment Bureau approved the
registration of Town House as a Sino Foreign Joint Investment Enterprise with
a defined period of existence of 20 years to October 27, 2023.
Town House's principal activity is the development and sale of commercial
and residential real estate. Town House's principal country of operations is
in The People's Republic of China ("PRC").
The following table reflects Town House's 2003 inventory sold as well as
inventory remaining at December 31, 2003.
Property Held For Sale
Sales in 2003 at December 31, 2003
--------------------------------------------------------------------
Sq. Meters
Sq. Meters Sq. Cost Plus Available
Available Meters Allocable @
PROPERTY * @ 12/31/02 Sold Sales Price Sales Tax 12/31/03 Cost
---------------------- ----------- -------- ------------ ----------- --------- ------------
Garden of Eden 9,270 5,390 $ 842,173 $ 278,456 3,880 $ 183,394
General Garden Phase I 11,944 225 25,795 23,833 11,719 1,202,087
General Garden Phase II 9,843 375 57,922 31,597 9,468 757,189
Diamond Mansion
(7F to 17F) 7,045 2,042 762,320 560,108 5,003 1,208,639
Diamond Mansion -
Floors 1-5 5,746 2,372 7,392,491 4,226,442 3,375 4,382,506
Gutian Apartment 8,285 - - - 8,285 608,669
Sanyang Apartments - - - - - -
----------- -------- ------------ ----------- --------- -----------
52,133 10,404 $9,080,701 $5,120,435 41,730 $8,352,484
=========== ======== ============ =========== ========= ===========
The following table reflects Town House's 2002 inventory sold as well as
inventory remaining at December 31, 2002.
Property Held For Sale
Sales in 2002 at December 31, 2002
--------------------------------------------------------------------
Sq. Meters
Sq. Meters Sq. Cost Plus Available
Available Meters Allocable @
PROPERTY * @ 12/31/01 Sold Sales Price Sales Tax 12/31/02 Cost
----------------------- ----------- -------- ------------ ----------- --------- ------------
Garden of Eden 15,370 6,100 $ 965,258 $ 309,264 9,270 $ 428,887
General Garden Phase I 32,234 20,290 2,199,114 2,102,570 11,944 1,221,209
General Garden Phase II 21,105 11,262 1,600,167 963,778 9,843 773,736
Diamond Mansion
(7F to 17F) 9,673 2,628 997,626 662,718 7,045 1,701,841
Diamond Mansion
Floors 1-5 3,677 - - - 3,677 6,062,357
Gutian Apartment 12,129 3,844 612,906 197,599 8,285 556,358
Sanyang Apartments - - - - - -
----------- -------- ------------ ----------- --------- ------------
94,188 44,124 $ 6,375,071 $4,235,929 50,064 $10,744,388
=========== ======== ============ =========== ========= ============
18
The following table reflects Town House's inventory sold for the nine
months ended September 30, 2004, and September 30, 2003:
Sales in the nine months ended September 30, 2004
-------------------------------------------------
Cost Plus
Sales * Allocable Sales Tax
--------------- ---------------------
Diamond Mansion Phase 1 $ 5,402,777 $ 2,982,314
Diamond Mansion Phase 2 5,223,053 2,758,292
Reduction in carrying value
General Garden Phase 1 240,417
General Garden Phase 2 146,846
Gutian Apartments 118,235
--------------- ---------------------
$ 10,625,830 $ 6,246,104
=============== =====================
Sales in the nine months ended September 30, 2003
-------------------------------------------------
Cost Plus
Sales * Allocable Sales Tax
--------------- ---------------------
General Garden Phase 1 $ 25,795 $ 24,619
General Garden Phase 2 57,922 33,363
Garden of Eden 825,173 298,600
Diamond Mansion Phase 1 6,710,923 3,824,276
--------------- ----------------------
$ 7,619,813 $ 4,180,858
=============== ======================
* All of the sales of Diamond Mansion Phase 1 and Phase 2 are commercial
property (office and retail space), except for $762,320 in sales of
residential apartment units in Diamond Mansion Phase 1 in the nine months
ended September 30, 2003. Except for Diamond Mansion Phase 1 and Phase 2, all
of the sales referenced above are residential apartment units. All of the
inventory referenced above are completed properties available for sale.
Critical Accounting Estimates and Accounting Policies
Town House must make estimates of the collectability of accounts
receivable. Town House analyzes historical write-offs, changes in its
internal credit policies and customer concentrations when evaluating the
adequacy of its allowance for doubtful accounts. Differences may result in
the amount and timing of expenses for any period if Town House makes different
judgments or uses difference estimates.
Inventories are valued at the lower of cost or net realizable value.
Town House must periodically evaluate the carrying value of its inventories to
determine whether market conditions have impaired the carrying value of its
inventories.
Property and equipment are evaluated for impairment whenever indicators
of impairment exist. Accounting standards require that if an impairment
indicator is present, Town House must assess whether the carrying amount of
the asset is unrecoverable by estimating the sum of the future cash flows
expected to result from the asset, undiscounted and without interest charges.
If the carrying amount is less than the recoverable amount, an impairment
charge must be recognized based on the fair value of the asset. Management
assumed Town House was a going concern for purposes of evaluating the possible
impairment of its property and equipment.
19
Should Town House not be able to continue as a going concern, there may be
significant impairment in the value of Town House's property and equipment.
As part of the process of preparing our consolidated financial
statements, Town House management is required to estimate its income taxes.
This process involves estimating current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities. Town House must then assess the likelihood that its deferred tax
assets will be recovered from future taxable income, and, to the extent it
believes that recovery is not likely, it must establish a valuation allowance.
To the extent that it establishes a valuation allowance or increases this
allowance in a period, it must include a tax provision or reduce its tax
benefit in the statements of operations. Town House uses its judgment to
determine a provision or benefit for income taxes, deferred tax assets and
liabilities and any valuation allowance recorded against Town House's net
deferred tax assets.
Town House cannot predict what future laws and regulations might be
passed that could have a material effect on its results of operations. Town
House assesses the impact of significant changes in laws and regulations on a
regular basis and updates the assumptions and estimates used to prepare its
financial statements when management deems it necessary.
Town House has determined the significant principles by considering
accounting policies that involve the most complex or subjective decisions or
assessments.
Results from Operations - Comparison of Years Ended December 31, 2003 and 2002
Revenues increased 42% in 2003 to $9,080,701 from $6,375,071 in 2002,
resulting in net income of $2,577,838 for 2003 compared to net income of
$1,068,914 in 2002. This was mainly attributable to sales associated with the
Window of the World Shopping Mall (Diamond Mansion Phase 1 - commercial
properties) in addition to the normal residential projects. Sales for 2002
consist entirely of residential property.
Floors one through five are commercial shopping space which differs from
what we referred to as normal residential properties which up to that point
had all been residential apartments. As disclosed in the table included in
the business overview, sales from floors one though five of the Diamond
Mansion Phase I for 2003 were $7,329,491 versus no commercial property sales
in 2002. During 2003, advances from buyers decreased by $1,116,625 from
$1,845,016 at December 31, 2002 to $728,391 in 2003. This decrease represents
sales finalized in 2003 and accounts for 17.5% of increase in 2003 sales over
2002. This decrease was due to finalized sales on residential properties for
which advance payments had been received on or prior to December 31, 2002.
Cost of sales increased by 21% to $5,120,435 in 2003 as compared to
$4,232,929 for 2002. This increase was primarily due to a 42% increase in
sales. This increase in cost of sales is offset in part by a 10% increase in
gross profit margins from 33% in 2002 to 43% in 2003. Gross profit margin
increased by 10% during 2003 due primarily to the following factors:
1. During 2002, Town House had $3,799,281 in sales generated from the
General Garden project in which it generated only a 22% gross profit margin.
During 2003, the Company had sales of only $83,717 on which it generated a
gross profit margin of 33%.
20
2. During 2003, Town House had $7,392,491 in sales from the Diamond
Mansion commercial properties on which it generated a 42.8% gross profit
margin. There were no sales of the Diamond Mansion commercial properties in
2002.
Gross profit margins vary from project to project depending on a number
of factors including: (a) cost of land use rights; (b) customer demand; (c)
availability of other properties; and (d) competitor pricing policies.
Typically, the sales of commercial properties (retail shops) result in higher
gross profits than sales of residential properties.
General and administrative expenses increased by $128,454 or 75% from
$172,397 in 2002 to $300,851 in 2003. The increase was due primarily to
increases in consulting fees and salaries to administrative staff. Included
in consulting expenses were fees paid to legal counsel, development planning
fees and accounting fees. Salaries increased by $14,344 or 55% to $40,312 in
2003 as compared to $25,968 in 2002.
Selling expense increased by $400,015 or 1,026% from $38,991 in 2002 to
$439,006 in 2003. This increase was due to $312,521 in advertising incurred
in 2003 compared to none incurred in 2002.
Interest expense increased by 7% to $326,849 in 2003 from $304,580 in
2002 was primarily due to increased activities in short-term borrowings.
Results from Operations - Comparison of the Nine Months Ended September
30, 2004 and 2003
Revenues increased 40% in the nine months ended September 30, 2004 to
$10,625,830 from $7,619,813 in the comparable period in 2003, resulting in net
income of $2,154,239 for the nine months ended September 30, 2004, compared to
net income of $1,337,572 in the same period in 2003. This was mainly
attributable to sales associated with the Window of the World Shopping Mall
(Diamond Mansion Phase 1 and Phase 2) in 2004. Sales for 2003 included
$6,710,923 in sales from Diamond Mansion Phase 1, with the balance being sales
of residential property.
Floors one through five of Diamond Mansion Phase 1 are commercial
shopping space, which differs from what we referred to as normal residential
properties, which up to that point had all been residential apartments. Sales
from Diamond Mansion Phase I for 2004 were $5,402,777 for the nine months
ended September 30, 2004, compared to $6,710,923 for the comparable period in
2003.
Sales from Diamond Mansion Phase 2, which is also commercial shopping
space, were $5,223,053 during the nine months ended September 30, 2004
compared to no sales in the comparable period in 2003.
Cost of sales increased by 49% to $6,246,104 during the nine months
ended September 30, 2004, as compared to $4,180,858 for the comparable period
in 2003. This increase was due in part to a 40% increase in sales, and due in
part to reductions in the carrying values of certain slow moving properties in
the amount of $505,498.
Gross profit margins vary from project to project depending on a
number of factors including: (a) cost of land use rights; (b) customer demand;
(c) availability of other properties;
21
and (d) competitor pricing policies. Typically, the sales of commercial
properties (retail shops) result in higher gross profits than sales of
residential properties.
Selling expenses increased by 275% to $610,578 during the nine months
ended September 30, 2004, as compared to $162,930 for the comparable period in
2003. This increase was due to marketing efforts related to the Diamond
Mansion properties.
General and administrative expenses increased by 162% to $942,848
during the nine months ended September 30, 2004, as compared to $338,393 for
the comparable period in 2003. This increase was due primarily to the
charging to expense of $280,891 in offering costs which had previously been
deferred and in part to increased staffing to handling the higher volume of
activities.
Interest expense decreased by 30% to $204,873 during the nine months
ended September 30, 2004, compared with $294,550 during the comparable period
in 2003. This was due to a decrease in the debt outstanding during 2004 as
compared to 2003.
Income Taxes
Provision for the People's Republic of China enterprise income tax
("EIT") is calculated at the prevailing rate based on the estimated assessable
profits less available tax relief for losses carried forward. For the years
ended December 31, 2003 and 2004, Town House has been granted the privilege of
computing EIT based on 6% of sales revenues at the prevailing tax rate of 33%.
EIT is provided on the basis of the statutory profit for financial reporting
purposes, adjusted for income and expense items, which are not assessable or
deductible for income tax purposes.
A reconciliation of EIT tax at the statutory rate to Town House's
effective rate is as follows:
2003 2002
------------ ------------
Computed at the Statutory Rate $ 936,527 $ 519,077
Tax effect of special tax rate
granted during 2003 (756,729) -
Tax effect tax of minor timing
differences and credits - (48,079)
------------ ------------
Tax at effective rate $ 179,798 $ 470,998
============ ============
As of September 30, 2004, provision for the People's Republic of
China enterprise income tax ("EIT") is calculated at 50% of the prevailing
income tax rate of 33% due to a reduced rate granted to Town House for 2004.
As of September 30, 2003, provision for the People's Republic of
China enterprise income tax ("EIT") is calculated based on the 2003 privilege
of computed EIT based on 6% of sales revenues at the prevailing rate of 33%.
Liquidity and Capital Resources
Cash provided by operations totaled $3,802,017 for 2003 compared to cash
used in operations of $640,752 in 2002. The Company experienced positive cash
flows from operations
22
during 2003 due primarily to an increase in sales revenues for 2003. Sales
revenues were $9,080,701 in 2003 compared to $6,375,071 in 2002.
Town House anticipates that it will have adequate working capital in the
foreseeable future. However, Town House may wish to borrow additional amounts
in order to expand and grow its operations.
Cash provided by operations totaled $4,446,733 for the nine moths
ended September 30, 2004. The cash flow from operations was due primarily to
profitable operations combined with a $1,381,753 increase in advances from
buyer and a $1,856,796 increase in accounts payable offset in part by a
$2,374,340 increase in construction in progress and a $792,800 reduction in
amounts due to directors.
Contractual Obligations
The following table is a summary of the Company's contractual obligations
as of December 31, 2003.
Less than
Total One Year 1-3 years Thereafter
------------ ------------ ------------ ------------
Due to Directors $ 2,709,075 $ 2,709,075 $ - $ -
Enterprise Taxes Payable 1,006,201 1,006,201 - -
Other Tax Payable 400,441 400,441 - -
Short-Term Loans 791,063 791,063 - -
Long Term Debt 3,159,887 2,253,201 227,697 678,989
------------ ------------ ------------ ------------
Total $ 8,066,667 $ 7,159,981 $ 227,697 $ 678,989
============ ============ ============ ============
The following table is a summary of Town House's contractual obligations
as of September 30, 2004:
Less than
Total One Year 1-3 years Thereafter
------------ ------------ ------------ ------------
Amounts due to directors $ 1,916,275 $ 1,916,275 $ - $ -
Deferred income
taxes payable 1,378,487 1,378,487 - -
Other tax payable 759,790 759,790 - -
Short-term loans 370,319 370,319 - -
Long-term loans 1,747,316 893,946 23,724 829,646
------------ ------------ ------------ ------------
Total $ 6,172,187 $ 5,318,817 $ 23,724 $ 829,646
============ ============ ============ ============
AMENDMENT TO ARTICLES OF INCORPORATION
The proposed amendment to the Company's Articles of Incorporation will
cause the Company to change the name of the Company to "Town House Holdings,
Inc.," or such similar name as determined by the new Board of Directors, and
will increase its authorized capitalization from 20,000,000 shares, to
50,000,000 shares of Common Stock. Upon filing of the Amendment to the
Articles with the Nevada Secretary of State, the name change will be
effective.
23
Following the Closing of the Acquisition, the operations of Town House
will become the principal operations of the Company. Due to the Company's new
business direction following the Acquisition, management wishes to more
properly reflect its business activities, by changing the Company's name to
"Town House Holdings, Inc.," or such similar name as decided by the Board of
Directors. Management does not believe that the name change will have any
material effect on the Company's operations.
The Company currently has only 20,000,000 shares authorized, and will
have a total of 19,989,333 shares outstanding following the transaction.
Therefore, the Company will not have sufficient authorized but unissued shares
to raise any equity capital, to make any acquisitions, or to engage in any
other financing involving the shares of Common Stock of the Company.
Accordingly, the parties to the Exchange Agreement have determined it is in
the best interest of the Company to increase its authorized capitalization to
50,000,000 shares to provide the Company with sufficient authorized but
unissued shares for future equity financings, possible acquisitions, and other
transactions requiring the issuance of Common Stock.
The Nevada Revised Statutes (the "Nevada Law") requires the approval of
shareholders who hold at least a majority of the voting power present at a
meeting at which a quorum is present to amend the Company's Articles of
Incorporation to change its name and to increase its authorized capitalization
of shares of Common Stock. Nevada Law also permits actions that would
otherwise require a vote at a meeting of shareholders to be taken by written
consent of the holders of at least the number of shares that would be
necessary to authorize such actions at a meeting.
Shareholders who own approximately 55.6% of the issued and outstanding
voting securities of the Company, including officers and directors, have
consented to amend the Company's Articles of Incorporation to change its name
to "Town House Holdings, Inc.," or such similar name as decided by the Board
of Directors and to increase its authorized capitalization of Common Stock.
PROPOSED REVERSE STOCK SPLIT
As a result of the Reverse Split, each three shares of Common Stock
outstanding at the effective time of the Reverse Split, will, without any
action on the part of the holder thereof, become one share of Common Stock.
For purposes of this description, the Common Stock, as presently constituted,
is referred to as the "Old Common Stock" and the Common Stock resulting from
the Reverse Split is referred to as the "New Common Stock." The closing bid
price of the Company's Old Common Stock on January 14, 2005 was $0.23.
Principal Effects of the Reverse Split
The principal effects of the Reverse Split will be as follows:
Based upon the 3,598,000 shares of Old Common Stock outstanding on the
Record Date, the Reverse Split would decrease the outstanding shares of Old
Common Stock to 1,199,333 shares. The Reverse Split will not decrease the
authorized number of shares of Common Stock, or change the par value per share
($0.001) of Common Stock. Upon the effectiveness of the Reverse Split, and
the completion of the Acquisition, approximately 19,989,333 shares of New
Common Stock would be outstanding, including the 18,390,000 shares issued to
the Town House shareholders.
24
The Company will obtain a new CUSIP number for the New Common Stock at
the time of the Reverse Split. Following the effectiveness of the Reverse
Split, each three shares of Old Common Stock, without any action on the part
of the holder, will represent one share of New Common Stock.
Subject to minor differences resulting from the rounding up of fractional
shares, as described below, consummation of the Reverse Split will not result
in a material change in the relative equity position or voting power of the
holders of Old Common Stock.
The Amendment of the Company's Articles of Incorporation will be filed
with the Nevada Secretary of State, twenty days after the mailing of this
Information Statement. The Reverse Split is also expected to become effective
at approximately the date of such filing (the "Effective Date").
Purposes of the Reverse Stock Split
The Reverse Split was a negotiated provision of the Exchange Agreement.
The Reverse Split will decrease the number of shares of Old Common Stock
outstanding and presumably increase the per share market price for the New
Common Stock. Theoretically, the number of shares outstanding should not, by
itself, affect the marketability of the stock, the type of investor who
acquires it, or the Company's reputation in the financial community.
Many leading brokerage firms are reluctant to recommend lower-priced
securities to their clients and a variety of brokerage house policies and
practices currently tend to discourage individual brokers within firms from
dealing in lower-priced stocks. Some of those policies and practices pertain
to the payment of brokers' commissions and to time-consuming procedures that
make the handling of lower priced stocks unattractive to brokers from an
economic standpoint. In addition, the structure of trading commissions also
tends to have an adverse impact upon holders of lower priced stocks because
the brokerage commission on a sale of a lower priced stock generally
represents a higher percentage of the sales price than the commission on a
relatively higher priced issue.
In addition, in the absence of the Reverse Split, there are not a
sufficient number of authorized but unissued shares of Common Stock to
consummate the Acquisition. The Board of Directors believes that the Reverse
Split and Acquisition is in the best interest of the Company and its
shareholders because the Acquisition will provide shareholders with an
operating business with the potential for growth. The Reverse Split is
required to consummate the Acquisition and, if the Reverse Split is not
consummated, the Acquisition will not take place, and the Company will remain
an inactive "blank check" company with no significant assets or business.
Additionally, the Reverse Split would reduce the number of shares of its
Common Stock outstanding to amounts that the Board of Directors believes are
more reasonable in light of its size and market capitalization. Finally, the
resulting company may require additional capital for its operations and may
not be able to raise the necessary capital unless the price of the Common
Stock is higher than the current Common Stock price levels. However, no
assurance can be given that the Reverse Split will result in any increase in
the Common Stock price or that the Company will be able to complete any
financing following the Reverse Split.
When the trading price of the Company's Common Stock is below $5.00 per
share, the Common Stock is considered to be "penny stocks" that are subject to
rules promulgated by the United States Securities and Exchange Commission (the
"Commission") (Rule 15-1 through 15g-9) under the Securities Exchange Act of
1934. These rules impose significant requirements
25
on brokers under these circumstances, including: (a) delivering to customers
the Commission's standardized risk disclosure document; (b) providing to
customers current bid and offers; (c) disclosing to customers the
broker-dealer and sales representatives' compensation; and (d) providing to
customers monthly account statements.
The possibility exists that the reduced number of outstanding shares will
adversely affect the market for the Common Stock by reducing the relative
level of liquidity. In addition, the Reverse Split will increase the number
of shareholders who own odd lots, or less than 100 shares. Shareholders who
own odd lots typically find it difficult to sell their shares and frequently
find odd lot sales more expensive than round lot sales of 100 shares or more.
After the Reverse Split, and the completion of the Acquisition, the
Company will have issued and outstanding approximately 19,989,333 shares of
its Common Stock, and the Company will have the corporate authority to issue
approximately 30,010,667 additional shares of authorized but unissued Common
Stock. These authorized and unissued shares may be issued without shareholder
approval at any time, in the sole discretion of the Board of Directors. The
authorized and unissued shares may be issued for cash, to acquire property or
for any other purpose that is deemed in the best interests of the Company.
Any decision to issue additional shares will reduce the percentage of the
Company's shareholders' equity held by the current shareholders and could
dilute the Company's net tangible book value.
No Exchange of Certificates and Elimination of Fractional Share Interests
On the Effective Date, three shares of Old Common Stock will
automatically be combined and changed into one share of New Common Stock. No
additional action on the part of the Company or any shareholder will be
required in order to effect the Reverse Split. Shareholders will not be
requested to exchange their certificates representing shares of Old Common
Stock held prior to the Reverse Split for new certificates representing shares
of New Common Stock. However, shareholders will be furnished the necessary
materials and instructions to effect such exchange upon request.
No fractional shares of New Common Stock will be issued to any
shareholder, and all fractional shares will be rounded up to the next whole
number.
Federal Income Tax Consequences of the Reverse Split
The combination of three shares of the Old Common Stock into one share of
New Common Stock should be a tax-free transaction under the Internal Revenue
Code of 1986, as amended, and the holding period and tax basis of the Old
Common Stock will be transferred to the New Common Stock received in exchange
therefor.
This discussion should not be considered as tax or investment advice, and
the tax consequences of the Reverse Split may not be the same for all
shareholders. Shareholders should consult their own tax advisors to know their
individual Federal, state, local and foreign tax consequences.
26
APPROVAL OF THE 2004 STOCK INCENTIVE PLAN
The Company's Board of Directors has adopted a 2004 Stock Incentive Plan
(the "Plan"). Shareholders who hold approximately 55.6% of the outstanding
stock of the Company have approved the Plan. The Plan designates a Stock
Option Committee appointed by the Board of Directors and authorizes the Stock
Option committee to grant or award to eligible participants of the Company and
its subsidiaries and affiliates, stock options, stock appreciation rights,
restricted stock performance stock awards and Bonus Stock awards for up to
1,500,000 post-split shares of the New Common Stock of the Company. The
initial members of the Stock Option Committee have not yet been appointed.
There are no awards outstanding under the Plan. A complete copy of the Plan
is attached hereto as Exhibit "B."
The following is a general description of certain features of the Plan:
1. Eligibility. Officers, other key employees and consultants of the
Company, its subsidiaries and its affiliates who are responsible for the
management, growth and profitability of the business of the Company, its
subsidiaries and its affiliates, are eligible to be granted stock options,
stock appreciation rights, and restricted or deferred stock awards under the
Plan. Directors are eligible to receive Stock Options.
2. Administration. The Plan is administered by the Stock Option
Committee (the "Committee") of the Company. The Committee has full power to
select, from among the persons eligible for awards, the individuals to whom
awards will be granted, to make any combination of awards to any participants
and to determine the specific terms of each grant, subject to the provisions
of the Plan.
3. Stock Options. The Plan permits the granting of non-transferable
stock options that are intended to qualify as incentive stock options
("ISO's") under section 422 of the Internal Revenue Code of 1986, and stock
options that do not so qualify ("Non-Qualified Stock Options"). The option
exercise price for each share covered by an option shall be determined by the
Committee but shall not be less than 100% of the fair market value of a share
on the date of grant for ISO's, and not less than 85% of the fair market value
of a share on the date of grant for Non-qualified Stock Options. The term of
each option will be fixed by the Committee, but may not exceed 10 years from
the date of the grant in the case of an ISO or 10 years and two days from the
date of the grant in the case of a Non-Qualified Stock Option. In the case of
10% stockholders, no ISO shall be exercisable after the expiration of five (5)
years from the date the ISO is granted.
4. Stock Appreciation Rights. Non-transferable stock appreciation
rights ("SAR's") may be granted in conjunction with options, entitling the
holder upon exercise to receive an amount in any combination of cash or
unrestricted Common Stock of the Company (as determined by the Committee), not
greater in value than the increase since the date of grant in the value of the
shares covered by such right. Each SAR will terminate upon the termination of
the related option.
5. Restricted Stock. Restricted shares of the Common Stock may be
awarded by the Committee subject to such conditions and restrictions as they
may determine. The Committee shall also determine whether a recipient of
restricted shares will pay a purchase price per share or will receive such
restricted shares without, any payment in cash or property. No Restricted
Stock Award may provide for restrictions beyond ten (10) years from the date
of grant.
27
6. Performance Stock. Performance shares of Common Stock may be
awarded without any payment for such shares by the Committee if specified
performance goals established by the Committee are satisfied. The designation
of an employee eligible for a specific Performance Stock Award shall be made
by the Committee in writing prior to the beginning of the period for which the
performance is based. The Committee shall establish the maximum number of
shares to stock to be issued to a designated Employee if the performance goal
or goals are met. The Committee reserves the right to make downward
adjustments in the maximum amount of an Award if, in it discretion unforeseen
events make such adjustment appropriate. The Committee must certify in writing
that a performance goal has been attained prior to issuance of any certificate
for a Performance Stock Award to any Employee.
7. Bonus Stock. The Committee may award shares of Common Stock to
eligible persons, without any payment for such shares and without any
specified performance goals. The Employees eligible for bonus Stock Awards are
senior officers and consultants of the Company and such other employees
designated by the Committee.
8. Transfer Restrictions. Grants under the Plan are not transferable
except, in the event of death, by will or by the laws of descent and
distribution.
9. Termination of Benefits. In certain circumstances such as death,
disability, and termination without cause, beneficiaries in the Plan may
exercise Options, SAR's and receive the benefits of restricted stock grants
following their termination or their employment or tenure as a director as the
case may be.
10. Change of Control. The Plan provides that (a) in the event of a
"Change of Control" (as defined in the Plan), unless otherwise determined by
the Committee prior to such Change of Control, or (b) to the extent expressly
provided by the Committee at or after the time of grant, in the event of a
"Potential Change of Control" (as defined in the Plan), (i) all stock options
and related SAR's (to the extent outstanding for at least six months) will
become immediately exercisable: (ii) the restrictions and deferral limitations
applicable to outstanding restricted stock awards and deferred stock awards
will lapse and the shares in question will be fully vested: and (iii) the
value of such options and awards, to the extent determined by the Committee,
will be cashed out on the basis of the highest price paid (or offered) during
the preceding 60-day period, as determined by the Committee. The Change of
Control and Potential Change of Control provisions may serve as a disincentive
or impediment to a prospective acquirer of the Company and, therefore, may
adversely affect the market price of the Common Stock of the Company.
11. Amendment of the Plan. The Plan may be amended from time to time by
majority vote of the Board of Directors provided as such amendment may affect
outstanding options without the consent of an option holder nor may the plan
be amended to increase the number of shares of Common Stock subject to the
Plan without stockholder approval.
Shareholders should note that certain disadvantages may result from the
adoption of the Plan. Pursuant to the plan the Company is reserving the right
to issue up to 1,500,000 shares of New Common Stock. Such issuances may be in
the form of stock options, stock appreciation rights, restrictive stock
awards, performance stock or bonus stock. Each of these issuances may be made
at prices below the then current market price of the Company's Common Stock,
or at the time of exercise the exercise price may be below current market
prices of the Company's Common Stock. Accordingly, the sale of these shares
may adversely affect the
28
market price of our Common Stock. The issuance of shares upon the exercise of
stock options may also result in substantial dilution to the interests of
other stockholders. Additionally, the issuance of shares under the plan will
result in the reduction of shareholder's interest of the Company with respect
to earnings per share, voting, liquidation and book value per share.
Federal Income Tax Consequences
The following discussion summarizes U.S. federal tax treatment of options
granted under the Plan under federal tax laws currently in effect. The rules
governing the tax treatment of options are quite technical and the following
discussion is necessarily general in nature and does not purport to be
complete. The statutory provisions and interpretations described below are, of
course, subject to change, and their application may vary in individual
circumstances. Optionees are encouraged to seek professional tax advice when
exercising Awards under the Plan.
Non-Qualified Stock Options. If an optionee is granted options under the
Plan that constitute non-qualified stock options, the optionee will not have
taxable income on the grant of the option, nor will the Company be entitled to
any deduction. Generally, on exercise of non-qualified stock options, an
optionee will recognize ordinary income, and the Company will be entitled to a
deduction, in an amount equal to the difference between the exercise price and
the fair market value of the Common Stock on the date of exercise. The
holder's basis for the Common Stock for purposes of determining gain or loss
on subsequent disposition of such shares generally will be the fair market
value of the Common Stock on the date the optionee exercises the stock option.
Any subsequent gain or loss will be generally taxable as capital gains or
losses.
Incentive Stock Options. There is no taxable income to an optionee when
he is granted an option under the Plan that constitutes an ISO or when that
option is exercised. However, the amount by which the fair market value of the
Common Stock at the time of exercise exceeds the exercise price will be an
"item of tax preference" for the optionee. Gain realized by the optionee on
the sale of an ISO is taxable at capital gains rates, and no tax deduction is
available to the Company, unless the optionee disposes of the Common Stock
within (a) two years after the date of grant of the ISO or (b) within one year
of the date the Common Stock was transferred to the optionee. If the shares of
Common Stock are sold or otherwise disposed of before the end of the one-year
and two-year periods specified above, the difference between the exercise
price and the fair market value of the Common Stock on the date of the
option's exercise will be taxed at ordinary income rates, and the Company will
be entitled to a deduction to the extent the optionee must recognize ordinary
income. An ISO exercised more than three months after an optionee retires,
other than by reason of death or disability, will be taxed as a non-qualified
stock option, and the optionee will have been deemed to have received income
on the exercise taxable at ordinary income rates. The Company will be
entitled to a tax deduction equal to the ordinary income, if any, realized by
the optionee.
SARs. No taxable income is realized on the receipt of an SAR, but on
exercise of the SAR the fair market value of the Common Stock (or cash in lieu
of Common Stock) received must be treated as compensation taxable as ordinary
income to the optionee in the year of the exercise. The Company will be
entitled to a deduction for compensation paid in the same amount which the
optionee realized as ordinary income.
29
Stock Awards. The taxation of stock awards will depend in part on the
type of stock award that is granted. However, if an employee has been granted
a restricted stock unit, he will generally not realize taxable income at the
time of grant, and the Company will not be entitled to a deduction at that
time. Instead, the employee will generally recognize ordinary income at the
time a restricted stock unit becomes vested (that is, when the Committee
approves the release of the restricted stock unit) in an amount equal to the
fair market value of the Common Stock that becomes vested pursuant to such
restricted stock unit (plus the amount of any dividend equivalents awarded
with respect to the restricted stock unit and interest thereon), and the
Company will be entitled to a corresponding deduction.
The foregoing is only a summary of certain federal income tax
consequences under the Plan. It does not purport to be complete and does not
discuss the tax consequences arising in the context of a participant's death
or the income tax laws of any municipality, state or foreign country in which
the participant's income or gain may be taxable.
The foregoing is only a summary of the Plan and is qualified in its
entirety by reference to its full text, a copy of which is attached hereto as
Exhibit "B."
MANAGEMENT
Current Management of the Company
The following table sets forth the names, ages, and positions with the
Company for each of the directors and officers of the Company.
Name Age Positions* Since
----------------------------------------------------------------------------
Richard B. Stuart 70 President and Director 1986
Jack M. Gertino 65 Secretary, Treasurer and Director 1986
* In August, 2003, Philip C. Gugel, Vice President and a director, passed
away. Mr. Gugel has not been replaced.
All executive officers are elected by the Board and hold office until the
next Annual Meeting of stockholders or until their successors are duly elected
and qualified.
The following is information on the business experience of each director
and officer.
Richard B. Stuart earned his BA at New York University in 1955 and
masters and doctoral degrees at Columbia University in 1960 and 1965,
respectively. He currently holds the following positions: President,
Behavior Change Systems (Ann Arbor, MI), a firm offering business consulting
and program development services; Program Director, Respecialization in
Clinical Psychology, The Fielding Graduate Institute (Santa Barbara, CA);
Clinical Professor Emeritus, Department of Psychiatry, University of
Washington (Seattle, WA). Dr. Stuart also provides psychological services
through a private practice in Seattle, WA. From 1972 to 1983, he was
Psychological Director of Weight Watchers International and President of its
subsidiary, One-To-One Weight Control Clinics. Dr. Stuart has also been a
consultant to companies involved in businesses ranging from wholesale
groceries to auto parts production and human services. Dr. Stuart was an
officer and director of Domino Investments (Salt Lake City, UT).
30
Jack M. Gertino has been a private investor and business consultant in
Salt Lake City, Utah, for the past ten years. For the past ten years, he has
also been engaged in the private development of, and investment in, commercial
and residential real estate in Utah, Arizona and New Mexico. He currently
provides consulting services for financial institutions. Mr. Gertino has been
involved in private and public financings over the past twenty years. From
February 1992 to the present, he has served as a director of Red Horse
Entertainment Corporation, a publicly held shell corporation seeking a
business acquisition.
Proposed New Management
At or shortly following Closing of the Town House Acquisition, it is
anticipated that the current Board of Directors will appoint the designees of
Town House as new directors. Following such appointment, the current Board of
Directors will resign their positions with the Company. Two of these
individuals are expected to become executive officers of the Company at
Closing. The individuals who it is currently expected will be directors and
officers of the Company following Closing are set forth below.
Name Age Position(s)
---------------------------------------------------------------------------
Fang Zhong 39 Chairman, Director, Chief Executive
Officer and President
Luo Yun Fang 46 Director, Executive Vice President-Chief Financial
Officer and Treasurer
Fang Wei Feng 33 Director
Fang Wei Jun 37 Director
Hu Min 24 Director
The following is information on the business experience of each director
and officer.
Mr. Fang Zhong is the founder and has been the Chairman of the Board,
Chief Executive Officer and President of Town House since its organization in
2003. From 1995 to the present, he has been the Chief Executive Officer and a
director of Wuhan Pacific which is the principal operating subsidiary of Town
House. Mr. Fang Zhong received Bachelor of Science degree in industrial and
domestic architecture from the Wuhan Institute of Urban Construction. He also
participated in the MBA program at Northern Jiaotong University. He has
received various awards, including "Young Entrepreneur in Central-south Area"
of the PRC, and "One of Ten Excellent Young Entrepreneurs Leading Private
Enterprises in Wuhan". He also holds various significant positions such as
the Standing Director of Hubei Physical Culture Foundation, Deputy to Jiang'an
District People's Congress, a Standing Member to Jiang'an District Political
Consultative Conference, and the Vice Chairman of Jiang'an District Young
People Association, etc.
Mr. Luo Yun Fang became a director, the Executive Vice President-Chief
Financial Officer and Treasurer of Town House in 2003. He has been the
general manager of Wuhan Pacific since 1998. He has more than 20 years of
experience in financial and administration
31
management. He received a Bachelor of Science degree in 1980 from the Hunan
Financial University, and received an MBA degree from Northern Jiaotong
University in 2001. Mr. Luo Yun Fang also holds other positions, such as an
editor of the Financial Periodical in the PRC; Consultant and Standing
Director of Chinese Finance and Tax website; member of standing committee and
member of executive committee of Wuhan Industrial and Commercial Association
and Wuhan General Commerce Association.
Mr. Fang Wei Feng has been employed as the manager of the materials
department and construction operations responsible for construction material
purchases and distribution, since 1996. He became a director and Vice
President-Construction Operations of Town House in 2003.
Mr. Fang Wei Jun has been employed as the manager of the engineering
department of Wuhan Pacific, since 2000. He has been an employee of Wuhan
Pacific for over ten (10) years. He became the General Manager of Operations
of Town House in 2003. He attended Zhengzhou College and graduated in 1985.
Ms. Hu Min has been employed as the Human Resources Manager of Wuhan
Pacific since 2000. She graduated from Wuhan University in 2001.
Mr. Fang Zhong is married to Ms. Hu Min. Fang Zhong, Fang Wei Feng, and
Fang Wei Jun are siblings. Luo Yun Fang is a cousin to all of these siblings.
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following sets forth the compensation of Comet's executive officers
for the three fiscal years ended December 31, 2003.
------------------- -------------- --------- -------- ------------- ---------------
Fiscal All
Name and Year Ended Other
Principal Position Dec. 31 (1)(2) Salary($) Bonus($) Options(#)(3) Compensation($)
------------------- -------------- --------- -------- ------------- ---------------
Richard B. Stuart 2003 0 0 0 10,000(1)
President and Chief 2002 0 0 0 5,000(2)
Executive Officer 2001 0 0 0 0
------------------- -------------- --------- -------- ------------- ---------------
Jack M. Gertino 2003 0 0 0 20,000(1)
Secretary/Treasurer 2002 0 0 0 10,000(2)
and Chief Financial 2001 0 0 0 0
Officer
------------------- -------------- --------- -------- ------------- ---------------
(1) The Company recorded compensation expense for Richard B. Stuart and
Jack M. Gertino, computed on an hourly basis, in the amounts indicated, for
their efforts in reviewing the business opportunity with Town House for a
possible business combination during the fiscal year, participating in
meetings and conference calls in connection with such opportunity, and
undertaking related activities.
32
(2) The Company recorded compensation expense for Richard B. Stuart and
Jack M. Gertino, computed on an hourly basis, in the amounts indicated, for
their efforts in reviewing a specific business opportunity for a possible
business combination during the fiscal year, participating in meetings and
conference calls in connection with such opportunity, and undertaking related
activities. This possible transaction was terminated in October, 2002.
(3) On March 11, 1999, the Company granted to Richard B. Stuart, Phillip
C. Gugel and Jack M. Gertino options to purchase 200,000 shares of Common
Stock each at an exercise price of $0.1875, which was the average of the bid
and asked prices for the Common Stock on that date. The options are vested
and expire in March 2009. The options were issued to compensate these persons
for their services to the Company over the past 13 years, for which they had
received no other compensation. Messrs. Gertino and Stuart have agreed that
their options to purchase all but 12,500 post-split shares each, will be
cancelled at the Closing. The options of Mr. Gugel have now passed on to his
estate.
The Company has no agreement or understanding, express or implied, with
any officer, director, or principal stockholder, or their affiliates or
associates, regarding employment with the Company or compensation for
services. The Company has no plan, agreement, or understanding, express or
implied, with any officer, director, or principal stockholder, or their
affiliates or associates, regarding the issuance to such persons of any shares
of the Company's authorized and unissued Common Stock. There is no
understanding between the Company and any of its present stockholders
regarding the sale of a portion or all of the Common Stock currently held by
them in connection with any future participation by the Company in a business.
There are no other plans, understandings, or arrangements whereby any of the
Company's officers, directors, or principal stockholders, or any of their
affiliates or associates, would receive funds, stock, or other assets in
connection with the Company's participation in a business. No advances have
been made or contemplated by the Company to any of its officers, directors, or
principal stockholders, or any of their affiliates or associates.
There is no policy that prevents management from adopting a plan or
agreement in the future that would provide for cash or stock based
compensation for services rendered to the Company.
In connection with the Exchange Agreement between the Company and Town
House, Town House has entered into a consulting agreement with Belair
Consulting, L.L.C., a limited liability company of which Messrs. Stuart and
Gertino are owners. (See "Certain Relationships and Related Transactions,"
page 34).
The following table sets forth certain information with respect to
unexercised options held by the executive officers as of December 31, 2003.
The option shares reflected below give effect to the proposed Reverse Split.
33
Number of Securities Value of Unexercised
Name and Principal Underlying Unexercised Options In-the-Money Options
Position at December 31, 2003 (#) at December 31, 2003($)(1)
--------------------- ------------------------------- ---------------------------
Exerciseable/Unexerciseable Exerciseable/Unexerciseable
--------------------------- ---------------------------
Richard B. Stuart (2)
President 66,667/ -0- -0-/ -0-
Philip C. Gugel (3)
Vice President 66,667/ -0- -0-/ -0-
Jack M. Gertino (2)
Secretary and Treasurer 66,667/ -0- -0-/ -0-
(1) This value is determined on the basis of the difference between the
average of the high bid and asked prices on December 31, 2003, of the
securities underlying the options, and the exercise price.
(2) The options covering all but 12,500 post-split shares each held by
Richard B. Stuart and Jack M. Gertino, will be cancelled at Closing.
(3) Mr. Gugel passed away in 2003; however, his options are held by his
estate.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Closing of the Exchange Agreement, Town House and
the Company have entered into a consulting agreement (the "Consulting
Agreement") with Belair Consulting, LLC, a Utah limited liability company
("Belair"), of which Jack M. Gertino, Secretary/Treasurer of the Company and
Richard Stuart, officers and directors, are members and owners. Under this
agreement, Belair will provide consulting services in financial management
planning, capital formation and shareholder relations for a period of two (2)
years, and will receive up to 400,000 post-split shares of restricted Common
Stock of the resulting company, together with up to $130,000 in cash
compensation, over such two year period. This transaction cannot be
considered the result of arms' length negotiations.
Except the transactions described above, there are no proposed
transactions and no transactions during the past two years to which the
Company was a party and in which any officer, director, or principal
shareholder, or their affiliates or associates, was also a party.
The officers and directors are compensated at an hourly rate for time
expended in connection with the Exchange Agreement.
A shareholder of the Company, James C. Lewis, has provided legal services
in connection with the Town House transaction, and will be compensated at his
normal rates for such services.
34
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Although quotations for the Company's Common Stock appear on the NASD
Electronic Bulletin Board, there is no established trading market for the
Common Stock. For the past two calendar years to the present, transactions in
the Common Stock can only be described as sporadic. Consequently, the Company
is of the opinion that any published prices cannot be attributed to a liquid
and active trading market and, therefore, are not indicative of any meaningful
market value.
The following table sets forth for the respective periods indicated the
prices of the Company's Common Stock in the over-the-counter market, as
reported and summarized by the NASD Electronic Bulletin Board. Such prices
are based on inter-dealer bid and asked prices, without markup, markdown,
commissions, or adjustments and may not represent actual transactions.
Calendar Quarter Ended High Bid ($) Low Bid ($)
----------------------- ------------- -----------
March 31, 2002 0.5300 0.1600
June 30, 2002 0.2300 0.1000
September 30, 2002 0.1200 0.1000
December 31, 2002 0.0700 0.0700
March 31, 2003 0.0700 0.0700
June 30, 2003 0.0700 0.0700
September 30, 2003 0.0800 0.0700
December 31, 2003 0.1500 0.0800
March 31, 2004 0.3000 0.1500
June 30, 2004 0.2500 0.2400
September 30, 2004 0.2900 0.2000
December 31, 2004 0.2900 0.2100
As of January 14, 2005, the closing bid price for the Company's
Common Stock was $0.23. There are outstanding options to purchase
600,000 pre-split shares of Common Stock at an exercise price of $0.1875,
which expire in March 2009. Of such amount, Jack M. Gertino and Richard B.
Stuart each hold options to purchase 200,000 shares. In connection with the
Town House Acquisition, Jack M. Gertino and Richard B. Stuart have agreed that
options to purchase all but 75,000 pre-split shares may be cancelled at
Closing. There is an outstanding warrant to purchase 50,000 pre-split shares
of the Company's Common Stock at an exercise price of $0.1875, which expires
in March 2009. All shares of Common Stock outstanding may be sold without
restriction under Rule 144(k) promulgated under the Securities Act of 1933,
except 403,360 pre-split shares, which are held by officers and directors
("Control Shares"). Control Shares may be sold subject to complying with all
of the terms and conditions of Rule 144, except the one-year holding period,
which has been satisfied.
Since its inception, no dividends have been paid on the Company's Common
Stock. The Company intends to retain any earnings for use in its business
activities, so it is not expected that any dividends on the Common Stock will
be declared and paid in the foreseeable future.
35
At January 17, 2005, there were approximately 98 holders of
record of the Company's Common Stock.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors, executive officers and persons who own more than ten percent of a
registered class of our equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of our Common Stock. The Company believes all forms required to be
filed under Section 16 of the Exchange Act have been filed timely.
HISTORICAL FINANCIAL INFORMATION OF COMET AND TOWN HOUSE
The audited consolidated financial statements of Town House for the two
years ended December 31, 2003, together with the report of Murrell, Hall,
McIntosh & Co., PLLP, independent auditors, and the unaudited consolidated
financial statements of Town House for the nine months ended September
30, 2004 and 2003, are included in this Information Statement beginning
on page F-1.
The financial statements of Comet for the fiscal year ended December 31,
2003, have been audited by HJ & Associates, LLC, independent public
accountants, as indicated in their report with respect thereto and are
included in Comet's Annual Report on Form 10-KSB for fiscal 2003, which is
incorporated herein by reference, in reliance upon the authority of said firm
as experts in accounting and auditing.
The unaudited financial statements of the Company for the nine
months ended September 30, 2004 and September 30, 2003, are included in the
Company's quarterly reports on Form 10-QSB for the quarter ended September 30,
2004, which is incorporated herein by reference. Similarly, the unaudited
financial statements for the Company for the quarters ended June 30, 2004 and
2003 and March 31, 2004 and 2003 are included in the Company's quarterly
reports on Form 10-QSB for the quarters ended June 30, 2004 and March 31,
2004, respectively, which are also incorporated herein be reference.
PRO FORMA INFORMATION
The Pro Forma Financial Information, required by Item 310(d) of
Regulation S-B showing the effect on the Company and Town House of the Town
House Acquisition, as of December 31, 2003 and September 30, 2004, are
included in this Information Statement beginning on page F-44.
INDEPENDENT ACCOUNTANTS
The Company's current independent auditor is HJ & Associates, LLC. It is
contemplated that following Closing of the Acquisition, Murrell, Hall,
McIntosh & Co PLLP ("Murrell"), Oklahoma City, Oklahoma, will become the
Company's independent auditors.
36
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, files reports
and other information with the Commission. The Registration Statement and such
reports and other information may be inspected without charge at the Public
Reference Room maintained by the U.S. Securities and Exchange Commission (the
"Commission") at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such material may be obtained from the Public Reference Room of the
Commission at 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed
rates. Information on the operation of the Public Reference Room is available
by calling the Commission at 1-800-SEC-0330. In addition, the Commission
maintains an Internet site where the Registration Statement and other
information filed with the Commission may be retrieved, and the address of
such site is http://www.sec.gov. Statements made in this Information
Statement concerning the contents of any document referred to herein are not
necessarily complete.
By Order of the Board of Directors of
COMET TECHNOLOGIES, INC.
By /s/ Jack M. Gertino
-------------------------------------
Jack M. Gertino, Chairman
37
INDEX TO FINANCIAL STATEMENTS
Town House Land Limited and Subsidiaries:
1. Unaudited Condensed Consolidated Comparative Financial Statements as of
September 30, 2004 and 2003:
Unaudited condensed consolidated comparative balance sheets...........F-2
Unaudited condensed consolidated comparative statements
of operations.....................................................F-3
Unaudited condensed consolidated comparative statements of
members' equity...................................................F-4
Unaudited condensed consolidated comparative statements of
cash flows........................................................F-5
Notes to the unaudited condensed consolidated comparative
financial statements..............................................F-6
2. Consolidated Financial Statements as of December 31, 2003 and 2002:
Report of Independent Registered Public Accounting Firm..............F-21
Consolidated Balance Sheets..........................................F-22
Consolidated Statements of Operations................................F-23
Consolidated Statements of Members' Equity...........................F-24
Consolidated Statements of Cash Flows................................F-25
Notes to the Consolidated Financial Statements.......................F-27
Comet Technologies, Inc. and Subsidiaries:
1. Pro Forma Condensed Consolidated Financial Statements as of
September 30, 2004...................................................F-44
Pro Forma Condensed Consolidated Balance Sheet.......................F-45
Pro Forma Condensed Consolidated Statement of Operations.............F-47
Notes to Pro Forma Condensed Consolidated Financial Statements.......F-48
2. Pro Forma Condensed Consolidated Financial Statements as of
December 31, 2003....................................................F-49
Pro Forma Condensed Consolidated Statement of Operations...... .F-50
F-1
38
TOWN HOUSE LAND LIMITED & SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2004
(Unaudited)
(Expressed in U.S. dollars)
September 30,
2004
-------------
ASSETS
Current assets
Cash and equivalents $ 2,288,518
Accounts receivable, net 2,485,490
Other receivables, 223,983
Prepaid Expense 301,933
Properties held for resale 7,902,177
Construction-in-progress - current 4,686,159
-------------
Total current assets 17,888,260
-------------
Property and equipment - net 2,693,411
Construction-in-progress - non-current 931,433
-------------
Total assets $ 21,513,104
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,276,451
Advances from buyers 2,110,144
Amount due to directors 1,916,275
Deferred income tax liability 1,378,487
Other tax payable 759,790
Short - term loans 370,319
Current portion of long term debts- secured 893,946
-------------
Total current liabilities 9,705,412
-------------
Long-term debts - net of current portion shown 853,370
-------------
Minority interest 378,199
-------------
STOCKHOLDERS' EQUITY
Capital stock - HK$1 par ($.012), 500,000 share
Authorized issued and outstanding 62,180
Additional paid-in capital 5,857,936
General reserve 997,928
Retained profit (deficit) 3,658,078
-------------
Total stockholder's equity 10,576,122
-------------
Total liabilities and stockholders' equity $ 21,513,104
=============
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
39
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Unaudited)
(Expressed in U.S. dollars)
For the Nine Months
Ended September 30,
---------------------------
2004 2003
------------- -------------
Sales Revenues $ 10,625,830 $ 7,619,813
Cost of Goods Sold 6,246,104 4,180,858
------------- -------------
Gross Profit 4,379,726 3,438,955
------------- -------------
Operating Expenses
Selling expenses 610,578 162,930
Administrative expenses 942,848 338,393
Other operating expenses 17,678 966
------------- -------------
1,571,104 502,289
------------- -------------
Income from Operations 2,808,621 2,936,666
------------- -------------
Other (expense)/income
Other revenue 3,041 7,429
Interest and finance costs (204,874) (294,550)
------------- -------------
(201,833) (287,121)
------------- -------------
Net Income before Income Taxes and
Minority Interest 2,606,789 2,649,545
Provision for Income Taxes (383,046) (150,872)
------------- -------------
Net Income before Minority Interest 2,223,743 2,498,673
Minority Interest in Earnings (69,504) (74,960)
------------- -------------
Net Income $ 2,154,239 $ 2,423,713
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
40
TOWN HOUSE LAND LIMITED & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF MEMBERS' EQUITY
AS OF SEPTEMBER 30, 2004
(Unaudited)
(Expressed in U.S. dollars)
Additional Retained Total
Share paid-in Capital Profit/ Minority members'
capital capital reserve (loss) interest equity
------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 2003 $ 62,180 $ 5,857,936 $ 997,928 $ 1,503,839 $ 308,695 $ 8,730,578
Net income for the
nine months ended
September 30, 2004 - - - 2,154,239 69,504 2,223,743
------------ ------------ ------------ ------------ ------------ ------------
Balance at
September 30, 2004 $ 62,180 $ 5,857,936 $ 997,928 $ 3,658,078 $ 378,199 $ 10,954,321
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
41
TOWN HOUSE LAND LIMITED & SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
AS OF SEPTEMBER 30, 2004 AND 2003
(Unaudited)
(Expressed in U.S. dollars)
September 30, September 30,
2004 2003
-------------- --------------
Cash flows from operating activities
Net income $ 2,154,239 $ 2,423,713
Adjustments to reconcile net profit to net cash
provided by operating activities
Depreciation 51,658 59,635
Minority interest in earnings 69,504 41,368
Changes in:
Accounts receivable, net and other receivables 541,834 (4,451,376)
Properties held for resale 440,307 3,737,923
Prepayments and advances to suppliers 105,256 (232,007)
Construction in progress (2,374,340) (512,593)
Deferred offering costs 280,891 (280,891)
Accounts payable and other payables 1,856,796 680,736
Amounts due to directors (792,800) 821,109
Advances from buyers 1,381,753 (1,421,969)
Deferred tax expenses 372,286 703,181
Other taxes payable 359,349 (115,978)
-------------- --------------
Net cash provided by operating activities 4,446,733 1,452,851
-------------- --------------
Cash flows from investing activities
Purchases of fixed assets (1,687,869) -
-------------- --------------
Net cash provided by (used in) investing activities (1,687,869) -
-------------- --------------
Cash flows from financing activities
Notes payable 8,000 -
Principal payments on loans (1,841,315) (774,268)
Capital contributions - 62,628
-------------- --------------
Net cash provided by/(used in) financing activities (1,833,315) (711,640)
-------------- --------------
Net increase in cash 925,549 741,211
Cash at beginning of year 1,362,969 302,044
-------------- --------------
Cash at end of period/ year $ 2,288,518 $ 1,043,255
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $ 204,874 $ 294,550
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
42
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
1. DESCRIPTION OF BUSINESS
Organizational structure
Town House Land Limited (formerly: Hong Kong Window of the World Apparel Co.,
Limited) was incorporated in Hong Kong, as a private limited liability company
on August 13, 2001 with an authorized capital of $64,103 (HK$500,000) divided
into 500,000 ordinary shares of par value $0.12 (HK$1.00) each. Town House
Land Limited ("Town House Land") changed to its present name on August 13,
2003. On August 15, 2003, Town House Land Limited entered into a reverse
merger agreement with Wuhan Town House Land Limited ("Wuhan Town House")
(formerly: Wuhan Pacific Real Estate Development Company Limited). At
September 30, 2004 Town House held 97% of the registered capital of Wuhan Town
House.
Wuhan Town House Land Limited ("Wuhan Town House") (formerly: Wuhan Pacific
Real Estate Development Company Limited) was registered as a formal third
level property Company in Hubei Province, in the People's Republic of China as
a limited liability company on December 18, 1995 with a registered capital of
$1,207,729 (Rmb.10,000,000) and a defined period of existence of 14 years to
December 18, 2009 as a third level property company. Subsequent
recapitalizations during 2000 increased Wuhan Town House's registered capital
to $6,038,647 and changed its classification to a second level property
company.
On October 10, 2003 Wuhan City Foreign Investment Bureau approved the
registration of Wuhan Town House Land (formerly: Wuhan Pacific Real Estate
Development Company Limited) as a Sino Foreign Joint Investment Enterprise
with a defined period of existence of 20 years to October 27, 2023.
Pursuant to the approval of Wuhan City Industrial and Commercial
Administrative Bureau on February 20, 2004 Wuhan Pacific Real Estate
Development Company Limited changed its name to Wuhan Town House Land Limited.
In addition, Town House Land Limited owns 100% shares of Town House Land (USA)
Inc.; a Company was incorporated in California, United States on March 4, 2004
with authorized capital of $1,000,000 divided into 1,000,000 shares at par of
$1.00. Upon incorporation, 300,000 shares were issued to Wuhan Town House
Land Limited at par for cash of $300,000. The subsidiary company's principal
country of operations is in the United States.
Description of business
The Company's principal activity is the development and sale of commercial and
residential real estate. The Company's principal country of operations is in
The People's Republic of China ("PRC").
F-6
43
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
2. CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
Consolidations Policy - The condensed financial statements include the
accounts of Town House Land, Wuhan Town House Land from August 15, 2003
forward, and Town House Land (USA) from March 4, 2004 forward. Prior to
August 15, 2003, the financial statements reflect the activity of Wuhan Town
House Land, as adjusted for the effects of the recapitalization of August 15,
2003.
All significant inter-company transactions and balances within the Company are
eliminated in consolidation.
Cash and Equivalents - The Company considers all highly liquid debt
instruments purchased with maturity period of three months or less to be cash
equivalents. The carrying amounts reported in the accompanying consolidated
balance sheet for cash and cash equivalents approximate their fair value. The
Company has restricted cash in accordance with the loan covenants.
Accounts Receivable - Provision is made against accounts receivable to the
extent which they are considered to be doubtful. Accounts receivable in the
balance sheet is stated net of such provision. Town House must make estimates
of the collectability of accounts receivable. Town House analyzes historical
write-offs, changes in its internal credit policies and customer
concentrations when evaluating the adequacy of its allowance for doubtful
accounts. Differences may result in the amount and timing of expenses for any
period if Town House makes different judgments or uses difference estimates.
Properties Held for Sale - Properties held for sale are comprised of
properties held for sale and repossessed properties held for resale and are
stated at the lower of cost or net realizable value. Cost includes
acquisition costs of land use rights, development expenditure, interests and
any overhead costs incurred in bringing the developed properties to their
present location and condition.
Net realizable value is determined by reference to management estimates based
on prevailing market conditions. Management evaluates the market value of its
properties on a quarterly basis by comparing selling prices of its properties
with those of other equivalent properties in the vicinity offered by other
developers to determine whether market conditions have impaired the carrying
value of its inventories. During the nine months ended September 30, 2004,
the Company lowered the carrying value of certain slow moving properties by
$505,498. No such impairment was incurred for the comparable period of 2003.
Capital Reserve - Capital reserve represents that amount of reserve
appropriated from the net distributable profit after income tax in each year
when a net profit after operations is generated. In accordance with the
provisions of the Company's Memorandum and Articles of Association, the
Company is required to appropriate 20% of the net distributable profit after
enterprises income tax to capital reserve.
One-half of the capital reserve may be used for staff welfare payments and the
balance may be transferred back to the statement of operations to mitigate
the losses from operations. The Company shall not be required to appropriate
any amount to capital reserve when the balance standing in capital reserve is
equal to or exceeds 50% of the registered capital.
F-7
44
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
2. CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICIES (CONTINUED)
Property and Equipment Property and equipment is being depreciated over the
estimated useful lives of the related assets. Depreciation is computed on the
straight-line basis for both financial and income tax reporting purposes over
useful lives as follows:
Building and land rights 40 years
Equipment 5 years
Motor vehicles 5-8 years
Office furniture and fixtures 5 years
Repairs and maintenance costs are normally charged to the statement of
operations in the year in which they are incurred. In situations where it can
be clearly demonstrated that the expenditure has resulted in an increase in
the future economic benefits expected to be obtained from the use of the
asset, the expenditure is capitalized as an additional cost of the asset.
Property and equipment are evaluated annually for any impairment in value.
Town House must assess where the recoverable amount of any property and
equipment is determined to have declined below its carrying amount, the
carrying amount is reduced to reflect the decline in value. If the carrying
amount is less than the recoverable amount, an impairment charge must be
recognized based on the fair value of the asset. Management assumed Town
House was a going concern for purposes of evaluating the possible impairment
of its property and equipment. Should Town House not be able to continue as a
going concern, there may be significant impairment in the value of Town
House's property and equipment.
Construction-In-Progress - Properties currently under development are
accounted for as construction-in-progress. Construction-in-progress is
recorded at acquisition cost, including land rights cost, development
expenditure, professional fees and the interest expenses capitalized during
the course of construction for the purpose of financing the project. Upon
completion and readiness for use of the project, the cost of
construction-in-progress is to be transferred to properties held for sale. As
of September 30, 2004, one construction project is reflected as long-term as
further development has ceased until such time as new access roads are
completed by the Wuhan City Government. Management anticipates these roads
will be completed in 2004 at which time construction should resume on this
project.
Construction-In-Progress is valued at the lower of cost or market. Management
evaluates the market value of its properties on a quarterly basis by comparing
selling prices of its properties with those of other equivalent properties in
the vicinity offered by other developers reduced by anticipated selling costs
and associated taxes. In the case of construction in progress, management
takes into consideration the estimated cost to complete the project when
making the lower of cost or market calculation.
Related Companies - A related company is a company in which the director has
beneficial interests in and in which the company has significant influence.
F-8
45
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
2. CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICIES (CONTINUED)
Income Recognition In accordance with SFAS No. 66, "Accounting for Sales of
Real Estate," sales are recognized at closing only when sufficient down
payments have been obtained, possession and other attributes of ownership have
been transferred to the buyer and we have no significant continuing
involvement. The gain or loss resulting from the sale of properties is
included in net income at the time of sale.
Interest income is recognized when earned, taking into account the average
principal amounts outstanding and the interest rates applicable.
Cost of Goods Sold - The cost of goods sold includes the carrying amount of
the properties being sold and the business taxes paid by the Company in
connection with the sales. Business taxes included in cost of sales were
$547,230 and $442,935 for the period ended September 30, 2004 and September
30, 2003, respectively.
Foreign Currencies - These financial statements have been prepared in U.S.
dollars. The functional currencies for Town House and Wuhan Town House are
the "Hong Kong dollars" and "Renminbi" or "Yuan", respectively. Non-monetary
assets and liabilities are translated at historical rates, monetary assets and
liabilities are translated at the exchange rates in effect at the end of the
year, and income statement accounts are translated at average exchange rates.
There were no material translation gains or losses during the period ended
September 30, 2004 and September 30, 2003 as the Renminbi was tied to the U.S.
Dollar during the time period covered in these financial statements.
Taxation - Taxation on overseas profits has been calculated on the estimated
assessable profits for the year at the rates of taxation prevailing in the
countries in which the Company operates.
Provision for The People's Republic of China enterprise income tax is
calculated at the prevailing rate based on the estimated assessable profits
less available tax relief for losses brought forward.
Enterprise income tax
Under the Provisional Regulations of The People's Republic of China Concerning
Income Tax on Enterprises promulgated by the State Council and which came into
effect on January 1, 1994, income tax is payable by enterprises at a rate of
33% of their taxable income. Preferential tax treatment may, however, be
granted pursuant to any law or regulations from time to time promulgated by
the State Council.
Enterprise income tax ("EIT") is provided on the basis of the statutory profit
for financial reporting purposes, adjusted for income and expense items, which
are not assessable or deductible for income tax purposes. Property
development companies in Wuhan are assessed at the preferential rate of 33% on
15% of sales revenues generated. During 2003, the Company was allowed certain
tax concessions which allowed it to compute its Enterprise income tax at a
rate of 33% of 6% of sales.
F-9
46
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
2. CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICIES (CONTINUED)
Deferred Taxes - Deferred taxes are accounted for at the current tax rate in
respect of timing differences between profit as computed for taxation purposes
and profit as stated in the accounts to the extent that a liability or asset
is expected to be payable or receivable in the foreseeable future. The
principal timing difference giving rise to the deferred income tax liability
at September 30, 2004 is the deferral for income tax reporting purposes of the
gain on sale of real estate until the entire development is sold out.
Retirement Benefit Costs - According to The People's Republic of China
regulations on pension, the Company contributes to a defined contribution
retirement plan organized by municipal government in the province in which the
Company was registered and all qualified employees are eligible to participate
in the plan. Contributions to the plan are calculated at 20% or 26% of the
employees' salaries above a fixed threshold amount and the employees
contribute 6% while the Company contributes the balance contribution of 14% or
20%. The Company has no other material obligation for the payment of
retirement benefits beyond the annual contributions under this plan.
Use of Estimates - The preparation of financial statements in accordance with
U.S. generally accepted accounting principles require management to make
estimates and assumptions that affect reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Recent accounting pronouncements - In December 2004, the Financial Accounting
Standards Board issued SFAS 123 (Revised) Share-Base Payments. This Standard
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. As of September 30,
2004, the Company had no such transactions.
In December 2004, the Financial Accounting Standards Board issued SFAS 152
Accounting for Real Estate Time-Sharing Transactions. As of September 30,
2004, the Company had not entered into any time-sharing transactions.
In December 2004, the Financial Accounting Standards Board issued SFAS 151,
Inventory Costs. This statement amends the guidance in ARB No 43, Chapter 4,
"Inventory Pricing" to clarify the accounting for abnormal amounts of idle
facility expense, freight handling costs, and wasted materials. This SFAS is
not anticipated to affect the Company.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150
Accounting for Certain Financial Instruments with Characteristics of both
Liability and Equity. This standard establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. As of September 30, 2004 and December 31, 2003,
the Company had no financial instruments with these characteristics.
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
This statement amends and clarifies financial accounting and reporting for
derivative instruments and for hedging activities under FASB No. 133,
Accounting for Derivative Instruments and Hedging Activities. As of September
30, 2004 and December 31, 2003, the Company had no derivative or hedging
activities.
F-10
47
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
2. CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICIES (CONTINUED)
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, Accounting for Stock-Based Compensation- Transition and Disclosure. This
statement amends SFAS No. 123, Accounting for Stock Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
Company has elected to implement this reporting disclosure commencing in the
year ending December 31, 2004. Management anticipates this will not have a
material effect on the financial statements or notes thereto.
In October 2002, the Financial Accounting Standards Board issued SFAS No. 147,
Acquisition of Certain Financial Institutions. As of September 30, 2004 and
December 31, 2003, this statement has no effect on the Company's reporting as
it has not acquired any financial institutions.
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 addresses significant issues regarding the recognition,
measurement and reporting of costs associated with exit and disposal
activities, including restructuring activities. SFAS No. 146 also addresses
recognition of certain costs related to terminating a contract that is not a
capital lease, costs to consolidate facilities, relocate employees and
termination benefits provided to employees that are involuntary terminated
under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS No.
146 was issued in June 2002.
In April 2002, the FASB issued Statement of Financial Accounting Standard No.
145, Rescission of FASB Statements No. 44, and No. 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which updates, clarifies and
simplifies existing accounting pronouncements. SFAS No. 4, which required all
gains and losses from the extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related tax effect was
rescinded, as a result, SFAS 64, which amended SFAS No. 4, was rescinded as it
was no longer necessary. SFAS No. 145 amended SFAS No. 13 to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain leases modifications that have
economic effects that are similar to sale-leaseback transactions. As of
September 30, 2004 and December 31, 2003, the Company had not incurred any
transactions of the type addressed in this FASB.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. This new statement also supersedes certain aspects of the
Accounting Principles Board Opinion (APB) No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
with regard to reporting the effects of a disposal of a segment of a business
and will require expected future operating losses from discontinued operations
to be reported in discontinued operations in the period incurred (rather than
estimated as of the measurement date as was required by APB No. 30). The
Company adopted the provisions of FASB No. 144 during the period ended
September 30, 2004.
F-11
48
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
Substantially all of the Company's bank accounts are in banks located in the
PRC and are not covered by any type of protection similar to that provided by
the FDIC on funds held in U.S banks.
The Company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and clients and maintains
allowances for doubtful accounts based on factors surrounding the credit risk
of specific customers and clients, historical trends, and other information.
Accounts receivable totaling $2,485,490 as of September 30, 2004 were
collateralized by real estate.
4. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
Accounts receivable and other receivables consist of the following:
September 30,
2004
-------------
Accounts receivable $ 2,485,490
Less: Provision for doubtful debts -
-------------
Accounts receivable, net of provision for doubtful debts 2,485,490
-------------
Other receivables 223,983
-------------
$ 2,709,473
=============
5. PROPERTIES HELD FOR RESALE
A break down of properties held for resale by project is as follows:
Sept. 30, 2004
(Unaudited)
--------------
General Garden $ 1,549,052
Garden of Eden 171,631
Diamond Mansion Phase I Residential 4,365,761
Diamond Mansion Phase I Commercial 1,124,315
Gutian Apartments 472,942
Repossessed properties held for resale 218,476
--------------
TOTAL $ 7,902,177
==============
As of September 30, 2004, the carrying values of properties held for resale
of $783,055, have been pledged as securities for the Company's long-term bank
loans.
F-12
49
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
6. PROPERTIES AND EQUIPMENT
Properties and equipment, stated at cost less accumulated depreciation and
amortization, at September 30, 2004 are as follows:
Diamond Mansion Phase II Parking garage $ 1,420,080
Land use rights and buildings 1,074,952
Plant and machineries 29,590
Motor vehicles 308,578
Office equipment 108,200
Furniture and fixtures 5,871
2,947,271
Less: Accumulated depreciation and amortization (253,860)
-------------
TOTAL $ 2,693,411
=============
As of December 31, 2003 and as a result of the transfer of the pledged fixed
assets to properties held for sale, the security for the bank loans had been
replaced by security over properties held for sale. The new security over
properties held for sale of $2,775,494 (Rmb.22,981,098) replaced the security
over fixed assets as of December 31, 2002.
7. CONSTRUCTION-IN-PROGRESS
Construction-in-progress represents two combined residential and a commercial
projects. Construction-in-progress represents the cost of the land use
rights, capitalized interest expenses, related pre-approval capital
expenditures and government approval fees. A breakdown on these costs by
project as of September 30, 2004 is as follows:
Current
Diamond Mansion Phase II - Pacific Shopping Mall $ -
Sanyang Apartments 2,168,595
Yi Chang Project 2,517,564
---------------
4,686,159
Non-Current
Jing Qi Project 931,433
---------------
TOTAL $ 5,617,592
===============
Official approval for the construction of Diamond Mansion Phase II was
received in 2003 and the construction was completed in September 2004, while
the construction of the Jing Qi Project was strategically temporarily
suspended until the completion of the construction of a main road near the
site of the project by the Wuhan City Government. As at December 16, 2004,
construction to the road is still incomplete and the Jing Qi Project has been
further postponed.
The Company had already started the foundation works of Sanyang Apartments and
Yi Chang Project. The capital expenditures in respect of the Yi Chang Project
comprised land use rights of $2,004,831 and purchases of construction
materials and other expenses totaling $512,733 as of September 30, 2004.
Several approvals for construction are needed to be obtained from relevant
government departments and the processes usually take time.
F-13
50
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
8. ADVANCES FROM BUYERS
Advances from buyers represented deposits from residential property buyers and
which procedures for the transfer of ownership of the property purchased have
not been completed as at the balance sheets date. The deposits from such
property buyers for residential properties to be transferred in the subsequent
years are carried forward as deferred revenue.
9. TRANSACTIONS WITH RELATED PARTIES
Amounts due to directors at September 30, 2004 are as follows:
Maximum
outstanding
September 30, balance during Security
2004 period held
---------------- ---------------- -------------
Name Unaudited
Fang Zhong (Director) $ (1,648,158) $ (2,399,321) None
Hu Min (Director) (43,154) (43,154) None
Luo Yun Fang (Director) (48,090) (48,090) None
Fang Wei Jun (Director) (49,564) (49,564) None
Fang Hui (Director) (49,564) (49,564) None
Fang Wei Feng (Director) (77,745) $ (125,822) None
----------------
$ (1,916,275)
================
The amounts due are unsecured, interest free and have no fixed repayment
terms.
10. OTHER TAX PAYABLES
Other tax payables at September 30, 2004 consist of the following:
City construction tax $ 9,252
Business tax 701,610
Food price balancing tax 7,238
Education surcharge 3,655
Flood control tax 7,422
Education development tax 17,059
Other taxes 13,554
-------------
$ 759,790
=============
F-14
51
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
11. SHORT-TERM LOANS
Short term loan is unsecured, bear interest at 5.04% per annum and are
repayable within three months if the lender was not appointed as the main
contractor to the Yi Chang Project. As a pre-condition for the unsecured
short-term loan of $362,319, a subsidiary company, Wuhan Town House, has
agreed to appoint the lender as main contractor to Yi Chang construction
project and should the subsidiary company fails to appoint the lender as main
contractor, the subsidiary company has agreed to make a penalty payment of
$36,232 to the lender. The lender has been appointed as the main contractor
to the Yi Chang Project.
Short term loan of $428,744 was secured by the Yi Chang project and was fully
paid during the period ended September 30, 2004.
12. LONG-TERM DEBT - SECURED
The Company had the following long-term debt at September 30, 2004:
Current Long-term
------------- -------------
6.534% note payable to a bank, interest
payable quarterly with principal due
December 2004, secured by Diamond Mansion
Phase I 833,333 -
6.03% notes payable to a bank, monthly
installments of principal and interest,
due on various dates through 2007,
secured by property 2,270 4,577
7.2% notes payable to a bank, monthly
installments of principal and interest,
due on various dates through 2007,
secured by property 3,371 5,565
7.2% notes payable to a bank, monthly
installments of principal and interest,
due on various dates through 2014,
secured by property 1,312 15,455
5.58% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2007,
secured by property 1,632 2,509
5.58% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2010,
secured by property 920 5,502
F-15
52
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
12. LONG-TERM DEBT - SECURED (CONTINUED)
5.58% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2011,
secured by property 904 6,788
5.58% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2015,
secured by property 1,476 19,556
5.58% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2016,
secured by property 1,591 23,094
5.58% notes payable to a bank, monthly
installments of principal and interest,
due on various dates through 2020,
secured by property 2,569 59,252
5.58% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2025,
secured by property 882 33,623
5.58% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2030,
secured by property 265 14,283
4.65% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2026,
secured by property 1,175 40,527
5.04% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2012,
secured by property 5,397 45,477
5.04% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2013,
secured by property 8,823 78,692
F-16
53
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
12. LONG-TERM DEBT - SECURED (CONTINUED)
5.04% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2018,
secured by property 15,147 268,409
5.04% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2022,
secured by property 4,991 136,384
5.04% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2023,
secured by property 2,968 81,874
7.65% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2006,
secured by property 1,811 1,990
5.58% note payable to a bank, monthly
installments of principal and interest,
due on various dates through 2008,
secured by property 3,109 9,813
------------ -----------
$ 893,946 $ 853,370
============ ===========
As of September 30, 2004, bank loans are secured by stock of properties held
for resale of $783,055.
Maturities of the long-term debts for each of the next five years and
thereafter are as follows:
Amount
-----------
2005 $ 893,946
2006 3,800
2007 19,924
2008 -
2009 9,813
Thereafter 819,833
------------
$ 1,747,316
============
F-17
54
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
13. CAPITAL
Sept 30, 2004
-------------
Authorized, issued and outstanding:
500,000 ordinary share at HK$1.00 ($.012) each $ 64,103
Less: minority interest (1,923)
-------------
$ 62,180
=============
Town House Land Limited (formerly Hong Kong Window of the World Apparel Co.,
Limited) ("Town House Land") was incorporated in Hong Kong, as a limited
liability company on August 13, 2001 with an authorized capital of $64,103
(HK$500,000). Based on the Certificate of Incorporation on Change of Name
dated August 3, 2003, the Company changed its name from "Hong Kong Window of
the World Apparel Co., Limited" to "Town House Land Limited".
14. INCOME TAX
Enterprise income tax ("EIT") is provided on the basis of the statutory profit
for financial reporting purposes, adjusted for income and expense items, which
are not assessable or deductible for income tax purposes. For the fiscal year
ended December 31, 2003, the Company was assessed EIT tax based on 33% of 6%
of sales revenues. During the fiscal year ended December 31, 2004, the
Company will be assessed EIT tax based on 33% of 15% of sales revenues.
15. COMMITMENTS
As of September 30, 2004, the Company had contractual commitments of the
construction projects and commitments for rental, capital expenditures for
land use rights, plant and machineries totaling $833,028.
a) Capital Commitments
CAPITAL COMMITMENT
As of
Sept 30, 04
------------
Contracted and authorized (Jing Qi Project) 42,880
Contracted and authorized (Sanyang Apartments) 246,670
Contracted and authorized (Yichang Project) 543,478
------------
833,028
============
F-18
55
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
15. COMMITMENTS (CONTINUED)
b) Operating Lease Commitments
A small office was set up for salesmen to meet customers in Shanghai and
Wenzhou, and at September 30, 2004 the Company had commitments to make
payments for leasing of these office. Rent expense for the nine months ended
September 30, 2004 and 2003 was $24,027 and $-0- respectively. Minimum future
lease payments under these operating leases are as follows:
As of As of
OPERATING LEASE COMMITMENT Sept 30, 04 Dec 31, 03
------------- ------------
December 31, 2004 $ 5,570 $ -
December 31, 2005 22,042 -
------------- ------------
$ 27,612 $ -
============= ============
9. CONTINGENT LIABILITIES
As of September, 2004, pursuant to a Bank Agreement (the "Agreement") of
September 1, 2003 between Bank of China Limited (the "Bank") and Wuhan Town
House Land, the Bank agreed to provide mortgage loans, representing 60% of the
purchase price, to buyers of properties (Window of the World Shopping Mall
Diamond Mansion Phase I) developed by the Company. Buyers are required to make
cash down payments equal to 40% of the purchase price before financing is
guaranteed on the remaining 60% balance which is financed by Bank of China.
The corporate guarantee shall remain enforceable for up to 10 years of the
mortgage period against any defaults by the buyers. The corporate guarantees
are released when the mortgages are paid in full or at some earlier point in
time as might be negotiated with the bank. Because buyers have made a minimum
down payment of at least 40% of the purchase price, the buyers' initial and
continuing investments are adequate to demonstrate a commitment to pay for the
property in accordance with the terms and conditions of the purchased
agreement. According to the terms and conditions of the mortgage facilities,
the Company agreed to guarantee the mortgage loans provided to property buyers
of Diamond Mansion Phase I to a maximum limit of $3,623,188 (Rmb.30,000,000)
to be extended by Bank of China to property buyers for a period of 10 years
from September 1, 2003 to September 1, 2013. On October 22, 2004, the
Company was released from this guarantee.
F-19
56
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
16. CONTINGENT LIABILITIES (CONTINUED)
As of September 30, 2004, pursuant to another Bank Agreement (the "Agreement")
of April 22, 2004 between Hua Xia Bank Limited (the "Bank") and Wuhan Town
House Land, the Bank agreed to provide mortgage loans, representing 60% of the
purchase price, to buyers of properties (Window of the World Shopping Mall
Diamond Mansion Phase I) developed by the Company. Buyers are required to make
cash down payments equal to 40% of the purchase price before financing is
guaranteed on the remaining 60% balance which is financed by Bank of China.
The corporate guarantee shall remain enforceable for up to 10 years of the
mortgage period against any defaults by the buyers. The corporate guarantees
are released when the mortgages are paid in full or at some earlier point in
time as might be negotiated with the bank. Because buyers have made a minimum
down payment of at least 40% of the purchase price, the buyers' initial and
continuing investments are adequate to demonstrate a commitment to pay for the
property In accordance with the terms and conditions of the purchased
agreement. According to the terms and conditions of the mortgage facilities,
the Company agreed to guarantee the mortgage loans provided to properties
buyers of Diamond Mansion Phase I extended by Hua Xia Bank to property buyers
for a period of 10 years from April 22, 2004 to April 21, 2014. As of October
22, 2004, the Company was released from this guarantee.
F-20
57
MHM
MURRELL, HALL, MCINTOSH & CO., PLLP
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND MEMBERS OF
TOWN HOUSE LAND COMPANY LIMITED
(Incorporated in Hong Kong with limited liability)
We have audited the accompanying consolidated balance sheets of Town House
Land Limited and subsidiaries (the "Company") as of December 31, 2003 and 2002
and the related consolidated statements of operations, statements of members'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits 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 presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Town House
Land Limited and subsidiaries as of December 31, 2003 and 2002 and the results
of their operations and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Murrell, Hall, McIntosh & Co, PLLP
Murrell, Hall, McIntosh & Co, PLLP
Oklahoma City, Oklahoma
June 29, 2004 except for Note 18 as to which the date is November 1, 2004
2601 N.W. EXPRESSWAY - SUITE 800 EAST (405) 842-4420
OKLAHOMA CITY, OKLAHOMA 73112 FAX:(405) 842-3776
www.mhmcpa.com
F-21
58
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 AND 2002
(Expressed in US dollars)
2003 2002
------------- -------------
Assets
Current assets
Cash and equivalents $ 1,159,310 $ 300,002
Restricted cash 203,659 2,042
Accounts receivable, net 3,251,307 452,716
Properties held for resale 8,342,484 10,744,378
Advances to supplies 407,189 -
Deferred offering costs 280,891 -
Construction-in-progress - current 2,311,819 1,633,263
------------- -------------
Total current assets 15,956,659 13,132,401
------------- -------------
Property and equipment - net 1,057,200 3,046,828
------------- -------------
Construction-in-progress - non-current 931,433 931,433
------------- -------------
$ 17,945,292 $ 17,110,662
============= =============
Liabilities and members' equity
Current liabilities
Accounts payable and accrued expenses $ 419,656 $ 115,698
Advances from buyers 728,391 1,845,016
Amount due to directors 2,709,075 1,421,036
Enterprise tax payable 1,006,201 826,403
Other tax payable 400,441 147,383
Short - term loans 791,063 -
Current portion of long term debt - secured 2,253,201 2,448,702
------------- -------------
Total current liabilities 8,308,028 6,804,238
------------- -------------
Long-term debt - net of current portion shown 906,686 2,694,073
------------- -------------
Commitments and contingencies - -
Minority interest 308,695 228,370
------------- -------------
Members' equity:
Registered capital 62,180 62,180
Additional paid-in capital 5,857,936 5,795,308
Capital reserve 997,928 519,260
Retained profit 1,503,839 1,007,233
------------- -------------
Total members' equity 8,421,883 7,383,981
------------- -------------
Total liabilities and members' equity $ 17,945,292 $ 17,110,662
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-22
59
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(Expressed in US dollars)
2003 2002
------------- -------------
Sales Revenues $ 9,080,701 $ 6,375,071
Cost of goods sold 5,120,435 4,232,929
------------- -------------
Gross profit 3,960,266 2,142,142
------------- -------------
Selling General and Administrative Expenses:
Selling expenses 439,006 38,991
General and administrative expenses 300,851 172,397
Depreciation expense 69,664 79,513
------------- -------------
Total expenses 809,521 290,901
------------- -------------
Income from operations 3,150,745 1,851,241
------------- -------------
Other income (expense)
Other revenues 14,065 26,300
Interest and finance costs (326,849) (304,580)
------------- -------------
(312,784) (278,280)
------------- -------------
Net Income before income taxes and minority interest 2,837,961 1,572,961
Provision for income taxes (179,798) (470,988)
------------- -------------
Net income before minority interest 2,658,163 1,101,973
Minority interest in earnings (80,325) (33,059)
------------- -------------
Net income $ 2,577,838 $ 1,068,914
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-23
60
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
AS OF DECEMBER 31, 2003 AND 2002
(Expressed in US dollars)
Additional Total
Registered Paid-in Capital Retained Minority Members'
Capital Capital Reserve Profit (Loss) Interest Equity
------------ ------------ ----------- ------------- ---------- -------------
Balance,
December 31, 2001 $ 62,180 $ 5,795,308 $ 265,047 $ 192,532 $ 195,311 $ 6,510,378
Net income for the year
ended December 31, 2002 - - - 1,068,914 33,059 1,101,973
Transfer to general reserve - - 254,213 (254,213) - -
------------ ------------ ----------- ------------- ---------- -------------
Balance at
December 31, 2002 62,180 5,795,308 519,260 1,007,233 228,370 7,612,351
Net income for the year
ended December 31, 2003 - - - 2,577,838 80,325 2,658,163
Distribution to members - 62,628 - (1,602,564) - (1,539,936)
Transfer to capital reserve - - 478,668 (478,668) - -
------------ ------------ ----------- ------------- ---------- -------------
Balance,
December 31, 2003 $ 62,180 $ 5,857,936 $ 997,928 $ 1,503,839 $ 308,695 $ 8,730,578
============ ============ =========== ============= ========== =============
The accompanying notes are an integral part of these consolidated financial statements.
F-24
61
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002
(Expressed in US dollars)
2003 2002
------------- -------------
Cash flows from operating activities
Net income $ 2,577,838 $ 1,068,914
Adjustments to reconcile net profit to net cash
provided by operating activities
Depreciation 69,664 79,513
Provision for doubtful accounts - 16,592
Minority interest in earnings 80,325 33,059
Changes in:
Restricted cash (201,617) 25,455
Accounts receivable, net and other receivables (2,798,591) (413,463)
Properties held for resale 4,331,189 4,054,198
Advances to suppliers (407,189) 5,166
Construction in progress (678,556) (72,408)
Deferred offering costs (280,891) -
Accounts payable and other payables 303,955 (1,202,252)
Amounts due to directors 1,288,042 576,377
Advances from buyers (1,116,625) (5,257,387)
Deferred tax expenses 179,798 470,938
Other taxes payable 253,058 -
------------- -------------
Net cash provided by operating activities 3,600,400 (615,298)
------------- -------------
Cash flows from investing activities
Purchases of fixed assets (9,331) -
------------- -------------
Net cash provided by (used in) investing activities (9,331) -
------------- -------------
Cash flows from financing activities
Loan proceeds 1,292,271 553,403
Principal payments on loans (2,484,096) -
Member capital contributions 62,628 -
Distributions to members (1,602,564) (45,246)
------------- -------------
Net cash provided by/ (used in) financing activities (2,731,761) 508,157
------------- -------------
Net increase in cash 859,308 (107,141)
Cash at beginning of year 300,002 407,143
------------- -------------
Cash at end of year $ 1,159,310 $ 300,002
============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-25
62
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
SUPPLEMENTAL DISCLOSURE OF CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003 AND 2002
(Expressed in US dollars)
2003 2002
------------- ---------------
Supplemental Disclosure of Cash Flow information
Interest paid $ 395,134 $ 304,477
Enterprise income taxes paid - -
Supplemental disclosure of non-cash investing and financing activities:
During the year ended December 31, 2002 a related company transferred
investment properties totaling $688,562 to the Company as settlement of cash
advances made by the Company.
During the year ended December 31, 2003, the Company transferred two floors of
the commercial complex in Diamond Mansion Phase 1, at a net book value of
$1,929,295 from property and equipment to properties held for resale.
During 2003, the Members of 97% of the registered capital of Wuhan transferred
their interests to Town House Land Limited ("Town House") in a transaction
treated as a recapitalization of Wuhan. In connection with that acquisition,
the former Wuhan members, who became members in Town House, were to receive
cash of $1,602,564, $62,628 of which was used to repay balances due from
directors by Town House prior to the acquisition and the balance was treated
as an increase in payables to directors at December 31, 2003.
The accompanying notes are an integral part of these consolidated
financial statements.
F-26
63
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
1. DESCRIPTION OF BUSINESS
Organizational structure
Wuhan Pacific Real Estate Development Company Limited ("Wuhan)") was
registered as a formal third level property company in Hubei Province, in the
People's Republic of China as a limited liability company on December 18, 1995
with a registered capital of $1,207,729 (Rmb.10,000,000) and a defined period
of existence of 14 years to December 18, 2009. To meet the qualifications of a
third level property company, the company must (1) have registered capital of
Rmb. 10,000,000 (b) have engineering and staff of not less than 12 people, (3)
should have completed at least 50,000 square meters of accumulated development
area, and (4) have a 100% passing rate in construction quality and 10% ranked
as excellent. Subsequent recapitalizations during 2000 increased Wuhan's
registered capital to $6,038,647 and changed is classification to a second
level property company. To meet the qualifications of a second level property
company, the company must (1) have registered capital of Rmb. 40,000,000, (2)
have engineering and management staff of not less than 24 people, (3) should
have 150,000 square meters of accumulated areas completed within three years,
(4) 100% pass rate in construction quality with 10% ranked as excellent, and
(5) at least three years experience in property development. On August 15,
2003, Wuhan entered into a reserve merger agreement with Town House Land
Limited. At December 31, 2003 Town House held 97% of the registered capital
of Wuhan Pacific. Collectively hereinafter, Town House and Wuhan Pacific are
referred to as "the Company".
Town House Land Limited (formerly: Hong Kong Window of the World Apparel Co.,
Limited) was incorporated in Hong Kong, as a private limited liability company
on August 13, 2001 with an authorized capital of $64,103 (HK$500,000) divided
into 500,000 ordinary shares of par value $0.12 (HK$1.00) each. Town House
Land Limited ("Town House") changed to its present name on August 13, 2003.
On August 15, 2003, Town House acquired 97% of the outstanding registered
capital of Wuhan Pacific Real Estate Development Company Limited ("Wuhan
Pacific"). Terms of the transaction call for Town House to pay $1,602,564 in
cash plus the contribution of an additional $5,857,488 in share capital in
Town House as consideration for the acquisition of the 97% interest in Wuhan's
registered capital. For financial reporting purposes, Wuhan Pacific was
considered to be the acquiring entity and the additional cash consideration
paid was treated as a distribution to members. Town House had no operations
prior to this reverse acquisition and there was substantially no change in
ownership from that of Wuhan Pacific Real Estate Development as a result of
this transaction.
On October 10, 2003 Wuhan City Foreign Investment Bureau approved the
registration of the company as a Sino Foreign Joint Investment Enterprise with
a defined period of existence of 20 years to October 27, 2023.
Description of business
The Company's principal activity is the development and sale of commercial and
residential real estate. The Company's principal country of operations is in
The People's Republic of China ("PRC").
F-27
64
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
Consolidation Policy - The consolidated financial statements include the
accounts of Town House and Wuhan Pacific from August 15, 2003 forward. Prior
to August 15, 2003, the financial statements reflect the activity of Wuhan
Pacific as adjusted for the effects of the recapitalization of August 15,
2003.
All significant inter-company transactions and balances within the Company are
eliminated on consolidation.
Cash and Equivalents - The Company considers all highly liquid debt
instruments purchased with maturity period of three months or less to be cash
equivalents. The carrying amounts reported in the accompanying consolidated
balance sheet for cash and cash equivalents approximate their fair value. The
Company has restricted cash in accordance with the loan covenants.
Accounts Receivable - Provision is made against accounts receivable to the
extent which they are considered to be doubtful. Accounts receivable in the
balance sheet is stated net of such provision. As of December 31, 2003 and
2002, provision for doubtful debts amounted to $0 and $16,592, respectively.
Properties Held for Sale - Properties held for sale are comprised of
properties held for sale and repossessed properties held for resale and are
stated at the lower of cost or net realizable value. Cost includes
acquisition costs of land use rights, development expenditure, interests and
any overhead costs incurred in bringing the developed properties to their
present location and condition.
Net realizable value is determined by reference to management estimates based
on prevailing market conditions. Management evaluates the market value of its
properties on a quarterly basis by comparing selling prices of its properties
with those of other equivalent properties in the vicinity offered by other
developers. Management reduces the estimated market value by anticipated
selling expenses and associated taxes to derive the net realizable value.
Capital Reserve - Capital reserve represents that amount of reserve
appropriated from the net distributable profit after income tax in each year
when a net profit after operations is generated. In accordance with the
provisions of the Company's Memorandum and Articles of Association, the
Company is required to appropriate 20% of the net distributable profit after
enterprises income tax to capital reserve.
One-half of the capital reserve may be used for staff welfare payments and the
balance one-half may be transferred back to the statement of operations to
mitigate the losses from operations. The Company shall not be required to
appropriate any amount to capital reserve when the balance standing in capital
reserve is equal to or exceeds 50% of the registered capital.
F-28
65
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment - Property and equipment is being depreciated over the
estimated useful lives of the related assets. Depreciation is computed on the
straight-line basis for both financial and income tax reporting purposes over
useful lives as follows:
Building and land rights 40 years
Equipment 5 years
Motor vehicles 5-8 years
Office furniture and fixtures 5 years
Repairs and maintenance costs are normally charged to the statement of
operations in the year in which they are incurred. In situations where it can
be clearly demonstrated that the expenditure has resulted in an increase in
the future economic benefits expected to be obtained from the use of the
asset, the expenditure is capitalized as an additional cost of the asset.
Property and equipment are evaluated annually for any impairment in value.
Where the recoverable amount of any property and equipment is determined to
have declined below its carrying amount, the carrying amount is reduced to
reflect the decline in value. There were no property and equipment
impairments recognized during the years ended December 31, 2003 and 2002.
Construction-In-Progress - Properties currently under development are
accounted for as construction-in-progress. Construction-in-progress is
recorded at acquisition cost, including land rights cost, development
expenditure, professional fees and the interest expenses capitalized during
the course of construction for the purpose of financing the project. Upon
completion and readiness for use of the project, the cost of
construction-in-progress is to be transferred to properties held for sale. As
of December 31, 2003 and 2002, one construction project is reflected as
long-term as further development has ceased until such time as new access
roads are completed by the Wuhan City Government. Management anticipates
these roads will be completed in 2004 at which time construction should resume
on this project.
Construction-In-Progress is valued at the lower of cost or market. Management
evaluates the market value of its properties on a quarterly basis by comparing
selling prices of its properties with those of other equivalent properties in
the vicinity offered by other developers reduced by anticipated selling costs
and associated taxes. In the case of construction in progress, management
takes into consideration the estimated cost to complete the project when
making the lower of cost or market calculation.
Related Companies - A related company is a company in which the director has
beneficial interests in and in which the company has significant influence.
Income Recognition - Revenue from the sale of properties is recognized in
accordance with Financial Accounting Standards Board Statement No. 66
Accounting for Sales of Real Estate. As required by this statement sales are
recognized when the following four criteria are met: (1) a sale is
consummated (2) the buyers initial and continuing investments are adequate to
demonstrate a commitment to pay for the property, (3) the seller's receivable
is not subject to future subordination and (4) the seller has transferred to
the buyer the usual risks and rewards of ownership in a transaction that is in
substance a sale and does not have a substantial continuing involvement with
the property.
F-29
66
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In certain cases, the Company has guaranteed third party loans to buyers, none
of which exceeds 60% of the purchase price and none of which exceeds 10 years
in duration. A minimum of 40% down payment for both commercial and residential
properties is required on all sales before the sale is recognized for
financial reporting purposes.
Sales are considered to be consummated when the sale becomes legally binding
on all parties and title to the properties has passed to the buyer. Sales are
not recognized until such time as buyers have made a down payment of at least
40% of the sales price. The Company's receivable for the balance of the sales
price is not subject to future subordination. Sales are not recognized until
such time as title has passed to the buyer which transfers the usual risks and
rewards of ownership to the buyer.
Subsequent to year-end the Company was released from all loan guarantees
related to third party buyers. Furthermore, as described in Note 17 below,
the Company has subsequently elected to discontinue the practice of
guaranteeing buyers loans.
Cost of Goods Sold - The cost of goods sold includes the carrying amount of
the properties being sold and the business taxes paid by the Company in
connection with the sales. Business taxes included in cost of sales were
$300,689 and $178,731 for the years ended December 31, 2003 and 2002,
respectively.
Foreign Currencies - These financial statements have been prepared in U.S.
dollars. The functional currencies for Town House and Wuhan Pacific are the
"Hong Kong dollar" and "Renminbi" or "Yuan", respectively. Nonmonetary assets
and liabilities are translated at historical rates, monetary assets and
liabilities are translated at the exchange rates in effect at the end of the
year, and income statement accounts are translated at average exchange rates.
There were material translation gains or losses during the years ended
December 31, 2003 and 2002 as the Renminbi was tied to the U.S. Dollar during
the time period covered in these financial statements.
Taxation - Taxation on overseas profits has been calculated on the estimated
assessable profits for the year at the rates of taxation prevailing in the
countries in which the Company operates.
Provision for The People's Republic of China enterprise income tax is
calculated at the prevailing rate based on the estimated assessable profits
less available tax relief for losses brought forward.
Enterprise income tax
Under the Provisional Regulations of The People's Republic of China Concerning
Income Tax on Enterprises promulgated by the State Council and which came into
effect on January 1, 1994, income tax is payable by enterprises at a rate of
33% of their taxable income. Preferential tax treatment may, however, be
granted pursuant to any law or regulations from time to time promulgated by
the State Council. For the years ended December 31, 2003 and 2004, the Company
has been granted the privilege of computing the gross profit margins on real
estate development sales at 6% of sales and computing the enterprise income
tax at 33% on only 6% of sales.
Enterprise income tax ("EIT") is provided on the basis of the statutory profit
for financial reporting purposes, adjusted for income and expense items, which
are not assessable or deductible for income tax purposes.
F-30
67
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Retirement Benefit Costs - According to The People's Republic of China
regulations on pension, the Company contributes to a defined contribution
retirement plan organized by municipal government in the province in which the
Company was registered and all qualified employees are eligible to participate
in the plan. Contributions to the plan are calculated at 20% or 26% of the
employees' salaries above a fixed threshold amount and the employees
contribute 6% while the Company contributes the balance contribution of 14% or
20%. The Company has no other material obligation for the payment of
retirement benefits beyond the annual contributions under this plan.
For the years ended December 31, 2003 and 2002, the Company's pension cost
charged to the statements of operations under the plan amounted to $1,814 and
$1,018 respectively.
Fair Value of Financial Instruments - The carrying amounts of certain
financial instruments, including cash, accounts receivable, commercial notes
receivable, other receivables, accounts payable, commercial notes payable,
accrued expenses, and other payables approximate their fair values as of
December 31, 2003 and 2002 because of the relatively short-term maturity of
these instruments.
Use of Estimates - The preparation of financial statements in accordance with
generally accepted accounting principles require management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Recent accounting pronouncements - In May 2003, the Financial Accounting
Standards Board issued SFAS No. 150 Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity. This standard
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. As
of December 31, 2003, the Company had no financial instruments with these
characteristics.
In April 2003, the Financial Accounting Standards Board issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities.
This statement amends and clarifies financial accounting and reporting for
derivative instruments and for hedging actives under FASB No. 133, Accounting
for Derivative Instruments and Hedging Activities. As of December 31, 2003,
the Company had no derivative or hedging activities.
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, Accounting for Stock-Based Compensation- Transition and Disclosure. This
statement amends SFAS No. 123, Accounting for Stock Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. The
Company has elected to implement this reporting disclosure commencing in the
year ending December 31, 2004. Management anticipates this will not have a
material effect on the financial statements or notes thereto.
In October 2002, the Financial Accounting Standards Board issued SFAS No. 147,
Acquisition of Certain Financial Institutions. As of December 31, 2003, this
statement has no effect on the Company-s reporting as it has not acquired any
financial institutions.
F-31
68
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, Accounting for Costs Associated with Exit or Disposal Activities.
SFAS No. 146 addresses significant issues regarding the recognition,
measurement and reporting of costs associated with exit and disposal
activities, including restructuring activities. SFAS No. 146 also addresses
recognition of certain costs related to terminating a contract that is not a
capital lease, costs to consolidate facilities, relocate employees and
termination benefits provided to employees that are involuntary terminated
under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract. SFAS No.
146 was issued in June 2002. As of December 31, 2003, this statement has no
effect on the Company's report.
In April 2002, the FASB issued Statement of Financial Accounting Standard No.
145, Rescission of FASB Statements No. 44, and No. 64, Amendment of FASB
Statement No. 13, and Technical Corrections, which updates, clarifies and
simplifies existing accounting pronouncements. SFAS No. 4, which required all
gains and losses from the extinguishment of debt to be aggregated and , if
material, classified as an extraordinary item, net of related tax effect was
rescinded, as a result, SFAS 64, which amended SFAS No. 4, was rescinded as it
was no longer necessary. SFAS No. 145 amended SFAS No. 13 to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. As of December 31,
2003, the Company had not incurred any transactions of the type addressed in
this FASB.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes SFAS Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of. This new statement also supersedes certain aspects of the
Accounting Principles Board Opinion (APB) No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,
with regard to reporting the effects of a disposal of a segment of a business
and will require expected future operating losses from discontinued operations
to be reported in discontinued operations in the period incurred (rather than
estimated as of the measurement date as was required by APB No. 30). The
Company adopted the provisions of FASB No. 144 during the fiscal year ended
December 31, 2001.
Management believes adoption of these new statements will not have any
significant effect on the Company's financial condition or results of
operations.
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
Substantially all of the Company's bank accounts are in banks located in the
PRC and are not covered by any type of protection similar to that provided by
the FDIC on funds held in U.S banks.
The Company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and clients and maintains
allowances for doubtful accounts based on factors surrounding the credit risk
of specific customers and clients, historical trends, and other information.
Accounts receivable totaling $3,195,074 and $450,170 as of December 31, 2003
and 2002, respectively, were collateralized by real estate.
F-32
69
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
4. CASH AND EQUIVALENTS
As of December 31, 2003 and 2002, the Company had the following cash and cash
equivalents:
December 31
--------------------------
2003 2002
------------- ------------
Restricted cash:
Pledged deposits $ 203,659 $ 2,042
============= ============
Cash on hand: $ 2,922 $ 8,504
Bank deposits 1,156,388 291,225
Savings accounts held in trust by staff - 273
------------- ------------
$ 1,159,310 $ 300,002
============= ============
The pledged bank deposits, which are restricted, bear interest ranging from
0.6% to 0.825% per month and in accordance with the terms and conditions of
the banking facilities agreed with a bank to provide mortgage loan facilities
to buyers of properties developed by the subsidiary, Wuhan Pacific, which
agreed to place guarantee fund deposits of not less than 18% of the total
outstanding mortgage loans extended to properties buyers and to guarantee the
repayments of the mortgage loans. The guarantee fund shall be restricted while
the mortgage loans extended to properties buyers shall remain outstanding.
5. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
Accounts receivable and other receivables consist of the following:
December 31
--------------------------
2003 2002
------------- ------------
Accounts receivable $ 3,195,074 $ 450,170
Less: Provision for doubtful debts - (99,550)
------------- ------------
Accounts receivable net of provision
for doubtful debts 3,195,074 350,620
Other receivables
Staff advances 4,590 900
Utilities and other deposits 15,097 20,045
Others 36,546 81,151
------------- ------------
Other receivables 56,233 102,096
------------- ------------
$ 3,251,307 $ 452,716
============= ============
F-33
70
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
6. PROPERTIES HELD FOR RESALE
Properties held for resale consist of the following:
December 31
------------------------
2003 2002
------------- ------------
Properties held for resale $ 8,205,945 $10,606,998
Repossessed properties held for resale 136,539 137,380
------------- ------------
$ 8,342,484 $10,744,378
============= ============
A break down of properties held for resale by project is as follows:
December 31
--------------------------
2003 2002
------------- ------------
General Garden $ 1,936,315 $ 1,968,332
Garden of Eden 171,632 417,374
Diamond Mansion Phase I Residential 1,124,315 1,617,507
Diamond Mansion Phase I Commercial 4,382,506 6,062,357
Gutian Apartments 591,177 541,428
------------- ------------
Total $ 8,205,945 $10,606,998
============= ============
As of December 31, 2003 and 2002, the carrying values of properties held for
resale of $2,775,494 and $6,062,357, respectively, have been pledged as
securities for the Company's long-term bank loans.
7. PROPERTIES AND EQUIPMENT
Properties and equipment, stated at cost less accumulated depreciation and
amortization, consist of:
December 31
--------------------------
2003 2002
------------- ------------
Land use rights and buildings $ 1,074,957 $ 3,098,402
Plant and machineries 1,981 1,981
Motor vehicles 94,769 94,769
Office equipment 87,695 78,364
------------- ------------
1,259,402 3,273,516
Less: Accumulated depreciation and amortization (202,202) (226,688)
------------- ------------
$ 1,057,200 $ 3,046,828
============= ============
During 2003, properties totaling $1,929,295 net of accumulated depreciation of
$94,149 were transferred from property and equipment to properties held for
resale.
F-34
71
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
7. PROPERTIES AND EQUIPMENT (CONTINUED)
As of December 31, 2003 and as a result of the transfer of the pledged fixed
assets to properties held for sale, the security for the bank loans has been
replaced by security over properties held for sale. The new security over
properties held for sale of $2,775,494 (Rmb. 22,981,098) replaced the security
over fixed assets as of December 31, 2002.
8. CONSTRUCTION-IN-PROGRESS
Construction-in-progress represents two combined residential and a commercial
project. Construction-in-progress represents the cost of the land use rights,
capitalized interest expenses, related pre-approval capital expenditures and
government approval fees. A breakdown on these costs by project is as
follows:
December 31
--------------------------
2003 2002
------------- ------------
Current
Diamond Mansion Phase II Commercial Project $ 2,049,213 $ 1,633,263
Sanyang Apartments 262,606 -
Non-Current
Jing Qi Project 931,433 931,433
------------- ------------
$ 3,243,252 $ 2,564,696
============= ============
Official approval for the construction of Diamond Mansion Phase II was
received in 2003 while the construction of the Jing Qi Project was temporarily
suspended until the completion of the construction of a main road near the
site of the project by the Wuhan City Government that is expected in 2004.
The Company had already started the foundation works of Sanyang Apartments.
Several approvals for construction are needed to be obtained from relevant
government departments and this process usually takes time.
9. ADVANCES FROM BUYERS
Advances from buyers represented deposits from residential property buyers and
which procedures for the transfer of ownership of the property purchased have
not been completed as of the balance sheet date. The deposits from such
property buyers for residential properties to be transferred in the subsequent
years are carried forward as deferred revenue.
F-35
72
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
10. TRANSACTIONS WITH RELATED PARTIES
During 2003, the Company sold four units in the Diamond Mansion shopping
center for $695,301 recognizing a profit of approximately $333,000. The
buyers of these properties subsequently leased the properties assuring Window
of the World Shopping Center Co. Limited for terms that virtually assured the
purchaser a 100% return of his investment within periods ranging from six to
ten years. As of December 31, 2003, Window of the World Shopping Center Co.
Limited was affiliated by common ownership with certain members of Town House
Land Limited. Subsequent to December 31, 2003 the members and directors have
divested their ownership in Window of the World Shopping Center Co., Limited
to third parties.
Amounts due to directors at December 31, 2003 and 2002 are as follows:
Maximum
outstanding
balance
December 31, during Security
Name 2003 2002 year held
---------------------- -------------- ------------- ------------- ---------
Fang Zhong (Director) $ (2,399,324) $ (1,336,881) $ 2,399,324 none
Hu Min (Director) (41,667) ( -) 41,667 none
Luo Yun Fang (Director) (46,108) ( -) 46,108 none
Fang Wei Jun (Director) (48,077) ( -) 48,077 none
Fang Hui (Director) (48,077) ( -) 48,077 none
Fang Wei Feng (Director) (125,822) ( 84,155) 125,822 none
-------------- -------------
$ (2,709,075) $ (1,421,036)
============== =============
The amounts due are unsecured, interest free and have no fixed repayment
terms.
11. OTHER TAX PAYABLES
Other tax payables consist of the following:
December 31
---------------------------
2003 2002
------------- -------------
City construction tax $ 17,748 $ 3,207
Business tax 336,985 129,264
Food price balancing tax 9,666 951
Education surcharge 7,296 1,064
Flood control tax 4,990 684
Education development tax 9,766 1,052
Other taxes 13,990 11,161
------------- -------------
$ 400,441 $ 147,383
============= =============
F-36
73
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
12. SHORT-TERM LOANS
December 31
Other short-term loans 2003 2002
------------- ----------
Secured $ 428,744 $ -
Unsecured 362,319 -
------------- ----------
$ 791,063 $ -
============= ==========
Other short-term loans, one of which is secured and the other is unsecured,
bear interest ranging from 5.04% and 10.89% per annum and are repayable within
three months.
As a pre-condition for the unsecured short-term loan of $362,319, the Company
has agreed to appoint a lender as main contractor to a construction project
and where the Company fails to appoint the lender as main contractor, the
Company has agreed to make a penalty payment of $36,232 to the lender.
The other short-term loan of $428,744 is secured by the Yichang project.
13. LONG-TERM DEBT - SECURED
The Company had the following long-term debt at December 31, 2003 and 2002:
2003 2002
-------- ----------
Current Long-term Current Long-term
----------- ----------- ----------- -----------
6.534% note payable to a bank,
interest payable quarterly
with principal due September
2004, secured by Diamond
Mansion Phase I $ 1,207,729 $ - $ 2,415,459 $ 1,207,729
6.534% note payable to a bank,
interest payable quarterly
with principal due December
2004, secured by Diamond
Mansion Phase I 966,184 - - 966,184
6.03% notes payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2007,
secured by property 2,083 6,377 2,016 8,527
F-37
74
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
13. LONG-TERM DEBT - SECURED (CONTINUED)
2003 2002
-------- ----------
Current Long-term Current Long-term
----------- ----------- ----------- -----------
7.2% notes payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2007,
secured by property 5,133 8,322 3,046 11,376
7.2% notes payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2014,
secured by property 1,578 16,247 - -
5.58% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2007,
secured by property 1,510 3,851 - -
5.58% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2010,
secured by property 795 6,283 - -
5.8% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2008,
secured by property 2,838 12,301 1,756 10,641
5.58% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2012,
secured by property 3,417 24,842 - -
F-38
75
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
13. LONG-TERM DEBT - SECURED (CONTINUED)
2003 2002
-------- ----------
Current Long-term Current Long-term
----------- ----------- ----------- -----------
5.58% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2015,
secured by property 1,645 20,469 - -
5.58% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2016,
secured by property 2,013 23,816 633 14,438
5.58% notes payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2020,
secured by property 3,599 60,104 1,007 35,482
5.58% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2025,
secured by property 1,498 33,675 843 35,576
5.58% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2030,
secured by property 523 14,225 - -
4.65% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2026,
secured by property 1,836 40,668 958 43,381
5.04% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2012,
secured by property 7,488 47,271 4,921 56,119
F-39
76
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
13. LONG-TERM DEBT - SECURED (CONTINUED)
2003 2002
-------- ----------
Current Long-term Current Long-term
----------- ----------- ----------- -----------
5.04% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2013,
secured by property 10,266 83,545 - -
5.04% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2018,
secured by property 20,451 274,007 - -
5.04% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2022,
secured by property 6,516 143,805 4,552 147,118
5.04% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2023,
secured by property 4,589 83,374 - -
7.65% note payable to a bank,
monthly installments of
principal and interest, due
on various dates through 2006,
secured by property 1,510 3,504 1,516 5,007
Unsecured notes payable to a bank - - 11,995 152,495
----------- ----------- ----------- -----------
$ 2,253,201 $ 906,686 $ 2,448,702 $ 2,694,073
=========== =========== =========== ===========
As of December 31, 2003 and 2002, bank loans are secured by a legal charge
over the Wuhan Pacific's land use rights and buildings of $0 and $1,814,713
respectively and stock of properties held for resale of $2,775,494 and
$6,062,357, respectively.
During the year ended December 31, 2003, the 2nd and 3rd Floors of Diamond
Mansion Phase I were pledged for a bank loan amounting to $2,415,459 (Rmb.
20,000,000), and which loan was repaid during the year. According to the Land
Use Right Certificates, the security was discharged/released on November 20,
2003 and February 4, 2004.
F-40
77
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
13. LONG-TERM DEBT - SECURED (CONTINUED)
As of December 31, 2003, two floors of the commercial complex in Diamond
Mansion Phase I with a net book value of $1,264,997 (Rmb.10,474,171), are
pledged to secure the loan of $1,207,729 (Rmb.10,000,000). As of December 31,
2003, they have been transferred to stock of properties for sale (trading
stock) at the net book value of $1,264,996 (Rmb. 10,474,171).
Maturities of the long-term debts for each of the next five years and
thereafter are as follows:
Amount
-------------
2004 $ 2,253,201
2005 77,344
2006 76,029
2007 74,324
2008 72,369
Thereafter 606,620
-------------
$ 3,159,887
=============
14. CAPITAL
December 31
2003 2002
------------- -------------
Authorized, issued and outstanding:
500,000 ordinary share at HK$1.00 each $ 64,103 $ 64,103
Less minority interest (1,923) (1,923)
------------- -------------
$ 62,180 $ 62,180
============= =============
Town House Land Limited (formerly Hong Kong Window of the World Apparel Co.,
Limited) (the "Company") was registered as in Hong Kong, as a limited
liability company on August 13, 2001 with a registered capital of $64,103 (HK
$500,000). Based on the Certificate of Incorporation on Change of Name dated
August 3, 2003, the Company changed its name from "Hong Kong Window of the
World Apparel Co., Limited" to "Town House Land Limited".
15. INCOME TAX
Provision for the People's Republic of China enterprise income tax ("EIT") is
calculated at the prevailing rate based on the estimated assessable profits
less available tax relief for losses carried forward.
For the year ended December 31, 2003 and 2004, the Company has been granted
the privilege of computing the gross profit margins on real estate development
sales at 6% of sales and computed the enterprise income tax at 33% on only 6%
of sales.
EIT is computed on the basis of the statutory profit for financial reporting
purposes, adjusted for income and expense items, which are not assessable or
deductible for income tax purposes.
F-41
78
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
15. INCOME TAX (CONTINUED)
A reconciliation of EIT tax at the statutory rate to the Company's effective
rate is as follows:
December 31
---------------------------
2003 2002
------------- -------------
Computed at the statutory rate $ 936,527 $ 519,077
Tax effect of special tax rate granted during 2003 (756,729) -
------------- -------------
Tax effect of minor timing differences and credits - (48,079)
------------- -------------
Tax at effective rate $ 179,798 $ 470,998
============= =============
16. COMMITMENTS
As of December 31, 2003 and 2002, the Company had commitments for capital
expenditures for land use rights, plant and machineries and contractual
commitments of the construction projects totaling $1,660,721 and $164,442,
respectively.
17. CONTINGENT LIABILITIES
As of December 31, 2003, pursuant to a Bank Agreement (the "Agreement") of
September 1, 2003 between Bank of China (the "Bank") and Wuhan Pacific Real
Estate Development Co., Limited, the Bank has agreed to provide mortgage
loans, representing 60% of the purchase price, to buyers of properties (Window
of the World Shopping Mall - Diamond Mansion Phase I) developed by the
Company. Buyers are required to make cash down payments equal to 40% of the
purchase price before financing is guaranteed on the remaining 60% balance
which is financed by Bank of China. The corporate guarantee shall remain
enforceable for up to 10 years of the mortgage period against any defaults by
the buyers. The corporate guarantees are released when the mortgages are paid
in full or at some earlier point in time as might be negotiated with the bank.
Because buyers have made a minimum down payment of at least 40% of the
purchase price, the buyers' initial and continuing investments are adequate to
demonstrate a commitment to pay for the property. In accordance with the terms
and conditions of the Agreement, the Company has agreed to guarantee the
mortgage loans provided to property buyers of Diamond Mansion Phase I to a
maximum limit of $3,623,188 (Rmb. 30,000,000) to be extended by Bank of China
to property buyers for a period of 10 years from September 1, 2003 to
September 1, 2013.
As of December 31, 2003, the Company's contingent liabilities to the bank
amounted to $1,016,908 due to mortgage loans for property buyers of Window of
the World Shopping Center. Subsequent to year end the Bank of China released
the Company from its loan guarantee on these loans.
F-42
79
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
17. CONTINGENT LIABILITIES (CONTINUED)
As of December 31, 2002, pursuant to banking facilities extended by the banks
to property buyers, the bank has agreed to extend mortgage loans to property
buyers of units in the yet to be completed Diamond Mansion Phase 1 developed
by the Company. During the construction period of Diamond Mansion Phase 1, the
Company has agreed to guarantee the mortgage loans extended to the property
buyers to the maximum limit of $1,811,594 (Rmb. 15,000,000) extended by the
banks. The construction of Diamond Mansion was completed as of December 31,
2002. At December 31, 2002, all loans guaranteed were reflected as advances
from buyers in the Company's financial statements and none had been recognized
as income until such time as the guarantees are released.
As of December 31, 2002, pursuant to a letter confirmation from a bank dated
August 6, 2003, the Company was released from its obligations under three
separate Corporate Guarantees (the "guarantees") totaling $1,998,792 in 2002
and $1,998,792 in 2001 effective from August 6, 2002.
December 31
---------------------------
2003 2002
------------- -------------
Corporate guarantees given to a bank with respect
to mortgage loans extended to property buyers $ 1,016,908 $ -
Corporate guarantees given to a bank with respect
to mortgage loans extended to property buyers of
properties yet to be completed - 1,811,594
Penalty clause for a short-term loan 36,232 -
------------- -------------
$ 1,053,140 $ 1,811,594
============= =============
As of December 31, 2003, pursuant to Loan Agreement (the "Agreement") dated
November 30, 2003 between the Lender and the Company, the Lender has agreed to
extend a short-term unsecured loan of $362,319 (Rmb.3,000,000) with a maturity
period of three months and interest rate of 10.89% per annum. The loan was
intended for Xiling Plaza Project. If the Company does not appoint the Lender
as the main contractor for the Xiling Plaza Project, the Lender shall be
entitled to a penalty payment of $36,232 (Rmb.300,000) being 10% of the
principal amount of the loan.
18. RELEASE OF LOAN GUARANTEES
During October of 2004, the Company obtained a release from the Bank of China
with respect to loan guarantees it had made to the Company in connection with
financing provided to buyers of Diamond Mansion Phase 1. This guarantee had a
maximum limit of $3,623,188 (Rmb 30,000,000) of which guarantees totaling
$1,106,908 were outstanding at December 31, 2003. Furthermore, the Company
has elected to discontinue the practice of guaranteeing buyers loans.
F-43
80
Comet Technologies, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
On January 19, 2004, Comet Technologies, Inc. (the "Company") entered into a
Stock Exchange Agreement with Town House Land Limited, ("Town House") a
company organized in the Hong Kong Special Administrative Region in the
People's Republic of China. The agreement provides that subject to the
meeting of certain conditions, including the Reverse Split on a one-for-three
basis of the Common Stock of the Company, the Company will issue to the Town
House shareholders, a total of 18,390,000 shares of Common Stock with
restrictive legend for all of the shares of Town House common stock. After
the closing of the Acquisition, Town House will be a wholly-owned subsidiary
of the Company and the ownership of the Company will be controlled by the
former shareholders of Town House.
The Company has entered into a Consulting Agreement with Belair Consulting,
L.L.C. ("Belair"), an affiliate of Richard B. Stuart, President, director, and
principal shareholder, and Jack Gertino, Secretary/Treasurer, director, and
principal shareholder, under the terms of which it has agreed to issue a total
of 400,000 post-split shares of restricted common stock, and pay up to
$130,000 in cash for consulting services, over a period of two (2) years.
For financial reporting purposes, this acquisition will be treated as a
so-called "reverse acquisition," whereby Town House will account for the
transaction as a recapitalization of Town House. As a recapitalization
transaction, the historical stockholders' equity of Town House, the accounting
acquiror, is retroactively restated for the equivalent number of shares
received by Town House's shareholders in the merger, and the historical
retained earnings/deficit of Town House are carried forward.
The accompanying condensed consolidated financial statements illustrate the
effect of the acquisition (pro forma) on the Company's financial position and
results of operations. The condensed consolidated balance sheet as of
September 30, 2004 is based on the historical balance sheets of the Company
and Town House as of that date and assumes the acquisition took place on that
date. The condensed consolidated statement of income for the nine months
ended September 30, 2004 is based on the historical statements of income of
the Company and Town House for those periods. The pro forma condensed
consolidated statement of income assumes the acquisition took place on January
1, 2003.
The unaudited pro forma condensed consolidated financial statements may not be
indicative of the actual results of the acquisition.
The accompanying condensed consolidated pro forma financial statements should
be read in connection with the historical financial statements of the Company
and Town House.
F-44
81
TOWN HOUSE LAND LIMITED & SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2004
(Expressed in U.S. dollars)
(Unaudited)
Town House Pro Forma Pro Forma
Group Comet Adjustments Balance
------------- ------------- ------------- --------------
ASSETS
Current assets
Cash and equivalents $ 2,288,518 $ 92,855 $ - $ 2,381,373
Accounts receivable, net 2,485,490 - - 2,485,490
Other receivables 223,983 - - 223,983
Prepaid Expense 301,933 - 198,515(a) 500,448
Properties held for resale 7,902,177 - - 7,902,177
Construction-in-progress - current 4,686,159 - - 4,686,159
------------- ------------- ------------- --------------
Total current assets 17,888,260 92,855 198,515 18,179,630
------------- ------------- ------------- --------------
Non-current assets
Property and equipment - net 2,693,411 - - 2,693,411
Construction-in-progress - non-current 931,433 - - 931,433
------------- ------------- ------------- --------------
Total assets $ 21,513,104 $ 92,855 $ 198,515 $ 21,804,474
============= ============= ============= ==============
See Notes to the Pro Forma Consolidated Financial Statements (Unaudited)
F-45
82
TOWN HOUSE LAND LIMITED & SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF SEPTEMBER 30, 2004
(Expressed in U.S. dollars)
(Unaudited)
Town House Pro Forma Pro Forma
Group Comet Adjustments Balance
------------- ------------- ---------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,276,452 $ 1,775 $ - $ 2,278,227
Payable - related parties - 51,795 - 51,795
Advances from buyers 2,110,144 - - 2,110,144
Amount due to directors 1,916,275 - - 1,916,275
Deferred income tax liability 1,378,487 - - 1,378,487
Other tax payable 759,790 - - 759,790
Short - term loans 362,319 - - 362,319
Current portion of long term debts- secured 893,946 - - 893,946
Notes Payable 8,000 - - 8,000
------------- ------------- ---------------- --------------
Total current liabilities 9,705,413 53,570 - 9,758,983
------------- ------------- ---------------- --------------
Long-term debts- net of current portion shown 853,370 - - 853,370
------------- ------------- ---------------- --------------
Minority interest 378,199 - - 378,199
------------- ------------- ---------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock, par value of $.001
5,000,000 shares authorized, no share
Issued or outstanding - - - -
Common stock, par value of $0.001,
50,000,000 shares authorized, 19,989,333
shares outstanding - 3,598 400 (a) 19,989
(2,399)(b)
18,390 (c)
Registered Capital 62,180 - (62,180)(c)
Additional paid-in capital 5,857,936 238,561 198,115 (a) 6,195,457
(142,945)(b)
43,790 (c)
Capital reserve 997,928 - - 997,928
Accumulated (deficit) / Retained profit 3,658,078 (202,874) 145,344 (b) 3,600,548
Effect of cumulative translation adjustment - - - -
------------- ------------- ---------------- --------------
Total shareholders' equity 10,576,122 39,285 198,515 10,813,922
------------- ------------- ---------------- --------------
Total liabilities and members' equity $ 21,513,104 $ 92,855 $ 198,515 $ 21,804,474
============= ============= ================ ==============
See Notes to the Pro Forma Consolidated Financial Statements (Unaudited)
F-46
83
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDING SEPTEMBER 30, 2004
(Expressed in U.S. dollars)
(Unaudited)
Town House Pro Forma Pro Forma
Group Comet Adjustments Balance
------------- ------------- ------------- --------------
Sales Revenues $ 10,699,091 $ - $ - $ 10,699,091
Sales Return 73,261 - - 73,261
------------- ------------- ------------- --------------
10,625,830 - - 10,625,830
Cost of Goods Sold 5,698,874 - - 5,698,874
------------- ------------- ------------- --------------
Gross Profit 4,926,956 - - 4,926,956
------------- ------------- ------------- --------------
Operating Expenses
Business tax and additions 547,230 - - 547,230
Selling expenses 610,578 - - 610,578
Administrative expenses 942,848 84,429 - 1,027,277
Other operating expenses 17,678 - - 17,678
------------- ------------- ------------- --------------
2,118,334 84,429 - 2,202,763
------------- ------------- ------------- --------------
Income from Operations 2,808,621 (84,429) - 2,724,192
------------- ------------- ------------- --------------
Other (expense)/income
Interest income - 297 - 297
Reimbursement for fees - 1,820 - 1,820
Other revenue 3,041 - - 3,041
Interest and finance costs (204,873) - - (204,873)
------------- ------------- ------------- --------------
(201,832) 2,117 - (199,715)
------------- ------------- ------------- --------------
Net Income before Income Taxes
and Minority Interest 2,606,790 (82,312) - 2,524,478
Provision for Income Taxes (383,046) - - (383,046)
------------- ------------- ------------- --------------
Net Income before Minority Interest 2,223,743 (82,312) - 2,141,431
Minority Interest in Earnings (69,504) - - (69,504)
------------- ------------- ------------- --------------
Net Income $ 2,154,239 $ (82,312) $ - $ 2,071,927
============= ============= ============= ==============
See Notes to the Pro Forma Consolidated Financial Statements (Unaudited)
F-47
84
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The pro forma adjustments to the condensed consolidated balance sheet are as
follows:
(a) Prepaid consulting 198,515
Common stock 400
Additional paid in capital 198,115
To record consulting fee to Balair L.L.C.
(b) Common stock 2,399
Additional paid-in capital 142,945
Accumulated deficit 145,344
To record recapitalization of Town House by eliminating Comet Capital stock
effective as of January 1, 2003
(c) Registered capital 62,180
Common stock 18,390
Additional paid in capital 43,790
To reclassify Town House Capital in recapitalization.
F-48
85
Comet Technologies, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Financial Statements
(Unaudited)
On January 19, 2004, Comet Technologies, Inc. (the "Company") entered into a
Stock Exchange Agreement with Town House Land Limited, ("Town House") a
company organized in the Hong Kong Special Administrative Region in the
People's Republic of China. The agreement provides that subject to the
meeting of certain conditions, including the Reverse Split on a one-for-three
basis of the Common Stock of the Company, the Company will issue to the Town
House shareholders, a total of 18,390,000 shares of Common Stock with
restrictive legend for all of the shares of Town House common stock. After
the closing of the Acquisition, Town House will be a wholly-owned subsidiary
of the Company and the ownership of the Company will be controlled by the
former shareholders of Town House.
The Company has entered into a Consulting Agreement with Belair Consulting,
L.L.C. ("Belair"), an affiliate of Richard B. Stuart, President, director, and
principal shareholder, and Jack Gertino, Secretary/Treasurer, director, and
principal shareholder, under the terms of which it has agreed to issue a total
of 400,000 post-split shares of restricted common stock, and pay up to
$130,000 in cash for consulting services, over a period of two (2) years.
For financial reporting purposes, this acquisition will be treated as a
so-called "reverse acquisition," whereby Town House will account for the
transaction as a recapitalization of Town House. As a recapitalization
transaction, the historical stockholders' equity of Town House, the accounting
acquiror, is retroactively restated for the equivalent number of shares
received by Town House's shareholders in the merger, and the historical
retained earnings/deficit of Town House are carried forward.
The accompanying condensed consolidated financial statements illustrate the
effect of the acquisition (pro forma) on the Company's financial position and
results of operations. The condensed consolidated statement of income for the
year ended December 31, 2003 is based on the historical statements of income
of the Company and Town House for those periods. The pro forma condensed
consolidated statement of income assumes the acquisition took place on January
1, 2003.
The unaudited pro forma condensed consolidated financial statements may not be
indicative of the actual results of the acquisition.
The accompanying condensed consolidated pro forma financial statements should
be read in connection with the historical financial statements of the Company
and Town House.
F-49
86
COMET TECHNOLOGIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(UNAUDITED)
Pro Forma
Comet Town House Adjustments Pro Forma
-------------- ------------- ------------- -------------
SALES $ - $ 9,080,701 $ - $ 9,080,701
COST OF GOODS SOLD - 5,120,435 - 5,120,435
-------------- ------------- ------------- -------------
GROSS PROFIT - 3,960,266 - 3,960,266
-------------- ------------- ------------- -------------
OPERATING EXPENSES:
Selling expenses - 439,006 - 439,006
General and administrative expenses 41,415 300,851 - 342,266
Depreciation Expense - 69,664 - 69,664
Impairment of goodwill - - - -
-------------- ------------- ------------- -------------
Total operating expenses 41,415 809,521 - 850,936
-------------- ------------- ------------- -------------
(LOSS) FROM OPERATIONS (41,415) 3,150,745 - 3,109,330
-------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES):
Interest and finance costs - (326,849) - -
Other revenues 1,326 14,065 - 15,391
-------------- ------------- ------------- -------------
1,326 (312,784) - 15,391
-------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES $ (40,089) $ 2,837,961 $ - $ 2,797,872
PROVISION FOR INCOME TAXES - (179,798) - (179,798)
-------------- ------------- ------------- -------------
NET INCOME BEFORE MINORITY INTEREST $ (40,089) $ 2,658,163 $ - $ 2,618,074
-------------- ------------- ------------- -------------
MINORITY INTEREST IN EARNINGS $ - $ 80,325 $ - $ 80,325
-------------- ------------- ------------- -------------
NET INCOME $ (40,089) $ 2,577,838 $ - $ 2,537,749
============== ============= ============= =============
BASIC EARNINGS PER SHARE $ (0.00) $ 0.14 $ - $ 0.14
============== ============= ============= =============
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 19,989,333 19,989,333 19,989,333
============== ============= =============
THE COMPONENTS OF COMPREHENSIVE LOSS:
Net income (loss) $ (40,089) $ 2,837,961 $ 2,797,872
Foreign currency translation adjustment - - -
-------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ (40,089) $ 2,837,961 $ 2,797,872
============== ============= =============
See Notes to the Pro Forma Consolidated Financial Statements (Unaudited)
F-50
87
EXHIBIT A
STOCK EXCHANGE AGREEMENT
THIS STOCK EXCHANGE AGREEMENT (hereinafter referred to as this
"Agreement"), is entered into as of this 19th day of January, 2004, by and
among Comet Technologies, Inc., a Nevada corporation ("Comet"); Town House
Land Limited, a company organized in the Hong Kong Special Administrative
Region in The People's Republic of China ("Town House"); and the persons
listed on Schedule 1(a) to this Agreement, being all of the equity registered
capital of Town House ( the "Shareholders"), upon the following premises:
PREMISES
A. Comet is a non-operating public company which has been in existence
since 1986.
B. The Shareholders of Town House own all of the issued and outstanding
shares of Town House (the "Town House Stock") which in turn owns the entire
registered capital of Wuhan Pacific Industry Development Company Limited
("Wuhan"), a wholly-owned foreign enterprise organized in Hubei Province in
The People's Republic of China.
C. The Shareholders of Town House have agreed to sell to Comet and Comet
has agreed to purchase the Town House Stock from the Shareholders in exchange
for shares representing ninety four percent (94%) of the total outstanding
common shares of Comet after the stock exchange, pursuant to the terms and
conditions set forth in this Agreement.
D. Town House together with its wholly-owned foreign subsidiary, Wuhan,
will become a wholly-owned subsidiary of Comet after the Closing of the
Exchange.
AGREEMENT
NOW THEREFORE, on the stated premises and for and in consideration of the
mutual covenants and agreements hereinafter set forth and the mutual benefits
to the parties to be derived herefrom, it is hereby agreed as follows:
ARTICLE I
PLAN OF EXCHANGE
1.1 The Exchange. At the Closing (as defined in Section 1.3 below), each
of the Shareholders of Town House hereby agree to assign, transfer, and
deliver to Comet, free and clear of all liens, pledges, encumbrances, charges,
restrictions, or known claims of any kind, nature, or description, the
certificates evidencing the Town House Stock duly endorsed for transfer to
Comet or accompanied by stock powers executed in blank by the Shareholders,
and Comet agrees to acquire such shares on such date by issuing and delivering
in exchange therefore solely shares of Comet common stock, in the amount of
13,800,667 post-split shares (subject to adjustment for fractionalized shares
as set forth below) of its common voting stock, par value $0.001 (the "Comet
Stock") to be issued to the Shareholders of Town House and their designees as
listed on Schedule 1(b) following a one-for-three (1-for-3) reverse stock
split of the presently issued and outstanding common stock of Comet, in full
satisfaction of any right or interest which each Shareholder held in the Town
House Stock. The Comet Stock will be issued
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to the Shareholders of Town House and their designees with a restrictive
Regulation S legend as set forth on Schedule 1(a) and Schedule 1(b) attached
hereto. Any fractional shares that will result due to such pro rata
distribution will be rounded up to the next highest whole number. As a result
of the exchange of the Town House Stock in exchange for the Comet Stock, Town
House will become a wholly-owned subsidiary of Comet and the Shareholders of
Town House and their designees will own ninety four percent of the issued and
outstanding common stock of Comet.
1.2 Anti-Dilution. For all relevant purposes of this Agreement, the
13,800,667 post-split shares of Comet Stock to be issued and delivered
pursuant to this Agreement to the Shareholders of Town House, take into
account the 1-for-3 reverse split provided for in Section 1.1 and no further
change or adjustment shall be made in connection therewith. The number of
shares of Comet Stock and all shares of stock covered by existing Town House
options shall be appropriately adjusted to take into account any other stock
split, stock dividend, reverse stock split, recapitalization, or similar
change in the Comet common stock, par value $0.001, which may occur between
the date of the execution of this Agreement and the date of delivery of such
shares.
1.3 Closing. The closing ("Closing") of the transactions contemplated by
this Agreement shall be on a date and at such time as the parties may agree
("Closing Date"), within the five-day period commencing with the last to occur
of the following: the Comet shareholders' meeting pursuant to Section 5.1;
provided however, that the Closing shall in no event be after February 28,
2004, unless extended in writing by the parties.
1.4 Closing Events. At the Closing, each of the respective parties
hereto shall execute, acknowledge, and deliver (or shall cause to be executed,
acknowledged, and delivered) any and all certificates, opinions, financial
statements, schedules, agreements, resolutions, rulings, or other instruments
required by this Agreement to be so delivered at or prior to the Closing,
together with such other items as may be reasonably requested by the parties
hereto and their respective legal counsel in order to effectuate or evidence
the transactions contemplated hereby if agreed to by the parties, the Closing
may take place through the exchange of documents by fax and/or express
courier.
ARTICLE II
REPRESENTATIONS, COVENANTS, AND WARRANTIES OF TOWN HOUSE
As an inducement to, and to obtain the reliance of, Comet, Town House
represents and warrants as follows:
2.1 Organization. Town House is a duly organized, validly existing, and
in good standing under the laws of the Hong Kong Special Administrative Region
in The People's Republic of China ("PRC"). Town House has the power and is
duly authorized, qualified, franchised, and licensed under all applicable
laws, regulations, ordinances, and orders of public authorities to own all of
its properties and assets and to carry on its business in all material
respects as it is now being conducted, including qualification to do business
as a foreign corporation in the states in which the character and location of
the assets owned by it or the nature of the business transacted by it requires
qualification. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated by this Agreement in accordance
with the terms hereof will not, violate any provision of Town House's and its
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wholly-owned subsidiary's organizational documents. Town House has taken all
action required by laws, its articles of incorporation, its bylaws, or
otherwise to authorize the execution and delivery of this Agreement. Town
House has full power, authority, and legal right and has taken all action
required by law, its certificate of incorporation, bylaws, and otherwise to
consummate the transactions herein contemplated.
2.2 Capitalization. The authorized capitalization of Town House consists
of 500,000 shares of ordinary stock, par value HK$1, of which 500 shares are
currently issued and outstanding. All issued and outstanding shares are
legally issued, fully paid, and non-assessable and not issued in violation of
the pre-emptive or other rights of any person. Town House has not granted any
options.
2.3 Subsidiaries and Predecessor Corporations. Town House owns all of
the registered capital wholly-owned subsidiary, Wuhan, and does not own,
beneficially or of record, any shares of any other corporation.
(a) On or before January 31, 2004, Town House will provide to Comet
its consolidated audited balance sheets of at December 31, 2002 and 2001, and
the related audited consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 2002 and 2001, together
with notes to such statements and the opinion of Henny Wee & Co., independent
certified public accountants, with respect thereto, and its unaudited
consolidated balance sheet as of September 30, 2003 date (the "most recent
Town House balance sheet"), consolidated statement of operations, condensed
consolidated stockholders' equity, and consolidate cash flow for the nine (9)
months ended September 30, 2003, together with the notes thereto. All of these
consolidated financial statements will be included in the Town House
Schedules.
(b) All such consolidated financial statements will have been
prepared in accordance with generally accepted accounting principles in Hong
Kong. The Town House balance sheets present fairly as of their date the
consolidated financial condition of Town House. Town House and its
wholly-owned subsidiary, Wuhan, will not have, as of the date of such
consolidated balance sheets, except as and to the extent reflected or reserved
against therein, any liabilities or obligations (absolute or contingent) which
should be reflected in the consolidated balance sheets or the notes thereto,
prepared in accordance with generally accepted accounting principles in Hong
Kong, and all assets reflected therein will be properly reported and present
fairly the value of the assets of Town House and its wholly-owned subsidiary,
Wuhan, in accordance with such generally accepted accounting principles. The
consolidated statements of income, condensed consolidated stockholders'
equity, and consolidated cash flows will reflect fairly the information
required to be set forth therein by generally accepted accounting principles
in Hong Kong.
(c) Town House and its wholly-owned subsidiary, Wuhan, have filed all
local income tax returns required to be filed by them from inception to the
date hereof and all taxes have been paid. Town House and its wholly-owned
subsidiary, Wuhan, have filed all national, province, and local income tax
returns required to be filed by them from inception to the date hereof and all
taxes have been paid. None of such income tax returns have been examined or
audited in the PRC.
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(d) Town House and its wholly-owned subsidiary, Wuhan, do not owe any
unpaid national, province, county, local, or other taxes (including any
deficiencies, interest, or penalties), except for taxes accrued but not yet
due and payable, for which Town House and its wholly-owned subsidiary, Wuhan,
may be liable in their own right or as a transferee of the assets of, or as a
successor to, any other corporation or entity. Furthermore, except as accruing
in the normal course of business, Town House and its wholly-owned subsidiary,
Wuhan, do not owe any accrued and unpaid taxes to the date of this Agreement.
(e) The books and records, financial and otherwise, of Town House and
its subsidiary, Wuhan, are in all material respects complete and correct and
have been maintained in accordance with good business and accounting
practices.
(f) Town House and its wholly-owned subsidiary, Wuhan, have good and
marketable title to their assets and, except as set forth in the Town House
Schedules or the consolidated financial statements of Town House or the notes
thereto, has no material contingent liabilities, direct or indirect, matured
or unmatured.
2.4 Information. The information concerning Town House set forth in this
Agreement and in the Town House Schedules is complete and accurate in all
material respects and does not contain any untrue statement of a material fact
or omit to state a material fact required to make the statements made, in
light of the circumstances under which they were made, not misleading.
2.5 Options or Warrants. There are no existing options, warrants, calls,
or commitments of any character relating to the authorized and unissued Town
House common stock, except options, warrants, calls or commitments, if any, to
which Town House is not a party and by which it is not bound.
2.6 Absence of Certain Changes or Events. Except as set forth in this
Agreement or the Town House Schedules, as of the most recent Town House
consolidated balance sheet, when received:
(a) except in the normal course of business, there will not be (i)
any material adverse change in the business, operations, properties, assets,
or condition of Town House and its wholly-owned subsidiary, Wuhan; or (ii) any
damage, destruction, or loss to Town House and its wholly-owned subsidiary,
Wuhan (whether or not covered by insurance) materially and adversely affecting
the business, operations, properties, assets, or condition of Town House and
its wholly-owned subsidiary, Wuhan;
(b) Town House and its wholly-owned subsidiary, Wuhan, will not have
(i) amended their organizational documents; (ii) declared or made, or agreed
to declare or make, any payment of dividends or distributions of any assets of
any kind whatsoever to stockholders or purchased or redeemed, or agreed to
purchase or redeem, any of its capital stock; (iii) waived any rights of value
which in the aggregate are extraordinary or material considering the business
of Town House and its wholly-owned subsidiary, Wuhan; (iv) made any material
change in its method of management, operation, or accounting; (v) entered into
any other material transaction which is not in the ordinary course of
business; (vi) made any accrual or arrangement for payment of bonuses or
special compensation of any kind or any severance or termination pay to any
present or former officer or employee; (vii) increased the rate of
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compensation payable or to become payable by it to any of its officers or
directors or any of its employees whose monthly compensation exceeds $5,000;
or (viii) made any increase in any profit sharing, bonus, deferred
compensation, insurance, pension, retirement, or other employee benefit plan,
payment, or arrangement made to, for, or with its officers, directors, or
employees; and
(c) Town House and its wholly-owned subsidiary, Wuhan, will not have
(i) borrowed or agreed to borrow any funds or incurred, or become subject to,
any material obligation or liability (absolute or contingent) not otherwise in
the ordinary course of business, and except for capital raised by issuance of
debt or equity in a private placement or other capital raising transaction
deemed advisable by Town House; (ii) paid any material obligation or liability
not otherwise in the ordinary course of business (absolute or contingent)
other than current liabilities reflected in or shown on the most recent Town
House consolidated balance sheet, and current liabilities incurred since that
date in the ordinary course of business; (iii) sold or transferred, or agreed
to sell or transfer, any of its assets, properties, or rights not otherwise in
the ordinary course of business (except assets, properties, or rights not used
or useful in its business which, in the aggregate have a value of less than
$10,000), or canceled, or agreed to cancel, any debts or claims (except debts
or claims which in the aggregate are of a value of less than $10,000); (iv)
made or permitted any amendment or termination of any contract, agreement, or
license to which they are a party not otherwise in the ordinary course of
business if such amendment or termination is material, considering the
business of Town House and its wholly-owned subsidiary, Wuhan; or (v) issued,
delivered, or agreed to issue or deliver any stock, bonds or other corporate
securities including debentures (whether authorized and unissued or held as
treasury stock).
2.7 Title and Related Matters. Town House and its wholly-owned
subsidiary, Wuhan, have good and marketable title to all of their properties,
inventory, interests in properties, and assets, real and personal, which will
be reflected in the most recent Town House consolidated balance sheet or
acquired after that date (except properties, interests in properties, and
assets sold or otherwise disposed of since such date in the ordinary course of
business), free and clear of all liens, pledges, charges, or encumbrances
except
(a) as such assets may be affected by laws of the Hong Kong Special
Administrative Region and The People's Republic of China;
(b) statutory liens or claims not yet delinquent;
(c) such imperfections of title and easements as do not and will not
materially detract from or interfere with the present or proposed use of the
properties subject thereto or affected thereby or otherwise materially impair
present business operations on such properties; and
(d) except as set forth in the Town House Schedules, Town House and its
wholly-owned subsidiary, Wuhan, own, free and clear of any liens, claims,
encumbrances, royalty interests, or other restrictions or limitations of any
nature whatsoever, any and all properties it is currently constructing and all
procedures, techniques, marketing plans, business plans, methods of
management, or other information utilized in connection with Town House and
its wholly-owned subsidiary's business. Except as set forth in the Town House
Schedules, no third party has any right to, and Town House and its
wholly-owned subsidiary, Wuhan, have not received any notice of infringement
of or conflict with asserted rights of others with respect to
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any product, technology, data, trade secrets, know-how, proprietary
techniques, trademarks, service marks, trade names, or copyrights which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling,
or finding, would have a materially adverse affect on the business,
operations, financial condition, income, or business prospects of Town House
and its wholly-owned subsidiary, Wuhan, or any material portion of its
properties, assets, or rights.
2.8 Litigation and Proceedings. Except as set forth in the Town House
Schedules, there are no actions, suits, proceedings, or investigations pending
or, to the knowledge of Town House after reasonable investigation, threatened
by or against Town House and its wholly-owned subsidiary, Wuhan, or affecting
Town House and its wholly-owned subsidiary, Wuhan, or their properties, at law
or in equity, before any court or other governmental agency or
instrumentality, domestic or foreign, or before any arbitrator of any kind.
Town House does not have any knowledge of any default on its part with respect
to any judgment, order, writ, injunction, decree, award, rule, or regulation
of any court, arbitrator, or governmental agency or instrumentality or of any
circumstances which, after reasonable investigation, would result in the
discovery of such a default.
2.9 Contracts.
(a) Town House has provided, or will provide Comet on reasonable
request, copies of all material contracts, agreements, franchises, license
agreements, or other commitments to which Town House and its wholly-owned
subsidiary, Wuhan, are parties or by which they or any of their assets,
products, technology, or properties are bound;
(b) All contracts, agreements, franchises, license agreements, and
other commitments to which Town House and its wholly-owned subsidiary, Wuhan,
are parties or by which their properties are bound and which are material to
the operations of Town House and its wholly-owned subsidiary, Wuhan, taken as
a whole are valid and enforceable by Town House and its wholly-owned
subsidiary, Wuhan, in all respects, except as limited by bankruptcy and
insolvency laws and by other laws affecting the rights of creditors generally;
and
(c) Except as described in the Town House Schedules, Town House and its
wholly-owned subsidiary, Wuhan, are not parties to or bound by, and the
properties of Town House and its wholly-owned subsidiary, Wuhan, are not
subject to, any contract, agreement, other commitment or instrument; any
charter or other corporate restriction; or any judgment, order, writ,
injunction, decree, or award which materially and adversely affects, or in the
future may (as far as Town House or its wholly-owned subsidiary, Wuhan, can
now foresee) materially and adversely affect, the business, operations,
properties, assets, or condition of Town House and its wholly-owned
subsidiary, Wuhan.
2.10 Material Contract Defaults. Town House and its wholly-owned
subsidiary, Wuhan, are not in default in any material respect under the terms
of any outstanding contract, agreement, lease, or other commitment which is
material to the business, operations, properties, assets, or condition of Town
House and its wholly-owned subsidiary, Wuhan, and there is no event of default
in any material respect under any such contract, agreement, lease, or other
commitment in respect of which Town House and its wholly-owned subsidiary,
Wuhan, have not taken adequate steps to prevent such a default from occurring.
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2.11 No Conflict With Other Instruments. The execution of this Agreement
and the consummation of the transactions contemplated by this Agreement will
not result in the breach of any term or provision of, or constitute an event
of default under, any material indenture, mortgage, deed of trust, or other
material contract, agreement, or instrument to which Town House and its
wholly-owned subsidiary, Wuhan, are parties or to which any of their
properties or operations are subject.
2.12 Compliance With Laws and Regulations. Town House and its
wholly-owned subsidiary, Wuhan, have complied with all applicable statutes and
regulations of any national, province, county, or other governmental entity or
agency thereof, except to the extent that noncompliance would not materially
adversely affect the business, operations, properties, assets, or condition of
Town House and its wholly-owned subsidiary, Wuhan, or except to the extent
that noncompliance would not result in the incurrence of any material
liability for Town House or its wholly-owned subsidiary, Wuhan.
2.13 Approval of Agreement. The board of directors of Town House has
authorized the execution and delivery of this Agreement by Town House, has or
will have approved the transactions contemplated hereby, and approved the
submission of this Agreement and the transactions contemplated hereby to the
Shareholders of Town House for their approval with the recommendation that the
reorganization be accepted.
2.14 Material Transactions or Affiliations. Set forth in the Town House
Schedules is a description of every material contract, agreement, or
arrangement between Town House and its wholly-owned subsidiary, Wuhan, and any
predecessor and any person who was at the time of such contract, agreement, or
arrangement an officer, director, or person owning of record, or known by town
House to own beneficially, 10% or more of the issued and outstanding common
stock of Town House and which is to be performed in whole or in part after the
date hereof or which was entered into not more than three years prior to the
date hereof. In all of such transactions, the amount paid or received, whether
in cash, in services, or in kind, is, had been during the full term thereof,
and is required to be during the unexpired portion of the term thereof, no
less favorable to Town House and its wholly-owned subsidiary, Wuhan, than
terms available from otherwise unrelated parties in arm's length transactions.
Except as disclosed in the Town House Schedules or otherwise disclosed herein,
no officer, director, or 10% shareholder of Town House has, or has had since
inception of Town House, any material interest, direct or indirect, in any
material transaction with Town House or its wholly-owned subsidiary, Wuhan.
There are no commitments by Town House and its wholly-owned subsidiary, Wuhan,
whether written or oral, to lend any funds to, borrow any money from, or enter
into any other material transaction with, any such affiliated person.
2.15 Town House Schedules. Town House has delivered to Comet or will
deliver, as soon as practicable, the following schedules, which are
collectively referred to as the "Town House Schedules" and which consist of
separate schedules dated as of the date of execution of this Agreement and
instruments and data as of such date, all certified by the chief executive
officer of Town House as complete, true, and correct:
(a) a schedule containing complete and correct copies of the
organizational documents, as amended, of Town House and its wholly-owned
subsidiary, Wuhan, in effect as of the date of this Agreement;
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(b) a schedule containing the consolidated financial statements of Town
House and its wholly-owned subsidiary, Wuhan, identified in paragraph 2.3(a);
(c) a schedule requested by Comet, containing true and correct copies
of all material contracts, agreements, or other instruments to which Town
House and its wholly-owned subsidiary, Wuhan, are parties or by which they or
their properties are bound, specifically including all contracts, agreements,
or arrangements referred to in Section 2.9;
(d) a schedule setting forth a description of any material adverse
change in the business, operations, property, inventory, assets, or condition
of Town House or its wholly-owned subsidiary, Wuhan, since the date of the
most recent Town House consolidated balance sheet, required to be provided
pursuant to section 2.6 hereof; and
(e) a schedule setting forth any other information, together with any
required copies of documents, required to be disclosed in the Town House
Schedules by sections 2.1 through 2.15. Town House shall cause the Town House
Schedules and the instruments and data delivered to Comet hereunder to be
updated after the date hereof up to and including the Closing Date.
ARTICLE III
REPRESENTATIONS, COVENANTS, AND WARRANTIES OF
SHAREHOLDERS
As an inducement to, and to obtain reliance of Comet, the Shareholders of
Town House represent and warrant as follows:
3.1 Ownership of Town House Shares. Each Town House Shareholder hereby
represents and warrants with respect to the legal and beneficial owner of the
percentage of Town House registered capital set forth on Schedule 1(a) of this
Agreement, free and clear of any claims, charges, equities, liens, security
interests, and encumbrances whatsoever, and each such Shareholder has full
right, power, and authority to transfer, assign, convey, and deliver their
Town House shares; and delivery of such registered capital at the closing will
convey to Comet good and marketable title to such shares free and clear of any
claims, charges, equities, liens, security interests, and encumbrances
whatsoever.
3.2 Knowledge of Representations. To their best knowledge and belief,
the representations of Town House in Article II, above, are true, accurate and
complete.
ARTICLE IV
REPRESENTATIONS, COVENANTS, AND WARRANTIES OF COMET
As an inducement to, and to obtain the reliance of Town House and the
Shareholders, Comet represents and warrants as follows:
4.1 Organization. Comet is a corporation duly organized, validly
existing, and in good standing under the laws of the state of Nevada, and has
the corporate power and is duly authorized, qualified, franchised, and
licensed under all applicable laws, regulations, ordinances, and orders of
public authorities to own all of its properties and assets and to carry on its
business in all material respects as it is now being conducted, and there is
no jurisdiction
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in which it is not qualified in which the character and location of the assets
owned by it or the nature of the business transacted by it requires
qualification. Included in the Comet Schedules (as hereinafter defined) are
complete and correct copies of the articles of incorporation and bylaws of
Comet, as in effect on the date hereof. The execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated
hereby will not, violate any provision of Comet's articles of incorporation or
bylaws. Comet has taken all action required by law, its articles of
incorporation, its bylaws, or otherwise to authorize the execution and
delivery of this Agreement, and Comet has full power, authority, and legal
right and has taken all action required by law, its articles of incorporation,
bylaws, or otherwise to consummate the transactions herein contemplated.
4.2 Capitalization. Comet's authorized capitalization consists of
20,000,000 shares of common stock, par value $0.001, of which 3,598,000 shares
are issued and outstanding; and consists of 5,000,000 shares of preferred
stock, par value $.001, of which no shares are issued and outstanding. All
issued and outstanding shares are legally issued, fully paid, and
non-assessable and not issued in violation of the pre-emptive or other rights
of any person.
4.3 Subsidiaries. Comet does not have any subsidiaries and does not own,
beneficially or of record, any shares of any other corporation.
4.4 Financial Statements.
(a) Included in the Comet Schedules are the audited balance sheets of
Comet as of December 31, 2002 and 2001, and the related audited statements of
operations, stockholders' equity, and cash flow for the two fiscal years ended
December 31, 2002 together with the notes to such statements and the opinion
of HJ & Associates, LLC, independent certified public accountants, with
respect thereto; the unaudited balance sheet of Comet as of September 30,
2003, and the related unaudited statements of operations, stockholders'
equity, and cash flow for the nine-month period ended September 30, 2003,
together with the notes to such statements.
(b) All such financial statements have been prepared in accordance with
generally accepted accounting principles in the United States consistently
applied throughout the periods involved. The Comet balance sheets present
fairly as of their respective dates the financial condition of Comet. Comet
did not have as of the date of any such Comet balance sheet, except as and to
the extent reflected or reserved against therein, any liabilities or
obligations (absolute or contingent) which should be reflected in a balance
sheet or the notes thereto prepared in accordance with generally accepted
accounting principles, and all assets reflected therein are properly reported
and present fairly the value of the assets of Comet, in accordance with
generally accepted accounting principles. The statements of operations,
stockholders' equity, and cash flow reflect fairly the information required to
be set forth therein by generally accepted accounting principles.
(c) Comet has no liabilities with respect to the payment of any
federal, state, county, local, or other taxes (including any deficiencies,
interest, or penalties), except for taxes accrued but not yet due and payable.
(d) Comet has filed all federal, state, or local income tax returns
required to be filed by it from inception to the date hereof. Included in the
Comet Schedules are true and correct
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copies of the federal income tax returns of Comet filed since the date of
inception. None of such federal income tax returns have been examined by the
Internal Revenue Service. Each of such income tax returns reflects the taxes
due for the period covered thereby, except for amounts which, in the
aggregate, are immaterial.
(e) The books and records, financial and otherwise, of Comet are in all
material respects complete and correct and have been maintained in accordance
with good business and accounting practices.
(f) Comet has good and marketable title to its assets and, except as
set forth in the Comet Schedules or the Financial Statements of Comet or the
notes thereto, has no material contingent liabilities, direct or indirect,
matured or unmatured.
4.5 Information. The information concerning Comet set forth in this
Agreement and the Comet Schedules is complete and accurate in all material
respects and does not contain any untrue statement of a material fact or omit
to state a material fact required to make the statements made, in light of the
circumstances under which they were made, not misleading. All outstanding
stock options of Comet will be terminated and cancelled as of the Closing
date.
4.6 Options or Warrants. Except as set forth in Schedule 2, there are no
existing options, warrants, calls, or commitments of any character relating to
authorized and unissued stock of Comet, except options, warrants, calls, or
commitments, if any, to which Comet is not a party and by which it is not
bound. All outstanding stock options and warrants, if any, will be terminated
and cancelled as of the Closing Date.
4.7 Absence of Certain Changes or Events. Except as described herein or
in the Comet Schedules, since the date of the most recent Comet balance sheet:
(a) there has not been (i) any material adverse change in the business,
operations, properties, assets, or condition of Comet (whether or not covered
by insurance) materially and adversely affecting the business, operations,
properties, assets, or condition of Comet;
(b) Comet has not (i) amended its articles of incorporation or bylaws;
(ii) declared or made, or agreed to declare or make any payment of dividends
or distributions of any assets of any kind whatsoever to stockholders or
purchased or redeemed, or agreed to purchase or redeem, any of its capital
stock; (iii) waived any rights of value which in the aggregate are
extraordinary or material considering the business of Comet; (iv) made any
material change in its method of management, operation, or accounting; (v)
entered into any other material transactions; (vi) made any accrual or
arrangement for or payment of bonuses or special compensation of any kind or
any severance or termination pay to any present or former officer or employee;
(vii) increased the rate of compensation payable or to become payable by it to
any of its officers or directors or any of its employees whose monthly
compensation exceeds $1,000; or (viii) made any increase in any profit
sharing, bonus, deferred compensation, insurance, pension, retirement, or
other employee benefit plan, payment, or arrangement, made to, for, or with
its officers, directors, or employees;
(c) Comet has not (i) granted or agreed to grant any options, warrants,
or other rights for its stocks, bonds, or other corporate securities calling
for the issuance thereof; (ii) borrowed or agreed to borrow any funds or
incurred, or become subject to, any material
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4.12 Governmental Authorizations. Comet has all licenses, franchises,
permits, and other government authorizations, that are legally required to
enable it to conduct its business operations in all material respects as
conducted on the date hereof. Except for compliance with federal and state
securities or corporation laws, as hereinafter provided, no authorization,
approval, consent, or order of, or registration, declaration, or filing with,
any court or other governmental body is required in connection with the
execution and delivery by Comet of this Agreement and the consummation by
Comet of the transactions contemplated hereby.
4.13 Compliance With Laws and Regulations. To the best of its knowledge,
Comet has complied with all applicable statutes and regulations of any
federal, state, or other applicable governmental entity or agency thereof,
except to the extent that noncompliance would not materially and adversely
affect the business, operations, properties, assets, or conditions of Comet or
except to the extent that noncompliance would not result in the incurrence of
any material liability. This compliance includes, but is not limited to, the
filing of all reports to date with the U.S. Securities and Exchange Commission
and state securities authorities.
4.14 Insurance. Comet owns no insurable properties and carries no
casualty or liability insurance.
4.15 Approval of Agreement. The board of directors of Comet has
authorized the execution and delivery of this Agreement by Comet and has
approved this Agreement and the transactions contemplated hereby.
4.16 Continuity of Business Enterprises. Comet has no commitment or
present intention to liquidate Comet or sell or otherwise dispose of a
material portion of its business or assets following the consummation of the
transactions contemplated hereby.
4.17 Material Transactions of Affiliations. Except as disclosed herein
and in the Comet Schedules, there exists no material contract, agreement, or
arrangement between Comet and any person who was at the time of such contract,
agreement, or arrangement an officer, director, or person owning of record or
known by Comet to own beneficially, 10% or more of the issued and outstanding
common stock of Comet and which is to be performed in whole or in part after
the date hereof or was entered into not more than three years prior to the
date hereof. Neither any officer, director, nor 10% shareholder of Comet has,
or has had during the last preceding full fiscal year, any known interest in
any material transaction with Comet which was material to the business of
Comet. Comet has no commitment, whether written or oral, to lend any funds to,
borrow any money from, or enter into any other material transaction with any
such affiliated person.
4.18 Employment Matters. Comet has no employees other than its executive
officers.
4.19 Comet Schedules. Comet has delivered to Town House, or will deliver
as soon as practicable at Town House's request, the following schedules, which
are collectively referred to as the "Comet Schedules," which are dated the
date of this Agreement, all certified by an officer to be complete, true, and
accurate:
(a) a schedule containing complete and accurate copies of the articles
of incorporation and bylaws of Comet as in effect as of the date of this
Agreement;
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(b) a schedule containing any filings with the U.S. Securities and
Exchange Commission (the "SEC"), not available on EDGAR;
(c) a schedule containing a copy of the federal income tax returns of
Comet identified in paragraph 4.4(d);
(d) a schedule setting forth the description of any material adverse
change in the business, operations, property, assets, or condition of Comet
since the date of the most recent Comet balance sheet, required to be provided
pursuant to section 4.7 hereof; and
(e) a schedule setting forth any other information, together with any
required copies of documents, required to be disclosed in the Comet Schedules
by sections 4.1 through 4.19. Comet shall cause the Comet Schedules and the
instruments and data delivered to Town House hereunder to be updated after the
date hereof up to and including the Closing Date.
ARTICLE V
SPECIAL COVENANTS
5.1 Stockholders' Meeting of Comet. As soon as practicable following the
execution of this Agreement, and prior to the Closing, Comet shall call a
special meeting, or obtain a consent, of its shareholders, in accordance with
Nevada State laws and the proxy rules of the Securities Exchange Act of 1934,
to approve the following proposals:
(a) the election of Mr. Fang Zhong, Ms. Hu Min, Ms. Fang Hui, Mr. Luo
Yun Fang, and Mr. Fang Wei Jun as directors of Comet;
(b) a 1-for-3 reverse split or consolidation of the outstanding common
stock of Comet;
(c) the amendment to the articles of incorporation of Comet to change
its name to "Wuhan Development Corporation," or such other name to be
determined by Town House (the "New Name"), and to increase the authorized
number of shares of Comet from 20,000,000 to 50,000,000 shares;
(d) the approval of the "2004 Stock Option, SAR and Stock Bonus Plan"
of Comet covering 1,000,000 shares of common stock, attached as Schedule 3
hereto;
(e) approve the appointment of Murrell, Hall, McIntosh & Co., PLLP as
the independent auditors of Comet for its fiscal year ended December 31, 2004;
(f) to take such other actions as the directors may determine are
necessary or appropriate, including (if necessary) the approval of this
Agreement and the transactions contemplated herein.
5.2 Consulting Agreement. At Closing, Comet will enter into a Consulting
Agreement with Belair Consulting, LC, an affiliate of Jack Gertino, Secretary,
and Richard Stuart, President of Comet, in a form acceptable to the parties.
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5.3 Access to Properties and Records. Comet and Town House will each
afford to the officers and authorized representatives of the other full access
to the properties, books, and records of Comet or Town House and its
wholly-owned subsidiary, Wuhan, as the case may be, in order that each may
have full opportunity to make such reasonable investigation as it shall desire
to make of the affairs of the other, and each will furnish the other with such
additional financial and operating data and other information as to the
business and properties of Comet or Town House and its wholly-owned
subsidiary, Wuhan, as the case may be, as the other shall from time to time
reasonably request.
5.4 Delivery of Books and Records. At the Closing, Comet shall deliver
to Stephen A. Zrenda, Jr., Esq., legal counsel of Town House, the originals of
the corporate minute books, books of account, contracts, records, and all
other books or documents of Comet now in the possession or control of Comet or
its representatives and agents.
5.5 Special Covenants and Representations Regarding the Comet Stock. The
consummation of this Agreement and the transactions herein contemplated,
including the issuance of the Comet Stock to the Shareholders of Town House as
contemplated hereby, constitutes the offer and sale of securities under the
Securities Act of 1933 and any applicable state statutes. Such transactions
shall be consummated in reliance on Regulation S and other exemptions from the
registration requirements of such statutes, which depend, inter alias, upon
the circumstances under which the Town House Shareholders acquire such
securities. In connection with reliance upon exemptions from the registration
requirements for such transactions, at the Closing, Town House shall cause to
be delivered, and the Shareholders shall deliver to Comet, letters of
representation in the form attached hereto as Schedule 4.
5.6 Audited Financial Statements. As soon as reasonably practicable,
Town House will prepare and complete audited financial statements for the
fiscal year ended December 31, 2003, including an audited balance sheet as of
December 31, 2003; and audited statements of operations, stockholders equity,
and cash flows for the year ended December 31, 2003 (" 2003 Financial
Statements"). The 2003 Financial Statements will be prepared in accordance
with generally accredited accounting principles consistently applied and
Regulation S-X. The statement of operations included in the 2003 Financial
Statements will reflect net income, after taxes, of at least $2,600,000.
5.7 NASDAQ Listing. As soon as reasonably practicable following the
closing, the consolidated company and its new management will undertake their
best efforts to prepare and file such documentation as required to obtain a
NASDAQ listing for the consolidated company; provided, however, that such
efforts will not be required until such time as the consolidated company
satisfies the eligibility requirements of NASDAQ.
5.8 Third Party Consents and Certificates. Comet and Town House agree to
cooperate with each other in order to obtain any required third party consents
to this Agreement and the transactions herein and therein contemplated.
5.9 Actions Prior to Closing.
(a) From and after the date of this Agreement until the Closing Date
and except as set forth in the Comet or Town House Schedules or as permitted
or contemplated by this Agreement, Comet and Town House and its wholly-owned
subsidiary, Wuhan, respectively, will
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each: (i) carry on its business in substantially the same manner as it has
heretofore; (ii) maintain and keep its properties in states of good repair and
condition as at present, except for depreciation due to ordinary wear and tear
and damage due to casualty; (iii) maintain in full force and effect insurance
comparable in amount and in scope of coverage to that now maintained by it;
(iv) perform in all material respects all of its obligation under material
contracts, leases, and instruments relating to or affecting its assets,
properties, and business; (v) use its best efforts to maintain and preserve
its business organization intact, to retain its key employees, and to maintain
its relationship with its material suppliers and customers; and (vi) fully
comply with and perform in all material respects all obligations and duties
imposed on it by all federal and state laws and all rules, regulations, and
orders imposed by federal or state governmental authorities.
(b) From and after the date of this Agreement until the Closing Date,
neither Comet nor Town House and its wholly-owned subsidiary, Wuhan will: (i)
make any change in their organizational documents, articles of incorporation
or bylaws; (ii) take any action described in section 2.7 in the case of Town
House and its wholly-owned subsidiary, Wuhan, or in section 3.7, in the case
of Comet (all except as permitted therein or as disclosed in the applicable
party's schedules); or (iii) enter into or amend any contract, agreement, or
other instrument of any of the types described in such party's schedules,
except that a party may enter into or amend any contract, agreement, or other
instrument in the ordinary course of business involving the sale of goods or
services.
5.10 Sales Under Rules 144 or 145, If Applicable.
(a) Comet will use its best efforts to at all times comply with the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including timely filing all periodic reports required under
the provisions of the Securities Exchange Act of 1934 (the "Exchange Act") and
the rules and regulations promulgated thereunder.
(b) Upon being informed in writing by any person holding restricted
stock of Comet as of the date of this Agreement that such person intends to
sell any shares under Rule 144 or Rule 145 promulgated under the Securities
Act (including any rule adopted in substitution or replacement thereof), Comet
will certify in writing to such person that it has filed all of the reports
required to be filed by it under the Exchange Act to enable such person to
sell such person's restricted stock under Rule 144 or 145, as may be
applicable in the circumstances, or will inform such person in writing that it
has not filed any such report or reports.
(c) If any certificate representing any such restricted stock is
presented to Comet's transfer agent for registration of transfer in connection
with any sale theretofore made under Rule 144 or 145, provided such
certificate is duly endorsed for transfer by the appropriate person(s) or
accompanied by a separate stock power duly executed by the appropriate
person(s) in each case with reasonable assurances that such endorsements are
genuine and effective, and is accompanied by an opinion of counsel
satisfactory to Comet and its counsel that such transfer has complied with the
requirements of Rule 144 or 145, as the cases may be, Comet will promptly
instruct its transfer agent to register such transfer and to issue one or more
new certificates representing such shares to the transferee and, if
appropriate under the provisions of Rule 144 or 145, as the case may be, free
of any stop transfer order or restrictive
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legend. The provisions of this Section 5.9 shall survive the Closing and the
consummation of the transactions contemplated by this Agreement.
5.11 Indemnification.
(a) Town House and the Shareholders hereby agree to indemnify Comet and
each of the officers, agents and directors of Comet as of the date of
execution of this Agreement against any loss, liability, claim, damage, or
expense (including, but not limited to, any and all expense whatsoever
reasonably incurred in investigating, preparing, or defending against any
litigation, commenced or threatened, or any claim whatsoever), to which it or
they may become subject arising out of or based on any inaccuracy appearing in
or misrepresentation made under Article II of this Agreement. The
indemnification provided for in this paragraph shall survive the Closing and
consummation of the transactions contemplated hereby and termination of this
Agreement.
(b) Comet hereby agrees to indemnify Town House and each of the
officers, agents and directors of Town House as of the date of execution of
this Agreement against any loss, liability, claim, damage, or expense
(including, but not limited to, any and all expense whatsoever reasonably
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever), to which it or they may
become subject arising out of or based on any inaccuracy appearing in or
misrepresentation made under Article IV of this Agreement. The indemnification
provided for in this paragraph shall survive the Closing and consummation of
the transactions contemplated hereby and termination of this Agreement.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF COMET
The obligations of Comet under this Agreement are subject to the
satisfaction, at or before the Closing Date, of the following conditions:
6.1 Accuracy of Representations. The representations and warranties made
by Town House and the Shareholders in this Agreement were true when made and
shall be true at the Closing Date with the same force and effect as if such
representations and warranties were made at and as of the Closing Date (except
for changes therein permitted by this Agreement), and Town House and the
Shareholders shall have performed or complied with all covenants and
conditions required by this Agreement to be performed or complied with by Town
House and the Shareholders prior to or at the Closing. Comet shall be
furnished with a certificate, signed by a duly authorized officer of Town
House and dated the Closing Date, to the foregoing effect.
6.2 Officer's Certificates. Comet shall have been furnished with a
certificate dated the Closing Date and signed by a duly authorized officer of
Town House to the effect that no litigation, proceeding, investigation, or
inquiry is pending or, to the best knowledge of Town House threatened, which
might result in an action to enjoin or prevent the consummation of the
transactions contemplated by this Agreement, or, to the extent not disclosed
in the Town House Schedules, by or against Town House which might result in
any material adverse change in any of the assets, properties, business, or
operations of Town House and its wholly-owned subsidiary, Wuhan.
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6.3 No Material Adverse Change. Prior to the Closing Date, there shall
not have occurred any material adverse change in the financial condition,
business, or operations of Town House and its wholly-owned subsidiary, Wuhan,
nor shall any event have occurred which, with the lapse of time or the giving
of notice, may cause or create any material adverse change in the financial
condition, business, or operations of Town House and its wholly-owned
subsidiary, Wuhan.
6.4 Officer and Director Questionnaires. Comet shall have received
officer and director questionnaires completed and signed by each executive
officer and director of Town House in form and substance reasonably
satisfactory to Comet and its counsel which shall contain information for use
by Comet in reporting the transaction contemplated hereby on Form 8-K to be
filed with the Securities and Exchange Commission.
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6.5 Other Items.
(a) Comet shall have received a shareholders list of Town House
containing the name, address, and number of shares held by each Town House
Shareholder as of the date of Closing certified by an executive officer of
Town House as being true, complete, and accurate.
(b) Comet shall have received such further documents, certificates, or
instruments relating to the transactions contemplated hereby as Comet may
reasonably request.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF
TOWN HOUSE AND THE SHAREHOLDERS
The obligations of Town House and the Shareholders under this Agreement
are subject to the satisfaction, at or before the Closing Date, of the
following conditions:
7.1 Accuracy of Representations. The representations and warranties made
by Comet in this Agreement were true when made and shall be true as of the
Closing Date (except for changes therein permitted by this Agreement) with the
same force and effect as if such representations and warranties were made at
and as of the Closing Date, and Comet shall have performed and complied with
all covenants and conditions required by this Agreement to be performed or
complied with by Comet prior to or at the Closing. Town House shall have been
furnished with a certificate, signed by a duly authorized executive officer of
Comet and dated the Closing Date, to the foregoing effect.
7.2 Stockholder Approval. The stockholders of Comet shall have approved
this Agreement, the transactions contemplated hereby, and the other matters
described in Section 5.1.
7.3 Officer's Certificate. Town House shall have been furnished with a
certificate dated the Closing Date and signed by a duly authorized executive
officer of Comet to the effect that no litigation, proceeding, investigation,
or inquiry is pending or, to the best knowledge of Comet threatened, which
might result in an action to enjoin or prevent the consummation of the
transactions contemplated by this Agreement.
7.4 No Material Adverse Change. Prior to the Closing Date, there shall
not have occurred any material adverse change in the financial condition,
business, or operations of Comet nor shall any event have occurred which, with
the lapse of time or the giving of notice, may cause or create any material
adverse change in the financial condition, business, or operations of Comet.
7.5 Good Standing. Comet shall have received a certificate of good
standing from the Secretary of State of the state of Nevada or other
appropriate office, dated as of a date within ten days prior to the Closing
Date certifying that Comet is in good standing as a corporation in the State
of Nevada and has filed all tax returns required to have been filed by it to
date and has paid all taxes reported as due thereon.
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(c) This Agreement may be terminated at any time prior to the Closing
by action of the board of directors of Town House if Comet shall fail to
comply in any material respect with any of its covenants or agreements
contained in this Agreement or if any of the representations or warranties of
Comet contained herein shall be inaccurate in any material respect. If this
Agreement is terminated pursuant to this paragraph (c) of section 8.1, this
Agreement shall be of no further force or effect, and no obligation, right, or
liability shall arise hereunder, except that Comet shall bear its own costs as
well as the costs of Town House incurred in connection with the negotiation,
preparation, and execution of this Agreement.
ARTICLE IX
MISCELLANEOUS
9.1 Brokers. Comet and Town House agree that there were no finders or
brokers involved in bringing the parties together or who were instrumental in
the negotiation, execution, or consummation of this Agreement. Comet and Town
House each agree to indemnify the other against any claim by any third person
for any commission, brokerage, or finders' fee arising from the transactions
contemplated hereby based on any alleged agreement or understanding between
the indemnifying party and such third person, whether express or implied from
the actions of the indemnifying party.
9.2 Governing Law. This Agreement shall be governed by, enforced, and
construed under and in accordance with the laws of the United States of
America and, with respect to matters of state law, with the laws of Nevada.
Any dispute arising under or in any way related to this Agreement will be
submitted to binding arbitration before a single arbitrator by the American
Arbitration Association in accordance with the Association's commercial rules
then in effect. The arbitration will be conducted in Salt Lake City, Utah. The
decision of the arbitrator will set forth in reasonable detail the basis for
the decision and will be binding on the parties. The arbitration award may be
confirmed by any court of competent jurisdiction.
9.3 Notices. Any notices or other communications required or permitted
hereunder shall be sufficiently given if personally delivered to it or sent by
registered mail or certified mail, postage prepaid, or by prepaid telegram
addressed as follows:
If to Comet, to: Comet Technologies, Inc.
10 West 100 South, Suite 610
Salt Lake City, UT 84101
Attention: Jack M. Gertino, President
Telephone: (801) 532-7851
Facsimile: (801) 355-0289
With copies to: James C. Lewis, Esq.
10 West 100 South, Suite 615
Salt Lake City, UT 84101
Telephone: (801) 994-3846
Facsimile: (801) 355-0289
If to Town House, to: Town House Land Limited
c/o American Eastern Securities, Inc.
865 South Figueroa Street, Suite 3340
Los Angeles, CA 90017
Telephone: (213) 488-5131
Facsimile: (213) 488-5126
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With copies to: Stephen A. Zrenda, Jr., Esq.
Stephen A. Zrenda, Jr., P.C.
2440 Bank One Center
100 N. Broadway
Oklahoma City, OK 73102
Telephone: (405) 235-2111
Facsimile: (405) 235-2157
If to the Shareholders
of Town House, to: c/o Charles Hung
American Eastern Securities, Inc.
865 South Figueroa Street, Suite 3340
Los Angeles, CA 90017
Telephone: (213) 488-5131
Facsimile: (213) 488-5126
or such other addresses as shall be furnished in writing by any party in the
manner for giving notices hereunder, and any such notice or communication
shall be deemed to have been given as of the date so delivered, mailed, or
telegraphed.
9.4 Attorney's Fees. In the event that any party institutes any action
or suit to enforce this Agreement or to secure relief from any default
hereunder or breach hereof, the breaching party or parties shall reimburse the
nonbreaching party or parties for all costs, including reasonable attorneys'
fees, incurred in connection therewith and in enforcing or collecting any
judgment rendered therein.
9.5 Confidentiality. Each party hereto agrees with the other parties
that, unless and until the transactions contemplated by this Agreement have
been consummated, and representatives will hold in strict confidence all data
and information obtained with respect to another party or any subsidiary
thereof from any representative, officer, director, or employee, or from any
books or records or from personal inspection, or such other party, and shall
not use such data or information or disclose the same to others, except (i) to
the extent such data or information is published, is a matter of public
knowledge, or is required by law to be published; and (ii) to the extent that
such data or information must be used or disclosed in order to consummate the
transactions contemplated by this Agreement.
9.6 Expenses of Stock Exchange. Comet and Town House agree that they
will each bear their own costs and expenses in negotiating and closing the
transactions contemplated by this Agreement, including but not limited to,
attorneys' fees, accounting fees, due diligence expenses, travel, printing,
copying, mail, telephone and other related expenses.
9.7 Schedules; Knowledge. Each party is presumed to have full knowledge
of all information set forth in the other party's schedules delivered pursuant
to this Agreement.
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9.8 Third Party Beneficiaries. This contract is solely between Comet and
Town House, and, except as specifically provided, no director, officer,
stockholder, employee, agent, independent contractor, or any other person or
entity shall be deemed to be a third party beneficiary of this Agreement.
9.9 Entire Agreement. This Agreement represents the entire agreement
between the parties relating to the subject matter hereof, including this
Agreement alone fully and completely expresses the agreement of the parties
relating to the subject matter hereof. There are no other courses of dealing,
understandings, agreements, representations, or warranties, written or oral,
except as set forth herein.
9.10 Survival; Termination. The representations, warranties, and
covenants of the respective parties shall survive the Closing Date and the
consummation of the transactions herein contemplated.
9.11 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which taken
together shall be but a single instrument.
9.12 Amendment or Waiver. Every right and remedy provided herein shall
be cumulative with every other right and remedy, whether conferred herein, at
law, or in equity, and may be enforced concurrently herewith, and no waiver by
any party of the performance of any obligation by the other shall be construed
as a waiver of the same or any other default then, theretofore, or thereafter
occurring or existing. At any time prior to the Closing Date, this Agreement
may be amended by a writing signed by all parties hereto, with respect to any
of the terms contained herein, and any term or condition of this Agreement may
be waived or the time for performance hereof may be extended by a writing
signed by the party or parties for whose benefit the provision is intended.
IN WITNESS WHEREOF, the corporate parties hereto have caused this
Agreement to be executed by their respective officers, hereunto duly
authorized, as of the date first above-written.
COMET TECHNOLOGIES, INC.
By: /s/ Richard B. Stuart
ATTEST: -------------------------------------
Richard B. Stuart, President
By: /s/ Jack M. Gertino
-----------------------------
Jack M. Gertino, Secretary
TOWN HOUSE LAND LIMITED
By: /s/ Fang Zhong
-------------------------------------
Fang Zhong, President
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TOWN HOUSE SHAREHOLDERS: /s/ Fang Zhong
-------------------------------------
Fang Zhong
/s/ Hu Min
-------------------------------------
Hu Min
/s/ Fang Hui
-------------------------------------
Fang Hui
/s/ Fang Wei Jun
-------------------------------------
Fang Wei
/s/ Luo Yun Fang
-------------------------------------
Luo Yun Fang
/s/ Fang Wei Feng
-------------------------------------
Fang Wei Feng
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AMENDMENT TO
STOCK EXCHANGE AGREEMENT
This amendment (the "Amendment") to the Stock Exchange Agreement (the
"Agreement"), is entered into as of this 9th day of April, 2004, by and among
Comet Technologies, Inc., a Nevada corporation (hereinafter referred to as
"Comet"); Town House Land Limited, a company organized in the Hong Kong
Special Administrative Region in The People's Republic of China ("Town House")
and the persons listed on Schedule 1(a) to the Agreement, being all of the
equity registered capital of Town House (the "Town House Shareholders"), as
follows:
1. Sections 1.1 and 1.2 of the Agreement shall be amended by deleting
the 13,800,667 shares referenced in said Sections (as the number of shares to
be received by the shareholders of Town House), and inserting in lieu thereof,
the number of 18,390,000 post-split shares.
2. Section 1.3 is amended as follows:
1.3 Closing. The closing ("Closing") of the transactions
contemplated by this Agreement shall be on a date and at such time as the
parties may agree ("Closing Date"), within the five-day period commencing with
the last to occur of the following: the Comet shareholders' meeting pursuant
to Section 5.1; provided however, that the Closing shall in no event be after
May 31, 2004, unless extended in writing by the parties.
3. Schedule 1(b) will be amended as set forth in Exhibit "A" to this
Amendment, to reflect the issuance of 18,390,000 shares to the shareholders of
Town House.
4. Town House hereby represents that it has the authority to execute
this Amendment on behalf of the Town House Shareholders who are listed on
Schedule 1(a) to the Agreement.
5. Except as amended or modified above, the Agreement will remain
unchanged.
IN WITNESS WHEREOF, the corporate parties hereto have caused this
Amendment to be executed by their respective officers, hereunto duly
authorized, as of the date first above-written.
COMET TECHNOLOGIES, INC.
ATTEST: /s/ Jack M. Gertino
Jack M. Gertino, Secretary
TOWN HOUSE LAND LIMITED
By: /s/ Fang Zhong
Fang Zhong, President
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SECOND AMENDMENT TO
STOCK EXCHANGE AGREEMENT
This Second Amendment (the "Amendment") to the Stock Exchange Agreement
(the "Agreement"), is entered into as of this the 13th day of May, 2004, by
and among Comet Technologies, Inc., a Nevada corporation (hereinafter referred
to as "Comet"); Town House Land Limited, a company organized in the Hong Kong
Special Administrative Region in The People's Republic of China ("Town House")
and the persons listed on Schedule 1(a) to the Agreement, being all of the
equity registered capital of Town House (the "Town House Shareholders"), as
follows:
1. Section 1.3 is amended as follows:
1.3 Closing. The closing ("Closing") of the transactions contemplated
by this Agreement shall be on a date and at such time as the parties may agree
("Closing Date"), within twenty two days after the mailing of the 14C
Information Statement by Comet to its shareholders, at a time and place to be
agreed upon by the parties.
2. Comet agrees that, as a condition to Closing, it shall cause Jack
Gertino and Richard Stuart to agree that the options each of them currently
holds, will be amended so that each of them will be able to purchase only
37,500 shares (12,500 post-split shares) under such options, with the
remaining options being cancelled in full.
3. Town House hereby represents that it has the authority to execute
this Amendment on behalf of the Town House Shareholders who are listed on
Schedule 1(a) to the Agreement.
4. Except as amended or modified above, the Agreement will remain
unchanged.
IN WITNESS WHEREOF, the corporate parties hereto have caused this
Amendment to be executed by their respective officers, hereunto duly
authorized, as of the date first above-written.
COMET TECHNOLOGIES, INC.
ATTEST: By: /s/ Jack M. Gertino
----------------------------------
Jack M. Gertino, Secretary
TOWN HOUSE LAND LIMITED
By: /s/ Fang Zhong
-----------------------------------
Fang Zhong, President
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EXHIBIT B
COMET TECHNOLOGIES, INC.
2004 STOCK INCENTIVE PLAN
ARTICLE I - PLAN
1.1 PURPOSE. This Plan is a plan for key Employees (including officers
and employee directors) and Consultants of the Company and its Affiliates and
is intended to advance the best interests of the Company, its Affiliates, and
its stockholders by providing those persons who have substantial
responsibility for the management and growth of the Company and its Affiliates
with additional incentives and an opportunity to obtain or increase their
proprietary interest in the Company, thereby encouraging them to continue in
the employ of the Company or any of its Affiliates.
1.2 RULE 16B-3 PLAN. The Plan is intended to comply with all
applicable conditions of Rule 16b-3 (and all subsequent revisions thereof)
promulgated under the Securities Exchange Act of 1934, as amended (the "1934
Act"). To the extent any provision of the Plan or action by the Board of
Directors or Committee fails to so comply, it shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Committee. In
addition, the Board of Directors may amend the Plan from time to time, as it
deems necessary in order to meet the requirements of any amendments to Rule
16b-3 without the consent of the shareholders of the Company.
1.3 EFFECTIVE DATE OF PLAN. The Plan shall be effective April 1, 2004
(the "Effective Date"), provided that within one year of the Effective Date,
the Plan shall have been approved by at least a majority vote of stockholders.
No Incentive Option, Nonqualified Option, Stock Appreciation Right, Restricted
Stock Award or Performance Stock Award shall be granted pursuant to the Plan
ten years after the Effective Date.
ARTICLE II - DEFINITIONS
The words and phrases defined in this Article shall have the meaning set
out in these definitions throughout this Plan, unless the context in which any
such word or phrase appears reasonably requires a broader, narrower, or
different meaning.
2.1 "AFFILIATE" means any parent corporation and any subsidiary
corporation. The term "parent corporation" means any corporation (other than
the Company) in an unbroken chain of corporations ending with the Company if,
at the time of the action or transaction, each of the corporations other than
the Company owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in the chain.
The term "subsidiary corporation" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if,
at the time of the action or transaction, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing 50% or more
of the total combined voting power of all classes of stock in one of the other
corporations in the chain.
2.2 "AWARD" means each of the following granted under this Plan:
Incentive Option, Nonqualified Option, Stock Appreciation Right, Restricted
Stock Award or Performance Stock Award.
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2.3 "BONUS STOCK AWARD" means an Award of Bonus Stock.
2.4 "BOARD OF DIRECTORS" means the board of directors of the Company.
2.5 "CHANGE IN CONTROL" shall mean and include the following
transactions or situations:
(a) A sale, transfer, or other disposition by the Company through a
single transaction or a series of transactions of securities of the Company
representing thirty (30%) percent or more of the combined voting power of the
Company's then outstanding securities to any "Unrelated Person" or "Unrelated
Persons" acting in concert with one another. For purposes of this definition,
the term "Person" shall mean and include any individual, partnership, joint
venture, association, trust corporation, or other entity (including a "group"
as referred to in Section 13(d)(3) of the 1934 Act). For purposes of this
definition, the term "Unrelated Person" shall mean and include any Person
other than the Company, a wholly-owned subsidiary of the Company, or an
employee benefit plan of the Company; provided however, a sale to underwriters
in connection with a public offering of the Company's securities pursuant to a
firm commitment shall not be a Change of Control.
(b) A sale, transfer, or other disposition through a single
transaction or a series of transactions of all or substantially all of the
assets of the Company to an Unrelated Person or Unrelated Persons acting in
concert with one another.
(c) A change in the ownership of the Company through a single
transaction or a series of transactions such that any Unrelated Person or
Unrelated Persons acting in concert with one another become the "Beneficial
Owner," directly or indirectly, of securities of the Company representing at
least thirty (30%) percent of the combined voting power of the Company's then
outstanding securities. For purposes of this definition, the term "Beneficial
Owner" shall have the same meaning as given to that term in Rule 13d-3
promulgated under the 1934 Act, provided that any pledgee of voting securities
is not deemed to be the Beneficial Owner thereof prior to its acquisition of
voting rights with respect to such securities.
(d) Any consolidation or merger of the Company with or into an
Unrelated Person, unless immediately after the consolidation or merger the
holders of the common stock of the Company immediately prior to the
consolidation or merger are the beneficial owners of securities of the
surviving corporation representing at least fifty (50%) percent of the
combined voting power of the surviving corporation's then outstanding
securities.
(e) During any period of two years, individuals who, at the beginning
of such period, constituted the Board of Directors of the Company cease, for
any reason, to constitute at least a majority thereof, unless the election or
nomination for election of each new director was approved by the vote of at
least two-thirds of the directors then still in office who were directors at
the beginning of such period.
(f) A change in control of the Company of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the 1934 Act, or any successor regulation of similar
importance, regardless of whether the Company is subject to such reporting
requirement.
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2.6 "CODE" means the Internal Revenue Code of 1986, as amended.
2.7 "COMMITTEE" means the Compensation Committee of the Board of
Directors or such other committee designated by the Board of Directors. The
Committee shall be comprised solely of at least two members who are both
Disinterested Persons and Outside Directors or by the Board of Directors in
its entirety.
2.8 "COMPANY" means Comet Technologies, Inc.
2.9 "CONSULTANT" means any person, including an advisor, engaged by
the Company or Affiliate to render services and who is compensated for such
services.
2.10 "DISINTERESTED PERSON" means a "disinterested person" as that term
is defined in Rule 16b-3 under the 1934 Act.
2.11 "ELIGIBLE PERSONS" shall mean, with respect to the Plan, those
persons who, at the time that an Award is granted, are (i) key personnel
(including officers and directors) of the Company or Affiliate, or (ii)
Consultants or independent contractors who provide valuable services to the
Company or Affiliate as determined by the Committee; provided, however, that
no person will be entitled to receive Stock under this Plan for services
relating to capital raising activities for the Company or related to any stock
promotion activities.
2.12 "EMPLOYEE" means a person employed by the Company or any Affiliate
to whom an Award is granted.
2.13 "FAIR MARKET VALUE" of the Stock as of any date means (a) the
average of the high and low sale prices of the Stock on that date on the
principal securities exchange on which the Stock is listed; or (b) if the
Stock is not listed on a securities exchange, the average of the high and low
sale prices of the Stock on that date as reported on the Nasdaq National
Market System; or (c) if the Stock is not listed on the Nasdaq National Market
System, the average of the high and low bid quotations for the Stock on that
date as reported by the National Quotation Bureau Incorporated; or (d) if none
of the foregoing is applicable, an amount at the election of the Committee
equal to (x), the average between the closing bid and ask prices per share of
Stock on the last preceding date on which those prices were reported or (y)
that amount as determined by the Committee in good faith.
2.14 "INCENTIVE OPTION" means an option to purchase Stock granted under
this Plan which is designated as an "Incentive Option" and satisfies the
requirements of Section 422 of the Code.
2.15 "NONQUALIFIED OPTION" means an option to purchase Stock granted
under this Plan other than an Incentive Option.
2.16 "OPTION" means both an Incentive Option and a Nonqualified Option
granted under this Plan to purchase shares of Stock.
2.17 "OPTION AGREEMENT" means the written agreement by and between the
Company and an Eligible Person which sets out the terms of an Option.
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2.18 "OUTSIDE DIRECTOR" means a member of the Board of Directors
serving on the Committee who satisfies Section 162(m) of the Code.
2.19 "PLAN" means the Comet Technologies, Inc. 2004 Stock Incentive
Plan, as set out in this document and as it may be amended from time to time.
2.20 "PLAN YEAR" means the Company's fiscal year.
2.21 "PERFORMANCE STOCK AWARD" means an award of shares of Stock to be
issued to an Eligible Person if specified predetermined performance goals are
satisfied as described in Article VII.
2.22 "RESTRICTED STOCK" means Stock awarded or purchased under a
Restricted Stock Agreement entered into pursuant to this Plan, together with
(i) all rights, warranties or similar items attached or accruing thereto or
represented by the certificate representing the stock and (ii) any stock or
securities into which or for which the stock is thereafter converted or
exchanged. The terms and conditions of the Restricted Stock Agreement shall be
determined by the Committee consistent with the terms of the Plan.
2.23 "RESTRICTED STOCK AGREEMENT" means an agreement between the
Company or any Affiliate and the Eligible Person pursuant to which the
Eligible Person receives a Restricted Stock Award subject to Article VI.
2.24 "RESTRICTED STOCK AWARD" means an Award of Restricted Stock.
2.25 "RESTRICTED STOCK PURCHASE PRICE" means the purchase price, if
any, per share of Restricted Stock subject to an Award. The Restricted Stock
Purchase Price shall be determined by the Committee. It may be greater than or
less than the Fair Market Value of the Stock on the date of the Stock Award.
2.26 "STOCK" means the common stock of the Company, $.001 par value or,
in the event that the outstanding shares of common stock are later changed
into or exchanged for a different class of stock or securities of the Company
or another corporation, that other stock or security.
2.27 "STOCK APPRECIATION RIGHT" and "SAR" means the right to receive
the difference between the Fair Market Value of a share of Stock on the grant
date and the Fair Market Value of the share of Stock on the exercise date.
2.28 "10% STOCKHOLDER" means an individual who, at the time the Option
is granted, owns Stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of any Affiliate. An
individual shall be considered as owning the Stock owned, directly or
indirectly, by or for his brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants; and Stock owned, directly
or indirectly, by or for a corporation, partnership, estate, or trust, shall
be considered as being owned proportionately by or for its stockholders,
partners, or beneficiaries.
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ARTICLE III - ELIGIBILITY
The individuals who shall be eligible to receive Awards shall be those
Eligible Persons of the Company or any of its Affiliates as the Committee
shall determine from time to time.
ARTICLE IV - GENERAL PROVISIONS RELATING TO AWARDS
4.1 AUTHORITY TO GRANT AWARDS. The Committee may grant to those
Eligible Persons of the Company or any of its Affiliates as it shall from time
to time determine, Awards under the terms and conditions of this Plan. Subject
only to any applicable limitations set out in this Plan, the number of shares
of Stock to be covered by any Award to be granted to an Eligible Person shall
be determined by the Committee.
4.2 SHARES SUBJECT TO PLAN. The total number of shares of Stock set
aside for Awards may be granted under the Plan shall be 4,500,000 shares. The
shares may be treasury shares or authorized but unissued shares. The maximum
number of shares subject to options or stock appreciation rights which may be
issued to any eligible person under the plan during each plan year shall be
determined by the Committee. The maximum number of shares subject to
restricted stock awards which may be granted to any eligible person under the
plan during each plan year shall be determined by the Committee. The maximum
number of shares subject to performance stock awards which may be granted to
any eligible person during each plan year shall be determined by the
Committee. The number of shares stated in this Section 4.2 shall be subject to
adjustment in accordance with the provisions of Section 4.5. In the event that
any outstanding Award shall expire or terminate for any reason or any Award is
surrendered, the shares of Stock allocable to the unexercised portion of that
Award may again be subject to an Award under the Plan.
4.3 NON-TRANSFERABILITY. Awards shall not be transferable by the
Eligible Person otherwise than by will or under the laws of descent and
distribution, and shall be exercisable, during the Eligible Person's lifetime,
only by him. Restricted Stock shall be purchased by and/or become vested under
a Restricted Stock Agreement during the Eligible Person's lifetime, only by
him. Any attempt to transfer an Award other than under the terms of the Plan
and the Agreement shall terminate the Award and all rights of the Eligible
Person to that Award.
4.4 REQUIREMENTS OF LAW. The Company shall not be required to sell or
issue any Stock under any Award if issuing that Stock would constitute or
result in a violation by the Eligible Person or the Company of any provision
of any law, statute, or regulation of any governmental authority.
Specifically, in connection with any applicable statute or regulation relating
to the registration of securities, upon exercise of any Option or pursuant to
any Award, the Company shall not be required to issue any Stock unless the
Committee has received evidence satisfactory to it to the effect that the
holder of that Option or Award will not transfer the Stock except in
accordance with applicable law, including receipt of an opinion of counsel
satisfactory to the Company to the effect that any proposed transfer complies
with applicable law. The determination by the Committee on this matter shall
be final, binding and conclusive. The Company may, but shall in no event be
obligated to, register any Stock covered by this Plan pursuant to applicable
securities laws of any country or any political subdivision. In the event the
Stock issuable on exercise of an Option or pursuant to an Award is not
registered, the Company may imprint on the certificate evidencing the Stock
any legend that counsel for the Company considers necessary or advisable to
comply with applicable law. The Company shall not be obligated to take any
other affirmative action in order to cause the exercise of an Option or
vesting under an Award, or the issuance of shares pursuant thereto, to comply
with any law or regulation of any governmental authority.
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4.5 CHANGES IN THE COMPANY'S CAPITAL STRUCTURE.
(a) The existence of outstanding Options or Awards shall not affect in
any way the right or power of the Company or its stockholders to make or
authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Stock or its rights, or the
dissolution or liquidation of the Company, or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise. If the Company shall effect a
subdivision or consolidation of shares or other capital readjustment, the
payment of a Stock dividend, or other increase or reduction of the number of
shares of the Stock outstanding, without receiving compensation for it in
money, services or property, then (a) the number, class, and per share price
of shares of Stock subject to outstanding Options under this Plan shall be
appropriately adjusted in such a manner as to entitle an Eligible Person to
receive upon exercise of an Option, for the same aggregate cash consideration,
the equivalent total number and class of shares he would have received had he
exercised his Option in full immediately prior to the event requiring the
adjustment; and (b)the number and class of shares of Stock then reserved to be
issued under the Plan shall be adjusted by substituting for the total number
and class of shares of Stock then reserved, that number and class of shares of
Stock that would have been received by the owner of an equal number of
outstanding shares of each class of Stock as the result of the event requiring
the adjustment.
(b) If the Company is merged or consolidated with another corporation
and the Company is not the surviving corporation, or if the Company is
liquidated or sells or otherwise disposes of substantially all its assets
while unexercised Options remain outstanding under this Plan:
(i) subject to the provisions of clause (c) below, after the
effective date of the merger, consolidation, liquidation, sale or other
disposition, as the case may be, each holder of an outstanding Option shall be
entitled, upon exercise of the Option, to receive, in lieu of shares of Stock,
the number and class or classes of shares of stock or other securities or
property to which the holder would have been entitled if, immediately prior to
the merger, consolidation, liquidation, sale or other disposition, the holder
had been the holder of record of a number of shares of Stock equal to the
number of shares as to which the Option shall be so exercised;
(ii) the Board of Directors may waive any limitations set out in
or imposed under this Plan so that all Options, from and after a date prior to
the effective date of the merger, consolidation, liquidation, sale or other
disposition, as the case may be, specified by the Board of Directors, shall be
exercisable in full; and
(iii) all outstanding Options may be canceled by the Board of
Directors as of the effective date of any merger, consolidation, liquidation,
sale or other disposition, if (i) notice of cancellation shall be given to
each holder of an Option and (ii) each holder of an Option shall have the
right to exercise that Option in full (without regard to any limitations set
out in or imposed under this Plan or the Option Agreement granting that
Option) during a period set by the Board of Directors preceding the effective
date of the merger, consolidation, liquidation, sale or other disposition and,
if in the event all outstanding Options may not be exercised in full under
applicable securities laws without
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registration of the shares of Stock issuable on exercise of the Options, the
Board of Directors may limit the exercise of the Options to the number of
shares of Stock, if any, as may be issued without registration. The method of
choosing which Options may be exercised, and the number of shares of Stock for
which Options may be exercised, shall be solely within the discretion of the
Board of Directors.
(c) After a merger of one or more corporations into the Company or
after a consolidation of the Company and one or more corporations in which the
Company shall be the surviving corporation, each Eligible Person shall be
entitled to have his Restricted Stock and shares earned under a Performance
Stock Award appropriately adjusted based on the manner the Stock was adjusted
under the terms of the agreement of merger or consolidation.
(d) In each situation described in this Section 4.5, the Committee
will make similar adjustments, as appropriate, in outstanding Stock
Appreciation Rights.
(e) The issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, for cash or
property, or for labor or services either upon direct sale or upon the
exercise of rights or warrants to subscribe for them, or upon conversion of
shares or obligations of the Company convertible into shares or other
securities, shall not affect, and no adjustment by reason of such issuance
shall be made with respect to, the number, class, or price of shares of Stock
then subject to outstanding Awards.
4.6 ELECTION UNDER SECTION 83(B) OF THE CODE. No Employee shall
exercise the election permitted under Section 83(b) of the Code without
written approval of the Committee. Any Employee doing so shall forfeit all
Awards issued to him under this Plan.
ARTICLE V - OPTIONS AND STOCK APPRECIATION RIGHTS
5.1 TYPE OF OPTION. The Committee shall specify at the time of grant
whether a given Option shall constitute an Incentive Option or a Nonqualified
Option. Incentive Stock Options may only be granted to Employees.
5.2 OPTION PRICE. The price at which Stock may be purchased under an
Incentive Option shall not be less than the greater of: (a) 100% of the Fair
Market Value of the shares of Stock on the date the Option is granted or (b)
the aggregate par value of the shares of Stock on the date the Option is
granted. The Committee in its discretion may provide that the price at which
shares of Stock may be purchased under an Incentive Option shall be more than
100% of Fair Market Value. In the case of any 10% Stockholder, the price at
which shares of Stock may be purchased under an Incentive Option shall not be
less than 110% of the Fair Market Value of the Stock on the date the Incentive
Option is granted. The price at which shares of Stock may be purchased under
a Nonqualified Option shall be such price as shall be determined by the
Committee in its sole discretion but in no event lower than the greater of (1)
85% of the Fair Market Value of the shares of Stock on the date the option is
granted, or (b) the par value of the shares of Stock on the date the Option is
granted.
5.3 DURATION OF OPTIONS AND SARS. No Option or SAR shall be
exercisable after the expiration of ten (10) years from the date the Option or
SAR is granted. In the case of a 10% Stockholder, no Incentive Option shall be
exercisable after the expiration of five years from the date the Incentive
Option is granted.
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5.4 AMOUNT EXERCISABLE -- INCENTIVE OPTIONS. Each Option may be
exercised from time to time, in whole or in part, in the manner and subject to
the conditions the Committee, in its sole discretion, may provide in the
Option Agreement, as long as the Option is valid and outstanding, and further
provided that no Option may be exercisable within six (6) months of the date
of grant, unless otherwise stated in the Option Agreement. To the extent that
the aggregate Fair Market Value (determined as of the time an Incentive Option
is granted) of the Stock with respect to which Incentive Options first become
exercisable by the optionee during any calendar year (under this Plan and any
other incentive stock option plan(s) of the Company or any Affiliate) exceeds
$100,000, the portion in excess of $100,000 of the Incentive Option shall be
treated as a Nonqualified Option. In making this determination, Incentive
Options shall be taken into account in the order in which they were granted.
5.5 EXERCISE OF OPTIONS. Each Option shall be exercised by the
delivery of written notice to the Committee setting forth the number of shares
of Stock with respect to which the Option is to be exercised, together with:
(a) cash, certified check, bank draft, or postal or express money
order payable to the order of the Company for an amount equal to the option
price of the shares,
(b) Stock at its Fair Market Value on the date of exercise, (if
approved in advance by the Committee),
(c) an election to make a cashless exercise through a registered
broker-dealer (if approved in advance by the Committee),
(d) an election to have shares of Stock, which otherwise would be
issued on exercise, withheld in payment of the exercise price (if approved in
advance by the Committee), and/or
(e) any other form of payment which is acceptable to the Committee,
including without limitation, payment in the form of a promissory note, and
specifying the address to which the certificates for the shares are to be
mailed.
As promptly as practicable after receipt of written notification and
payment, the Company shall deliver to the Eligible Person certificates for the
number of shares with respect to which the Option has been exercised, issued
in the Eligible Person's name. If shares of Stock are used in payment, the
aggregate Fair Market Value of the shares of Stock tendered must be equal to
or less than the aggregate exercise price of the shares being purchased upon
exercise of the Option, and any difference must be paid by cash, certified
check, bank draft, or postal or express money order payable to the order of
the Company. Delivery of the shares shall be deemed effected for all purposes
when a stock transfer agent of the Company shall have deposited the
certificates in the United States mail, addressed to the Eligible Person, at
the address specified by the Eligible Person.
Whenever an Option is exercised by exchanging shares of Stock owned by
the Eligible Person, the Eligible Person shall deliver to the Company
certificates registered in the name of the Eligible Person representing a
number of shares of Stock legally and beneficially owned by the Eligible
Person, free of all liens, claims, and encumbrances of every kind, accompanied
by stock powers duly endorsed in blank by the record holder of the shares
represented by the
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certificates (with signature guaranteed by a commercial bank or trust company
or by a brokerage firm having a membership on a registered national stock
exchange). The delivery of certificates upon the exercise of Options is
subject to the condition that the person exercising the Option provide the
Company with the information the Company might reasonably request pertaining
to exercise, sale or other disposition.
5.6 STOCK APPRECIATION RIGHTS. All Eligible Persons shall be eligible
to receive Stock Appreciation Rights. The Committee shall determine the SAR to
be awarded from time to time to any Eligible Person. The grant of an SAR to be
awarded from time to time shall neither entitle such person to, nor disqualify
such person, from participation in any other grant of awards by the Company,
whether under this Plan or any other plan of the Company. If granted as a
stand-alone SAR Award, the terms of the Award shall be provided in a Stock
Appreciation Rights Agreement.
5.7 STOCK APPRECIATION RIGHTS IN TANDEM WITH OPTIONS. Stock
Appreciation Rights may, at the discretion of the Committee, be included in
each Option granted under the Plan to permit the holder of an Option to
surrender that Option, or a portion of the part which is then exercisable, and
receive in exchange, upon the conditions and limitations set by the Committee,
an amount equal to the excess of the Fair Market Value of the Stock covered by
the Option, or the portion of it that was surrendered, determined as of the
date of surrender, over the aggregate exercise price of the Stock. The payment
may be made in shares of Stock valued at Fair Market Value, in cash, or partly
in cash and partly in shares of Stock, as the Committee shall decide in its
sole discretion. Stock Appreciation Rights may be exercised only when the Fair
Market Value of the Stock covered by the Option surrendered exceeds the
exercise price of the Stock. In the event of the surrender of an Option, or a
portion of it, to exercise the Stock Appreciation Rights, the shares
represented by the Option or that part of it which is surrendered, shall not
be available for reissuance under the Plan. Each Stock Appreciation Right
issued in tandem with an Option (a) will expire not later than the expiration
of the underlying Option, (b) may be for no more than 100% of the difference
between the exercise price of the underlying Option and the Fair Market Value
of a share of Stock at the time the Stock Appreciation Right is exercised, (c)
is transferable only when the underlying Option is transferable, and under the
same conditions, and (d) may be exercised only when the underlying Option is
eligible to be exercised.
5.8 CONDITIONS OF STOCK APPRECIATION RIGHTS. All Stock Appreciation
Rights shall be subject to such terms, conditions, restrictions or limitations
as the Committee deems appropriate, including by way of illustration but not
by way of limitation, restrictions on transferability, requirement of
continued employment, individual performance, financial performance of the
Company or payment of any applicable employment or withholding taxes.
5.9 PAYMENT OF STOCK APPRECIATION RIGHTS. The amount of payment to
which the Eligible Person who reserves an SAR shall be entitled upon the
exercise of each SAR shall be equal to the amount, if any by which the Fair
Market Value of the specified shares of Stock on the exercise date exceeds the
Fair Market Value of the specified shares of Stock on the date of grant of the
SAR. The SAR shall be paid in either cash or Stock, as determined in the
discretion of the Committee as set forth in the SAR agreement. If the payment
is in Stock, the number of shares to be paid shall be determined by dividing
the amount of such payment by the Fair Market Value of Stock on the exercise
date of such SAR.
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5.10 EXERCISE ON TERMINATION OF EMPLOYMENT. Unless it is expressly
provided otherwise in the Option or SAR agreement, Options and SAR granted to
Employees shall terminate one day less than three months after severance of
employment of the Employee from the Company and all Affiliates for any reason,
with or without cause, other than death, retirement under the then established
rules of the Company, or severance for disability. Whether authorized leave of
absence or absence on military or government service shall constitute
severance of the employment of the Employee shall be determined by the
Committee at that time.
5.11 DEATH. If, before the expiration of an Option or SAR, the
Eligible Person, whether in the employ of the Company or after he has retired
or was severed for disability, or otherwise dies, the Option or SAR shall
continue until the earlier of the Option's or SAR's expiration date or one
year following the date of his death, unless it is expressly provided
otherwise in the Option or SAR agreement. After the death of the Eligible
Person, his executors, administrators or any persons to whom his Option or SAR
may be transferred by will or by the laws of descent and distribution shall
have the right, at any time prior to the Option's or SAR's expiration or
termination, whichever is earlier, to exercise it, to the extent to which he
was entitled to exercise it immediately prior to his death, unless it is
expressly provided otherwise in the Option or SAR's agreement.
5.12 RETIREMENT. Unless it is expressly provided otherwise in the
Option Agreement, before the expiration of an Incentive Option, the Employee
shall be retired in good standing from the employ of the Company under the
then established rules of the Company, the Incentive Option shall terminate on
the earlier of the Option's expiration date or one day less than one year
after his retirement; provided, if an Incentive Option is not exercised within
specified time limits prescribed by the Code, it will become a Nonqualified
Option by operation of law. Unless it is expressly provided otherwise in the
Option Agreement, if before the expiration of a Nonqualified Option, the
Employee shall be retired in good standing from the employ of the Company
under the then established rules of the Company, the Nonqualified Option shall
terminate on the earlier of the Nonqualified Option's expiration date or one
day less than one year after his retirement. In the event of retirement, the
Employee shall have the right prior to the termination of the Nonqualified
Option to exercise the Nonqualified Option, to the extent to which he was
entitled to exercise it immediately prior to his retirement, unless it is
expressly provided otherwise in the Option Agreement. Upon retirement, an SAR
shall continue to be exercisable for the remainder of the term of the SAR
agreement.
5.13 DISABILITY. If, before the expiration of an Option or SAR, the
Employee shall be severed from the employ of the Company for disability, the
Option or SAR shall terminate on the earlier of the Option's or SAR's
expiration date or one day less than one year after the date he was severed
because of disability, unless it is expressly provided otherwise in the Option
or SAR agreement. In the event that the Employee shall be severed from the
employ of the Company for disability, the Employee shall have the right prior
to the termination of the Option or SAR to exercise the Option, to the extent
to which he was entitled to exercise it immediately prior to his retirement or
severance of employment for disability, unless it is expressly provided
otherwise in the Option Agreement.
5.14 SUBSTITUTION OPTIONS. Options may be granted under this Plan from
time to time in substitution for stock options held by employees of other
corporations who are about to become employees of or affiliated with the
Company or any Affiliate as the result of a merger or consolidation of the
employing corporation with the Company or any Affiliate, or the acquisition
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by the Company or any Affiliate of the assets of the employing corporation, or
the acquisition by the Company or any Affiliate of stock of the employing
corporation as the result of which it becomes an Affiliate of the Company. The
terms and conditions of the substitute Options granted may vary from the terms
and conditions set out in this Plan to the extent the Committee, at the time
of grant, may deem appropriate to conform, in whole or in part, to the
provisions of the stock options in substitution for which they are granted.
5.15 RELOAD OPTIONS. Without in any way limiting the authority of the
Board of Directors or Committee to make or not to make grants of Options
hereunder, the Board of Directors or Committee shall have the authority (but
not an obligation) to include as part of any Option Agreement a provision
entitling the Eligible Person to a further Option (a "Reload Option") in the
event the Eligible Person exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Stock in
accordance with this Plan and the terms and conditions of the Option
Agreement. Any such Reload Option (a)shall be for a number of shares equal to
the number of shares surrendered as part or all of the exercise price of such
Option; (b) shall have an expiration date which is the greater of (i) the same
expiration date of the Option the exercise of which gave rise to such Reload
Option or (ii) one year from the date of grant of the Reload Option; and (c)
shall have an exercise price which is equal to one hundred percent (100%) of
the Fair Market Value of the Stock subject to the Reload Option on the date of
exercise of the original Option. Notwithstanding the foregoing, a Reload
Option which is an Incentive Option and which is granted to a 10% Stockholder,
shall have an exercise price which is equal to one hundred ten percent (110%)
of the Fair Market Value of the Stock subject to the Reload Option on the date
of exercise of the original Option and shall have a term which is no longer
than five (5) years.
Any such Reload Option may be an Incentive Option or a Nonqualified
Option, as the Board of Directors or Committee may designate at the time of
the grant of the original Option; provided, however, that the designation of
any Reload Option as an Incentive Option shall be subject to the one hundred
thousand dollar ($100,000) annual limitation on exerciseability of Incentive
Stock Options described in the Plan and in Section 422(d) of the Code. There
shall be no Reload Options on a Reload Option. Any such Reload Option shall be
subject to the availability of sufficient shares under Section 4.2 herein and
shall be subject to such other terms and conditions as the Board of Directors
or Committee may determine which are not inconsistent with the express
provisions of the Plan regarding the terms of Options.
5.16 NO RIGHTS AS STOCKHOLDER. No Eligible Person shall have any rights
as a stockholder with respect to Stock covered by his Option until the date a
stock certificate is issued for the Stock.
ARTICLE VI - RESTRICTED STOCK AWARDS
6.1 RESTRICTED STOCK AWARDS. The Committee may issue shares of Stock
to an Eligible Person subject to the terms of a Restricted Stock Agreement.
The Restricted Stock may be issued for no payment by the Eligible Person or
for a payment below the Fair Market Value on the date of grant. Restricted
Stock shall be subject to restrictions as to sale, transfer, alienation,
pledge or other encumbrance and generally will be subject to vesting over a
period of time specified in the Restricted Stock Agreement. The Committee
shall determine the period of vesting, the number of shares, the price, if
any, of Stock included in a Restricted Stock Award, and the other terms and
provisions which are included in a Restricted Stock Agreement.
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6.2 RESTRICTIONS. Restricted Stock shall be subject to the terms and
conditions as determined by the Committee, including without limitation, any
or all of the following:
(a) a prohibition against the sale, transfer, alienation, pledge or
other encumbrance of the shares of Restricted Stock, such prohibition to lapse
(i) at such time or times as the Committee shall determine (whether in annual
or more frequent installments, at the time of the death, disability or
retirement of the holder of such shares, or otherwise);
(b) a requirement that the holder of shares of Restricted Stock
forfeit, or in the case of shares sold to an Eligible Person, resell back to
the Company at his cost, all or a part of such shares in the event of
termination of the Eligible Person's employment during any period in which the
shares remain subject to restrictions;
(c) a prohibition against employment of the holder of Restricted Stock
by any competitor of the Company or its Affiliates, or against such holder's
dissemination of any secret or confidential information belonging to the
Company or an Affiliate;
(d) unless stated otherwise in the Restricted Stock Agreement, (i) if
restrictions remain at the time of severance of employment with the Company
and all Affiliates, other than for reason of disability or death, the
Restricted Stock shall be forfeited; and (ii) if severance of employment is by
reason of disability or death, the restrictions on the shares shall lapse and
the Eligible Person or his heirs or estate shall be 100% vested in the shares
subject to the Restricted Stock Agreement.
6.3 STOCK CERTIFICATE. Shares of Restricted Stock shall be registered
in the name of the Eligible Person receiving the Restricted Stock Award and
deposited, together with a stock power endorsed in blank, with the Company.
Each such certificate shall bear a legend in substantially the following form:
"The transferability of this certificate and the shares of Stock
represented by it is restricted by and subject to the terms and
conditions (including conditions of forfeiture) contained in the
Comet Technologies, Inc. 2003 Stock Incentive Plan, and an
agreement entered into between the registered owner and the
Company. A copy of the Plan and agreement is on file in the
office of the Secretary of the Company."
6.4 RIGHTS AS STOCKHOLDER. Subject to the terms and conditions of the
Plan, each Eligible Person receiving a certificate for Restricted Stock shall
have all the rights of a stockholder with respect to the shares of Stock
included in the Restricted Stock Award during any period in which such shares
are subject to forfeiture and restrictions on transfer, including without
limitation, the right to vote such shares. Dividends paid with respect to
shares of Restricted Stock in cash or property other than Stock in the Company
or rights to acquire stock in the Company shall be paid to the Eligible Person
currently. Dividends paid in Stock in the Company or rights to acquire Stock
in the Company shall be added to and become a part of the Restricted Stock.
6.5 LAPSE OF RESTRICTIONS. At the end of the time period during which
any shares of Restricted Stock are subject to forfeiture and restrictions on
sale, transfer, alienation, pledge, or other encumbrance, such shares shall
vest and will be delivered in a certificate, free
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of all restrictions, to the Eligible Person or to the Eligible Person's legal
representative, beneficiary or heir; provided the certificate shall bear such
legend, if any, as the Committee
determines is reasonably required by applicable law. By accepting a Stock
Award and executing a Restricted Stock Agreement, the Eligible Person agrees
to remit when due any federal and state income and employment taxes required
to be withheld.
6.6 RESTRICTION PERIOD. No Restricted Stock Award may provide for
restrictions continuing beyond ten (10) years from the date of grant.
ARTICLE VII - PERFORMANCE STOCK AWARDS
7.1 AWARD OF PERFORMANCE STOCK. The Committee may award shares of
Stock, without any payment for such shares, to designated Eligible Persons if
specified performance goals established by the Committee are satisfied. The
terms and provisions herein relating to these performance based awards are
intended to satisfy Section 162(m) of the Code and regulations issued
thereunder. The designation of an employee eligible for a specific Performance
Stock Award shall be made by the Committee in writing prior to the beginning
of the period for which the performance is measured (or within such period as
permitted by IRS regulations). The Committee shall establish the maximum
number of shares of Stock to be issued to a designated Employee if the
performance goal or goals are met. The Committee reserves the right to make
downward adjustments in the maximum amount of an Award if in its discretion
unforeseen events make such adjustment appropriate.
7.2 PERFORMANCE GOALS. Performance goals determined by the Committee
may be based on specified increases in cash flow, net profits, Stock price,
Company, segment or Affiliate sales, market share, earnings per share, return
on assets, and/or return on stockholders' equity.
7.3 ELIGIBILITY. The employees eligible for Performance Stock Awards
are the senior officers (i.e., chief executive officer, president, vice
presidents, secretary, treasurer, and similar positions) of the Company and
its Affiliates, and such other employees of the Company and its Affiliates as
may be designated by the Committee.
7.4 CERTIFICATE OF PERFORMANCE. The Committee must certify in writing
that a performance goal has been attained prior to issuance of any certificate
for a Performance Stock Award to any Employee. If the Committee certifies the
entitlement of an Employee to the Performance Stock Award, the certificate
will be issued to the Employee as soon as administratively practicable, and
subject to other applicable provisions of the Plan, including but not limited
to, all legal requirements and tax withholding. However, payment may be made
in shares of Stock, in cash, or partly in cash and partly in shares of Stock,
as the Committee shall decide in its sole discretion. If a cash payment is
made in lieu of shares of Stock, the number of shares represented by such
payment shall not be available for subsequent issuance under this Plan.
ARTICLE VII - BONUS STOCK AWARDS
8.1 AWARD OF BONUS STOCK. The committee may award shares of Stock to
Eligible Persons, without any payment for such shares and without any
specified performance goals. The Committee reserves the right to issue such
amount of shares to Eligible Persons as the Committee deems fit.
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8.2 ELIGIBILITY. The Employees eligible for Bonus Stock Awards are the
senior officers (i.e., chief executive officer, chief operating officer, chief
financial officer, president, vice presidents, secretary, treasurer, and
similar positions) and consultants of the Company and its Affiliates, and such
other employees of the Company and its Affiliates as may be designated by the
Committee.
ARTICLE IX - ADMINISTRATION
The Plan shall be administered by the Committee. All questions of
interpretation and application of the Plan and Awards shall be subject to the
determination of the Committee. A majority of the members of the Committee
shall constitute a quorum. All determinations of the Committee shall be made
by a majority of its members. Any decision or determination reduced to writing
and signed by a majority of the members shall be as effective as if it had
been made by a majority vote at a meeting properly called and held. This Plan
shall be administered in such a manner as to permit the Options which are
designated to be Incentive Options to qualify as Incentive Options. In
carrying out its authority under this Plan, the Committee shall have full and
final authority and discretion, including but not limited to the following
rights, powers and authorities, to: (a) determine the Eligible Persons to whom
and the time or times at which Options or Awards will be made, (b) determine
the number of shares and the purchase price of Stock covered in each Option or
Award, subject to the terms of the Plan, (c) determine the terms, provisions
and conditions of each Option and Award, which need not be identical, (d)
accelerate the time at which any outstanding Option or SAR may be exercised,
or Restricted Stock Award will vest, (e) define the effect, if any, on an
Option or Award of the death, disability, retirement, or termination of
employment of the Employee, (f) prescribe, amend and rescind rules and
regulations relating to administration of the Plan, and (g) make all other
determinations and take all other actions deemed necessary, appropriate, or
advisable for the proper administration of this Plan.
The actions of the Committee in exercising all of the rights, powers, and
authorities set out in this Article and all other Articles of this Plan, when
performed in good faith and in its sole judgment, shall be final, conclusive
and binding on all parties.
ARTICLE X - AMENDMENT OR TERMINATION OF PLAN
The Board of Directors of the Company may amend, terminate or suspend
this Plan at any time, in its sole and absolute discretion; provided, however,
that to the extent required to qualify this Plan under Rule 16b-3 promulgated
under Section 16 of the Securities Exchange Act of 1934, as amended, no
amendment that would (a) materially increase the number of shares of Stock
that may be issued under this Plan, (b) materially modify the requirements as
to eligibility for participation in this Plan, or (c) otherwise materially
increase the benefits accruing to participants under this Plan, shall be made
without the approval of the Company's stockholders; provided further,
however, that to the extent required to maintain the status of any Incentive
Option under the Code, no amendment that would (a) change the aggregate number
of shares of Stock which may be issued under Incentive Options, (b) change the
class of employees eligible to receive Incentive Options, or (c) decrease the
Option price for Incentive Options below the Fair Market Value of the Stock at
the time it is granted, shall be made without the approval of the Company's
stockholders. Subject to the preceding sentence, the Board of Directors shall
have the power to make any changes in the Plan and in the regulations and
administrative provisions under it or in any outstanding Incentive Option as
in the opinion of counsel for the Company may be necessary or appropriate from
time to time to enable any Incentive Option granted under this Plan to
continue to qualify as an incentive stock option or such other stock option as
may be defined under the Code so as to receive preferential federal income tax
treatment.
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ARTICLE XI - MISCELLANEOUS
11.1 NO ESTABLISHMENT OF A TRUST FUND. No property shall be set aside
nor shall a trust fund of any kind be established to secure the rights of any
Eligible Person under this Plan. All Eligible Persons shall at all times rely
solely upon the general credit of the Company for the payment of any benefit
which becomes payable under this Plan.
11.2 NO EMPLOYMENT OBLIGATION. The granting of any Option or Award
shall not constitute an employment contract, express or implied, nor impose
upon the Company or any Affiliate any obligation to employ or continue to
employ any Eligible Person. The right of the Company or any Affiliate to
terminate the employment of any person shall not be diminished or affected by
reason of the fact that an Option or Award has been granted to him.
11.3 FORFEITURE. Notwithstanding any other provisions of this Plan, if
the Committee finds by a majority vote after full consideration of the facts
that an Eligible Person, before or after termination of his employment with
the Company or an Affiliate for any reason (a) committed or engaged in fraud,
embezzlement, theft, commission of a felony, or proven dishonesty in the
course of his employment by the Company or an Affiliate, which conduct damaged
the Company or Affiliate, or disclosed trade secrets of the Company or an
Affiliate, or (b) participated, engaged in or had a material, financial or
other interest, whether as an employee, officer, director, consultant,
contractor, stockholder, owner, or otherwise, in any commercial endeavor in
the United States which is competitive with the business of the Company or an
Affiliate without the written consent of the Company or Affiliate, the
Eligible Person shall forfeit all outstanding Options and all outstanding
Awards, and including all exercised Options and other situations pursuant to
which the Company has not yet delivered a stock certificate. Clause (b) shall
not be deemed to have been violated solely by reason of the Eligible Person's
ownership of stock or securities of any publicly owned corporation, if that
ownership does not result in effective control of the corporation.
The decision of the Committee as to the cause of an Employee's discharge,
the damage done to the Company or an Affiliate, and the extent of an Eligible
Person's competitive activity shall be final. No decision of the Committee,
however, shall affect the finality of the discharge of the Employee by the
Company or an Affiliate in any manner.
11.4 TAX WITHHOLDING. The Company or any Affiliate shall be entitled to
deduct from other compensation payable to each Eligible Person any sums
required by federal, state, or local tax law to be withheld with respect to
the grant or exercise of an Option or SAR, lapse of restrictions on Restricted
Stock, or award of Performance Stock. In the alternative, the Company may
require the Eligible Person (or other person exercising the Option, SAR or
receiving the Stock) to pay the sum directly to the employer corporation. If
the Eligible Person (or other person exercising the Option or SAR or receiving
the Stock) is required to pay the sum directly, payment in cash or by check of
such sums for taxes shall be delivered within 10 days after the date of
exercise or lapse of restrictions. The Company shall have no obligation upon
exercise of any Option or lapse of restrictions on Stock until payment has
been received, unless withholding (or offset against a cash payment) as of or
prior to the date of exercise or lapse of restrictions is sufficient to cover
all sums due with respect to that exercise. The Company and its Affiliates
shall not be obligated to advise an Eligible Person of the existence of the
tax or the amount which the employer corporation will be required to withhold.
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11.5 WRITTEN AGREEMENT. Each Option and Award shall be embodied in a
written agreement which shall be subject to the terms and conditions of this
Plan and shall be signed by the Eligible Person and by a member of the
Committee on behalf of the Committee and the Company or an executive officer
of the Company, other than the Eligible Person, on behalf of the Company. The
agreement may contain any other provisions that the Committee in its
discretion shall deem advisable which are not inconsistent with the terms of
this Plan.
11.6 INDEMNIFICATION OF THE COMMITTEE AND THE BOARD OF DIRECTORS. With
respect to administration of this Plan, the Company shall indemnify each
present and future member of the Committee and the Board of Directors against,
and each member of the Committee and the Board of Directors shall be entitled
without further act on his part to indemnity from the Company for, all
expenses (including attorney's fees, the amount of judgments and the amount of
approved settlements made with a view to the curtailment of costs of
litigation, other than amounts paid to the Company itself) reasonably incurred
by him in connection with or arising out of any action, suit, or proceeding in
which he may be involved by reason of his being or having been a member of the
Committee and/or the Board of Directors, whether or not he continues to be a
member of the Committee and/or the Board of Directors at the time of incurring
the expenses, including, without limitation, matters as to which he shall be
finally adjudged in any action, suit or proceeding to have been found to have
been negligent in the performance of his duty as a member of the Committee or
the Board of Directors. However, this indemnity shall not include any expenses
incurred by any member of the Committee and/or the Board of Directors in
respect of matters as to which he shall be finally adjudged in any action,
suit or proceeding to have been guilty of gross negligence or willful
misconduct in the performance of his duty as a member of the Committee and the
Board of Directors. In addition, no right of indemnification under this Plan
shall be available to or enforceable by any member of the Committee and the
Board of Directors unless, within 60 days after institution of any action,
suit or proceeding, he shall have offered the Company, in writing, the
opportunity to handle and defend same at its own expense. This right of
indemnification shall inure to the benefit of the heirs, executors or
administrators of each member of the Committee and the Board of Directors and
shall be in addition to all other rights to which a member of the Committee
and the Board of Directors may be entitled as a matter of law, contract, or
otherwise.
11.7 GENDER. If the context requires, words of one gender when used in
this Plan shall include the others and words used in the singular or plural
shall include the other.
11.8 HEADINGS. Headings of Articles and Sections are included for
convenience of reference only and do not constitute part of the Plan and shall
not be used in construing the terms of the Plan.
11.9 OTHER COMPENSATION PLANS. The adoption of this Plan shall not
affect any other stock option, incentive or other compensation or benefit
plans in effect for the Company or any Affiliate, nor shall the Plan preclude
the Company from establishing any other forms of incentive or other
compensation for employees of the Company or any Affiliate.
11.10 OTHER OPTIONS OR AWARDS. The grant of an Option or Award shall
not confer upon the Eligible Person the right to receive any future or other
Options or Awards under this Plan, whether or not Options or Awards may be
granted to similarly situated Eligible Persons, or the right to receive
future Options or Awards upon the same terms or conditions as previously
granted.
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11.11 GOVERNING LAW. The provisions of this Plan shall be construed,
administered, and governed under the laws of the State of Nevada.
COMET TECHNOLOGIES, INC.
Dated March 18, 2004 By /s/ Jack M. Gertino
-----------------------------------------
Jack M. Gertino, Secretary/Treasurer
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