Due to the unique products that we offer, there is little direct
competition in the Chinese marketplace. With respect to existing products that
are similar to Photosynthesis Biological Catalyst and their manufacturers,
management believes that we have product differentiation and cost advantages
(cost to customer) which will enable us to outperform our competitors, in terms
of profitability, for the following reasons, among others:
o High effectiveness in increasing crop yield and quality while being
environmentally friendly;
o Lower price point and higher return on investment to end users;
o Powder-based form making transportation and storage easier; and
o Complimentary to existing use of chemical fertilizer which will help to
minimize switching costs for end users.
We have conducted detailed research and analysis of the competitive
landscape in the marketplace. From a broader view, there are about 10 companies,
in different stages and of varied sizes of operations, which have or are
producing similar photosynthesis related, microbial bio-fertilizer products in
China, according to the categorization records from the Agriculture Fertilizer
License Authority in China. The products of these companies are all in liquid
form. Below is a summary of these 10 companies:
COMPANY NAME CURRENT STATUS
Shanxi Kelin Environment Protection The products are still in the experimental
Center, Shanxi Province stage.
----------------------------------- ------------------------------------------
Xinjin Microbial Products Factory Only sells in part of Sichuan Province
of Sichuan Agriculture University, with a relatively low sales volume.
Sichuan Province
22
Shenyang Fengyuan Bio-tech Products A wholly-owned Japanese company.
Co., Ltd., Liaoning Province
3 years in production of photosynthesis-
based fertilizer product.
Annual production of 2,000 tons (liquid).
----------------------------------- ------------------------------------------
Shanghai Pudong Yiyijou Bio- In business since 1999.
engineering Co., Ltd., Shanghai
Covers more than 10 provincial markets.
----------------------------------- ------------------------------------------
Chongyi Bio-technology Development A county-level plant.
Center, She County, Hebei Province
Small production scale.
Products are sold in Linxi County in
Shandong Province nearby.
----------------------------------- ------------------------------------------
Bierfu Bio-engineering Co., Ltd., Products mostly sold in Jinan and
Weihai, Shandong Province Shouguang areas in Shandong Province.
Sales branches in Hebei, Nanjing & Fujian.
Annual sales of 100 tons.
----------------------------------- ------------------------------------------
North Design Institute, Protection Has no commercial production.
Sub-Institute
Owns the related intellectual property
rights.
----------------------------------- ------------------------------------------
Wuhan Shiruifu Bio-Technology Co., Its target market is in Hubei Province.
Ltd., Wuhan, Hubei Province
Annual production of 3,000 tons (liquid).
----------------------------------- ------------------------------------------
Harbin Tianye Bio-Technology Co., For details, refer to the following
Ltd., Harbin, Heilongjiang Province section.
----------------------------------- ------------------------------------------
Beijing Feishite Bio-engineering Expected to establish two photosynthesis
Co., Ltd., Beijing bacteria fertilizer production bases in
Beijing with annual production of 5,000
tons (liquid).
FACILITIES AND EQUIPMENT
We are in the process of constructing a manufacturing facility on 15.7
acres of land in Shandong Province, China. The right of land use has been
approved by the local government for up to 10 years without land use costs. In
the event our Chinese subsidiary becomes profitable, it will have the option to
acquire the land use rights for a period of up to 50 years. Phase I of a
three-phase construction plan has been completed. We expect the facility to be
fully operational in 2005.
Our principal executive offices are located at 17700 Castleton Street,
Suite 589, City of Industry, California 91748.
SOURCES OF RAW MATERIALS
The major raw materials for photosynthetic bacteria production are
photosynthetic bacteria, sodium acetate, glucose, diammonium phosphate, and
dipotassium hydrogen phosphate. Other chemicals are also used in the growth
media. These materials are either cultured by our technicians or purchased from
local markets.
23
DEPENDENCE ON CUSTOMERS
We currently have 17 customers. One customer accounted for 100% of our
net sales for the first quarter of fiscal year 2004 and for approximately 62% of
our estimated sales for the second quarter of fiscal year 2004. We hope to
expand our customer base to reduce our reliance on any single customer.
REGULATORY
Our production needs to follow bio-fertilizer and photosynthetic
bacteria standard production and testing procedures issued by the Chinese
Ministry of Agriculture. We comply with the applicable standard production and
testing procedures.
ENVIRONMENTAL MATTERS
The bacteria used in our products are naturally occurring in many water
bodies and have been extensively tested for environmental safety. They have been
recognized as group beneficiary bacteria that can digest small inorganic and
organic molecules for water cleaning and other water treatment purpose. They are
environmental friendly and are not known to cause any environmental problems.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
We intend to develop, manufacture, distribute and market innovative,
cost-effective and environmentally safe bio-technological products for the
agricultural, natural resources and environmental protection markets located
primarily in the People's Republic of China. We intend to improve existing
products and to develop new products. Our activities to date have included
conducting research and development, acquiring and developing intellectual
property, raising capital, developing of a manufacturing facility and
identifying strategic acquisitions. Our first product, a photosynthesis
biological catalyst, was introduced in the People's Republic of China's
agricultural market in November 2003. We are a development stage entity.
In March 2004, we entered into a merger with Kiwa Bio-Tech Products
Group Ltd., a privately-held British Virgin Islands corporation, through a newly
formed wholly-owned subsidiary, with Kiwa Bio-Tech Products Group Ltd. surviving
as our wholly-owned subsidiary. For accounting purposes this transaction was
treated as an acquisition of the public company and a recapitalization of Kiwa
Bio-Tech Products Group Ltd. and its wholly owned subsidiary, KIWA Bio-Tech
Products (Shandong) Co., Ltd. For accounting purposes, Kiwa Bio-Tech Products
Group Ltd. is considered the acquirer in this transaction. The statements of
operations and cash flows subsequent to the merger will be those of Kiwa
Bio-Tech Products Group Ltd.
MAJOR CUSTOMERS AND SUPPLIERS
We currently have 17 customers. One customer accounted for 100% of our
net sales for the first quarter of fiscal year 2004. We did not have any sales
for the three months ended March 31, 2003.
Three suppliers accounted for 21%, 21%, and 10%, respectively, of our
net purchases for the three months ended March 31, 2004. We did not have any
purchases for the three months ended March 31, 2003.
GOING CONCERN
Our consolidated financial statements have been prepared assuming that
we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
carrying amounts of assets and liabilities presented in the consolidated
financial statements do not purport to represent the realizable or settlement
values. We incurred a net loss of $1,650,247 and $1,355,239 during
24
the three months ended March 31, 2004 and the year ended December 31, 2003,
respectively, and our current liabilities exceeded its current assets by
$965,294 and $585,313 and it had a stockholders' deficiency of $621,990 and
$211,123 at March 31, 2004 and December 31, 2003, respectively. In addition, we
are still in the development stage and will require additional capital to fund
our business plan, and are continuing to develop our manufacturing facility and
have not generated significant revenues from our planned principal operations.
These factors create substantial doubt about our ability to continue as a going
concern.
As of March 31, 2004, we had obtained non-interest bearing loans from
the local People's Republic of China government of approximately $1,200,000. The
repayment of approximately $1,060,000 will start as our Chinese subsidiary
becomes profitable and will be paid off within three years. The balance of the
loans has been paid off as of June 30, 2004.
On April 12, 2004, we entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled "Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing", which was originally granted by the People's Republic of China
Patent Bureau on July 12, 1996. The purchase consideration is approximately
$720,612, of which $30,204 was paid at signing of the agreement and an
additional $30,204 will be paid within five days of the completion of the
issuance of a notice regarding the patent right holder alternate registration by
the People's Republic of China Patent Bureau. In addition, we agreed to issue
1,000,000 shares of common stock at an agreed-upon value of $0.63 per share, the
fair market value on April 12, 2004 (aggregate value $630,000) within two months
of the completion of the issuance of a notice regarding the patent right holder
alternate registration by the People's Republic of China Patent Bureau.
As of July 6, 2004, we entered into the Standby Equity Distribution
Agreement with Cornell Capital Partners, LP for the sale and issuance of up to
$10,000,000 of our common stock. We plan to use these funds to finance our
operations.
During the year ending December 31, 2004, we intend to raise additional
capital through the issuance of debt or equity securities to fund the
development of its planned business operations, although there can be no
assurances that we will be successful in this regard. To the extent that we are
unable to successfully raise the capital necessary to fund our future cash
requirements on a timely basis and under acceptable terms and conditions, we
will not have sufficient cash resources to maintain operations, and may have to
curtail operations and consider a formal or informal restructuring or
reorganization.
CRITICAL ACCOUNTING POLICIES
We prepared our consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Management periodically evaluates the estimates and judgments made.
Management bases its estimates and judgments on historical experience and on
various factors that are believed to be reasonable under the circumstances.
Actual results may differ from these estimates as a result of different
assumptions or conditions.
The following critical accounting policies affect the more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
ACCOUNTS RECEIVABLE. We perform ongoing credit evaluations of our
customers and intend to establish an allowance for doubtful accounts when
amounts are not considered fully collectable. We believe that the accounts
receivable balance at March 31, 2004 is fully collectible.
INVENTORIES. Inventories are stated at the lower of cost or net
realizable value. Cost is determined on the weighted average method. Inventories
include raw materials, work-in-progress, finished goods and low-value
consumables. Net realizable value is the estimated selling price in the ordinary
course of business, less estimated costs to complete and dispose.
25
REVENUE RECOGNITION. We recognize revenue in accordance with Securities
and Exchange Commission Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements." Sales represent the invoiced value of goods, net of
value added tax, supplied to customers, and are recognized upon delivery of
goods and passage of title.
IMPAIRMENT OF ASSETS. Our long-lived assets consist of property and
equipment. At March 31, 2004, the net value of property and equipment was
$1,467,190, which represented approximately 67% of our total assets. At December
31, 2003, the net value of property and equipment was $1,477,148, which
represented approximately 69% of our total assets.
We periodically evaluate our investment in long-lived assets, including
property and equipment, for recoverability whenever events or changes in
circumstances indicate the net carrying amount may not be recoverable. Our
judgments regarding potential impairment are based on legal factors, market
conditions and operational performance indicators, among others. In assessing
the impairment of property and equipment, we make assumptions regarding the
estimated future cash flows and other factors to determine the fair value of the
respective assets. If these estimates or the related assumptions change in the
future, we may be required to record impairment charges for these assets.
INCOME TAXES. We record a valuation allowance to reduce our deferred
tax assets arising from net operating loss carryforwards to the amount that is
more likely than not to be realized. In the event we were to determine that we
would be able to realize our deferred tax assets in the future in excess of our
recorded amount, an adjustment to the deferred tax assets would be credited to
operations in the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of our deferred tax
assets in the future, an adjustment to the deferred tax assets would be charged
to operations in the period such determination was made.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003:
NET SALES. Net sales were $53,458 for the three months ended March 31,
2004. We did not have any sales for the three months ended March 31, 2003. The
increase in net sales is the result of our first product being introduced to the
market in November 2003.
COST OF SALES. Cost of sales was $31,011 for the three months ended
March 31, 2004, including depreciation and amortization of $9,572.
GROSS PROFIT. Gross profit was $22,447 or 42% of net sales for the
three months ended March 31, 2004.
CONSULTING AND PROFESSIONAL FEES. Consulting and professional fees were
$29,887 for the three months ended March 31, 2004. We did not have any
consulting and professional fees for the three months ended March 31, 2003. The
increase in consulting and professional fees in 2004 is primarily attributable
to activities relating to fundraising.
DIRECTORS' COMPENSATION. Directors' compensation was $8,699 for the
three months ended March 31, 2004, as compared to $3,624 for the three months
ended March 31, 2003.
GENERAL AND ADMINISTRATIVE. General and administrative expense was
$74,545 for the three months ended March 31, 2004, as compared to $43,717 for
the three months ended March 31, 2003, an increase of $30,828 or 71%, primarily
as a result of increased personnel-related costs in the People's Republic of
China reflecting an increased level of business activity and increased costs
associated with being a public company. General and administrative expenses
include salaries, travel and entertainment, rent, office expense, telephone
expense and insurance costs.
26
RESEARCH AND DEVELOPMENT. Research and development expense increased
$2,820, or 29%, to $12,540 for the three months ended March 31, 2004, as
compared to $9,720 for the three months ended March 31, 2003. This increase is
the result of preparation for new product testing and development.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, increased $7,238, or
381%, to $9,138 for the three months ended March 31, 2004, as compared to $1,900
for the three months ended March 31, 2003. This increase is the result of the
completion of the first phase of construction of our manufacturing facility in
late 2003.
REVERSE MERGER COSTS. Reverse merger costs relating to our March 2004
reverse merger were $1,397,981 for the three months ended March 31, 2004,
including non-cash costs relating to the issuance of stock options and warrants
of $1,114,380. We did not have any reverse merger costs for the three months
ended March 31, 2003.
INTEREST INCOME (EXPENSE), NET. Interest expense increased $14,592, or
4,692%, to $14,903 for the three months ended March 31, 2004, as compared to
interest income of $311 for the three months ended March 31, 2003. This increase
is due to increased borrowing during the three months ended March 31, 2004.
AMORTIZATION OF BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTE
PAYABLE. On January 25, 2004, we entered into a convertible loan agreement for
$500,000, with interest at 12%, payable at maturity. The loan matures on
September 25, 2004. As part of the loan terms, the lender has the right to
convert the loan into shares of our common stock at $0.25 per share at any time
prior to the maturity date, subject to our completion of a reverse merger
transaction in the United States, which was accomplished in March 2004. The fair
value of this beneficial conversion feature was determined to be $500,000,
consisting of the aggregate fair value of the difference between the $0.25
conversion price and the fair market value of our common stock of $0.60 per
share, and is being charged to operations as interest expense from January 25,
2004 through September 25, 2004, which resulted in a charge to operations of
$125,000 for the three months ended March 31, 2004.
NET LOSS. Net loss increased $1,591,597 to $1,650,247 for the three
months ended March 31, 2004, as compared to $58,650 for the three months ended
March 31, 2003. The increased net loss in the current period is primarily the
result of charges related to the reverse merger, consulting and professional
fees, and convertible notes.
Twelve Months ended December 31, 2003 and 2002:
NET SALES. Net sales were $40,031 for the twelve months ended December
31, 2003. We did not have any sales for the twelve months ended December 31,
2002. The increase in net sales is the result of our first product being
introduced to the market in November 2003.
COST OF SALES. Cost of sales was $30,294 for the twelve months ended
December 31,2003, including depreciation and amortization of $16,578.
GROSS PROFIT. Gross profit was $9,737 or 24.3% of net sales for the
twelve months ended December 31, 2003.
CONSULTING AND PROFESSIONAL FEES. Consulting and professional fees were
$545,787 and $21,816 for the twelve months ended December 31, 2003 and 2002,
respectively. The increase in consulting and professional fees in 2003 is
primarily attributable to activities relating to implementing a strategy to
become a publicly traded company through reverse merger.
DIRECTORS' COMPENSATION. Directors' compensation was $347,110 for the
twelve months ended December 31, 2003, as compared to $906 for the same period
of 2002. In 2002 directors worked almost free for the company. In 2003 we issued
stock to compensate director's compensation due to increasing activities.
GENERAL AND ADMINISTRATIVE. General and administrative expense was
$327,501 for the twelve months ended December 31, 2003, as compared to $41,435
for the same period of 2002, an increase of 286,066 or 690.4%, primarily as a
result of a short operation history in 2002 and increased personnel-related
costs in the People's
27
Republic of China reflecting an increased level of business activity and
increased costs associated with being a public company. General and
administrative expenses include salaries, travel and entertainment, rent, office
expense, telephone expense and insurance costs.
RESEARCH AND DEVELOPMENT. Research and development expense increased
$57,269, or 928.94%, to $6,165 for the twelve months ended December 31, 2003, as
compared to $6,165 for the twelve months ended December 31, 2002. This increase
is due to the incorporation in June 2002 and minimum research and development
activities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization, excluding
depreciation and amortization included in cost of sales, increased $18,280, or
almost sixty times, to $18,585 for the twelve months ended December 31, 2003, as
compared to $305 for the same period of 2002. This increase is the result of a
short operational history in 2002.
REVERSE MERGER COSTS. Reverse merger costs relating to a proposed
reverse merger were $50,336 for the twelve months ended December 31, 2003 due to
implementing a strategy to become a publicly-traded company through reverse
merger. We did not have any reverse merger costs for the twelve months ended
December 31, 2002.
INTEREST INCOME (EXPENSE), NET. Interest expense increased $11,966, or
4,656%, to $12,223 for the twelve months ended December 31, 2003, as compared to
interest income of $257 for the same period of 2002. This increase is due to
increased borrowing in 2003.
NET LOSS. Net loss increased $1,284,355 to $1,355,239 for the twelve
months ended December 31, 2003, as compared to $70,844 for the same period of
2002. The increased net loss in 2003 is primarily the result of the increase in
consulting and professional fees as well as director's compensation.
LIQUIDITY AND CAPITAL RESOURCES
We have relied on the proceeds from the sale of our equity securities
and loans from both unrelated and related parties to provide the resources
necessary to fund the development of our business plan and operations. During
the three months ended March 31, 2004, we raised $500,000 in the form of a
convertible note payable.
We are in the development stage and will require additional capital to
fund our business plan, and are continuing to develop our manufacturing facility
and have not generated significant revenues from our planned principal
operations. We do not anticipate enough positive internal operating cash flow
until such time as we generate substantial revenues, which may take the next few
years to fully realize. In the event we cannot obtain the necessary capital to
pursue our strategic plan, we may have to cease or significantly curtail our
operations.
Over the next twelve months, we believe that existing capital and
anticipated funds from operations will not be sufficient to sustain operations
and planned expansion. However, our near term cash requirements are anticipated
to be offset through the receipt of funds through the Standby Equity
Distribution Agreement with Cornell Capital Partners, LP and through other
private placement offerings and loans obtained through private sources. Once
this registration statement becomes effective we anticipate being able to use
the cash advances from Cornell Capital Partners, LP to finance our operations.
If, however, these cash advances are unavailable, we will be required to seek
additional capital in the future to fund growth and expansion through additional
equity or debt financing or credit facilities. No assurance can be made that
such financing would be available, and such financing, if available, could have
a negative impact on our financial condition.
At March 31, 2004 and December 31, 2003, we had cash of $10,910 and
$48,730, respectively. At March 31, 2004 and December 31, 2003, our net working
capital deficiency was $965,294 and $585,313, respectively, reflecting current
ratios of .42:1 and .53:1, respectively, at such dates. During April 2004, we
borrowed $200,000 pursuant to a three-month convertible note payable.
During the three months ended March 31, 2004, our operations utilized
cash of $559,463, as compared to $53,040 for the three months ended March 31,
2003, as a result of an increased level of business activity and the
28
costs associated with operating a public company. For the years ended December
31, 2003 and 2002, our operations utilized cash of $186,503 and $37,337,
respectively.
During the three months ended March 31, 2004, we utilized $8,752 in
investing activities, as compared to $388,848 for the three months ended March
31, 2003, for the purchase of property and equipment. For the years ended
December 31, 2003 and 2002, we utilized $1,448,668 and $63,948, respectively, in
investing activities for the purchase of property and equipment.
During the three months ended March 31, 2004, we generated $530,395
from financing activities, consisting of the proceeds from a convertible note
payable of $500,000, a decrease in restricted cash of $100,000 and an increase
in long-term borrowings of $21,021, offset in part by the repayment of
short-term loans of $90,626.
During the three months ended March 31, 2003, we generated $300,328
from financing activities through an increase in long-term borrowings.
For the years ended December 31, 2003 and 2002, we generated $1,161,844
and $623,342, respectively, from financing activities, consisting of the
proceeds from the sale of common stock of $465,000, the proceeds from
convertible notes payable of $100,000, the proceeds from short-term borrowings
of $283,930 and the proceeds from long-term borrowings of $1,236,256, offset by
an increase in restricted cash of $300,000.
The short-term loans are secured by restricted cash in the form of a
bank certificate of deposit denominated in U.S. Dollars.
Long-term borrowings consist primarily of unsecured, non-interest
bearing notes payable to the local People's Republic of China government that do
not mature until three years after our People's Republic of China operations
reach defined levels of profitability.
INFLATION AND CURRENCY MATTERS:
In the most recent decade, the Chinese economy has experienced periods
of rapid economic growth as well as relatively high rates of inflation, which in
turn has resulted in the periodic adoption by the Chinese government of various
corrective measures designed to regulate growth and contain inflation. Our
success depends in substantial part on the continued growth and development of
the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. We conduct virtually all of
our business in China and, accordingly, the sale of our products is settled
primarily in Renminbi. As a result, devaluation or currency fluctuation of the
Renminbi against the U.S. Dollar would adversely affect our financial
performance when measured in U.S. Dollars. Although prior to 1994 the Renminbi
experienced significant devaluation against the U.S. Dollar, the Renminbi has
remained fairly stable since then. In addition, the Renminbi is not freely
convertible into foreign currencies, and the ability to convert the Renminbi is
subject to the availability of foreign currencies. Effective December 1, 1998,
all foreign exchange transactions involving the Renminbi must take place through
authorized banks or financial institutions in China at the prevailing exchange
rates quoted by the People's Bank of China.
As China has recently been admitted as a member of the World Trade
Organization, the central government of China is expected to adopt a more
rigorous approach to partially deregulate currency conversion restrictions,
which may in turn increase the exchange rate fluctuation of the Renminbi. Should
there be any major change in the central government's currency policies, we do
not believe that such an action would have a detrimental effect on our
operations, since we conduct virtually all of our business in China, and the
sale of our products is settled in Renminbi.
Although prior to 1994 the Renminbi experienced significant devaluation
against the U.S. Dollar, the Renminbi has remained fairly stable since then. The
exchange rate was approximately $1.00 to RMB 8.30 at March 31, 2004 and December
31, 2003.
29
COMMITMENTS AND CONTINGENCIES
On April 12, 2004, we entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled "Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing," which was originally granted by the People's Republic of China
Patent Bureau on July 12, 1996. The purchase consideration is approximately
$720,612, of which $30,204 was paid at signing of the agreement and an
additional $30,204 will be paid within five days after the completion of the
issuance of a notice regarding the patent right holder alternate registration by
the People's Republic of China Patent Bureau. In addition, we agreed to issue
1,000,000 shares of common stock at an agreed-upon value of $0.63 per share, the
fair market value on April 12, 2004 (aggregate value $630,000) within two months
of the completion of the issuance of a notice regarding the patent right holder
alternate registration by the People's Republic of China Patent Bureau.
OFF-BALANCE SHEET ARRANGEMENTS
At March 31, 2004, we did not have any transactions, obligations or
relationships that could be considered off-balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a significant
effect on our financial statement presentation or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 requires that an
issuer classify a financial instrument that is within its scope as a liability
(or an asset in some circumstances) because that financial instrument embodies
an obligation of the issuer. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. SFAS No.
150 is to be implemented by reporting the cumulative effect of a change in
accounting principle for financial instruments created before the issuance date
of SFAS No. 150 and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The adoption of SFAS No. 150 did not
have a significant effect on our financial statement presentation or
disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the company must recognize an initial liability for the fair
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and measurement provisions of FIN 45 apply on a prospective
basis to guarantees issued or modified after December 31, 2002. We implemented
the disclosure provisions of FIN 45 in our December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN 45
effective January 1, 2003. The implementation of the provisions of FIN 45 did
not have a significant effect on our consolidated financial statement
presentation or disclosures.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
relating to consolidation of certain entities. In December 2003, the FASB issued
a revised version of FIN 46 ("FIN 46R") that replaced the original FIN 46. FIN
46R requires identification of a company's participation in variable interest
entities ("VIEs"), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit it to operate on a
standalone basis. For entities identified as a VIE, FIN 46R sets forth a model
to evaluate potential consolidation based on an assessment of which party to the
VIE (if any) bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN 46R also sets
30
forth certain disclosures regarding interests in VIEs that are deemed
significant, even if consolidation is not required. We are not currently
participating in, or invested in any VIEs, as defined in FIN 46R. The
implementation of the provisions of FIN 46R in 2003 did not have a significant
effect on our consolidated financial statement presentation or disclosures.
DESCRIPTION OF PROPERTY
We are in the process of constructing a manufacturing facility on 15.7
acres of land in Shandong Province, China. The right of land use has been
approved by the local government for up to 10 years without land use costs. In
the event our Chinese subsidiary becomes profitable, it will have the option to
acquire the land use rights for a period of up to 50 years. The first phase of a
three-phase construction plan has been completed. We expect the facility to be
fully operational in 2005.
We lease our principal executive offices located at 17700 Castleton
Street, Suite 589, City of Industry, California 91748. The lease has a term of 2
years and expires on June 11, 2005.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
China Star Investment Group is a company which is 10% owned by one of
our major stockholders. The balance due to China Star at December 31, 2002 of
$26,902 was primarily related to pre-operating costs that China Star paid on our
behalf before it was incorporated in the People's Republic of China. The balance
due from China Star at December 31, 2003 of $30,574 resulted from unsecured,
non-interest bearing cash advances which are due on demand.
In October 2003, we obtained a $100,000 loan from China Star. The loan
was scheduled to mature on October 20, 2004, and bears interest at 12% per
annum, payable at maturity. As part of the loan terms, China Star had the right
to convert the loan into shares of our common stock at $0.25 per share at any
time prior to the maturity date, subject to our completing a reverse merger
transaction in the United States, which was accomplished in March 2004. China
Star waived this conversion right in March, 2004.
During the three months ended March 31, 2004, the $30,574 due from
China Star was offset against the $100,000 loan payable to China Star, resulting
in a liability to China Star of $69,426 at March 31, 2004.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since January 31, 2002, we have been eligible to participate in the OTC
Bulletin Board, an electronic quotation medium for securities traded outside of
the Nasdaq Stock Market, and prices for our common stock are published on the
Over-the-Counter Bulletin under the trading symbol "KWBT." The market for shares
of our common stock is extremely limited and no assurance can be given that the
present limited market for our common stock will continue or will be maintained.
The potential sale of our common stock pursuant to Rule 144 of the Commission by
officers and directors may have a substantial adverse impact on any such public
market. As of July 30, 2004 the closing price was $0.19.
The following table sets forth the quarterly high and low trade prices
for our common stock since we have been eligible to participate in the OTC
Bulletin Board as reported by the National Quotations Bureau. The quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission, and
may not necessarily represent actual transactions. These prices also take into
account the 4-for-1 stock split that occurred during the first quarter of 2004,
and the 1-for-10 reverse stock split that occurred during the first quarter of
2003.
31
YEAR 2002 HIGH TRADE LOW TRADE
Quarter Ended March 31, 2002 $0.25 $0.12
Quarter Ended June 30, 2002 $0.25 $0.12
Quarter Ended September 30, 2002 $0.25 $0.12
Quarter Ended December 31, 2002 $0.25 $0.12
YEAR 2003 HIGH TRADE LOW TRADE
Quarter Ended March 31, 2003 $0.22 $0.05
Quarter Ended June 30, 2003 $0.12 $0.12
Quarter Ended September 30, 2003 $0.12 $0.12
Quarter Ended December 31, 2003 $0.12 $0.12
YEAR 2004 HIGH TRADE LOW TRADE
Quarter Ended March 31, 2004 $0.12 $0.12
Quarter Ended June 30, 2004 $0.80 $0.31
HOLDERS OF COMMON STOCK
As of July 30, 2004, we had approximately 376 stockholders of record of
our common stock and 38,460,853 shares of our common stock were issued and
outstanding.
DIVIDENDS
We do not anticipate paying any cash dividends on our common stock in
the foreseeable future. We intend to retain any earnings to finance the growth
of the business. We cannot assure you that we will ever pay cash dividends.
Whether we pay any cash dividends in the future will depend on the financial
condition, results of operations and other factors that the Board of Directors
will consider.
EQUITY COMPENSATION PLAN INFORMATION
As of December 31, 2003, we did not have any securities to be issued
under any equity compensation plans.
AUTHORIZED AND UNISSUED STOCK
The authorized but unissued shares of our capital stock are available
for future issuance without our stockholders' approval. These additional shares
may be utilized for a variety of corporate purposes including but not limited to
future public or direct offerings to raise additional capital, corporate
acquisitions and employee incentive
32
plans. In the event of an unsolicited tender offer or takeover proposal, the
increased number of shares could give us greater opportunity to issue shares to
persons who are friendly to management. The shares might also be available to
make acquisitions or enter into other transactions that might frustrate
potential offerors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, as to the Chief Executive Officer,
information concerning all compensation paid for services to us in all
capacities for each of the three years ended December 31 indicated below. No
other executive officer received total annual salary and bonus in excess of
$100,000 for each of the three years ended December 31 indicated below.
LONG TERM COMPENSATION
ANNUAL COMPENSATION
FISCAL YEAR RESTRICTED ALL
NAME ENDED STOCK AWARDS OTHER
PRINCIPAL POSITION DECEMBER 31, SALARY BONUS ($) COMPENSATION
------------------ ------------ ------ ----- --- ------------
George Christopulos (1) 2003 0 0 8,139 (2) 0
President, Chief 2002 0 0 7,875 (3) 0
Executive Officer & 2001 0 0 6,900 (4) 0
Chief Financial Officer
(1) Mr. Christopulos resigned as of March 12, 2004.
(2) 81,391 shares of restricted stock valued at $0.10 per share were issued to
Mr. Christopulos as compensation for services rendered to us during the
fiscal year ended December 31, 2003.
(3) 45,000 shares of restricted stock valued at $0.175 per share were issued to
Mr. Christopulos as compensation for services rendered to us during the
fiscal year ended December 31, 2002.
(4) 23,000 shares of restricted stock valued at $0.30 per share (as adjusted
for the one share for ten shares reverse stock split approved by the Board
on January 17, 2003) were issued to Mr. Christopulos as compensation for
services rendered to us during the fiscal year ended December 31, 2001.
COMPENSATION OF DIRECTORS
At present, non-employee directors do not receive any cash compensation
or award of options, warrants, or stock appreciation rights (SARs) for their
service on the Board. The Board may in the future establish a policy for
compensation of non-employee directors, which may include cash payments, option
or stock grants and/or reimbursement of expenses.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
At present, there are no employment contracts between any named
executive officers and us. There are no compensatory plans or arrangements with
respect to a named executive officer that would result in payments or
installments in excess of $100,000 upon the resignation, retirement or other
termination of such executive officer's employment with us or from a
change-in-control.
2004 STOCK INCENTIVE PLAN
On May 10, 2004, our Board of Directors determined that it was in our
best interest to provide equity incentives to certain of our directors, officers
and employees and or consultants. Pursuant to that end, our Board of Directors
adopted and approved, subject to shareholder approval, our 2004 Stock Incentive
Plan. The 2004 Stock Incentive Plan reserves 1,047,907 shares of our common
stock for issuance to qualifying participants of options and
33
stock purchase rights. This key aspect of our compensation program is designed
to attract, retain, and motivate the highly qualified individuals required for
our long-term success. Approval of the Plan required the affirmative vote of the
majority of the outstanding shares of our common stock on the record date. As of
June 3, 2004, holders of a majority of our common stock had approved the 2004
Stock Incentive Plan.
HOW TO GET MORE INFORMATION
We have filed with the Securities and Exchange Commission in
Washington, DC, a registration statement on Form SB-2 under the Securities Act
with respect to the shares we are offering. This prospectus does not contain all
of the information set forth in the registration statement, as permitted by the
rules and regulations of the Securities and Exchange Commission. Reference is
hereby made to this registration statement and exhibits hereto for further
information with respect to Kiwa Bio-Tech Products Group Corporation and the
shares to which this prospectus relates. Copies of the registration statement
and other information filed by Kiwa with the Securities and Exchange Commission
can be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission in Washington, DC at 450 Fifth Street, NW,
Washington, DC 20549. In addition, the Securities and Exchange Commission
maintains a World Wide Web site that contains reports, proxy statements and
other information regarding registrants such as Kiwa which filed electronically
with the Securities and Exchange Commission at the following Internet address:
(http:www.sec.gov).
34
FINANCIAL STATEMENTS
TABLE OF CONTENTS
FINANCIAL STATEMENTS AS OF MARCH 31, 2004 (UNAUDITED).........................36
CONDENSED CONSOLIDATED BALANCE SHEETS FOR THE
QUARTER ENDED MARCH 31, 2004 (UNAUDITED) AND THE
YEAR ENDED DECEMBER 31, 2003.........................................36
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2004
AND 2003, AND JUNE 5, 2002 (INCEPTION) TO MARCH
31, 2004 (CUMULATIVE)................................................38
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'
EQUITY (DEFICIENCY) - JUNE 5, 2002 (INCEPTION)
TO MARCH 31, 2004 (CUMULATIVE).......................................39
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) - THREE MONTHS ENDED MARCH 31, 2004
AND 2003, AND JUNE 5, 2002 (INCEPTION) TO MARCH
31, 2004 (CUMULATIVE)................................................42
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED) - THREE MONTHS ENDED
MARCH 31, 2004 AND 2003, AND JUNE 5, 2002
(INCEPTION) TO MARCH 31, 2004 (CUMULATIVE)...........................44
FINANCIAL STATEMENTS OF KIWA BIO-TECH PRODUCTS GROUP LTD......................51
REPORT OF GROBSTEIN, HORWATH & COMPANY LLP,
INDEPENDENT AUDITORS.................................................51
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31,
2003 AND 2002........................................................52
CONSOLIDATED STATEMENTS OF OPERATIONS AND
DEFICIT ACCUMULATED DURING THE DEVELOPMENT
STAGE FOR THE YEAR ENDED DECEMBER 31, 2003,
PERIOD ENDED DECEMBER 31, 2002, AND FROM JUNE 5,
2002 (INCEPTION) THROUGH DECEMBER 31, 2003...........................53
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DEFICIT) FOR THE YEAR ENDED DECEMBER 31 AND THE
PERIOD ENDED DECEMBER 31, 2002.......................................54
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEAR ENDED DECEMBER 31, 2003, PERIOD ENDED
DECEMBER 31, 2002, AND FROM JUNE 5, 2002
(INCEPTION) THROUGH DECEMBER 31, 2003 AND 2002.......................55
NOTES TO FINANCIAL STATEMENTS........................................56
35
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Balance Sheets
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash .................................. $ 10,910 $ 48,730
Restricted cash ....................... 200,000 300,000
Accounts receivable ................... 60,408 45,235
Inventories ........................... 144,757 135,201
Due from related party ................ -- 30,574
Other current assets .................. 283,224 109,811
----------- -----------
Total current assets ....................... 699,299 669,551
----------- -----------
Property, plant and equipment:
Buildings ............................. 1,045,549 1,045,599
Machinery and equipment ............... 314,297 312,784
Automobiles ........................... 97,480 97,485
Construction in process ............... 52,403 45,108
Office equipment ...................... 11,639 11,640
----------- -----------
1,521,368 1,512,616
Less accumulated depreciation ......... (54,178) (35,468)
----------- -----------
1,467,190 1,477,148
----------- -----------
Total assets ............................... $ 2,166,489 $ 2,146,699
=========== ===========
See accompanying notes to condensed consolidated financial statements.
36
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Balance Sheets (continued)
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
Current liabilities:
Accounts payable and accrued
expenses .............................. $ 768,473 $ 737,636
Short-term loans .......................... 193,304 283,930
Due to related party ...................... 69,426 --
Convertible notes payable -
Related party ......................... -- 100,000
Unrelated party ....................... 500,000 --
Current portion of long-term
liabilities ........................... 133,390 133,298
----------- -----------
Total current liabilities ................. 1,664,593 1,254,864
----------- -----------
Long-term liabilities, less current portion:
Unsecured notes payable ............... 1,087,337 1,063,226
Bank notes payable .................... 36,549 39,732
----------- -----------
1,123,886 1,102,958
----------- -----------
Stockholders' deficiency:
Common stock, $0.001 par value -
Authorized - 50,000,000 shares
Issued and Outstanding - 34,930,248
shares and 30,891,676 shares at
March 31, 2004 and December 31, 2003,
respectively .............................. 34,930 30,892
Additional paid-in capital ..................... 2,794,450 1,184,108
Deficit accumulated during the
development stage ......................... (3,076,370) (1,426,123)
Deferred interest expense ...................... (375,000) --
----------- -----------
Total stockholders' deficiency ................. (621,990) (211,123)
----------- -----------
Total liabilities and
stockholders' deficiency .................. $ 2,166,489 $ 2,146,699
=========== ===========
See accompanying notes to condensed consolidated financial statements.
37
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended June 5, 2002
March 31, (Inception) to
---------------------------- March 31, 2004
2004 2003 (Cumulative)
------------ ------------ ------------
Net sales ..................... $ 53,458 $ -- $ 93,489
Cost of sales ................. 31,011 -- 61,305
------------ ------------ ------------
Gross profit .................. 22,447 -- 32,184
------------ ------------ ------------
Operating expenses:
Consulting and professional
Fees .................... 29,887 -- 597,490
Directors' compensation ..... 8,699 3,624 356,715
General and administrative .. 74,545 43,717 443,482
Research and development .... 12,540 9,720 82,139
Depreciation and amortization 9,138 1,900 28,028
Reverse merger costs ........ 1,397,981 -- 1,448,317
------------ ------------ ------------
Total costs and expenses .... 1,532,790 58,961 2,956,171
------------ ------------ ------------
(1,510,343) (58,961) (2,923,987)
------------ ------------ ------------
Interest income (expense), net (14,904) 311 (27,383)
Amortization of beneficial
conversion feature of
convertible note payable .... (125,000) -- (125,000)
------------ ------------ ------------
Net loss ...................... $ (1,650,247) $ (58,650) $ (3,076,370)
============ ============ ============
Net loss per common share -
basic and diluted ........... $ (0.05) $ --
============ ============
Weighted average number
of common shares
outstanding -
basic and diluted ........... 31,564,771 12,356,670
============ ============
See accompanying notes to condensed consolidated financial statements.
38
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficiency)
(Unaudited)
June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------ Paid-In Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
---------- ----------- ----------- ----------- ---------- -----------
Issuance of
common stock .... 12,356,670 $ 12,357 $ 452,643 $ -- $ -- $ 465,000
Net loss for the
period from
June 5, 2002
(Inception) to
December 31, 2002 -- -- -- (70,884) -- (70,884)
---------- ----------- ----------- ----------- ---------- -----------
Balance,
December 31, 2002 12,356,670 12,357 452,643 (70,884) -- 394,116
Shares issued
to consultants
for services .... 10,503,170 10,503 414,497 -- -- 425,000
Shares issued to
directors as
directors'
compensation .... 8,031,836 8,032 316,968 -- -- 325,000
Net loss for the
year ended
December 31, 2003 -- -- -- (1,355,239) -- (1,355,239)
---------- ----------- ----------- ----------- ---------- -----------
Balance,
December 31, 2003 30,891,676 30,892 1,184,108 (1,426,123) -- (211,123)
See accompanying notes to condensed consolidated financial statements.
39
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficiency)
(Unaudited) (continued)
June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------ Paid-In Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
---------- ----------- ----------- ----------- ---------- -----------
Shares retained
by public
shareholders
in March 2004
reverse merger
transaction ... 4,038,572 $ 4,038 $ (4,038) $ -- $ -- $ --
Issuance of
warrants in
conjunction
with March
2004 reverse
merger
transaction ... -- -- 943,380 -- -- 943,380
Issuance of
stock options
to consultant
in conjunction
with March 2004
reverse merger
transaction ... -- -- 171,000 -- -- 171,000
Beneficial
conversion
feature of
convertible
notes payable . -- -- 500,000 -- (500,000) --
See accompanying notes to condensed consolidated financial statements.
40
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statement of Stockholders' Equity (Deficiency)
(Unaudited) (continued)
June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
Deficit
Accumulated Total
Common Stock Additional During the Deferred Stockholders'
------------------------ Paid-In Development Interest Equity
Shares Amount Capital Stage Expense (Deficiency)
---------- ----------- ----------- ----------- ---------- -----------
Amortization
of beneficial
conversion
feature of
convertible
note payable -- $ -- $ -- $ -- $ 125,000 $ 125,000
Net loss for the
three months
ended March 31,
2004 -- -- -- (1,650,247) -- (1,650,247)
---------- ----------- ----------- ----------- ---------- -----------
Balance,
March 31, 2004 34,930,248 $ 34,930 $ 2,794,450 $(3,076,370) $ (375,000) $ (621,990)
=== ==== ========== =========== =========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
41
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended June 5, 2002
March 31, (Inception) to
-------------------------- March 31, 2004
2004 2003 (Cumulative)
----------- ----------- -----------
Cash flows from operating
activities:
Net loss .......................... $(1,650,247) $ (58,650) $(3,076,370)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Issuance of common stock for
to consultants for services .. -- -- 425,000
Issuance of common stock for
directors' compensation ...... -- -- 325,000
Issuance of securities for
reverse merger costs ......... 1,114,380 -- 1,114,380
Depreciation and amortization .. 18,710 1,915 54,178
Amortization of beneficial
conversion feature of
convertible note payable ..... 125,000 -- 125,000
Changes in operating assets
and liabilities:
(Increase) decrease in:
Accounts receivable ...... (15,173) -- (60,408)
Inventories .............. (9,556) (9,198) (144,757)
Other current assets ..... (173,413) (20,802) (283,224)
Deposits ................. -- 25,794 --
Due from related party ... -- -- (57,476)
Increase (decrease) in:
Accounts payable and
accrued liabilities .... 30,836 (2,227) 768,472
Due to related party ..... -- 10,128 26,902
----------- ----------- -----------
Net cash used in operating
Activities ..................... (559,463) (53,040) (783,303)
----------- ----------- -----------
Cash flows from investing
activities:
Purchase of property and
Equipment .................. (8,752) (388,848) (1,521,368)
----------- ----------- -----------
Net cash used in investing
Activities ..................... (8,752) (388,848) (1,521,368)
----------- ----------- -----------
See accompanying notes to condensed consolidated financial statements.
42
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)
Three Months Ended June 5, 2002
March 31, (Inception) to
-------------------------- March 31, 2004
2004 2003 (Cumulative)
----------- ----------- -----------
Cash flows from financing
activities:
(Increase) decrease in
restricted cash .............. $ 100,000 $ -- $ (200,000)
Proceeds from short-term
Loans ........................ 283,930
Repayment of short-term
Loans ........................ (90,626) -- (90,626)
Proceeds from convertible
notes payable ................ 500,000 -- 600,000
Increase in long-term
borrowings, net .............. 21,021 300,328 1,257,277
Proceeds from sale of
common stock ................. -- -- 465,000
----------- ----------- -----------
Net cash provided by
financing activities ........... 530,395 300,328 2,315,581
----------- ----------- -----------
Cash:
Net increase (decrease) ........ (37,820) (141,560) 10,910
At beginning of period ......... 48,730 522,057 --
----------- ----------- -----------
At end of period ............... $ 10,910 $ 380,497 $ 10,910
=========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
43
Kiwa Bio-tech Products Group Corporation and Subsidiaries
(A Development Stage Company)
Notes to Condensed Consolidated Financial Statements (Unaudited)
Three Months Ended March 31, 2004 and 2003,
and June 5, 2002 (Inception) to March 31, 2004 (Cumulative)
1. Organization and Basis of Presentation
Organization - On March 12, 2004, pursuant to an Agreement and Plan of Merger
(the "Merger Agreement") dated as of March 11, 2004, by and among Tintic Gold
Mining Company, a Utah corporation ("Tintic" or "Kiwa"), TTGM Acquisition
Corporation, a Utah corporation and wholly-owned subsidiary of Tintic ("Merger
Sub"), and Kiwa Bio-Tech Products Group Ltd., a privately-held corporation
organized in the British Virgin Islands ("Kiwa Bio-Tech"), Merger Sub merged
with and into Kiwa Bio-Tech with Kiwa Bio-Tech surviving as a wholly-owned
subsidiary of Tintic (the "Merger"). In exchange for 100% of the issued and
outstanding shares of Kiwa Bio-Tech, the Kiwa Bio-Tech stockholders were issued
30,891,676 shares of Tintic's common stock (after giving effect to a 4-to-1
stock split effective as of March 29, 2004). The stockholders of Tintic retained
their 4,038,572 shares of common stock which were issued and outstanding prior
to the consummation of the Merger Agreement. Tintic also assumed 1,852,501 stock
options issuable by Kiwa Bio-Tech at March 12, 2004. On March 17, 2004, Tintic
changed its name to Kiwa Bio-tech Products Group Corporation.
At the closing of the Merger Agreement, Tintic transferred all of its pre-merger
assets, consisting primarily of its interest in certain mining claims situated
in the State of Utah, subject to all of its pre-merger liabilities, to a
newly-formed, wholly-owned subsidiary, Tintic Gold Mining Company, a Nevada
corporation ("Tintic Nevada"). The shares of Tintic Nevada were transferred to
an escrow agent to be held in escrow for the benefit of the pre-merger
stockholders of Tintic until such time as the distribution of such shares has
been registered under the Securities Act of 1933 and any applicable state
securities laws.
The Merger resulted in a change of control of Tintic, with the former
stockholders of Kiwa Bio-Tech acquiring approximately 88.4% of Tintic's common
stock immediately following the closing of the Merger. Accordingly, this
transaction was accounted for as a recapitalization of Kiwa Bio-Tech, pursuant
to which the accounting basis of Kiwa Bio-Tech continued unchanged subsequent to
the transaction date. Accordingly, the pre-transaction financial statements of
Kiwa Bio-Tech are now the historical financial statements of the Company. The
stockholders' equity (deficiency) section of the balance sheet has been
retroactively restated for all periods presented to reflect the post-transaction
equity received by the Kiwa Bio-Tech stockholders as a result of the
recapitalization.
Kiwa Bio-Tech was incorporated on June 5, 2002 in the British Virgin Islands as
a holding company. On October 11, 2002, Kiwa Bio-Tech established a wholly-owned
subsidiary, Kiwa Bio-Tech Products (Shandong) Co., Ltd. ("Kiwa-SD") in Zoucheng
City, Shandong Province, People's Republic of China (the "PRC").
Unless the context indicates otherwise, Kiwa and its wholly-owned subsidiaries,
Kiwa Bio-Tech and Kiwa SD, are referred to herein collectively as the "Company,"
"we" or "our."
Business - The Company intends to develop, manufacture, distribute and market
innovative, cost-effective and environmentally safe bio-technological products
for the agricultural, natural resources and environmental protection, primarily
in the PRC. The Company intends to improve existing products and to develop new
products. Activities to date have included conducting research and development,
acquiring and developing intellectual property, raising capital, development of
a manufacturing facility and identification of strategic acquisitions. The
Company's first product, a photosynthesis biological catalyst, was introduced in
the PRC agricultural market in November 2003. The Company is a development stage
entity.
As the Company's principal operations are conducted in the PRC, the Company is
subject to special considerations and significant risks not typically associated
with companies in North America and Western Europe. These risks include, among
others, risks associated with the political, economic and legal environments and
foreign currency exchange limitations encountered in the PRC. The Company's
results of operations may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, among other things.
In addition, all of the Company's transactions undertaken in the PRC are
denominated in Renminbi ("RMB"), which must be converted into other currencies
before remittance out of the PRC may be considered. Both the conversion
44
of RMB into foreign currencies and the remittance of foreign currencies abroad
require the approval of the PRC government.
Basis of Presentation - The condensed consolidated financial statements include
the operations of Kiwa Bio-tech Products Group Corporation and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
The interim condensed consolidated financial statements are unaudited, but in
the opinion of management of the Company, contain all adjustments, which include
normal recurring adjustments, necessary to present fairly the financial position
at March 31, 2004, the results of operations for the three months ended March
31, 2004 and 2003, and the cash flows for the three months ended March 31, 2004
and 2003. The consolidated balance sheet as of December 31, 2003 is derived from
the Company's audited financial statements.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in the
United States of America for interim financial information and with the
instructions to Form 10-QSB and Item 310 of Regulation S-B. Certain information
and footnote disclosures normally included in financial statements that have
been presented in accordance with generally accepted accounting principles in
the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission with respect to
interim financial statements, although management of the Company believes that
the disclosures contained in these financial statements are adequate to make the
information presented therein not misleading. For further information, refer to
the consolidated financial statements and notes thereto included in the
Company's Current Report on Form 8-K dated March 12, 2004, as amended, as filed
with the Securities and Exchange Commission.
The results of operations for the three months ended March 31, 2004 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2004.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Going Concern - The consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The carrying amounts of assets and liabilities presented in
the consolidated financial statements do not purport to represent the realizable
or settlement values. The Company incurred a net loss of $1,650,247 and
$1,355,239 during the three months ended March 31, 2004 and the year ended
December 31, 2003, respectively, and the Company's current liabilities exceeded
its current assets by $965,294 and $585,313 and it had a stockholders'
deficiency of $621,990 and $211,123 at March 31, 2004 and December 31, 2003,
respectively. In addition, the Company is still in the development stage and
will require additional capital to fund its business plan, and is continuing to
develop its manufacturing facility and has not generated significant revenues
from its planned principal operations. These factors create substantial doubt
about the Company's ability to continue as a going concern.
The Company's independent certified public accountants, in their independent
auditors' report on the consolidated financial statements as of and for the year
ended December 31, 2003, have expressed substantial doubt about the Company's
ability to continue as a going concern.
As of March 31, 2004, the Company had obtained non-interest bearing loans from
the local PRC government of approximately $1,200,000 on favorable repayment
terms. During the year ending December 31, 2004, the Company intends to raise
additional capital through the issuance of debt or equity securities to fund the
development of its planned business operations, although there can be no
assurances that the Company will be successful in this regard.
45
There can be no assurances that the Company will be able to obtain sufficient
funds to allow it to continue its operations during the remainder of 2004.
To the extent that the Company is unable to successfully raise the capital
necessary to fund its future cash requirements on a timely basis and under
acceptable terms and conditions, the Company will not have sufficient cash
resources to maintain operations, and may have to curtail operations and
consider a formal or informal restructuring or reorganization.
Foreign Currency Translation - The functional currency of the Company is the
Renminbi ("RMB"). Transactions denominated in foreign currencies are translated
into RMB at the unified exchange rates quoted by the People's Bank of China,
prevailing at the transaction dates. Monetary assets and liabilities denominated
in foreign currencies are translated into RMB using the applicable unified
exchange rates prevailing at the balance sheet date.
Translations of amounts from RMB into United States Dollars ("US$") were at
approximately US $1.00 = RMB 8.28 for all periods presented. No representation
is made that the RMB amounts could have been, or could be, converted into US$ at
that rate or at any other rate. Due to the stability of the RMB during the
periods covered by the consolidated financial statements, no material exchange
differences exist.
Net Loss Per Common Share - Basic loss per common share is calculated by
dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted loss per common share reflects the potential dilution
that would occur if dilutive securities (stock options, warrants and convertible
debt) were exercised. These potentially dilutive securities were not included in
the calculation of loss per share for the periods presented because the Company
incurred a loss during such periods and thus their effect would have been
anti-dilutive. Accordingly, basic and diluted loss per common share is the same
for all periods presented. As of March 31, 2004, potentially dilutive securities
aggregated 4,047,000 shares of common stock, respectively. The loss per common
share calculation for the three months ended March 31, 2003 reflects the
retroactive restatement of the stockholders' equity (deficiency) section of the
balance sheet to reflect the March 2004 recapitalization of Kiwa Bio-Tech.
The Company effected a 4-for-1 forward split of its outstanding shares of common
stock effective March 29, 2004, in conjunction with the reverse merger
transaction with Kiwa Bio-Tech described above. Unless otherwise indicated, all
share and per share amounts presented herein have been adjusted to reflect the
forward stock split.
Comprehensive Income (Loss) - The Company has adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for the reporting
and display of comprehensive income, its components and accumulated balances in
a full set of general purpose financial statements. SFAS No. 130 defines
comprehensive income (loss) to include all changes in equity except those
resulting from investments by owners and distributions to owners, including
adjustments to minimum pension liabilities, accumulated foreign currency
translation, and unrealized gains or losses on marketable securities.
The Company's only component of comprehensive income (loss) is foreign currency
translation income (loss). Comprehensive income (loss) was not material for all
periods presented.
Stock-Based Compensation - The Company periodically issues shares of common
stock for services rendered or for financing costs. Such shares are valued based
on the market price on the transaction date.
The Company periodically issues stock options and warrants to employees and
non-employees in non-capital raising transactions for services and for financing
costs.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation", which establishes a fair value
method of accounting for stock-based compensation plans.
46
The provisions of SFAS No. 123 allow companies to either record an expense in
the financial statements to reflect the estimated fair value of stock options or
warrants to employees, or to continue to follow the intrinsic value method set
forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", but to disclose on an annual basis the pro forma effect on
net income (loss) and net income (loss) per common share had the fair value of
the stock options and warrants been recorded in the financial statements. SFAS
No. 123 was amended by SFAS No. 148, which now requires companies to disclose in
interim financial statements the pro forma effect on net income (loss) and net
income (loss) per common share of the estimated fair market value of stock
options or warrants issued to employees. The Company has elected to continue to
account for stock-based compensation plans utilizing the intrinsic value method.
Accordingly, compensation cost for stock options and warrants is measured as the
excess, if any, of the fair market price of the Company's common stock at the
date of grant above the amount an employee must pay to acquire the common stock.
In accordance with SFAS No. 123, the cost of stock options and warrants issued
to non-employees is measured at the grant date based on the fair value of the
award. The fair value of the stock-based award is determined using the
Black-Scholes option-pricing model. The resulting amount is charged to expense
on the straight-line basis over the period in which the Company expects to
receive benefit, which is generally the vesting period.
The Company did not issue any stock options to its officers or management during
the three months ended March 31, 2004.
2. Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies under what circumstances a contract with initial investments meets the
characteristics of a derivative and when a derivative contains a financing
component. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The adoption of SFAS No. 149 did not have a significant
effect on the Company's financial statement presentation or disclosures.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS No. 150 is to be
implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. The adoption of SFAS No. 150 did not have a
significant effect on the Company's financial statement presentation or
disclosures.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company implemented
the disclosure provisions of FIN 45 in its December 31, 2002 consolidated
financial statements, and the measurement and recording provisions of FIN 45
effective January 1, 2003. The implementation of the provisions of FIN 45 did
not have a significant effect on the Company's consolidated financial statement
presentation or disclosures.
47
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
relating to consolidation of certain entities. In December 2003, the FASB issued
a revised version of FIN 46 ("FIN 46R") that replaced the original FIN 46. FIN
46R requires identification of a company's participation in variable interest
entities ("VIEs"), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit it to operate on a
standalone basis. For entities identified as a VIE, FIN 46R sets forth a model
to evaluate potential consolidation based on an assessment of which party to the
VIE (if any) bears a majority of the exposure to its expected losses, or stands
to gain from a majority of its expected returns. FIN 46R also sets forth certain
disclosures regarding interests in VIEs that are deemed significant, even if
consolidation is not required. The Company is not currently participating in, or
invested in any VIEs, as defined in FIN 46R. The implementation of the
provisions of FIN 46R in 2003 did not have a significant effect on the Company's
consolidated financial statement presentation or disclosures.
3. Inventories
Inventories consisted of the following at March 31, 2004 and December 31, 2003:
March 31, December 31,
2004 2003
-------- --------
Raw materials ...................... $ 35,310 $ 23,497
Work in progress ................... 24,386 111,390
Finished goods ..................... 85,061 314
-------- --------
$144,757 $135,201
======== ========
4. Short-Term Loans
As of March 31, 2004 and December 31, 2003, short-term loans consisted of bank
loans that mature on various dates through June 2004, with interest rates
ranging from 5.04% to 6.9% per annum. The short-term loans are secured by
restricted cash in the form of a bank certificate of deposit denominated in
United States dollars.
5. Convertible Note Payable
On January 25, 2004, the Company entered into a convertible loan agreement for
$500,000, with interest at 12%, payable at maturity. The loan matures on
September 25, 2004. As part of the loan terms, the lender has the right to
convert the loan into shares of the Company's common stock at $0.25 per share at
any time prior to the maturity date, subject to the Company completing a reverse
merger transaction in the United States, which was accomplished in March 2004.
The lender is an unrelated party located outside the United States.
The fair value of this beneficial conversion feature was determined to be
$500,000, consisting of the aggregate fair value of the difference between the
$0.25 conversion price and the fair market value of the Company's common stock
of $0.60 per share, and has been presented as deferred interest expense in the
balance sheet at March 31, 2004 and is being charged to operations as interest
expense from January 25, 2004 through September 25, 2004, which resulted in a
charge to operations of $125,000 for the three months ended March 31, 2004.
48
6. Related Party Transactions with China Star Investment Group
China Star Investment Group is a company which is 10% owned by a major
stockholder of the Company. The balance due to China Star at December 31, 2002
of $26,902 was primarily related to pre-operating costs that China Star paid on
behalf of the Company before it was incorporated in the PRC. The balance due
from China Star at December 31, 2003 of $30,574 resulted from unsecured,
non-interest bearing cash advances which are due on demand.
In October 2003, the Company obtained a $100,000 loan from China Star. The loan
was scheduled to mature on October 20, 2004, and bears interest at 12% per
annum, payable at maturity. As part of the loan terms, China Star had the right
to convert the loan into shares of the Company's common stock at $0.25 per share
at any time prior to the maturity date, subject to the Company completing a
reverse merger transaction in the United States, which was accomplished in March
2004. China Star has waived this conversion right.
During the three months ended March 31, 2004, the $30,574 due from China Star
was offset against the $100,000 loan payable to China Star, resulting in a
liability to China Star of $69,426 at March 31, 2004.
7. Equity-Based Transactions
From June 5, 2002 (Inception) to March 31, 2004 (Cumulative), the Company has
engaged in the following equity-based transactions:
The Company was initially capitalized on June 5, 2002 through the sale of
12,356,670 shares of common stock for $465,000.
On December 31, 2003, the Company issued 18,535,006 shares of common stock in
exchange for consulting services provided by various consultants and directors
of the Company.
In conjunction with the March 2004 reverse merger transaction (see Note 1), the
Company entered into the following equity-based transactions:
a. In exchange for 100% of the issued and outstanding shares of Kiwa
Bio-Tech, the Kiwa Bio-Tech stockholders were issued 30,891,676 shares
of Tintic's common stock.
b. The stockholders of Tintic retained their 4,038,572 shares of
common stock which were issued and outstanding prior to the
consummation of the Merger Agreement.
c. Tintic assumed 1,852,501 stock options issuable by Kiwa Bio-Tech at
March 12, 2004.
d. Effective March 11, 2004, the Company issued a warrant to its
financial advisor to purchase 1,747,000 shares of common stock
exercisable at $0.20 per share six years. The fair value of this
warrant was determined to be approximately $0.54 per share pursuant to
the Black-Scholes option-pricing model. The aggregate fair value of
such warrant of $943,380 was charged to operations as reverse merger
costs during the three months ended March 31, 2004.
e. Effective March 30, 2004, the Company issued a stock option to a
consultant to purchase 300,000 shares of common stock exercisable at
$0.20 per share for ten years. The fair value of this option was
determined to be approximately $0.57 per share pursuant to the
Black-Scholes option pricing model. The aggregate fair value of such
option of $171,000 was charged to operations as reverse merger costs
during the three months ended March 31, 2004.
49
8. Major Customers and Suppliers
One customer accounted for 100% of the Company's net sales for the three months
ended March 31, 2004. The Company did not have any sales for the three months
ended March 31, 2003.
Three suppliers accounted for 21%, 21%, and 10% of the Company's net purchases
for the three months ended March 31, 2004. The Company did not have any
purchases for the three months ended March 31, 2003.
9. Subsequent Events
On March 12, 2004, the Company entered into a convertible loan agreement for
$200,000, with interest at 12%, payable at maturity. The loan matures three
months after funding. As part of the loan terms, the lender has the right to
convert the loan into shares of the Company's common stock at $0.25 per share at
any time prior to the maturity date, subject to the Company completing a reverse
merger transaction in the United States, which was accomplished in March 2004.
The lender is an unrelated party located outside the United States. The loan was
not funded until April 7, 2004.
The fair value of this beneficial conversion feature was determined to be
$200,000, consisting of the aggregate fair value of the difference between the
$0.25 conversion price and the fair market value of the Company's common stock
of $0.60 per share, and will be charged to operations as interest expense during
the three months ending June 30, 2004.
On April 6, 2004, the Company entered into a subscription agreement to issue
6,000,000 shares of common stock at $0.40 per share for gross proceeds of
$2,400,000. The investor is an unrelated party located outside the United
States. The transaction was scheduled to close on April 30, 2004. The Company
has granted the investor a 60 day extension to close the transaction.
On April 12, 2004, the Company entered into an agreement with China Agricultural
University to acquire patent no. ZL 93101635.5 entitled "Highly Effective
Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing", which was originally granted by the PRC Patent Bureau on July
12, 1996. The purchase consideration is approximately $720,612, of which $60,408
was paid at signing of the agreement and an additional $30,204 will be paid
within five days of the completion of the issuance of a notice regarding the
patent right holder alternate registration by the PRC Patent Bureau. In
addition, the Company will issue 1,000,000 shares of common stock at an
agreed-upon value of $0.63 per share, the fair market value on April 12, 2004
(aggregate value $630,000) within two months of the completion of the issuance
of a notice regarding the patent right holder alternate registration by the PRC
Patent Bureau.
50
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Kiwa Bio-Tech Products Group Ltd.
We have audited the accompanying consolidated balance sheets of Kiwa Bio-Tech
Products Group Ltd. and subsidiary, a development stage company, as of December
31, 2003 and 2002, and the related consolidated statements of operations and
deficit accumulated during the development stage, stockholders' equity
(deficit), and cash flows for the year ended December 31, 2003, period ended
December 31, 2002, and from June 5, 2002 (inception) through December 31, 2003.
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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. 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 Kiwa Bio-Tech
Products Group Ltd. and subsidiary as of December 31, 2003 and 2002 and the
consolidated results of their operations and their cash flows for the year ended
December 31, 2003, period ended December 31, 2002 and from June 5, 2002
(inception) through December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has been in the development stage
since its inception, has suffered recurring losses from operations, has a
working capital deficit and a net capital deficiency that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Grobstein, Horwath & Company, LLP
Sherman Oaks, California
March 19, 2004, except for Notes 13 and 16
which are as of April 30, 2004
51
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND DECEMBER 31, 2002
2003 2002
----------- -----------
Assets
Current Assets
Cash and cash equivalents ................. $ 48,730 $ 522,057
Restricted cash ........................... 300,000 --
Accounts receivable ....................... 45,235 --
Inventories ............................... 135,201 6,295
Due from related party .................... 30,574 --
Other current assets ...................... 109,811 6,433
----------- -----------
Total Current Assets ........................... 669,551 534,785
----------- -----------
Property, Plant and Equipment - net ............ 1,477,148 63,643
Deposits ....................................... -- 25,794
----------- -----------
Total Assets ................................... $ 2,146,699 $ 624,222
=========== ===========
Liabilities and Stockholders' (Deficit)
Equity
Current Liabilities
Short-term loans .......................... $ 283,930 $ --
Due to related party ...................... -- 26,902
Convertible note payable to
related party .......................... 100,000 --
Accounts payable and accrued
liabilities ............................ 737,636 44,862
Current portion of long-term
liabilities ............................ 133,298 6,996
----------- -----------
Total Current Liabilities ...................... 1,254,864 78,760
----------- -----------
Long-Term Liabilities, less current
portion ................................... 1,102,958 151,346
Stockholders' (Deficit) Equity
Common stock - par value $0.01 per
share, 5,000,000 shares authorized,
5,000,000 shares and 2,000,000
shares issued and outstanding at
December 31, 2003 and 2002,
respectively ........................... 50,000 20,000
Additional paid-in capital ................ 1,165,000 445,000
Deficit accumulated during the
development stage ...................... (1,426,123) (70,884)
----------- -----------
Total Stockholders' (Deficit) Equity ........... (211,123) 394,116
----------- -----------
Total Liabilities and Stockholders'
(Deficit) Equity .......................... $ 2,146,699 $ 624,222
=========== ===========
52
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE
CUMULATIVE
RESULTS OF
OPERATIONS
FROM JUNE 5,
2002
(INCEPTION)
YEAR ENDED PERIOD ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2003
----------- ----------- -----------
Net Sales ......................... $ 40,031 $ -- $ 40,031
Cost of Sales ..................... 30,294 -- 30,294
----------- ----------- -----------
Gross Profit ...................... 9,737 -- 9,737
----------- ----------- -----------
Operating Expenses:
Consulting and professional fees 545,787 21,816 567,603
Directors' compensation ........ 347,110 906 348,016
Salaries ....................... 97,534 12,393 109,927
Other .......................... 87,733 3,537 91,270
Travel and entertainment ....... 68,182 11,540 79,722
Research and development ....... 63,434 6,165 69,599
Reverse merger costs ........... 50,336 -- 50,336
Rent ........................... 27,570 1,800 29,370
Office and telephone expense ... 27,477 9,227 36,704
Insurance ...................... 19,005 2,938 21,943
Depreciation ................... 18,585 305 18,890
----------- ----------- -----------
1,352,753 70,627 1,423,380
----------- ----------- -----------
Loss Before Interest Expense and
Provision for Income Taxes ..... (1,343,016) (70,627) (1,413,643)
Interest Expense .................. 12,223 257 12,480
----------- ----------- -----------
Loss Before Provision for Income
Taxes .......................... (1,355,239) (70,884) (1,426,123)
Provision for Income Taxes ........ -- -- --
----------- ----------- -----------
Net Loss .......................... (1,355,239) (70,884) (1,426,123)
Beginning Deficit Accumulated
During the Development Stage ... (70,884) -- --
----------- ----------- -----------
Ending Deficit Accumulated During
the Development Stage .......... $(1,426,123) $ (70,884) $(1,426,123)
=========== =========== ===========
53
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FROM JUNE 5, 2002 (INCEPTION) TO DECEMBER 31, 2003
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DURING THE STOCKHOLDERS'
------------------------- PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL STAGE (DEFICIT)
----------- ----------- ----------- ----------- -----------
Balance at inception (June 5, 2002) -- $ -- $ -- $ -- $ --
Issuance of common stock .......... 2,000,000 20,000 445,000 -- 465,000
Net loss for the period from
June 5, 2002 (Inception) to
December 31, 2002 ............... -- -- -- (70,884) (70,884)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 ........ 2,000,000 20,000 445,000 (70,884) 394,116
Shares issued to consultants for
services ........................ 1,700,000 17,000 408,000 -- 425,000
Shares issued to directors as
directors' compensation ......... 1,300,000 13,000 312,000 -- 325,000
Net loss for the year ended
December 31, 2003 ............... -- -- -- (1,355,239) (1,355,239)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2003 ........ 5,000,000 $ 50,000 $ 1,165,000 $(1,426,123) $ (211,123)
=========== =========== =========== =========== ===========
54
KIWA BIO-TECH PRODUCTS GROUP LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOW
CUMULATIVE
RESULTS OF
OPERATIONS FROM
JUNE 5, 2002
(INCEPTION)
YEAR ENDED PERIOD ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2003
----------- ----------- -----------
OPERATING ACTIVITIES
Net loss ............................... $(1,355,239) $ (70,884) $(1,426,123)
Adjustments to reconcile net loss to net
cash used in operating activities:
Issuance of common stock for services .. 425,000 -- 425,000
Issuance of common stock for directors'
compensation ....................... 325,000 -- 325,000
Depreciation and amortization .......... 35,163 305 35,468
Sources and (uses) of cash from changes
in operating assets and liabilities:
Accounts receivable .................... (45,235) -- (45,235)
Inventories ............................ (128,906) (6,295) (135,201)
Other current assets ................... (103,378) (6,433) (109,811)
Deposits ............................... 25,794 (25,794) --
Accounts payable and accrued liabilities 692,774 44,862 737,636
Due (from) to related party ............ (57,476) 26,902 (30,574)
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES .. (186,503) (37,337) (223,840)
----------- ----------- -----------
INVESTING ACTIVITIES
Expenditures for property and
equipment ....................... (1,448,668) (63,948) (1,512,616)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES .. (1,448,668) (63,948) (1,512,616)
----------- ----------- -----------
FINANCING ACTIVITIES
Increase in restricted cash ........ (300,000) -- (300,000)
Proceeds from sale of common stock . -- 465,000 465,000
Proceeds from short-term loans ..... 283,930 -- 283,930
Proceeds from convertible note due
to a related party .............. 100,000 -- 100,000
Proceeds from long-term borrowings . 1,077,914 158,342 1,236,256
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES ......................... 1,161,844 623,342 1,785,186
----------- ----------- -----------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS ................... (473,327) 522,057 48,730
BEGINNING CASH AND CASH EQUIVALENTS .... 522,057 -- --
----------- ----------- -----------
ENDING CASH AND CASH EQUIVALENTS ....... $ 48,730 $ 522,057 $ 48,730
=========== =========== ===========
55
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
KIWA Bio-Tech Products Group Ltd. ("KIWA") was incorporated on June 5,
2002 in the British Virgin Islands ("BVI"). KIWA has been a development stage
enterprise since its inception as defined under Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises". KIWA has established a wholly owned subsidiary, KIWA Bio-Tech
Products (Shandong) Co., Ltd. ("KIWA-SD" or the "Subsidiary") in Zoucheng City,
Shandong Province, People's Republic of China ("PRC") on October 11, 2002.
Through its Subsidiary, KIWA intends to develop, manufacture,
distribute and market innovative, cost-effective, and environmentally safe
bio-technological products for the agriculture, natural resources and
environmental protection markets, primarily in the PRC. Activities to date have
included conducting research and development, acquiring and developing
intellectual property, raising capital, and identifying strategic acquisitions.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of KIWA and its wholly owned subsidiary (collectively "the Company"). All
significant inter-company balances and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements." Sales represent
the invoiced value of goods, net of value added tax ("VAT"), supplied to
customers, and are recognized upon delivery of goods and passage of title.
All of the Company's sales made in the PRC are subject to the Mainland
Chinese value-added tax at rates ranging from 13% to 17% ("output VAT"). Such
output VAT is payable after offsetting VAT paid by the Company on purchases
("input VAT").
USE OF ESTIMATES
The preparation of the consolidated financial statements in accordance
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions relating to the reporting of assets
and liabilities, the disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
COUNTRY RISK
As the Company's principal operations are conducted in the PRC, the
Company is subject to special considerations and significant risks not typically
associated with companies in North America and Western Europe. These risks
include, among others, risks associated with the political, economic and legal
environments and foreign currency exchange limitations encountered in the PRC.
The Company's results of operations may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, among other things.
In addition, all of the Company's transactions undertaken in the PRC
are denominated in Renminbi ("RMB") which must be converted into other
currencies before remittance out of the PRC may be considered. Both the
conversion of RMB into foreign currencies and the remittance of foreign
currencies abroad require the approval of the PRC government.
56
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
Highly liquid investments with maturity of three months or less at the
time of acquisition are considered to be cash equivalents.
CREDIT RISK
The Company performs ongoing credit evaluations of its customers and
intends to establish an allowance for doubtful accounts when amounts are not
considered fully collectable. Management of the Company believes the accounts
receivable balance as of December 31, 2003 will be fully collected.
INVENTORIES
Inventories, which include raw materials, work-in-progress, finished
goods and low-value consumables, are stated at the lower of cost, determined on
the weighted average method, or net realizable value. Net realizable value is
the estimated selling price in the ordinary course of business, less estimated
costs to complete and dispose.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Major renewals and improvements are capitalized while minor
replacements, maintenance and repairs are charged to expense as incurred.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets after taking into account the estimated residual
value. The estimated useful lives are as follows:
Buildings 30-35 years
Machinery and equipment 3-10 years
IMPAIRMENT OF LONG-LIVED ASSETS
The Company tests its investment in long-lived assets, including
property and equipment, for recoverability whenever events or changes in
circumstances indicate the net carrying amount may not be recoverable.
CONSTRUCTION IN PROGRESS
Construction in progress ("CIP") includes all costs incurred during the
preparation period before commencement of construction and until the asset is
ready for its intended use. CIP is transferred to fixed assets when the asset is
substantially ready for its intended use. The imputation of interest or
capitalization of interest during the construction period is not considered
applicable to the Company because the Company obtained construction financing on
an interest free basis from the local PRC government. In addition, repayment of
a substantial portion of the loans are to be determined based on achieving
specified levels of future profitability. Therefore, the loans do not have a
determinable repayment date.
ADVERTISING
The Company charges all advertising costs to expense as incurred.
Advertising expense for the year ended December 31, 2003 was $4,788. The Company
did not incur any advertising expense for the period from June 5, 2002
(Inception) to December 31, 2002.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
57
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATING LEASES
Operating leases represent those leases under which substantially all
the risks and rewards of ownership of the leased assets remain with the lessors.
Rental payments under operating leases are charged to expense on the
straight-line basis over the period of the relevant leases.
INCOME TAXES
Income taxes are computed using the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statements'
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in the years in which these temporary differences are expected to reverse.
Valuation allowances are provided against deferred tax assets that are not
expected to be realized. There were no material deferred tax assets or
liabilities as of December 31, 2003 and 2002.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the Renminbi ("RMB").
Transactions denominated in foreign currencies are translated into RMB at the
unified exchange rates quoted by the People's Bank of China, prevailing at the
transaction dates. Monetary assets and liabilities denominated in foreign
currencies are translated into RMB using the applicable unified exchange rates
prevailing at the balance sheet date.
Translations of amounts from RMB into United States ("US$") were at US
$1.00 = RMB 8.3 for the year ended December 31, 2003 and for the period from
June 5, 2002 (Inception) to December 31, 2002. No representation is made that
the RMB amounts could have been, or could be, converted into US$ at that rate or
at any other rate. Due to the stability of the RMB during the periods covered by
the consolidated financial statements, no material exchange differences exist.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others" ("FIN45"). FIN45 elaborates on the existing disclosure for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair market value of obligations it
assumes under that guarantee and must disclose that information in its interim
and annual financial statements. The initial recognition and measurement
provisions of FIN 45 apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The Company has implemented the disclosure
provisions of FIN45 in its December 31, 2002 and December 31, 2003 financial
statements, without significant impact.
In January 2003, (as revised in December 2003) The FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities", an
interpretation of Accounting Research Bulletin ("ARB") No. 51, "Consolidated
Financial Statements". Interpretation No. 46, as revised, addresses
consolidation by business enterprises of variable interest entities, which have
one or both or the following characteristics: (i) the equity investment at risk
is not sufficient to permit the entity to finance its activities without
additional subordinated support from other parties, which is provided through
other financial interests that will absorb some or all of the expected losses of
the entity; (ii) the equity investors lack one or more of the following
essential characteristics of a controlling financial interest: the direct or
indirect ability to make decisions about the entities activities through voting
rights or similar rights; or the obligation to absorb the expected losses of the
entity if they occur, which makes it possible for the entity to finance its
activities; the right to receive the expected residual returns of the entity if
they occur, which is the compensation for the risk of absorbing the expected
losses.
58
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interpretation No. 46, as revised, also requires expanded disclosures
by the primary beneficiary (as defined) of a variable interest entity and by an
enterprise that holds a significant variable interest in a variable interest
entity but is not the primary beneficiary.
The consolidation requirements of FIN 46 are required to be implemented
for any variable interest entity created on or after January 31, 2003. In
addition, FIN 46 requires disclosure of information regarding guarantees or
exposures to loss relating to any variable interest entity existing prior to
January 31, 2003 in financial statements issued after January 31, 2003. The
implementation of the provisions of Interpretation No. 46, as revised, is not
expected to have a significant effect on the Company's consolidated financial
statement presentation or disclosure.
In May 2003, the FASB issued SFAS No. 150, "Accounting For Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, could be accounted for as equity. SFAS No. 150 requires that
those instruments be classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash or other
assets. A second type includes put options and forward purchase contracts, which
involve instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments that
are liabilities under SFAS No. 150 are obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or which vary inversely with the value of the
issuers' shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of SFAS No. 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, "Elements of
Financial Statements". The remaining provisions of this Statement are consistent
with the FASB's proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own
shares. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of a non-public entity, as to which the
effective date is for fiscal periods beginning after December 15, 2003.
The adoption of SFAS No. 150 is not expected to have a material impact
on the Company's consolidated financial statements.
NOTE 2 - DEVELOPMENT ACTIVITIES
The accompanying consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America, which contemplates continuation of the Company as a going concern.
However, the Company incurred a net loss of $1,355,239 during the year ended
December 31, 2003, the Company's current liabilities exceeded its current assets
by $585,313 at December 31, 2003, and it had a stockholders' deficit of
$211,123. In addition, the Company continues to develop its manufacturing
facility, and has not generated significant revenues from its planned principal
operations. Those factors create an uncertainty about the Company's ability to
continue as a going concern.
As of December 31, 2003, the Company has obtained non-interest bearing
loans from the local PRC government of approximately $1,183,000 on favorable
repayment terms. In March 2004, the Company initiated a reverse merger
transaction with a publicly held shell company in the United States. During the
next 12 months, if the Company cannot generate sufficient working capital from
product sales to operate its business, the Company will sell debt or equity
securities (See Note 16). As the Company is still in the development stage,
there are no assurances that the Company will obtain funds sufficient to
continue its operations during the next 12 months.
59
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
Inventories consisted of the following at December 31:
2003 2002
-------- --------
Raw materials ................ $ 23,497 $ 2,295
Work in progress ............. 111,390 4,000
Finished goods ............... 314 --
-------- --------
$135,201 $ 6,295
======== ========
NOTE 4 - OTHER CURRENT ASSETS
Other current assets consisted of the following at December 31:
Advances consisted of petty cash and travel advances to our employees
for business purposes, and the prepayment for expenses associated with the
reverse merger transaction in the United States (See Note 16).
Deposits consisted of various deposits for raw materials, utilities,
telecommunications and insurance.
VAT receivable consisted of the balance of input VAT that is greater
than output VAT as of December 31, 2003.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December
31:
Depreciation expense for the year ended December 31, 2003 and for the
period from June 5, 2002 (Inception) to December 31, 2002 was $35,163 and $305,
respectively.
NOTE 6 - LAND USE RIGHTS
Private ownership of land is not allowed in the PRC. Rather, entities
acquire the right to use the land for a designated term. In accordance with an
agreement signed by the local government in Zoucheng City, Shandong
60
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Province, PRC, and KIWA-SD, the land underlying the Company's manufacturing
facility was assigned to KIWA-SD for up to a 10-year period free of land use
costs. In the event KIWA-SD becomes profitable, it will have the option to
acquire the land use rights for a period up to 50 years. In accordance with the
agreement, the consideration to acquire the land use rights will not exceed RMB
8.0 million (approximately $966,569 at the exchange rate of RMB 8.3 = $1.00).
Such land use rights cannot be mortgaged or resold without full payment of the
above consideration. As of December 31, 2003, KIWA-SD has not exercised its
option to acquire any land use rights.
NOTE 7 - SHORT-TERM LOANS
As of December 31, 2003, the short-term loans consisted of RMB bank
loans secured by a US Dollar deposit of $300,000, maturing on various dates
through June 2004, with interest rates ranging from 5.04% to 6.9%, per annum.
NOTE 8 - CONVERTIBLE NOTE PAYABLE TO RELATED PARTY
The Company obtained an unsecured loan of $100,000 from China Star
Investment Group ("China Star"), a company which is 10% owned by a major
stockholder of the Company. China Star has the right to convert the note into
shares of the Company's common stock based on an agreed-upon conversion price of
$0.25 per share at any time after the Company completes the reverse merger
transaction in the United States (See Note 16) and prior to the repayment date.
The note matures on October 20, 2004 and bears interest at 12% per annum,
payable on the maturity date of the note or the date China Star exercises its
conversion right. In March 2004, China Star waived its rights to convert the
loan into shares of the Company's common stock.
NOTE 9 - ADVANCES TO AND FROM RELATED PARTY
The Company has participated in additional transactions with China
Star. The balance due from China Star at December 31, 2003 of $30,574 results
from unsecured, non-interest bearing cash advances which are due on demand. The
balance due to China Star at December 31, 2002 of $26,902 was mainly related to
pre-operating expenses that China Star paid on behalf of the Company before it
was incorporated in the PRC.
NOTE 10 - LONG-TERM LIABILITIES
Long-term liabilities consisted of the following at December 31:
2003 2002
---------- ----------
Unsecured note payable to the local PRC
government, non-interest bearing,
becoming due within three years from
KIWA-SD's first profitable year on a
formula basis, interest has not been
imputed due to the undeterminable
repayment date ................................. $1,063,226 $ 120,814
Unsecured note payable to the local PRC
government, non-interest bearing, 50%
of the loan balance becomes due in
October 2004. Thereafter, the remaining
balance is due on demand, interest has
not been imputed due to the
undeterminable repayment date .................. 120,821 --
Note payable to a bank, payable in monthly
installments of $735 secured by an
automobile, bearing an interest rate
of 5.32% per annum, and maturing in
October 2007 ................................... 30,536 37,528
Note payable to a bank, payable in monthly
installments of $425, secured by an
automobile, bearing an interest rate
of 5.02% per annum, and maturing in
The Company leases an office facility under an operating lease expiring
in May 2004 with an aggregate monthly lease payment of approximately $2,880.
Rent expense under the operating lease for the year ended December 31, 2003 was
$27,570. At December 31, 2003, the Company's future minimum lease payments
required under the operating lease is $12,551 for the year ending December 31,
2004.
NOTE 12 - TAXATION
In accordance with the relevant tax laws in the PRC, KIWA-SD would
normally be subject to a corporate income tax rate of 30% on its taxable income.
However, in accordance with the relevant tax laws in the PRC, KIWA-SD is exempt
from corporate income taxes for its first two profit making years and is
entitled to a 50% tax reduction for the succeeding three years. KIWA-SD has not
provided for any corporate income taxes since it has no taxable income for the
year ended 2003 and the period from June 5, 2002 (inception) to December 31,
2002.
In accordance with the relevant tax laws in the BVI, KIWA, as an
International Business Company, is exempt from income taxes.
NOTE 13 - COMMON STOCK ISSUED FOR SERVICES
On December 31, 2003, the Company issued the following common stock in
exchange for consulting services provided by our various consultants and
directors as follows:
AMOUNTS
NUMBER OF -----------------------
SHARES ISSUED TO SHARES CONSULTANTS DIRECTORS
---------------- ---------- ---------- ----------
InvestLink (China) Limited (formerly
known as Peace Land Venture Ltd.)
for services in corporate and
product development ................... 1,000,000 $ 250,000 $ --
Guisheng Chen, Director, for
services in controlling product
formulas and guiding technology
development ........................... 750,000 -- 187,500
Dejun Zou, Director, for services
in fundraising with the People's
Republic of China government
agents ................................ 500,000 -- 125,000
Times Crossword Investment Ltd., for
services in fundraising ............... 500,000 125,000 --
62
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Lianjun Luo, Director, for services
in accounting and finance
management ............................ 50,000 -- 12,500
Bin Qu, for services in research and
development ........................... 50,000 12,500 --
Nian James Zhan, for services in
strategic business development ........ 50,000 12,500 --
Yunlong Zhang, for services in
marketing and distribution channel
development ........................... 50,000 12,500 --
Yuhong Pang, for services in product
and technology development ............ 50,000 12,500 --
---------- ---------- ----------
3,000,000 $ 425,000 $ 325,000
========== ========== ==========
In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") and the Emerging Issues
task Force Consensus Issue No. 96-18, "Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18"), the Company has accounted for the
consulting services performed based on the fair market value of the Company's
common stock at the date of their issuance. Management has estimated the fair
market value of the Company's common stock as of December 31, 2003 to be $0.25
per share. Management's estimate is based upon the conversion price option of
the convertible loan agreement entered into in January 2004 with a non-US
investor (See Note 16). For the year ended December 31, 2003, the Company
charged to expense a total of $425,000 associated with these consulting
agreements.
On December 31, 2003, the Company's Board of Directors approved a
director's compensation arrangement for certain directors who performed services
on behalf of the Company during 2003. The Company issued 1,300,000 shares of
common stock to the directors for such services. The value of such services has
been determined as set forth in the preceding paragraph. Directors' compensation
expense for the year ended December 31, 2003 was to $325,000.
NOTE 14 - MAJOR CUSTOMERS AND SUPPLIERS
Two customers accounted for 66% and 34% of the Company's net sales for
the year ended December 31, 2003.
Four suppliers accounted for 23%, 16%, 15% and 13%, respectively, of
the Company's net purchases for the year ended December 31, 2003.
NOTE 15 - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year ended December 31, 2003 and the period from
June 5, 2002 (inception) to December 31, 2002 was as follows:
The Company issued common stock for consulting services and directors'
compensation of $425,000 and $325,000, respectively, during the year ended
December 31, 2003.
63
KIWA BIO-TECH PRODUCTS GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - SUBSEQUENT EVENTS
CONVERTIBLE LOAN AGREEMENTS
In January and March 2004, KIWA entered into two convertible loan
agreements with two individual non-US investors in the amount of US $500,000 and
$200,000, respectively, each loan bearing an interest rate of 12% per annum. The
principal and interest payments on the January 2004 loan are due in September
2004, and the principal and interest payments due on the March 2004 loan are due
in June 2004. Prior to the respective maturity dates, both lenders were offered
an option to convert the loan amounts into common stock at a conversion price of
US $0.25 per share.
REVERSE MERGER TRANSACTION
In March 2004, Kiwa Bio-Tech Products Group Corporation ("KBPGC")
(formerly Tintic Gold Mining Company ("TTGM")) issued 7,722,919 shares of common
stock to the shareholders of KIWA in exchange for all the outstanding shares of
KIWA. In connection with the transaction, TTGM changed its name to Kiwa Bio-Tech
Products Group Corporation. For accounting purposes this transaction was treated
as an acquisition of KBPGC and a recapitalization of KIWA and its wholly owned
subsidiary, KIWA-SD. KIWA is considered the accounting acquirer, and KBPGC the
legal acquirer.
SUBSCRIPTION AGREEMENT
On April 6, 2004, KBPGC signed a subscription agreement with a non-US
investor to issue 6,000,000 shares of the Company's restricted common stock, at
price per share of $0.40, for gross proceeds of $2,400,000. The transaction was
expected to close on April 30, 2004. On April 28, 2004, the investor requested
an extension of time of 30 to 60 days to close the transaction. The Company is
considering the request and may grant an extension as the investor requested.
64
-------------------------------------- -------------------------------------
YOU SHOULD RELY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO GIVE YOU
INFORMATION DIFFERENT THAN THAT
CONTAINED IN THIS PROSPECTUS. THE
SELLING STOCKHOLDERS ARE OFFERING TO
SELL SHARES OF COMMON STOCK ONLY IN
JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION
CONTAINED IN THIS PROSPECTUS IS
CURRENT ONLY AS OF ITS DATE,
REGARDLESS OF THE TIME YOU RECEIVE 45,277,605 SHARES
THIS PROSPECTUS.
COMMON STOCK
----------------
TABLE OF CONTENTS KIWA BIO-TECH PRODUCTS
PAGE GROUP CORPORATION
Prospectus Summary...................1
Risk Factors.........................3
Use of Proceeds.....................10
Dilution............................11
Selling Stockholders................11
Equity Line of Credit...............13
Plan of Distribution................15
Directors, Executive Officers,
Promoters and Control ________________
Persons..........................16
Security Ownership of Certain
Beneficial Owners and PROSPECTUS
Management.......................17
Description of Securities...........19 ________________
Interest of Named Experts and
Counsel..........................19
Disclosure of Commission
Position of Indemnification
for Securities Act Liability.....19
Description of Business.............19
Management's Discussion and
Analysis or Plan of
Operation........................24
Description of Property.............31
Certain Relationships and
Related Transactions.............31
Market for Common Equity and AUGUST 2, 2004
Related Stockholder Matters......31
Executive Compensation..............33
How to Get More Information.........34
Financial Statements................35
Indemnification of Directors and
Officers.........................66
Other Expenses of Issuance and
Distribution.....................66
Recent Sales of Unregistered
Securities.......................66
Exhibits............................67
Undertakings........................68
-------------------------------------- -------------------------------------
65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Bylaws authorize us to indemnify, and our Certificate of
Incorporation include an indemnification provision under which we have agreed to
indemnify, to the fullest extent permitted by the Delaware General Corporation
Law, our directors and officers from and against certain claims arising from or
related to future acts or omissions as one of our directors or officers. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered. We will pay all of the expenses in connection with this
offering.
Registration Fee - Securities and
Exchange Commission ...................... $ 1,434.17
Accounting Fees and Expenses ................ 8,000.00
Legal Fees and Expenses ..................... 20,000.00
Miscellaneous 2,000.00
-------------
TOTAL ....................................... $ 31,434.17
=============
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
We have issued the following securities in the past three years without
registering them under the Securities Act:
On June 8, 2004, Kao Ming Investment Company converted a $500,000
convertible note into 2,000,000 shares of our common stock at the agreed upon
conversion price of $0.25 per share. The shares were issued to Tze Ming Hsu. Kao
Ming Investment Company is an unrelated party located outside the United States.
On June 8, 2004, JZU HSIANG Trading Co. Ltd converted a $200,000
convertible note into 800,000 shares of our common stock at the agreed upon
conversion price of $0.25 per share. The shares were issued to Sue-Chen Wang,
Wen-Jen Lee, Wai Sun Chan and Zheng Wang. JZU HSIANG Trading Co. Ltd is an
unrelated party located outside the United States.
On May 24, 2004, in connection with our engagement of Cinapsys, Inc.
for investor relations services, we agreed to issue a one-time stock payment of
75,000 shares or our common stock at an agreed upon value of $0.45 per share,
the closing price on May 24, 2004, for an aggregate value of $33,750. We have
agreed with Cinapsys, Inc. to issue the stock at the end of the engagement.
On April 12, 2004, the Company entered into an agreement with China
Agricultural University to acquire patent no. ZL 93101635.5 entitled "Highly
Effective Composite Bacteria for Enhancing Yield and the Related Methodology for
Manufacturing", which was originally granted by the PRC Patent Bureau on July
12, 1996. The purchase consideration is approximately $720,612, of which $30,204
was paid at signing of the agreement and an additional $30,204 will be paid
within five days of the completion of the issuance of a notice regarding the
patent
66
right holder alternation registration by the PRC Patent Bureau. In addition, the
Company agreed to issue 1,000,000 shares of common stock at an agreed-upon value
of $0.63 per share, the fair market value on April 12, 2004 (aggregate value
$630,000) within two months of the completion of the issuance of a notice
regarding the patent right holder alternate registration by the PRC Patent
Bureau. The application for the patent right holder alternation registration is
still in process.
On March 30, 2004, the Company issued a stock option to a consultant to
purchase 300,000 shares of common stock exercisable at $0.20 per share for ten
years. The fair value of this option was determined to be approximately $0.57
per share pursuant to the Black-Scholes option pricing model.
Effective March 11, 2004, the Company issued a warrant to its financial
advisor to purchase 1,747,000 shares of common stock exercisable at $0.20 per
share for a term of six years. The fair value of this warrant was determined to
be approximately $0.54 per share pursuant to the Black-Scholes option-pricing
model.
Pursuant to that certain Agreement and Plan of Merger, dated March 11,
2004, in exchange for 100% of the issued and outstanding shares of Kiwa Bio-Tech
Products Group Limited, the Kiwa Bio-Tech Products Group Limited shareholders
were issued 30,891,676 shares of Tintic's common stock.
Stock issuances. In December 2003, the Company issued 228,304 shares of
common stock for services rendered valued at approximately $5,708 or $.025 per
share.
In February 2003, the Company issued 2,146,444 shares of common stock
to members of the board of directors, the Company's legal counsel and
stockholders for services rendered valued at approximately $53,661, or $.025 per
share.
In December 2002, the Company issued 536,612 shares of common stock for
services rendered valued at approximately $23,477 or $.04375 per share.
In December 2001, the Company issued 200,024 shares of common stock for
services rendered valued at approximately $15,000 or $.075 per share.
With respect to the sale of unregistered securities referenced above,
all transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act, and Regulation D promulgated under the Securities Act. In each
instance, the purchaser had access to sufficient information regarding our
company so as to make an informed investment decision. More specifically, we had
a reasonable basis to believe that each purchaser was an "accredited investor"
as defined in Regulation D of the Securities Act and otherwise had the requisite
sophistication to make an investment in our securities.
Item 27. EXHIBITS
The following exhibits are included as part of this Form SB-2.
3.1 Certificate of Incorporation, effective as of July 21, 2004.
3.2 Bylaws, effective as of July 22, 2004.
5.1 Opinion and Consent of Stubbs Alderton & Markiles, LLP.
10.1 Standby Equity Distribution Agreement, dated July 6, 2004, between
Cornell Capital Partners, LP and Kiwa Bio-Tech Products Group
Corporation.
10.2 Placement Agent Agreement, dated July 6, 2004, between Newbridge
Securities Corporation and Kiwa Bio-Tech Products Group Corporation.
67
10.3 Registration Rights Agreement, dated July 6, 2004, between Cornell
Capital Partners, LP and Kiwa Bio-Tech Products Group Corporation.
10.4 Warrant Purchase Agreement, dated March 11, 2004, issued to Westpark
Capital, Inc. (incorporated herein by reference to our Quarterly Report
on Form 10-QSB filed May 20, 2004).
23.1 Consent of Grobstein, Horwath & Company, LLP.
23.2 Consent of Stubbs Alderton & Markiles, LLP (see Exhibit 5.1).
Item 28. UNDERTAKINGS
The undersigned registrant hereby undertakes to:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration
statement to:
(i) Include any prospectus required by Section 10(a)(3)
of the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental
change in the information in the registration
statement; and notwithstanding the forgoing, any
increase or decrease in volume of securities offered
(if the total dollar value of securities offered
would not exceed that which was registered) and any
deviation from the low or high end of the estimated
maximum offering range may be reflected in the form
of prospects filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in the
volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of
the securities offered, and the offering of the securities at
that time as the initial bona fide offering.
(3) File a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the
offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
68
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in the City of
Industry, State of California, on August 2, 2004.
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
/S/ WEI LI
--------------------------------
Wei Li
Chief Executive Officer
/S/ LIAN-JUN LUO
--------------------------------
Lian-jun Luo
Chief Financial Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated:
SIGNATURE DATE TITLE
/S/ WEI LI. August 2, 2004 Chief Executive Officer and Chairman
-------------------- of the Board
Wei Li
/S/ LIAN-JUN LUO August 2, 2004 Chief Financial Officer and Director
--------------------
Lian-jun Luo
/S/ JAMES NIAN ZHAN August 2, 2004 Secretary and Director
--------------------
James Nian Zhan
/S/ DA-CHANG JU August 2, 2004 Director
--------------------
Da-chang Ju
/S/ YUN-LONG ZHANG August 2, 2004 Director
--------------------
Yun-long Zhang
69
EXHIBITS INDEX
The following exhibits are included as part of this Form SB-2.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
3.1 Certificate of Incorporation, effective as of July 21, 2004.
3.2 Bylaws, effective as of July 22, 2004.
5.1 Opinion and Consent of Stubbs Alderton & Markiles, LLP.
10.1 Standby Equity Distribution Agreement, dated July 6, 2004,
between Cornell Capital Partners, LP and Kiwa Bio-Tech
Products Group Corporation.
10.2 Placement Agent Agreement, dated July 6, 2004, between
Newbridge Securities Corporation and Kiwa Bio-Tech Products
Group Corporation.
10.3 Registration Rights Agreement, dated July 6, 2004, between
Cornell Capital Partners, LP and Kiwa Bio-Tech Products Group
Corporation.
10.4 Warrant Purchase Agreement, dated March 11, 2004, issued to
Westpark Capital, Inc. (incorporated herein by reference to
our Quarterly Report on Form 10-QSB filed May 20, 2004).
23.1 Consent of Grobstein, Horwath & Company, LLP.
23.2 Consent of Stubbs Alderton & Markiles, LLP (see Exhibit 5.1).
70
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
THE UNDERSIGNED, acting as the incorporator of a corporation under and
in accordance with the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended from time to time (the "GENERAL
CORPORATION LAW"), hereby adopts the following Certificate of Incorporation for
such corporation:
ARTICLE 1.
The name of the corporation is Kiwa Bio-Tech Products Group Corporation
(the "CORPORATION").
ARTICLE 2.
The address of the Corporation's registered office in the State of
Delaware is 9 East Loockerman Street, Suite 1B, Dover, Kent County, Delaware
19901, and the name of its initial registered agent at such address is National
Registered Agents, Inc.
ARTICLE 3.
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law.
ARTICLE 4.
The Corporation is authorized to issue two (2) classes of capital stock
to be designated, respectively, "COMMON STOCK" and "PREFERRED STOCK." The total
number of shares of capital stock that this Corporation is authorized to issue
is One Hundred Twenty Million (120,000,000) shares. One Hundred Million
(100,000,000) shares shall be Common Stock, par value $0.001 per share, and
Twenty Million (20,000,000) shares shall be Preferred Stock, par value $0.001
per share.
The shares of Preferred Stock may be issued from time to time in one or
more series. Apart from any other provisions in this Certificate of
Incorporation authorizing the issuance of shares of Preferred Stock, the Board
of Directors of the Corporation is authorized to establish from time to time, by
resolution or resolutions, the number of shares to be included in each series
and to fix and alter the rights, preferences, privileges, and restrictions
granted to and imposed upon any series thereof, and to fix the designation of
any such series of Preferred Stock. The Board of Directors of the Corporation,
within the limits and restrictions stated in any resolution or resolutions of
the Board of Directors of the Corporation originally fixing the number of shares
constituting any series, may increase or decrease (but not below the number of
shares of such
series then outstanding) the number of shares of any series subsequent to the
original issue of shares of that series.
Subject to the provisions of applicable law or of the Bylaws with
respect to the closing of the transfer books or the fixing of a record date for
the determination of stockholders entitled to vote, and except as otherwise
provided by applicable law or by the resolution or resolutions providing for the
issue of any series of Preferred Stock, the holders of outstanding shares of
Common Stock shall exclusively possess the voting power for the election of
directors and for all other purposes, with each holder of record of shares of
Common Stock being entitled to one vote for each share of Common Stock standing
in the name of such holder on the books of the Corporation.
ARTICLE 5.
The Corporation will have perpetual existence.
ARTICLE 6.
The preemptive right of any stockholder of the Corporation to acquire
additional or unissued or treasury shares of the Corporation, or securities of
the Corporation convertible into or carrying a right to subscribe to or acquire
shares of the Corporation is hereby denied; provided, however, that nothing
herein precludes the Corporation from granting preemptive rights by contract or
agreement to any person, corporation, or other entity.
ARTICLE 7.
Elections of directors need not be by written ballot unless a duly
adopted Bylaw of the Corporation shall so provide.
ARTICLE 8.
To the fullest extent permitted by the General Corporation Law, as the
same exists or may hereafter be amended, a director of the Corporation shall not
be personally liable to the Corporation or its stockholders for monetary damage
for breach of fiduciary duty as a director. If the General Corporation Law is
amended after the date of the filing of this Certificate of Incorporation to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law, as so amended from time to time.
ARTICLE 9.
The Corporation shall indemnify to the fullest extent permitted by the
General Corporation Law as the same exists or may hereafter be amended, any
person made, or threatened to be made, a defendant or witness to any action,
suit or proceeding (whether civil or criminal or otherwise) by reason of the
fact that such person, or his or her testator or intestate, is or was a
director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation,
2
partnership, joint venture, trust, employee benefit plan or enterprise. Nothing
contained herein shall affect any rights to indemnification to which any person
may be entitled by law.
No amendment or repeal of this Article 9 shall adversely effect any
right to indemnification provided hereunder with respect to any act or omission
occurring prior to such amendment or repeal.
In furtherance and not in limitation of the powers conferred by
statute:
(i) this Corporation may purchase and maintain insurance on
behalf of any person who is or was a director or officer, employee or agent of
the Corporation, or is serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability asserted
against him or her and incurred by him or her in any such capacity, or arising
out of his or her status as such, whether or not the Corporation would have the
power to indemnify against such liability under the provisions of law; and
(ii) this Corporation may create a trust fund, grant a
security interest and/or use other means (including, without limitation, letters
of credit, surety bonds and/or other similar arrangements), as well as enter
into contracts providing indemnification to the full extent authorized or
permitted by law and including as part thereof provisions with respect to any or
all of the foregoing to ensure the payment of such amounts as may become
necessary to effect indemnification as provided therein, or elsewhere.
ARTICLE 10.
In furtherance and not in limitation of the powers conferred by the
laws of the State of Delaware, the Board of Directors of the corporation is
expressly authorized to make, alter and repeal the Bylaws of the corporation,
subject to the power of the stockholders of the corporation to alter or repeal
any Bylaw whether adopted by them or otherwise.
ARTICLE 11.
The name and mailing address of the incorporator of the Corporation is as
follows:
Name Address
Louis Wharton 15821 Ventura Boulevard, Suite 525
Encino, California 91436
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Incorporation this 21st day of July, 2004.
/S/ LOUIS WHARTON
-----------------------------------
Louis Wharton, Incorporator
3
EXHIBIT 3.2
BYLAWS
OF
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
A DELAWARE CORPORATION
(THE "CORPORATION")
ARTICLE I
STOCKHOLDERS MEETINGS
SECTION 1 PLACE OF MEETING. Meetings of the Stockholders shall be held
at the principal offices of the Corporation or at such place, within or without
the State of Delaware, as may from time to time be designated for that purpose,
by the Board.
SECTION 2 ANNUAL MEETINGS. Unless directors are elected by written
consent in lieu of an annual meeting as permitted by this SECTION 2, an annual
meeting of the Stockholders for the election of directors shall be held on such
date and at such time as may be designated, from time to time, by the Board.
Stockholders may, unless the Certificate of Incorporation otherwise provides,
act by written consent to elect directors; provided, however, that if such
consent is less than unanimous, such action by written consent may be in lieu of
holding an annual meeting only if all of the directorships to which directors
could be elected at an annual meeting held at the effective time of such action
are vacant and are filled by such action. If the annual meeting for the election
of directors is not held on the date designated therefor or action by written
consent to elect directors in lieu of an annual meeting has not been taken, the
directors shall cause the meeting to be held as soon as is convenient. Any other
proper business may be transacted at the annual meeting.
SECTION 3 SPECIAL MEETINGS. Special meetings of the Stockholders for
any purpose or purposes may be called at any time by the Board, the Chairman of
the Board or any two directors.
SECTION 4 NOTICE OF MEETINGS. Except as otherwise provided by the DGCL
written notice of each meeting of the Stockholders, whether annual or special,
shall be given not less than 10 nor more than 60 days prior to the date upon
which the meeting is to be held to each Stockholder entitled to vote at such
meeting. Such notice shall be deemed delivered when deposited in the United
States mail, postage prepaid, addressed to the Stockholder at such person's
address as it appears on the stock records of the Corporation, or otherwise
actually delivered to such address or such person. Such notice shall state the
place, date and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called. If a meeting is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each Stockholder of record entitled to
vote at the meeting.
SECTION 5 QUORUM. Except as otherwise provided by law, the Certificate
of Incorporation or these Bylaws, at each meeting of Stockholders the presence
in person or by
proxy of the holders of shares of stock having a majority of the votes which
could be cast by the holders of all outstanding shares of stock entitled to vote
at the meeting shall be necessary and sufficient to constitute a quorum. In the
absence of a quorum, any meeting of the Stockholders may be adjourned from time
to time by a majority of the votes represented either in person or by proxy, and
no other business may be transacted at a meeting except that the Stockholders
present at a duly called or held meeting at which a quorum is present may
continue to do business until adjournment, notwithstanding the withdrawal of
enough Stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
SECTION 6 ADJOURNED MEETING. Any Stockholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned by vote of a
majority of the shares present, either in person or by proxy. At any adjourned
meeting, the Corporation may transact any business which might have been
transacted at the original meeting.
SECTION 7 CHAIRMAN OF MEETING; OPENING OF POLLS. Meetings of
Stockholders shall be presided over by the person designated by the Board, or in
the absence of such designation, by the Chairman of the Board, if any, or in his
absence by the Vice Chairman of the Board, if any, or in his absence by the
Chief Executive Officer, or in their absence by a chairman chosen at the meeting
by the Stockholders. The Secretary shall act as secretary of the meeting, but in
his absence, the chairman of the meeting may appoint any person to act as
secretary of the meeting. The chairman of the meeting shall announce at each
meeting of Stockholders the date and time of the opening of the polls for each
matter upon which the Stockholders will vote.
SECTION 8 PROXIES. Each Stockholder entitled to vote at a meeting of
Stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for such person
by proxy.
SECTION 9 STOCKHOLDER LIST. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten days before every
meeting of Stockholders, a complete list of the Stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
Stockholder and the number of shares registered in the name of each Stockholder.
Such list shall be open to the examination of any Stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any Stockholder who is
present.
SECTION 10 CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Unless otherwise
provided in the Certificate of Incorporation, any action required to be taken,
or that may be taken, at any annual or special meeting of the Stockholders, may
be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action to be taken, shall have been signed
by the holders of outstanding stock eligible to vote on such action, having not
less than the minimum number of votes of each class of stock that would be
necessary to authorize or take such action at a meeting at which all shares of
each class of stock entitled to vote thereon were present and voted and shall be
delivered to the Corporation by delivery to its registered
2
office in the State of Delaware, its principal place of business, or to an
officer or agent of the Corporation having custody of the book in which
proceedings of minutes of stockholders are recorded. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested.
Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within 60 days of the
earliest dated consent delivered in the manner required by this SECTION to the
Corporation, written consents signed by a sufficient number of holders to take
action are delivered to the Corporation by delivery to its registered office in
the State of Delaware, its principal place of business, or to an officer or
agent of the Corporation having custody of the book in which proceedings of
minutes of stockholders are recorded. Delivery made to the Corporation's
registered office shall be by hand or by certified or registered mail, return
receipt requested.
The Secretary shall give prompt notice of the taking of any corporate
action without a meeting by less than unanimous written consent to those
Stockholders who have not consented in writing and who, if the action had been
taken at a meeting, would have been entitled to notice of the meeting if the
record date for such meeting had been the date that written consents signed by a
sufficient number of holders to take the action were delivered to the
Corporation as provided in this SECTION 10.
SECTION 11 INSPECTORS OF ELECTION. In advance of any meeting of the
Stockholders, the Board shall appoint at least one person, other than nominees
for office, as inspectors of election, to act at such meeting or any adjournment
thereof. The number of such inspectors of election shall be one or three. In
case any person appointed as inspector fails to appear or refuses to act, the
vacancy shall be filled by appointment by the Board in advance of the meeting,
or at the meeting by the chairman of the meeting.
The duties of each such inspector shall include: determining the number
of shares outstanding and voting power of each; determining the shares
represented at the meeting; determining the existence of a quorum; determining
the authenticity, validity and effect of proxies; receiving votes, ballots or
consents; hearing and determining all challenges and questions in any way
arising in connection with the right to vote; retaining for a reasonable period
the disposition of any challenges made to the inspector's determinations;
counting and tabulating all votes; determining when the polls shall close;
determining the result of any election; certifying the determination of the
number of shares represented at the meeting, and the count of all votes and
ballots; certifying any information considered in determining the validity and
counting of proxies and ballots if that information is used for the purpose of
reconciling proxies and ballots submitted by or on behalf of banks, brokers,
their nominees or similar persons which represent more votes than the
Stockholder holds of record; and performing such acts as may be proper to
conduct the election or vote with fairness to all Stockholders.
An announcement shall be made at each meeting of the Stockholders by
the chairman of the meeting of the date and time of the opening and closing of
polls for each matter upon which the Stockholders will vote at the meeting. No
ballot, proxies or votes, nor any revocations
3
thereof or changes thereto, shall be accepted by the inspectors after the
closing of the polls unless the Delaware Court of Chancery upon application by a
Stockholder shall determine otherwise.
Unless otherwise provided in the Certificate of Incorporation or these
Bylaws, this SECTION 11 shall not apply to the Corporation if the Corporation
does not have a class of voting stock that is:
(a) listed on a national securities exchange;
(b) authorized for quotation on an interdealer quotation system of
a registered national securities association; or
(c) held of record by more than 2,000 stockholders.
SECTION 12 RECORD DATE. In order that the Corporation may determine the
Stockholders entitled to notice of or to vote at any meeting of Stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board may fix, in advance, a record date, which shall
not be more than 60 nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other action.
If no record date is fixed:
(a) The record date for determining Stockholders entitled to
notice of or to vote at a meeting of Stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held;
(b) The record date for determining Stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board is necessary, shall be the day on which the first written
consent is expressed;
(c) The record date for determining Stockholders for any other
purpose shall be at the close of business on the day on which the Board adopts
the resolution relating thereto.
A determination of Stockholders of record entitled to notice of or to
vote at a meeting of Stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
SECTION 13 CONDUCT OF MEETINGS. The Board may adopt such rules and
regulations for the conduct of meetings of Stockholders as it shall deem
appropriate. Except to the extent inconsistent with such rules and regulations
as adopted by the Board, the chairman of any meeting shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgment of the chairman, are appropriate for the proper conduct
of the meeting. Such rules, regulations or procedures, whether adopted by the
Board or prescribed by the chairman of the meeting, may include, without
limitation, the following: (i) the
4
establishment of an agenda or order of business for the meeting; (ii) rules and
procedures for maintaining order at the meeting and the safety of those present;
(iii) limitations on attendance at or participation in the meeting to
Stockholders of record, their duly authorized and constituted proxies or such
other persons as the chairman of the meeting shall determine; (iv) restrictions
on entry to meeting after the time fixed for commencement thereof; (v)
limitations on the time allotted to questions or comments by participants.
Unless and to the extent determined by the Board or the chairman of meeting,
meetings of Stockholders shall not be required to be held in accordance with the
rules of parliamentary procedure.
SECTION 14 EXCEPTION TO REQUIREMENTS OF NOTICE. No notice is required
to be given to any Stockholder under the Certificate of Incorporation or these
Bylaws if under SECTION 230 of the DGCL no such notice is required to be given.
SECTION 15 MATTERS CONSIDERED AT ANNUAL MEETING. At an annual meeting
of the stockholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board, (b) otherwise
properly brought before the meeting by or at the direction of the Board, or (c)
otherwise properly brought before the meeting by a Stockholder. For business to
be properly brought before an annual meeting by a Stockholder, the Stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered to or mailed
and received at the principal executive offices of the Corporation, not less
than 60 days nor more than 180 days prior to the meeting; PROVIDED, HOWEVER,
that in the event that less than 70 days' notice or prior public disclosure of
the date of the meeting is given or made to the Stockholders, notice by the
Stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. A
Stockholder's notice to the Secretary shall set forth as to each matter the
Stockholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business, (c) the class and number of shares of the Corporation which are
beneficially owned by the Stockholder, and (d) any material interest of the
Stockholder in such business. Notwithstanding anything in the Bylaws to the
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this SECTION. The chairman of the
annual meeting shall, if the facts warrant, determine and declare to the meeting
that business was not properly brought before the meeting and in accordance with
the provisions of this section and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
SECTION 16 NOMINATIONS FOR DIRECTOR. Only persons who are nominated in
accordance with the procedures set forth in this SECTION shall be eligible for
election as Directors. Nominations of persons for election to the Board may be
made at a meeting of Stockholders by or at the direction of the Board or by any
Stockholder entitled to vote for the election of Directors at the meeting who
complies with the notice procedures set forth in this SECTION. Such nominations,
other than those made by or at the direction of the Board shall be made pursuant
to timely notice in writing to the Secretary of the Corporation. To be timely, a
Stockholder's notice
5
shall be delivered to or mailed and received at the principal executive offices
of the Corporation not less than 60 days nor more than 180 days prior to the
meeting; PROVIDED, HOWEVER, that in the event that less than 70 days' notice or
prior public disclosure of the date of the meeting is given or made to the
stockholders, notice by the Stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made.
Such Stockholder's notice shall set forth (a) as to each person whom the
Stockholder proposes to nominate for election or re-election as a Director, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the Corporation which are beneficially owned by such person, and (iv)
any other information relating to such person that is required to be disclosed
in solicitations of proxies for election of Directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including without limitation such persons' written consent to
being named in the proxy statement as a nominee and to serving as a Director if
elected); and (b) as to the Stockholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such stockholder and (ii)
the class and number of shares of the Corporation which are beneficially owned
by such stockholder. At the request of the Board any person nominated by the
Board for election as a Director shall furnish to the Secretary of the
Corporation that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. No person shall be eligible for
election as a Director of the Corporation unless nominated in accordance with
the procedures set forth in this SECTION. The chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by the Bylaws, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1 POWERS. The business and affairs of the Corporation shall be
managed by, or under the direction of the Board, except as may be otherwise
provided by the DGCL or in the Certificate of Incorporation or these Bylaws.
SECTION 2 NUMBER. The Board shall consist of one or more members, the
number thereof to be determined from time to time by resolution of the Board.
SECTION 3 PLACE OF MEETING. Unless otherwise provided in the
Certificate of Incorporation, meetings, both regular and special, of the Board
shall be held at the Corporation's principal executive offices, or at such other
place or places, as the Board or the Chairman of the Board may from time to time
determine.
SECTION 4 REGULAR MEETINGS. Immediately following each annual meeting
of the Stockholders the Board shall hold a regular meeting at the same place at
which such Stockholders' meeting is held, or any other place as may be fixed
from time to by the Board or the Chairman of the Board. Notice of such meeting
need not be given.
6
Other regular meetings of the Board shall be held without call at such
time as the Board may from time to time determine. If any day fixed for a
regular meeting shall be a legal holiday at the place where the meeting is to be
held, then the meeting which would otherwise be held on that day shall be held
at the same hour on the next succeeding business day not a legal holiday. Notice
of a regular meeting need not be given.
SECTION 5 SPECIAL MEETINGS. Except as otherwise provided in the
Certificate of Incorporation, special meetings of the Board for any purpose or
purposes may be called at any time by the Chairman of the Board, the Chief
Executive Officer or by any two directors.
Written notice of the time and place of special meetings shall be
delivered personally to each director or communicated to each director by
telephone or telegraph or telex or cable or mail or other form of recorded
communication, charges prepaid, addressed to each director at that director's
address as it is shown on the records of the Corporation or, if it is not so
shown on such records or is not readily ascertainable, at that director's
residence or usual place of business. In case such notice is mailed, it shall be
deposited in the United States mail at least seven days prior to the time of the
holding of the meeting. In case such notice is delivered personally, by
telephone or by other form of written communication, it shall be delivered at
least 48 hours before the time of the holding of the meeting. The notice shall
state the time of the meeting, but need not specify the place of the meeting if
the meeting is to be held at the principal executive office of the Corporation.
The notice need not state the purpose of the meeting unless expressly provided
otherwise by statute.
SECTION 6 MEETINGS BY COMMUNICATION EQUIPMENT. Members of the Board,
or any committee designated by the Board, may participate in a meeting of the
Board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in a meeting pursuant to this SECTION shall constitute
presence in person at such meeting.
SECTION 7 QUORUM AND MANNER OF ACTING. The presence of a majority of
the total number of directors shall constitute a quorum for the transaction of
business, and the act of a majority of the directors present at a meeting at
which a quorum is present shall be the act of the Board. In the absence of a
quorum, a majority of the directors present may adjourn any meeting from time to
time until a quorum is present. Notice of an adjourned meeting need not be
given.
SECTION 8 ACTION WITHOUT MEETING. Any action required or permitted to
be taken at any meeting of the Board, or of any committee thereof, may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
SECTION 9 COMPENSATION OF DIRECTORS. The Board may fix the
compensation of directors.
SECTION 10 COMMITTEES. The Board may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting
7
of the committee. In the absence or disqualification of a member of the
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent permitted by law and to the extent authorized by the Board, shall
have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it. The
Board may remove any director from a committee with or without cause at any
time.
ARTICLE III
OFFICERS
SECTION 1 OFFICERS. The Board may elect such officers with such titles
as the Board deems advisable. Each officer shall have the powers and duties set
forth in these Bylaws and any resolution of the Board appointing such officer
(to the extent such resolution is not inconsistent with these Bylaws), and to
the extent not so provided, as generally pertain to their respective offices,
subject to the control of the Board. The Board may designate two or more persons
as Chairman of the Board, in which case each shall be a Co-Chairman of the
Board. Each such officer shall hold office until his or her successor is elected
and qualified or until his or her earlier resignation or removal. Subject to
contractual obligations to the Company, any officer may resign at any time upon
written notice to the Corporation. The Board may remove any officer with or
without cause at any time, but such removal shall be without prejudice to the
contractual rights of such officer, if any, with the Corporation. One person may
hold any number of offices.
SECTION 2 CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
officer be elected, shall, if present, preside at all meetings of the Board and
exercise and perform such other powers and duties as may be from time to time
assigned to such person by the Board.
SECTION 3 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers,
if any, as may be given by the Board to the Chairman of the Board, the Chief
Executive Officer, if such an officer be elected, shall, subject to the control
of the Board, have general supervision, direction and control of the business
and the officers of the Corporation. The Chief Executive Officer shall exercise
and perform such other powers and duties as may be from time to time assigned to
such person by the Board, consistent with such person's position as Chief
Executive Officer.
SECTION 4 PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board to the Chairman of the Board and the Chief Executive
Officer, if there be such officers, the President shall be the chief operating
officer of the Corporation and shall, subject to the control of the Board, have
general supervision, direction, and control of the business and the officers of
the Corporation (other than the Chairman and Chief Executive Officer). The
President shall have the general powers and duties of management usually vested
in the office of president and general manager of a Corporation, and shall have
such other powers and duties as may be prescribed by the Board and the Chief
Executive Officer.
8
SECTION 5 VICE PRESIDENTS. In the absence or disability of the
Chairman, the Chief Executive Officer and the President, the Vice Presidents, if
any, in order of their rank as fixed by the Board, or, if not ranked, the Vice
President designated by the Board shall perform all the duties of such officer,
and when so acting shall have all the powers of, and be subject to all the
restrictions upon, such offices. The Vice Presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the Board, the Chief Executive Officer or the President.
SECTION 6 SECRETARY. The Secretary shall keep, or cause to be kept, at
the principal executive office or such other place as the Board may direct, a
book of minutes of all meetings and actions of directors, committees of
directors, and Stockholders, with the time and place of holding, whether regular
or special, and, if special, how authorized, the notice given, the names of
those present at directors' meetings or committee meetings, the number of shares
present or represented at Stockholders' meetings, and the proceedings.
The Secretary shall give, or cause to be given, notice of all meetings
of the Stockholders and of the Board required by the Bylaws or by law to be
given, and he shall keep the seal of the Corporation, if one be adopted, in safe
custody, and shall have such other powers and perform such other duties as may
be prescribed by the Board.
SECTION 7 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall
keep and maintain, or cause to be kept and maintained, adequate and correct
books and records of accounts of the properties and business transactions of the
Corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings and shares, and shall
send or cause to be sent to the Stockholders of the Corporation such financial
statements and reports as are by law or these Bylaws required to be sent to
them.
The Chief Financial Officer shall deposit all monies and other
valuables in the name or to the credit of the Corporation with such depositories
as may be designated by the Board or by an officer, if such authority is
delegated by the Board. The Chief Financial Officer shall disburse the funds of
the Corporation as may be ordered by the Board, shall render to the President
and directors, whenever they request it, an account of all transactions
undertaken as Chief Financial Officer and of the financial condition of the
Corporation, and shall have such other powers and perform such other duties as
may be prescribed by the Board.
ARTICLE IV
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND OTHER AGENTS
SECTION 1 AGENTS, PROCEEDINGS AND EXPENSES. For the purposes of this
Article IV, "agent" means any person who is or was a director, officer, employee
or other agent of the Corporation, or is or was a director, officer, employee or
other agent of the Corporation as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise, or was a director, officer, employee or agent of a foreign or
domestic corporation which was a predecessor corporation of the Corporation or
of another enterprise at the request of such predecessor corporation;
"proceeding" means any threatened, pending or complete action or proceeding,
whether civil, criminal, administrative, or
9
investigative; and "expenses" includes, without limitation, attorneys' fees and
any expenses of establishing a right to indemnification under SECTION 2 or
SECTION 3 of this Article IV.
SECTION 2 ACTIONS OTHER THAN BY THE CORPORATION. The Corporation shall
have power to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation) by reason of the fact that such person is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contender or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such person's conduct was unlawful.
SECTION 3 ACTIONS BY THE CORPORATION. The Corporation shall have power
to indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
such person is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable for
negligence or misconduct in the performance of such person's duty to the
Corporation unless and only to the extent that the Delaware Court of Chancery or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
SECTION 4 SUCCESSFUL DEFENSE BY AGENT. To the extent that a present or
former director or officer of the Corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
SECTIONs 2 and 3 of this Article IV, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
SECTION 5 REQUIRED APPROVAL. Any indemnification under SECTIONS 1 and
2 (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
present or former director, officer, employee or agent
10
is proper in the circumstances because such person has met the applicable
standard of conduct set forth in SECTIONs 2 and 3 of this Article IV. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (a) by a majority vote of the members
of the Board who are not parties to such action, suit or proceeding, even though
less than a quorum, or (b) by a committee of such disinterested directors
designated by majority vote of such disinterested directors, even though less
than a quorum, or (c) if there are no such disinterested directors, or if such
disinterested directors so direct, by independent legal counsel in a written
opinion, or (d) by the affirmative vote of a majority of Stockholders.
SECTION 6 ADVANCE OF EXPENSES. The Corporation may, in its discretion,
pay the expenses (including attorneys' fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding, in advance of the final disposition of such action, suit or
proceeding, provided, however, that the payment of expenses incurred by a
director or officer in advance of the final disposition of the proceeding shall
be made only upon receipt of an undertaking by or on behalf of such director or
officer to repay all amounts advanced if it should ultimately be determined that
the director or officer is not entitled to be indemnified by the Corporation as
authorized in this Article IV or otherwise. Such expenses (including attorneys'
fees) incurred by former directors and officers or other employees and agents
may be so paid upon such terms and conditions, if any, as the Corporation deems
appropriate.
SECTION 7 CONTRACTUAL RIGHTS. The indemnification and advancement of
expenses provided by, or granted pursuant to, the other sections of this Article
IV shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of Stockholders or disinterested directors or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding such office and shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 8 LIMITATIONS. No indemnification or advance shall be made
under this Article IV, except as provided in SECTION 4, in any circumstances
where it appears:
(a) That it would be inconsistent with a provision of the
Certificate of Incorporation, a resolution of the Stockholders or an agreement
in effect at the time of accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other amounts were paid, which
prohibits or otherwise limits indemnification; or
(b) That it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
SECTION 9 INSURANCE. The Corporation shall have the power to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Corporation would
11
have the power to indemnify such person against such liability under the
provisions of this Article IV.
SECTION 10 CONSTITUENT CORPORATIONS. For purposes of this Article IV,
references to "the Corporation" shall include, in addition to the Corporation,
any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors,
officers, employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was serving
at the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article IV with respect to the resulting or surviving corporation as such person
would have with respect to such constituent corporation if its separate
existence had continued.
SECTION 11 DEFINITIONS. For purposes of this Article IV, references to
"other enterprises" shall include employee benefit plans; references to "fines"
shall include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article IV.
ARTICLE V
MISCELLANEOUS
SECTION 1 INSPECTION OF BOOKS AND RECORDS BY STOCKHOLDERS. Any
Stockholder of record, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during the
usual hours for business to inspect for any proper purpose the Corporation's
stock ledger, a list of its Stockholders, and its other books and records, and
to make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a Stockholder. In every instance
where an attorney or other agent shall be the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing which authorizes the attorney or other agent to so act on
behalf of the Stockholder. The demand under oath shall be directed to the
Corporation at its registered office in the State of Delaware or at its
principal place of business.
SECTION 2 INSPECTION OF BOOKS AND RECORDS BY DIRECTORS. Any director
shall have the right to examine the Corporation's stock ledger, a list of its
Stockholders and its other books and records for a purpose reasonably related to
such person's position as a director. Such right to examine the records and
books of the Corporation shall include the right to make copies and extract
therefrom.
SECTION 3 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks,
drafts, or other orders for payment of money, notes or other evidences of
indebtedness, issued in the name of or
12
payable to the Corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by the
Board. In the absence of such determination, the Chief Executive Officer, the
President, the Chief Operating Officer and the Chief Financial Officer shall
have the authority to sign or endorse such instruments and documents.
SECTION 4 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The
Board, except as otherwise provided in these Bylaw, may authorize any officer or
officers, agent or agents, to enter into any contract or execute any instrument
in the name of and on behalf of the Corporation, and such person's authority may
be general or confined to specific instances; and, unless so authorized or
ratified by the Board or within the agency power of an officer, no officer,
agent or employee shall have any power or authority to bind the Corporation by
any contract or agreement or to pledge its credit or to render it liable for any
purpose or for any amount. In the absence of specific resolution of the Board
relating to the authority of officers to execute contracts generally, the Chief
Executive Officer, the President, the Chief Operating Officer and the Chief
Financial shall have the authority to execute contracts of the Corporation.
SECTION 5 CERTIFICATES FOR SHARES. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by, or in the name of
the Corporation by the Chairman or the President or a Vice-President, and by the
Chief Financial Officer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the Corporation representing the number of shares owned
by such person in the Corporation. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent, or registrar at the date
of issue.
SECTION 6 TRANSFER OF SHARES. Transfers of shares of the capital stock
of the Corporation shall be made only on the books of the Corporation by the
holder thereof, or by such person's attorney thereunto authorized by a power of
attorney duly executed and filed with the Secretary of the Corporation or a
transfer agent of the Corporation, if any, and on surrender of the certificate
or certificates for such shares properly endorsed. A person in whose name
appears on shares of stock and on the books of the Corporation shall be deemed
the owner thereof as regards the Corporation, and upon any transfer of shares of
stock the person or persons into whose name or names such shares shall have been
transferred, shall enjoy and bear all rights, privileges and obligations of
holders of stock of the Corporation and as against the Corporation or any other
person or persons. The term "person" or "persons" wherever used herein shall be
deemed to include any partnership, corporation, association or other entity.
Whenever any transfer of shares shall be made for collateral security, and not
absolutely, such fact, if known to the Secretary or to such transfer agent,
shall be so expressed in the entry of transfer.
SECTION 7 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation may
issue a new certificate of stock in the place of any certificate theretofore
issued by it, alleged to have been lost, stolen or destroyed, and the
Corporation may require the owner of the lost, stolen or destroyed certificate,
or such person's legal representative, to give the Corporation a bond sufficient
to indemnify it against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
13
SECTION 8 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman
of the Board, the Chief Executive Officer, the President, the Chief Operating
Officer, the Chief Financial Officer or any person designated by any of such
officers is authorized, in the absence of authorization by the Board, to vote on
behalf of the Corporation any and all shares of any other corporation or
corporations, foreign or domestic, for which the Corporation has the right to
vote. The authority granted to these officers to vote or represent on behalf of
the Corporation any and all shares held by the Corporation in any other
corporation or corporations may be exercised by any of these officers in person
or by any person authorized to do so by proxy duly executed by these officers.
SECTION 9 CONSTRUCTION AND DEFINITIONS. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions in the
DGCL shall govern the construction of these Bylaws. Without limiting the
generality of this provision, the singular number includes the plural, the
plural number includes the singular. In addition, as used in these Bylaws, the
following terms have the meanings set forth below:
"Board" means the Board of Directors of the Corporation.
"DGCL" means the Delaware General Corporation Law, as the same may from
time to time be amended.
"Stockholders" means the stockholders of the Corporation.
SECTION 10 AMENDMENTS TO BYLAWS. Unless otherwise provided in the
Certificate of Incorporation, these Bylaws may be altered or repealed, and new
Bylaws made, by the Board, but the Stockholders may make additional Bylaws and
may alter and repeal any Bylaws whether adopted by them or otherwise.
SECTION 11 CONFORMANCE TO THE LAW. In the event that it is determined
that these Bylaws, as now written or as amended, conflict with the DGCL, or any
other applicable law, as now enforced or as amended, these Bylaws shall be
deemed amended, without action of the Board or the Stockholders, to conform with
such law. Such amendment to be so interpreted as to bring these Bylaws within
minimum compliance. For purposes of this section, "amendment" shall include a
repeal of, or a change in interpretation of, the relevant compendium.
SECTION 12 FISCAL YEAR. The fiscal year of the Corporation shall be
determined by the Board.
SECTION 13 DIVIDENDS; SURPLUS. Subject to the provisions of the
Certificate of Incorporation and any restrictions imposed by statute, the Board
may declare dividends out of the net assets of the Corporation in excess of its
capital or, in case there shall be no such excess, out of the net profits of the
Corporation for the fiscal year then current and/or the preceding fiscal year,
or out of any funds at the time legally available for the declaration of
dividends (hereinafter referred to as "surplus or net profits") whenever, and in
such amounts as, in its sole discretion, the conditions and affairs of the
Corporation shall render advisable. The Board in its sole discretion may, in
accordance with law, from time to time set aside from surplus or net profits
such sum or sums as it may think proper as a reserve fund to meet contingencies,
or for equalizing dividends, or for the purpose of maintaining or increasing the
property or business of
14
the Corporation, or for any other purpose as it may think conducive to the best
interests of the Corporation.
SECTION 14 WAIVER OF NOTICE. Whenever notice is required to be given
under these Bylaws or the Certificate of Incorporation or the DGCL, a written
waiver, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
where the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the Stockholders, Board or
any committee of the Board need be specified in any written waiver of notice
unless so required by the Certificate of Incorporation or these Bylaws.
15
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of Kiwa Bio-Tech
Products Group Corporation, a Delaware corporation (the "Corporation"); and
(2) That the foregoing Bylaws comprising of 15 pages, constitute the
Bylaws of the Corporation as of July 22, 2004, as duly adopted by the Board of
Directors.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of this 22nd
day of July, 2004.
/s/ James Nian Zhan
------------------------------
James Nian Zhan, Secretary
16
EXHIBIT 5.1
STUBBS ALDERTON & MARKILES, LLP
15821 Ventura Boulevard, Suite 525
Encino, CA 91436
August 2, 2004
Kiwa Bio-Tech Products Group Corporation
17700 Castleton Street, Suite 589
City of Industry, California 91748
Re: Kiwa Bio-Tech Products Group Corporation,
Registration Statement on Form SB-2
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
SB-2 (the "Registration Statement") to which this letter is attached as Exhibit
5.1 filed by Kiwa Bio-Tech Products Group Corporation, a Delaware corporation
(the "COMPANY"), in order to register under the Securities Act of 1933, as
amended (the "ACT"), the sale by certain stockholders of 45,277,605 shares of
Common Stock of the Company (the "SHARES"). The Shares consist of: (i)
40,000,000 shares issuable pursuant to that certain Standby Equity Distribution
Agreement ("EQUITY DISTRIBUTION AGREEMENT"), dated July 6, 2004, between the
Company and Cornell Capital Partners, LP, (ii) 704,038 shares issued as a
one-time commitment fee to Cornell Capital Partners, LP pursuant to the Equity
Distribution Agreement, (iii) 2,800,000 shares issued to certain investors
listed in the Registration Statement, upon conversion of certain convertible
notes further described in the Registration Statement, (iii) 1,747,000 shares
issuable upon exercise of a common stock warrant ("COMMON STOCK WARRANT") issued
to Westpark Capital, Inc. on March 11, 2004, and (iv) 26,567 shares that were
issued to Newbridge Securities Corporation as a placement agent fee, pursuant to
that certain Placement Agent Agreement, dated July 6, 2004, between the Company
and Newbridge Securities Corporation.
We have examined originals or certified copies of such corporate
records of the Company and other certificates and documents of officials of the
Company, public officials and others as we have deemed appropriate for purposes
of this letter. We have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
authentic original documents of all copies submitted to us as conformed and
certified or reproduced copies.
Based on the foregoing, we are of the opinion that (a) the 3,530,605
issued and outstanding Shares have been duly authorized, and are validly issued,
fully paid and non-assessable, (b) the 40,000,000 Shares issuable pursuant to
the Equity Distribution Agreement have been duly authorized and upon issuance
and sale in conformity with and pursuant to the Equity Distribution Agreement,
and receipt by the Company of the purchase price therefor as specified in the
Equity Distribution Agreement, such Shares will be validly issued, fully paid
and non-assessable, and (c) the 1,747,000 Shares issuable upon exercise of the
Common Stock Warrant have been duly authorized and upon issuance and sale in
conformity with and pursuant
to the Common Stock Warrant, and receipt by the Company of the purchase price
therefor as specified in the Common Stock Warrant, such Shares will be validly
issued, fully paid and non-assessable.
We consent to the use of this opinion as an Exhibit to the Registration
Statement and to use of our name in the Prospectus constituting a part thereof.
THIS AGREEMENT dated as of the 6th day of July 2004 (the "AGREEMENT")
between CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the
"INVESTOR"), and KIWA BIO-TECH PRODUCTS GROUP CORPORATION, a corporation
organized and existing under the laws of the State of Utah in the process of
reincorporating in Delaware (the "COMPANY").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
from time to time as provided herein, and the Investor shall purchase from the
Company up to Ten Million U.S. Dollars ($10,000,000) of the Company's common
stock, par value $0.001 per share (the "COMMON STOCK"); and
WHEREAS, such investments will be made in reliance upon the provisions
of Regulation D ("REGULATION D") of the Securities Act of 1933, as amended, and
the regulations promulgated thereunder (the "SECURITIES ACT"), and or upon such
other exemption from the registration requirements of the Securities Act as may
be available with respect to any or all of the investments to be made hereunder.
WHEREAS, the Company has engaged Newbridge Securities Corporation (the
"PLACEMENT AGENT"), to act as the Company's exclusive placement agent in
connection with the sale of the Company's Common Stock to the Investor hereunder
pursuant to the Placement Agent Agreement dated the date hereof by and among the
Company, the Placement Agent and the Investor (the "PLACEMENT AGENT AGREEMENT").
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I.
CERTAIN DEFINITIONS
Section 1.1. "ADVANCE" shall mean the portion of the Commitment Amount
requested by the Company in the Advance Notice.
Section 1.2. "ADVANCE DATE" shall mean the date Butler Gonzalez LLP
Escrow Account is in receipt of the funds from the Investor and Butler Gonzalez
LLP, as the Investor's Counsel, is in possession of free trading shares from the
Company and therefore an Advance by the Investor to the Company can be made and
Butler Gonzalez LLP can release the free trading shares to the Investor. The
Advance Date shall be the first (1st) Trading Day after expiration of the
applicable Pricing Period for each Advance.
Section 1.3. "ADVANCE NOTICE" shall mean a written notice to the
Investor setting forth the Advance amount that the Company requests from the
Investor and the Advance Date.
Section 1.4. "ADVANCE NOTICE DATE" shall mean each date the Company
delivers to the Investor an Advance Notice requiring the Investor to advance
funds to the Company, subject to
the terms of this Agreement. No Advance Notice Date shall be less than seven (7)
Trading Days after the prior Advance Notice Date.
Section 1.5. "BID PRICE" shall mean, on any date, the closing bid price
(as reported by Bloomberg L.P.) of the Common Stock on the Principal Market or
if the Common Stock is not traded on a Principal Market, the highest reported
bid price for the Common Stock, as furnished by the National Association of
Securities Dealers, Inc.
Section 1.6. "CLOSING" shall mean one of the closings of a purchase and
sale of Common Stock pursuant to Section 2.3.
Section 1.7. "COMMITMENT AMOUNT" shall mean the aggregate amount of up
to Ten Million U.S. Dollars ($10,000,000) which the Investor has agreed to
provide to the Company in order to purchase the Company's Common Stock pursuant
to the terms and conditions of this Agreement.
Section 1.8. "COMMITMENT PERIOD" shall mean the period commencing on
the earlier to occur of (i) the Effective Date, or (ii) such earlier date as the
Company and the Investor may mutually agree in writing, and expiring on the
earliest to occur of (x) the date on which the Investor shall have made payment
of Advances pursuant to this Agreement in the aggregate amount of Ten Million
U.S. Dollars ($10,000,000) , (y) the date this Agreement is terminated pursuant
to Section 2.4 and 10.2, or (z) the date occurring twenty-four (24) months after
the Effective Date.
Section 1.9. "COMMON STOCK" shall mean the Company's common stock, par
value $0.001 per share.
Section 1.10. "CONDITION SATISFACTION DATE" shall have the meaning set
forth in Section 7.2.
Section 1.11. "DAMAGES" shall mean any loss, claim, damage, liability,
costs and expenses (including, without limitation, reasonable attorney's fees
and disbursements and costs and expenses of expert witnesses and investigation),
but shall not mean any punitive, exemplary, incidental, indirect, special,
consequential or similar damages (including, without limitation, loss of
profits)..
Section 1.12. "EFFECTIVE DATE" shall mean the date on which the SEC
first declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in Section 7.2(a).
Section 1.13. "ESCROW AGREEMENT" shall mean the escrow agreement among
the Company, the Investor, and Butler Gonzalez LLP, dated the date hereof.
Section 1.14. "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
Section 1.15. "MATERIAL ADVERSE EFFECT" shall mean any condition,
circumstance, or situation that would prohibit or otherwise materially interfere
with the ability of the Company to
2
enter into and perform any of its obligations under this Agreement or the
Registration Rights Agreement in any material respect.
Section 1.16. "MARKET PRICE" shall mean the lowest VWAP of the Common
Stock during the Pricing Period.
Section 1.17. "MAXIMUM ADVANCE AMOUNT" shall be Five Hundred Thousand
U.S. Dollars ($500,000) per Advance Notice up to a maximum of One Million Five
Hundred Thousand Dollars ($1,500,000), in the aggregate, in any thirty-day (30)
calendar period.
Section 1.18. "NASD" shall mean the National Association of Securities
Dealers, Inc.
Section 1.19. "PERSON" shall mean an individual, a corporation, a
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.
Section 1.20. "PLACEMENT AGENT" shall mean Newbridge Securities
Corporation, a registered broker-dealer.
Section 1.21. "PRICING PERIOD" shall mean the five (5) consecutive
Trading Days after the Advance Notice Date.
Section 1.22. "PRINCIPAL MARKET" shall mean the Nasdaq National Market,
the Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board
or the New York Stock Exchange, whichever is at the time the principal trading
exchange or market for the Common Stock.
Section 1.23. "PURCHASE PRICE" shall be set at ninety nine percent
(99%) of the Market Price during the Pricing Period.
Section 1.24. "REGISTRABLE SECURITIES" shall mean the shares of Common
Stock to be issued hereunder (i) in respect of which the Registration Statement
has not been declared effective by the SEC, (ii) which have not been sold under
circumstances meeting all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("RULE 144") or (iii)
which have not been otherwise transferred to a holder who may trade such shares
without restriction under the Securities Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities not bearing a
restrictive legend.
Section 1.25. "REGISTRATION RIGHTS AGREEMENT" shall mean the
Registration Rights Agreement dated the date hereof, regarding the filing of the
Registration Statement for the resale of the Registrable Securities, entered
into between the Company and the Investor.
Section 1.26. "REGISTRATION STATEMENT" shall mean a registration
statement on Form S-1 or SB-2 (if use of such form is then available to the
Company pursuant to the rules of the SEC and, if not, on such other form
promulgated by the SEC for which the Company then qualifies and which counsel
for the Company shall deem appropriate, and which form shall be available
3
for the resale of the Registrable Securities to be registered thereunder in
accordance with the provisions of this Agreement and the Registration Rights
Agreement, and in accordance with the intended method of distribution of such
securities), for the registration of the resale by the Investor of the
Registrable Securities under the Securities Act.
Section 1.27. "REGULATION D" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.28. "SEC" shall mean the Securities and Exchange Commission.
Section 1.29. "SECURITIES ACT" shall have the meaning set forth in the
recitals of this Agreement.
Section 1.30. "SEC DOCUMENTS" shall mean Annual Reports on Form 10-KSB,
Quarterly Reports on Form 10-QSB, Current Reports on Form 8-K and Proxy
Statements of the Company as supplemented to the date hereof, filed by the
Company for a period of at least twelve (12) months immediately preceding the
date hereof or the Advance Date, as the case may be, until such time as the
Company no longer has an obligation to maintain the effectiveness of a
Registration Statement as set forth in the Registration Rights Agreement.
Section 1.31. "To the knowledge of the Company and its subsidiaries"
shall mean and include the actual knowledge of the executive officers of the
Company and its subsidiaries after due inquiry.
Section 1.32. "TRADING DAY" shall mean any day during which the New
York Stock Exchange shall be open for business.
Section 1.31. "VWAP" shall mean the volume weighted average price ( as
reported by Bloomberg, LP) of the Company's Common Stock on the Principal
Market, or if the Common Stock is not quoted on the Principal Market the volume
weighted average price of the Common Stock as furnished by the National
Association of Securities Dealers, Inc.
ARTICLE II.
ADVANCES
Section 2.1. INVESTMENTS.
(a) ADVANCES. Upon the terms and conditions set forth herein
(including, without limitation, the provisions of Article VII hereof), on any
Advance Notice Date the Company may request an Advance by the Investor by the
delivery of an Advance Notice. The number of shares of Common Stock that the
Investor shall receive for each Advance shall be determined by dividing the
amount of the Advance by the Purchase Price. No fractional shares shall be
issued. Fractional shares shall be rounded to the next higher whole number of
shares. The aggregate maximum amount of all Advances that the Investor shall be
obligated to make under this Agreement shall not exceed the Commitment Amount.
Section 2.2. MECHANICS.
4
(a) ADVANCE NOTICE. At any time during the Commitment Period,
the Company may deliver an Advance Notice to the Investor, subject to the
conditions set forth in Section 7.2; provided, however, the amount for each
Advance as designated by the Company in the applicable Advance Notice, shall not
be more than the Maximum Advance Amount. The aggregate amount of the Advances
pursuant to this Agreement shall not exceed the Commitment Amount. The Company
acknowledges that the Investor may sell shares of the Company's Common Stock
corresponding with a particular Advance Notice on the day the Advance Notice is
received by the Investor. There shall be a minimum of seven (7) Trading Days
between each Advance Notice Date.
(b) DATE OF DELIVERY OF ADVANCE NOTICE. An Advance Notice
shall be deemed delivered on (i) the Trading Day it is received by facsimile or
otherwise by the Investor if such notice is received prior to 12:00 noon Eastern
Time, or (ii) the immediately succeeding Trading Day if it is received by
facsimile or otherwise after 12:00 noon Eastern Time on a Trading Day or at any
time on a day which is not a Trading Day. No Advance Notice may be deemed
delivered on a day that is not a Trading Day.
(c) PRE-CLOSING SHARE CREDIT. Within two (2) business days
after the Advance Notice Date, the Company shall credit shares of the Company's
Common Stock to the Investor's counsel's balance account with The Depository
Trust Company through its Deposit Withdrawal At Custodian system, in an amount
equal to the amount of the requested Advance divided by the VWAP of the
Company's Common Stock as of the Advance Notice Date multiplied by one point one
(1.1). Any adjustments to the number of shares to be delivered to the Investor
at the Closing as a result of fluctuations in the VWAP of the Company's Common
Stock shall be made as of the date of the Closing. Any excess shares shall be
credited to the next Advance. In no event shall the number of shares issuable to
the Investor pursuant to an Advance cause the Investor to own in excess of nine
and 9/10 percent (9.9%) of the then outstanding Common Stock of the Company.
(d) HARDSHIP. In the event the Investor sells the Company's
Common Stock pursuant to subsection (c) above and the Company fails to perform
its obligations as mandated in Section 2.5 and 2.2 (c), and specifically fails
to provide the Investor with the shares of Common Stock for the applicable
Advance, the Company acknowledges that the Investor shall suffer financial
hardship and therefore shall be liable for any and all losses, commissions,
fees, or financial hardship caused to the Investor.
Section 2.3. CLOSINGS. On each Advance Date, which shall be the first
(1st) Trading Day after expiration of the applicable Pricing Period for each
Advance, (i) the Company shall deliver to the Investor's Counsel, as defined
pursuant to the Escrow Agreement, shares of the Company's Common Stock,
representing the amount of the Advance by the Investor pursuant to Section 2.1
herein, registered in the name of the Investor which shall be delivered to the
Investor, or otherwise in accordance with the Escrow Agreement and (ii) the
Investor shall deliver to Butler Gonzalez LLP (the "ESCROW AGENT") the amount of
the Advance specified in the Advance Notice by wire transfer of immediately
available funds which shall be delivered to the Company, or otherwise in
accordance with the Escrow Agreement. In addition, on or prior to the Advance
Date, each of the Company and the Investor shall deliver to the other through
the Investor's Counsel, all documents, instruments and writings required to be
delivered by either of them
5
pursuant to this Agreement in order to implement and effect the transactions
contemplated herein. Payment of funds to the Company and delivery of the
Company's Common Stock to the Investor shall occur in accordance with the
conditions set forth above and those contained in the Escrow Agreement;
PROVIDED, HOWEVER, that to the extent the Company has not paid the fees,
expenses, and disbursements of the Investor or the Investor's counsel in
accordance with Section 12.4, the amount of such fees, expenses, and
disbursements may be deducted by the Investor (and shall be paid to the relevant
party) from the amount of the Advance with no reduction in the amount of shares
of the Company's Common Stock to be delivered on such Advance Date.
Section 2.4. TERMINATION OF INVESTMENT. The obligation of the Investor
to make an Advance to the Company pursuant to this Agreement shall terminate
permanently (including with respect to an Advance Date that has not yet
occurred) in the event that (i) there shall occur any stop order or suspension
of the effectiveness of the Registration Statement for an aggregate of fifty
(50) Trading Days, other than due to the acts of the Investor, during the
Commitment Period, and (ii) the Company shall at any time fail materially to
comply with the requirements of Article VI and such failure is not cured within
thirty (30) days after receipt of written notice from the Investor, PROVIDED,
HOWEVER, that this termination provision shall not apply to any period
commencing upon the filing of a post-effective amendment to such Registration
Statement and ending upon the date on which such post effective amendment is
declared effective by the SEC.
Section 2.5. AGREEMENT TO ADVANCE FUNDS.
(a) The Investor agrees to advance the amount specified in the
Advance Notice to the Company after the completion of each of the following
conditions and the other conditions set forth in this Agreement:
(i) the execution and delivery by the Company, and
the Investor, of this Agreement and the Exhibits hereto;
(ii) Investor's Counsel shall have received the
shares of Common Stock applicable to the Advance in accordance with Section
2.2(c) and 2.3 hereof;
(iii) the Company's Registration Statement with
respect to the resale of the Registrable Securities in accordance with theterms
of the Registration Rights Agreement shall have been declared effective by the
SEC;
(iv) the Company shall have obtained all material
permits and qualifications required by any applicable state for the offer and
sale of the Registrable Securities, or shall have the availability of exemptions
therefrom. The sale and issuance of the Registrable Securities shall be legally
permitted by all laws and regulations to which the Company is subject;
(v) the Company shall have filed with the Commission
in a timely manner all reports, notices and other documents required of a
"reporting company" under the Exchange Act and applicable Commission
regulations;
(vi) the fees as set forth in Section 12.4 below
shall have been paid or can be withheld as provided in Section 2.3; and
6
(vii) the conditions set forth in Section 7.2 shall
have been satisfied.
(viii) the Company shall have provided to the
Investor an acknowledgement, from Grobstein, Horwath & Company, LLP as to its
ability to provide all consents required in order to file a registration
statement in connection with this transaction;
Section 2.6. LOCK UP PERIOD.
(i) During the Commitment Period, the Company shall
not issue or sell (i) any Common Stock or Preferred Stock without consideration
or for a consideration per share less than the Bid Price on the date of issuance
or (ii) issue or sell any warrant, option, right, contract, call, or other
security or instrument granting the holder thereof the right to acquire Common
Stock without consideration or for a consideration per share less than the Bid
Price on the date of issuance.
(ii) On the date hereof, the Company shall obtain
from each officer and director a lock-up agreement, as defined below, in the
form annexed hereto as Schedule 2.6 agreeing to only sell in compliance with the
volume limitation of Rule 144.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Investor hereby represents and warrants to, and agrees with, the
Company that the following are true and as of the date hereof and as of each
Advance Date:
Section 3.1. ORGANIZATION AND AUTHORIZATION. The Investor is duly
incorporated or organized and validly existing in the jurisdiction of its
incorporation or organization and has all requisite power and authority to
purchase and hold the securities issuable hereunder. The decision to invest and
the execution and delivery of this Agreement by such Investor, the performance
by such Investor of its obligations hereunder and the consummation by such
Investor of the transactions contemplated hereby have been duly authorized and
requires no other proceedings on the part of the Investor. The undersigned has
the right, power and authority to execute and deliver this Agreement and all
other instruments (including, without limitations, the Registration Rights
Agreement), on behalf of the Investor. This Agreement has been duly executed and
delivered by the Investor and, assuming the execution and delivery hereof and
acceptance thereof by the Company, will constitute the legal, valid and binding
obligations of the Investor, enforceable against the Investor in accordance with
its terms.
Section 3.2. EVALUATION OF RISKS. The Investor has such knowledge and
experience in financial tax and business matters as to be capable of evaluating
the merits and risks of, and bearing the economic risks entailed by, an
investment in the Company and of protecting its interests in connection with
this transaction. It recognizes that its investment in the Company involves a
high degree of risk.
Section 3.3. NO LEGAL ADVICE FROM THE COMPANY. The Investor
acknowledges that it had the opportunity to review this Agreement and the
transactions contemplated by this Agreement with his or its own legal counsel
and investment and tax advisors. The Investor is relying solely on such counsel
and advisors and not on any statements or representations of the
7
Company or any of its representatives or agents for legal, tax or investment
advice with respect to this investment, the transactions contemplated by this
Agreement or the securities laws of any jurisdiction.
Section 3.4. INVESTMENT PURPOSE. The securities are being purchased by
the Investor for its own account, for investment and without any view to the
distribution, assignment or resale to others or fractionalization in whole or in
part. The Investor agrees not to assign or in any way transfer the Investor's
rights to the securities or any interest therein and acknowledges that the
Company will not recognize any purported assignment or transfer except in
accordance with applicable Federal and state securities laws. No other person
has or will have a direct or indirect beneficial interest in the securities. The
Investor agrees not to sell, hypothecate or otherwise transfer the Investor's
securities unless the securities are registered under Federal and applicable
state securities laws or unless, in the opinion of counsel satisfactory to the
Company, an exemption from such laws is available.
Section 3.5. ACCREDITED INVESTOR. The Investor is an "ACCREDITED
INVESTOR" as that term is defined in Rule 501(a)(3) of Regulation D of the
Securities Act.
Section 3.6. INFORMATION. The Investor and its advisors (and its
counsel), if any, have been furnished with all materials relating to the
business, finances and operations of the Company and information it deemed
material to making an informed investment decision. The Investor and its
advisors, if any, have been afforded the opportunity to ask questions of the
Company and its management. Neither such inquiries nor any other due diligence
investigations conducted by such Investor or its advisors, if any, or its
representatives shall modify, amend or affect the Investor's right to rely on
the Company's representations and warranties contained in this Agreement. The
Investor understands that its investment involves a high degree of risk. The
Investor is in a position regarding the Company, which, based upon employment,
family relationship or economic bargaining power, enabled and enables such
Investor to obtain information from the Company in order to evaluate the merits
and risks of this investment. The Investor has sought such accounting, legal and
tax advice, as it has considered necessary to make an informed investment
decision with respect to this transaction.
Section 3.7. RECEIPT OF DOCUMENTS. The Investor and its counsel have
received and read in their entirety: (i) this Agreement and the Exhibits annexed
hereto; (ii) all due diligence and other information necessary to verify the
accuracy and completeness of such representations, warranties and covenants;
(iii) the Company's Form 10-KSB for the year ended year ended December 31, 2003
and Form 10-QSB for the period ended September 30, 2003; and (iv) answers to all
questions the Investor submitted to the Company regarding an investment in the
Company; and the Investor has relied on the information contained therein and
has not been furnished any other documents, literature, memorandum or
prospectus.
Section 3.8. REGISTRATION RIGHTS AGREEMENT AND ESCROW AGREEMENT. The
parties have entered into the Registration Rights Agreement and the Escrow
Agreement, each dated the date hereof.
Section 3.9. NO GENERAL SOLICITATION. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or
8
general advertising (within the meaning of Regulation D under the Securities
Act) in connection with the offer or sale of the shares of Common Stock offered
hereby.
Section 3.10. NOT AN AFFILIATE. The Investor is not an officer,
director or a person that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with
the Company or any "AFFILIATE" of the Company (as that term is defined in Rule
405 of the Securities Act). Neither the Investor nor its Affiliates has an open
short position in the Common Stock of the Company, and the Investor agrees that
it will not, and that it will cause its Affiliates not to, engage in any short
sales of or hedging transactions with respect to the Common Stock, PROVIDED that
the Company acknowledges and agrees that upon receipt of an Advance Notice the
Investor will sell the Shares to be issued to the Investor pursuant to the
Advance Notice, even if the Shares have not been delivered to the Investor.
Section 3.11. TRADING ACTIVITIES. The Investor's trading activities
with respect to the Company's Common Stock shall be in compliance with all
applicable federal and state securities laws, rules and regulations and the
rules and regulations of the Principal Market on which the Company's Common
Stock is listed or traded. Neither the Investor nor its affiliates has an open
short position in the Common Stock of the Company and, except as set forth
below, the Investor shall not and will cause its affiliates not to engage in any
short sale as defined in any applicable SEC or National Association of
Securities Dealers rules on any hedging transactions with respect to the Common
Stock. Without limiting the foregoing, the Investor agrees not to engage in any
naked short transactions in excess of the amount of shares owned (or an
offsetting long position) during the Commitment Period. The Investor shall be
entitled to sell Common Stock during the applicable Pricing Period.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as stated below, on the disclosure schedules attached hereto or
in the SEC Documents (as defined herein), the Company hereby represents and
warrants to, and covenants with, the Investor that the following are true and
correct as of the date hereof:
Section 4.1. ORGANIZATION AND QUALIFICATION. The Company is duly
incorporated or organized and validly existing in the jurisdiction of its
incorporation or organization and has all requisite power and authority
corporate power to own its properties and to carry on its business as now being
conducted. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect on the Company and its
subsidiaries taken as a whole.
Section 4.2. AUTHORIZATION, ENFORCEMENT, COMPLIANCE WITH OTHER
INSTRUMENTS. (i) The Company has the requisite corporate power and authority to
enter into and perform this Agreement, the Registration Rights Agreement, the
Escrow Agreement, the Placement Agent Agreement and any related agreements, in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Placement Agent Agreement and any related agreements by the Company and
9
the consummation by it of the transactions contemplated hereby and thereby, have
been duly authorized by the Company's Board of Directors and no further consent
or authorization is required by the Company, its Board of Directors or its
stockholders, (iii) this Agreement, the Registration Rights Agreement, the
Escrow Agreement, the Placement Agent Agreement and any related agreements have
been duly executed and delivered by the Company, (iv) this Agreement, the
Registration Rights Agreement, the Escrow Agreement, the Placement Agent
Agreement and assuming the execution and delivery thereof and acceptance by the
Investor and any related agreements constitute the valid and binding obligations
of the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies.
Section 4.3. CAPITALIZATION. As of June 3, 2004 , the authorized
capital stock of the Company consists of 50,000,000 shares of Common Stock, par
value $0.001 per share and no shares of Preferred Stock of which 34,930,248
shares of Common Stock were issued and outstanding. The Company is in the
process if increasing authorized capital stock to consist of 100,000,000 shares
of Common Stock and 20,000,000 shares of Preferred Stock. All of such
outstanding shares have been validly issued and are fully paid and
nonassessable. Except as disclosed in the SEC Documents, no shares of Common
Stock are subject to preemptive rights or any other similar rights or any liens
or encumbrances suffered or permitted by the Company. Except as disclosed in the
SEC Documents, as of the date hereof, (i) there are no outstanding options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, any shares of
capital stock of the Company or any of its subsidiaries, or contracts,
commitments, understandings or arrangements by which the Company or any of its
subsidiaries is or may become bound to issue additional shares of capital stock
of the Company or any of its subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its subsidiaries, (ii) there are no outstanding debt
securities (iii) there are no outstanding registration statements other than on
Form S-8 and (iv) there are no agreements or arrangements under which the
Company or any of its subsidiaries is obligated to register the sale of any of
their securities under the Securities Act (except pursuant to the Registration
Rights Agreement). There are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by this Agreement or
any related agreement or the consummation of the transactions described herein
or therein. The Company has furnished to the Investor true and correct copies of
the Company's Certificate of Incorporation, as amended and as in effect on the
date hereof (the "CERTIFICATE OF INCORPORATION"), and the Company's By-laws, as
in effect on the date hereof (the "BY-LAWS"), and the terms of all securities
convertible into or exercisable for Common Stock and the material rights of the
holders thereof in respect thereto.
Section 4.4. NO CONFLICT. The execution, delivery and performance of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby will not (i) result in a violation of the
Certificate of Incorporation, any certificate of designations of any outstanding
series of preferred stock of the Company or By-laws or (ii) conflict with or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or
10
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and the rules and regulations of the Principal Market on
which the Common Stock is quoted) applicable to the Company or any of its
subsidiaries or by which any material property or asset of the Company or any of
its subsidiaries is bound or affected and which would cause a Material Adverse
Effect. Except as disclosed in the SEC Documents, neither the Company nor its
subsidiaries is in violation of any term of or in default under its Articles of
Incorporation or By-laws or their organizational charter or by-laws,
respectively, or any material contract, agreement, mortgage, indebtedness,
indenture, instrument, judgment, decree or order or any statute, rule or
regulation applicable to the Company or its subsidiaries. The business of the
Company and its subsidiaries is not being conducted in violation of any material
law, ordinance, regulation of any governmental entity. Except as specifically
contemplated by this Agreement and as required under the Securities Act and any
applicable state securities laws, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under or contemplated by this Agreement or the Registration
Rights Agreement in accordance with the terms hereof or thereof. All consents,
authorizations, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on
or prior to the date hereof. The Company and its subsidiaries are unaware of any
fact or circumstance which might give rise to any of the foregoing.
Section 4.5. SEC DOCUMENTS; FINANCIAL STATEMENTS. Since March 12, 2004,
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC under of the Exchange Act. The
Company has delivered to the Investor or its representatives, or made available
through the SEC's website at http://www.sec.gov, true and complete copies of the
SEC Documents. As of their respective dates, to the best knowledge of the
Company with respect to the SEC Documents filed with the SEC for any period
ending prior to March 12, 2004, and with respect to the SEC Documents field with
the SEC for any period ending from and after March 12, 2004 (i) the financial
statements of the Company disclosed in the SEC Documents (the "FINANCIAL
STATEMENTS") complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto and (ii) financial statements have been prepared in accordance
with generally accepted accounting principles, consistently applied, during the
periods involved (except (A) as may be otherwise indicated in such financial
statements or the notes thereto, or (B) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and, fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). To the knowledge of
the Company no other information provided by or on behalf of the Company to the
Investor which is not included in the SEC Documents contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
11
Section 4.6. 10B-5. The SEC Documents do not include any untrue
statements of material fact, nor do they omit to state any material fact
required to be stated therein necessary to make the statements made, in light of
the circumstances under which they were made, not misleading.
Section 4.7. NO DEFAULT. Except as disclosed in the SEC Documents, the
Company is not in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust or other material instrument or agreement to which it is
a party or by which it is or its property is bound and neither the execution,
nor the delivery by the Company, nor the performance by the Company of its
obligations under this Agreement or any of the exhibits or attachments hereto
will conflict with or result in the breach or violation of any of the terms or
provisions of, or constitute a default or result in the creation or imposition
of any lien or charge on any assets or properties of the Company under its
Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of
trust or other material agreement applicable to the Company or instrument to
which the Company is a party or by which it is bound, or any statute, or any
decree, judgment, order, rules or regulation of any court or governmental agency
or body having jurisdiction over the Company or its properties, in each case
which default, lien or charge is likely to cause a Material Adverse Effect on
the Company's business or financial condition.
Section 4.8. ABSENCE OF EVENTS OF DEFAULT. Except for matters described
in the SEC Documents and/or this Agreement, no Event of Default, as defined in
the respective agreement to which the Company is a party, and no event which,
with the giving of notice or the passage of time or both, would become an Event
of Default (as so defined), has occurred and is continuing, which would have a
Material Adverse Effect on the Company's business, properties, prospects,
financial condition or results of operations.
Section 4.9. INTELLECTUAL PROPERTY RIGHTS. To the knowledge of the
Company and its subsidiaries, the Company and its subsidiaries own or possess
adequate rights or licenses to use all material trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets and rights necessary to conduct their respective businesses as now
conducted. The Company and its subsidiaries do not have any knowledge of any
infringement by the Company or its subsidiaries of trademark, trade name rights,
patents, patent rights, copyrights, inventions, licenses, service names, service
marks, service mark registrations, trade secret or other similar rights of
others, and, to the knowledge of the Company, there is no claim, action or
proceeding being made or brought against, or to the Company's knowledge, being
threatened against, the Company or its subsidiaries regarding trademark, trade
name, patents, patent rights, invention, copyright, license, service names,
service marks, service mark registrations, trade secret or other infringement;
and the Company and its subsidiaries are unaware of any facts or circumstances
which might give rise to any of the foregoing.
Section 4.10. EMPLOYEE RELATIONS. Neither the Company nor any of its
subsidiaries is involved in any labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. None of the
Company's or its subsidiaries' employees is a member of a union and the Company
and its subsidiaries believe that their relations with their employees are good.
12
Section 4.11. ENVIRONMENTAL LAWS. To the knowledge of the Company and
its subsidiaries, the Company and its subsidiaries are (i) in compliance with
any and all applicable foreign, federal, state and local laws and regulations,
which if not complied with would in the commercially reasonable judgment of the
Company's officers have a material adverse effect on the business, properties,
operations, financial condition, and results of operations or prospects of the
Company and/or its subsidiaries, relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses
or other approvals, which if not received, would in the commercially reasonable
judgment of the Company's officers have a material adverse effect on the
business, properties, operations, financial condition, and results of operations
or prospects of the Company and/or its subsidiaries, required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval, in each case the failure .
Section 4.12. TITLE. Except as set forth in the SEC Documents, the
Company has good and marketable title to its properties and material assets
owned by it, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest other than such as are not material to the business
of the Company. Any real property and facilities held under lease by the Company
and its subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and its subsidiaries.
Section 4.13. INSURANCE. The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
subsidiaries are engaged. Neither the Company nor any such subsidiary has been
refused any insurance coverage sought or applied for and neither the Company nor
any such subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
Section 4.14. REGULATORY PERMITS. The Company and its subsidiaries
possess all material certificates, authorizations and permits issued by the
appropriate federal, state or foreign regulatory authorities necessary to
conduct their respective businesses, and neither the Company nor any such
subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit.
Section 4.15. INTERNAL ACCOUNTING CONTROLS. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
13
Section 4.16. NO MATERIAL ADVERSE BREACHES, ETC. Except as set forth in
the SEC Documents, to the knowledge of the Company and its subsidiaries, neither
the Company nor any of its subsidiaries is subject to any charter, corporate or
other legal restriction, or any judgment, decree, order, rule or regulation
which in the judgment of the Company's officers has or is expected in the future
to have a Material Adverse Effect on the business, properties, operations,
financial condition, results of operations or prospects of the Company or its
subsidiaries. Except as set forth in the SEC Documents, neither the Company nor
any of its subsidiaries is in breach of any contract or agreement which breach,
in the judgment of the Company's officers, has or is expected to have a Material
Adverse Effect on the business, properties, operations, financial condition,
results of operations or prospects of the Company or its subsidiaries.
Section 4.17. ABSENCE OF LITIGATION. Except as set forth in the SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board, government agency, self-regulatory organization
or body pending against or to the knowledge of the Company and its subsidiaries
affecting the Company, the Common Stock or any of the Company's subsidiaries,
wherein an unfavorable decision, ruling or finding would (i) have a Material
Adverse Effect on the transactions contemplated hereby (ii) adversely affect the
validity or enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of the documents
contemplated herein, or (iii) except as expressly disclosed in the SEC
Documents, have a Material Adverse Effect on the business, operations,
properties, financial condition or results of operation of the Company and its
subsidiaries taken as a whole.
Section 4.18. SUBSIDIARIES. Except as disclosed in the SEC Documents,
the Company does not presently own or control, directly or indirectly, any
interest in any other corporation, partnership, association or other business
entity.
Section 4.19. TAX STATUS. Except as disclosed in the SEC Documents, the
Company and each of its subsidiaries has made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject and (unless and only to the extent that the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) has paid
all taxes and other governmental assessments and charges that are material in
amount, shown or determined to be due on such returns, reports and declarations,
except those being contested in good faith and has set aside on its books
provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction, and the officers of the Company know of no basis
for any such claim.
Section 4.20. CERTAIN TRANSACTIONS. Except as set forth in the SEC
Documents none of the officers, directors, or employees of the Company is
presently a party to any transaction with the Company (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
14
Section 4.21. FEES AND RIGHTS OF FIRST REFUSAL. The Company is not
obligated to offer the securities offered hereunder on a right of first refusal
basis or otherwise to any third parties including, but not limited to, current
or former shareholders of the Company, underwriters, brokers, agents or other
third parties.
Section 4.22. USE OF PROCEEDS. The Company represents that the net
proceeds from this offering will be used for general corporate purposes.
However, in no event shall the net proceeds from this offering be used by the
Company for the payment (or loaned to any such person for the payment) of any
judgment, or other liability, incurred by any executive officer, officer,
director or employee of the Company, except for any liability owed to such
person for services rendered, or if any judgment or other liability is incurred
by such person originating from services rendered to the Company, or the Company
has indemnified such person from liability.
Section 4.23. FURTHER REPRESENTATION AND WARRANTIES OF THE COMPANY. For
so long as any securities issuable hereunder held by the Investor remain
outstanding, the Company acknowledges, represents, warrants and agrees that it
will maintain the listing of its Common Stock on the Principal Market.
Section 4.24. OPINION OF COUNSEL. Investor shall receive an opinion
letter from Stubbs Alderton & Markiles, LLP, counsel to the Company, on the date
hereof.
Section 4.25. OPINION OF COUNSEL. The Company will obtain for the
Investor, at the Company's expense, any and all opinions of counsel which may be
reasonably required in order to sell the securities issuable hereunder without
restriction.
Section 4.26. DILUTION. The Company is aware and acknowledges that
issuance of shares of the Company's Common Stock could cause dilution to
existing shareholders and could significantly increase the outstanding number of
shares of Common Stock.
ARTICLE V.
INDEMNIFICATION
The Investor and the Company represent to the other the following with
respect to itself:
Section 5.1. INDEMNIFICATION.
(a) In consideration of the Investor's execution and delivery
of this Agreement, and in addition to all of the Company's other obligations
under this Agreement, the Company shall defend, protect, indemnify and hold
harmless the Investor, and all of its officers, directors, partners, employees
and agents (including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "INVESTOR
INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Investor Indemnitee is a
party to the action for which indemnification hereunder is sought), and
including reasonable attorneys' fees and disbursements (the "INDEMNIFIED
LIABILITIES"), incurred by the Investor Indemnitees or any of them as a result
of, or arising out of, or relating to (a) any misrepresentation or breach of any
representation or warranty made by the Company in this Agreement or the
Registration Rights Agreement or any other
15
certificate, instrument or document contemplated hereby or thereby, (b) any
breach of any covenant, agreement or obligation of the Company contained in this
Agreement or the Registration Rights Agreement or any other certificate,
instrument or document contemplated hereby or thereby, or (c) any cause of
action, suit or claim brought or made against such Investor Indemnitee not
arising out of any action or inaction of an Investor Indemnitee, and arising out
of or resulting from the execution, delivery, performance or enforcement of this
Agreement or any other instrument, document or agreement executed pursuant
hereto by any of the Investor Indemnitees. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities, which is permissible under applicable law.
(b) In consideration of the Company's execution and delivery
of this Agreement, and in addition to all of the Investor's other obligations
under this Agreement, the Investor shall defend, protect, indemnify and hold
harmless the Company and all of its officers, directors, shareholders, employees
and agents (including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "COMPANY
INDEMNITEES") from and against any and all Indemnified Liabilities incurred by
the Company Indemnitees or any of them as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or
warranty made by the Investor in this Agreement, the Registration Rights
Agreement, or any instrument or document contemplated hereby or thereby executed
by the Investor, (b) any breach of any covenant, agreement or obligation of the
Investor(s) contained in this Agreement, the Registration Rights Agreement or
any other certificate, instrument or document contemplated hereby or thereby
executed by the Investor, or (c) any cause of action, suit or claim brought or
made against such Company Indemnitee based on misrepresentations or due to a
breach by the Investor and arising out of or resulting from the execution,
delivery, performance or enforcement of this Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the Company
Indemnitees. To the extent that the foregoing undertaking by the Investor may be
unenforceable for any reason, the Investor shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities, which is
permissible under applicable law.
(c) The obligations of the parties to indemnify or make
contribution under this Section 5.1 shall survive termination.
ARTICLE VI.
COVENANTS OF THE COMPANY
Section 6.1. REGISTRATION RIGHTS. The Company shall cause the
Registration Rights Agreement to remain in full force and effect and the Company
shall comply in all material respects with the terms thereof.
Section 6.2. LISTING OF COMMON STOCK. The Company shall maintain the
Common Stock's authorization for quotation on the National Association of
Securities Dealers Inc.'s Over the Counter Bulletin Board.
16
Section 6.3. EXCHANGE ACT REGISTRATION. The Company will cause its
Common Stock to continue to be registered under Section 12(g) of the Exchange
Act, will file in a timely manner all reports and other documents required of it
as a reporting company under the Exchange Act and will not take any action or
file any document (whether or not permitted by Exchange Act or the rules
thereunder) to terminate or suspend such registration or to terminate or suspend
its reporting and filing obligations under said Exchange Act.
Section 6.4. TRANSFER AGENT INSTRUCTIONS. Not later than two (2)
business days after each Advance Notice Date and prior to each Closing and the
effectiveness of the Registration Statement and resale of the Common Stock by
the Investor, the Company will deliver instructions to its transfer agent to
issue shares of Common Stock free of restrictive legends.
Section 6.5. CORPORATE EXISTENCE. The Company will take all steps
necessary to preserve and continue the corporate existence of the Company.
Section 6.6. NOTICE OF CERTAIN EVENTS AFFECTING REGISTRATION;
SUSPENSION OF RIGHT TO MAKE AN Advance. The Company will immediately notify the
Investor upon its becoming aware of the occurrence of any of the following
events in respect of a registration statement or related prospectus relating to
an offering of Registrable Securities: (i) receipt of any request for additional
information by the SEC or any other Federal or state governmental authority
during the period of effectiveness of the Registration Statement for amendments
or supplements to the registration statement or related prospectus; (ii) the
issuance by the SEC or any other Federal or state governmental authority of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose; (iii) receipt of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose; (iv) the happening of any event that makes any statement made in the
Registration Statement or related prospectus of any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of the Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (v) the Company's reasonable determination that a post-effective
amendment to the Registration Statement would be appropriate; and the Company
will promptly make available to the Investor any such supplement or amendment to
the related prospectus. The Company shall not deliver to the Investor any
Advance Notice during the continuation of any of the foregoing events.
Section 6.7. EXPECTATIONS REGARDING ADVANCE NOTICES. Within ten (10)
days after the commencement of each calendar quarter occurring subsequent to the
commencement of the Commitment Period, the Company must notify the Investor, in
writing, as to its reasonable expectations as to the dollar amount it intends to
raise during such calendar quarter, if any, through the issuance of Advance
Notices. Such notification shall constitute only the Company's good faith
estimate and shall in no way obligate the Company to raise such amount, or any
17
amount, or otherwise limit its ability to deliver Advance Notices. The failure
by the Company to comply with this provision can be cured by the Company's
notifying the Investor, in writing, at any time as to its reasonable
expectations with respect to the current calendar quarter.
Section 6.8. RESTRICTION ON SALE OF CAPITAL STOCK. During the
Commitment Period, the Company shall not issue or sell without fifteen (15)
calendar days prior written notice to the Investor, receipt of which is
acknowledged by the Investor, (i) any Common Stock or Preferred Stock without
consideration or for a consideration per share less than the bid price of the
Common Stock determined immediately prior to its issuance, (ii) issue or sell
any Preferred Stock warrant, option, right, contract, call, or other security or
instrument granting the holder thereof the right to acquire Common Stock without
consideration or for a consideration per share less than such Common Stock's Bid
Price determined immediately prior to its issuance, or (iii) file any
registration statement on Form S-8.
Section 6.9. CONSOLIDATION; MERGER. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or substantially all the assets of the Company to
another entity (a "CONSOLIDATION EVENT") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investor such shares of stock and/or securities as
the Investor is entitled to receive pursuant to this Agreement.
Section 6.10. ISSUANCE OF THE COMPANY'S COMMON STOCK. The sale of the
shares of Common Stock shall be made in accordance with the provisions and
requirements of Regulation D and any applicable state securities law.
ARTICLE VII.
CONDITIONS FOR ADVANCE AND CONDITIONS TO CLOSING
Section 7.1. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY.
The obligation hereunder of the Company to issue and sell the shares of Common
Stock to the Investor incident to each Closing is subject to the satisfaction,
or waiver by the Company, at or before each such Closing, of each of the
conditions set forth below.
(a) ACCURACY OF THE INVESTOR'S REPRESENTATIONS AND WARRANTIES.
The representations and warranties of the Investor shall be true and correct in
all material respects.
(b) PERFORMANCE BY THE INVESTOR. The Investor shall have
performed, satisfied and complied in all respects with all covenants, agreements
and conditions required by this Agreement and the Registration Rights Agreement
to be performed, satisfied or complied with by the Investor at or prior to such
Closing.
Section 7.2. CONDITIONS PRECEDENT TO THE RIGHT OF THE COMPANY TO
DELIVER AN ADVANCE NOTICE AND THE OBLIGATION OF THE INVESTOR TO PURCHASE SHARES
OF COMMON STOCK. The right of the Company to deliver an Advance Notice and the
obligation of the Investor hereunder to acquire and pay for shares of the
Company's Common Stock incident to a Closing is subject to the fulfillment by
the Company, on (i) the date of delivery of such Advance Notice and (ii) the
applicable Advance Date (each a "CONDITION SATISFACTION DATE"), of each of the
following conditions:
18
(a) REGISTRATION OF THE COMMON STOCK WITH THE SEC. The Company
shall have filed with the SEC a Registration Statement with respect to the
resale of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement. As set forth in the Registration Rights
Agreement, the Registration Statement shall have previously become effective and
shall remain effective on each Condition Satisfaction Date and (i) neither the
Company nor the Investor shall have received notice that the SEC has issued or
intends to issue a stop order with respect to the Registration Statement or that
the SEC otherwise has suspended or withdrawn the effectiveness of the
Registration Statement, either temporarily or permanently, or intends or has
threatened to do so (unless the SEC's concerns have been addressed and the
Investor is reasonably satisfied that the SEC no longer is considering or
intends to take such action), and (ii) no other suspension of the use or
withdrawal of the effectiveness of the Registration Statement or related
prospectus shall exist. The Registration Statement must have been declared
effective by the SEC prior to the first Advance Notice Date.
(b) AUTHORITY. The Company shall have obtained all permits and
qualifications required by any applicable state in accordance with the
Registration Rights Agreement for the offer and sale of the shares of Common
Stock, or shall have the availability of exemptions therefrom. The sale and
issuance of the shares of Common Stock shall be legally permitted by all laws
and regulations to which the Company is subject.
(c) FUNDAMENTAL CHANGES. There shall not exist any fundamental
changes to the information set forth in the Registration Statement which would
require the Company to file a post-effective amendment to the Registration
Statement.
(d) PERFORMANCE BY THE COMPANY. The Company shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement (including, without
limitation, the conditions specified in Section 2.5 hereof) and the Registration
Rights Agreement to be performed, satisfied or complied with by the Company at
or prior to each Condition Satisfaction Date.
(e) NO INJUNCTION. No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction that prohibits or directly and adversely affects any of the
transactions contemplated by this Agreement, and no proceeding shall have been
commenced that may have the effect of prohibiting or adversely affecting any of
the transactions contemplated by this Agreement.
(f) NO SUSPENSION OF TRADING IN OR DELISTING OF COMMON STOCK.
The trading of the Common Stock is not suspended by the SEC or the Principal
Market (if the Common Stock is traded on a Principal Market). The issuance of
shares of Common Stock with respect to the applicable Closing, if any, shall not
violate the shareholder approval requirements of the Principal Market (if the
Common Stock is traded on a Principal Market). The Company shall not have
received any notice threatening the continued listing of the Common Stock on the
Principal Market (if the Common Stock is traded on a Principal Market).
(g) MAXIMUM ADVANCE AMOUNT. The amount of an Advance requested
by the Company shall not exceed the Maximum Advance Amount. In addition, in no
event shall the
19
number of shares issuable to the Investor pursuant to an Advance cause the
Investor to own in excess of nine and 9/10 percent (9.9%) of the then
outstanding Common Stock of the Company.
(h) NO KNOWLEDGE. The Company has no knowledge of any event
which would be more likely than not to have the effect of causing such
Registration Statement to be suspended or otherwise ineffective.
(i) OTHER. On each Condition Satisfaction Date, the Investor
shall have received the certificate executed by an officer of the Company in the
form of EXHIBIT A attached hereto.
ARTICLE VIII.
DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION
Section 8.1. DUE DILIGENCE REVIEW. Prior to the filing of the
Registration Statement the Company shall make available for inspection and
review by the Investor, its advisors and representatives, and any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investor pursuant to the Registration Statement, any such registration statement
or amendment or supplement thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or underwriter in
connection with such Registration Statement (including, without limitation, in
response to all questions and other inquiries reasonably made or submitted by
any of them), prior to and from time to time after the filing and effectiveness
of the Registration Statement for the sole purpose of enabling the Investor and
such representatives, advisors and underwriters and their respective accountants
and attorneys to conduct initial and ongoing due diligence with respect to the
Company and the accuracy of the Registration Statement.
Section 8.2. NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
(a) The Company shall not disclose non-public information to
the Investor, its advisors, or its representatives, unless prior to disclosure
of such information the Company identifies such information as being non-public
information and provides the Investor, such advisors and representatives with
the opportunity to accept or refuse to accept such non-public information for
review. The Company may, as a condition to disclosing any non-public information
hereunder, require the Investor's advisors and representatives to enter into a
confidentiality agreement in form reasonably satisfactory to the Company and the
Investor.
(b) Nothing herein shall require the Company to disclose
non-public information to the Investor or its advisors or representatives, and
the Company represents that it does not disseminate non-public information to
any investors who purchase stock in the Company in a public offering, to money
managers or to securities analysts, provided, however, that notwithstanding
anything herein to the contrary, the Company will, as hereinabove provided,
immediately notify the advisors and representatives of the Investor and, if any,
underwriters, of any event or the existence of any circumstance (without any
obligation to disclose the specific
20
event or circumstance) of which it becomes aware, constituting non-public
information (whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the Registration Statement would cause
such prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements, therein, in light
of the circumstances in which they were made, not misleading. Nothing contained
in this Section 8.2 shall be construed to mean that such persons or entities
other than the Investor (without the written consent of the Investor prior to
disclosure of such information) may not obtain non-public information in the
course of conducting due diligence in accordance with the terms of this
Agreement and nothing herein shall prevent any such persons or entities from
notifying the Company of their opinion that based on such due diligence by such
persons or entities, that the Registration Statement contains an untrue
statement of material fact or omits a material fact required to be stated in the
Registration Statement or necessary to make the statements contained therein, in
light of the circumstances in which they were made, not misleading.
ARTICLE IX.
CHOICE OF LAW/JURISDICTION
Section 9.1. GOVERNING LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of Delaware without regard
to the principles of conflict of laws. The parties further agree that any action
between them shall be heard in Hudson County, New Jersey, and expressly consent
to the jurisdiction and venue of the Superior Court of New Jersey, sitting in
Hudson County, New Jersey and the United States District Court of New Jersey,
sitting in Newark, New Jersey, for the adjudication of any civil action asserted
pursuant to this paragraph.
ARTICLE X.
ASSIGNMENT; TERMINATION
Section 10.1. ASSIGNMENT. Neither this Agreement nor any rights of the
Company hereunder may be assigned to any other Person.
Section 10.2. TERMINATION. Provided that there are no Advance Notices
pending the Company shall have the right, upon thirty (30) calendar days prior
written notice to the Investor, to terminate this Agreement. The obligations of
the Investor to make Advances under Article II hereof shall terminate
twenty-four (24) months after the Effective Date.
ARTICLE XI.
NOTICES
Section 11.1. NOTICES. Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile,
provided a copy is mailed by U.S. certified mail, return receipt requested;
(iii) three (3) days after being sent by U.S. certified mail, return receipt
requested, or (iv) one (1) day after deposit with a nationally recognized
overnight delivery service, in each
21
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If to the Company, to: Kiwa Bio-Tech Products Group Corporation
17700 Castleton Street - Suite 589
City of Industry, CA 91748
Attention: James Zhan
Telephone: (626) 964-3232
Facsimile: (626) 965-9877
With a copy to: Stubbs Alderton & Markiles, LLP
15821 Ventura Blvd., Suite 525
Encino, CA 91436
Attention: V. Joseph Stubbs, Esq.
Telephone: (818) 444-4507
Facsimile: (818) 474-8607
If to the Investor(s): Cornell Capital Partners, LP
101 Hudson Street -Suite 3700
Jersey City, NJ 07302
Attention: Mark Angelo
Portfolio Manager
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
With a Copy to: Butler Gonzalez LLP
1416 Morris Avenue - Suite 207
Union, NJ 07083
Attention: David Gonzalez, Esq.
Telephone: (908) 810-8588
Facsimile: (908) 810-0973
Each party shall provide five (5) days' prior written notice to the other party
of any change in address or facsimile number.
ARTICLE XII.
MISCELLANEOUS
Section 12.1. COUNTERPARTS. This Agreement may be executed in two or
more identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof, though failure to deliver such copies shall not affect the
validity of this Agreement.
22
Section 12.2. ENTIRE AGREEMENT; AMENDMENTS. This Agreement supersedes
all other prior oral or written agreements between the Investor, the Company,
their affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor the Investor makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
Section 12.3. REPORTING ENTITY FOR THE COMMON STOCK. The reporting
entity relied upon for the determination of the trading price or trading volume
of the Common Stock on any given Trading Day for the purposes of this Agreement
shall be Bloomberg, L.P. or any successor thereto. The written mutual consent of
the Investor and the Company shall be required to employ any other reporting
entity.
Section 12.4. FEES AND EXPENSES. The Company hereby agrees to pay the
following fees:
(a) LEGAL FEES. Each of the parties shall pay its own fees and
expenses (including the fees of any attorneys, accountants, appraisers or others
engaged by such party) in connection with this Agreement and the transactions
contemplated hereby, except that the Company will pay Fifteen Thousand Dollars
($15,000) to Butler Gonzalez LLP for legal, administrative, and escrow fees of
which Two Thousand Five Hundred Dollars ($2,500) shall be paid on the date
hereof and Twelve Thousand Five Hundred Dollars ($12,5000) upon the first to
occur of i) sixty (60) calendar days from the date the registration statement,
filed pursuant to the Registration Rights Agreement dated the date hereof, is
filed with the United States Securities and Exchange Commission or ii) one
hundred twenty (120) calendar days from the date hereof. Subsequently on each
advance date, the Company will pay Butler Gonzalez LLP, the sum of Five Hundred
Dollars ($500) for legal, administrative and escrow fees directly out the
proceeds of any Advances hereunder.
(b) COMMITMENT FEES.
(i) On each Advance Date the Company shall pay to the
Investor, directly from the gross proceeds held in escrow, an amount equal to
four percent (4%) of the amount of each Advance. The Company hereby agrees that
if such payment, as is described above, is not made by the Company on the
Advance Date, such payment will be made at the direction of the Investor as
outlined and mandated by Section 2.3 of this Agreement.
(ii) Upon the execution of this Agreement the Company
shall issue to the Investor shares of the Company's Common Stock in an amount
equal to Two Hundred Sixty Five Thousand Dollars ($265,000) divided by the VWAP
of the Company's Common Stock, as quoted by Bloomberg, LP, on the date hereof
(the "INVESTOR'S SHARES").
(iii) RESTRICTION ON SALE OF THE INVESTOR'S SHARES.
Upon the Investor being entitled to sell Investor's Shares pursuant to an
effective registration statement if the VWAP of the Company's Common Stock is
below $0.50 the Investor shall only be entitled to
23
sell, every seven (7) calendar days, an amount of Investor's Shares equal to
Fifty Thousand Dollars ($50,000). In the event that the VWAP of the Company's
Common Stock is $0.50 or greater the Investor shall be entitled to sell
Investor's Shares free of any limitation and/or restriction contained herein.
Notwithstanding the foregoing in the event that the Investor's Shares are not
being sold pursuant to an effective registration statement the Investor shall
not be subject to the VWAP restrictions contained herein but shall sell pursuant
the volume restrictions of Rule 144.
(iii) FULLY EARNED. The Investor's Shares shall be
deemed fully earned as of the date hereof.
(iv) REGISTRATION RIGHTS. The Investor's Shares will
have "piggy-back" registration rights.
(v) DUE DILIGENCE FEE. Upon the submission of the due
diligence package the Company paid to the Investor Two Thousand Five Hundred
Dollars ($2,500) in order to defray the costs of due diligence.
Section 12.5. BROKERAGE. Each of the parties hereto represents that it
has had no dealings in connection with this transaction with any finder or
broker who will demand payment of any fee or commission from the other party.
The Company on the one hand, and the Investor, on the other hand, agree to
indemnify the other against and hold the other harmless from any and all
liabilities to any person claiming brokerage commissions or finder's fees on
account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby.
Section 12.6. CONFIDENTIALITY. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information without retaining copies thereof, previously furnished by it
as a result of this Agreement or in connection herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
24
IN WITNESS WHEREOF, the parties hereto have caused this Standby Equity
Distribution Agreement to be executed by the undersigned, thereunto duly
authorized, as of the date first set forth above.
COMPANY:
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
/s/ Wei Li
By: ----------------------------------------------
Name: Wei Li
Title: President and Chief Executive Officer
INVESTOR:
CORNELL CAPITAL PARTNERS, LP
BY: YORKVILLE ADVISORS, LLC
ITS: GENERAL PARTNER
By: /s/ Mark Angelo
----------------------------------------------
Name: Mark Angelo
Title: Portfolio Manager
25
EXHIBIT A
ADVANCE NOTICE/COMPLIANCE CERTIFICATE
KIWA BIO-TECH PRODUCTS GROUP CORPORATION.
The undersigned, _______________________ hereby certifies, with respect
to the sale of shares of Common Stock of Kiwa Bio-Tech Products Group
Corporation (the "COMPANY"), issuable in connection with this Advance Notice and
Compliance Certificate dated ___________________ (the "NOTICE"), delivered
pursuant to the Standby Equity Distribution Agreement (the "AGREEMENT"), as
follows:
1. The undersigned is the duly elected President of the Company.
2. There are no fundamental changes to the information set forth in the
Registration Statement which would require the Company to file a post effective
amendment to the Registration Statement.
3. The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Advance Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in the Agreement.
4. The Advance requested is _____________________.
The undersigned has executed this Certificate this ____ day of
_________________.
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
By:
Name:
Title:
SCHEDULE 2.6
KIWA BIO -TECH PRODUCTS GROUP CORPORATION
The undersigned hereby agrees that for a period commencing on the date
hereof and expiring on the termination of the Agreement dated July __, 2004
between Kiwa Bio-Tech Products Group Corporation, (the "Company"), and Cornell
Capital Partners, LP, (the "INVESTOR") (the "LOCK-UP PERIOD"), he, she or it
will not, directly or indirectly, without the prior written consent of the
Investor, issue, offer, agree or offer to sell, sell, grant an option for the
purchase or sale of, transfer, pledge, assign, hypothecate, distribute or
otherwise encumber or dispose of except pursuant to Rule 144 of the General
Rules and Regulations under the Securities Act of 1933, any securities of the
Company, including common stock or options, rights, warrants or other securities
underlying, convertible into, exchangeable or exercisable for or evidencing any
right to purchase or subscribe for any common stock (whether or not beneficially
owned by the undersigned), or any beneficial interest therein (collectively, the
"SECURITIES").
In order to enable the aforesaid covenants to be enforced, the
undersigned hereby consents to the placing of legends and/or stop-transfer
orders with the transfer agent of the Company's securities with respect to any
of the Securities registered in the name of the undersigned or beneficially
owned by the undersigned, and the undersigned hereby confirms the undersigned's
investment in the Company.
Dated: _______________, 2004
Signature
Address:
City, State, Zip Code:
Print Social Security Number
or Taxpayer I.D. Number
EXHIBIT 10.2
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
PLACEMENT AGENT AGREEMENT
Dated as of: July 6, 2004
Newbridge Securities Corporation
1451 Cypress Creek Road, Suite 204
Fort Lauderdale, Florida 33309
Ladies and Gentlemen:
The undersigned, Kiwa Bio-Tech Products Group Corporation, a Utah
corporation in the process of reincorporating in Delaware (the "Company"),
hereby agrees with Newbridge Securities Corporation (the "Placement Agent") and
Cornell Capital Partners, LP, a Delaware Limited Partnership (the "Investor"),
as follows:
1. Offering. The Company hereby engages the Placement Agent to
act as its exclusive placement agent in connection with the Standby Equity
Distribution Agreement dated the date hereof (the "Standby Equity Distribution
Agreement"), pursuant to which the Company shall issue and sell to the Investor,
from time to time, and the Investor shall purchase from the Company (the
"Offering") up to Ten Million U.S. Dollars ($10,000,000) of the Company's common
stock (the "Commitment Amount"), par value US$0.001 per share (the "Common
Stock"), at price per share equal to the Purchase Price, as that term is defined
in the Standby Equity Distribution Agreement. The Placement Agent services shall
consist of reviewing the terms of the Standby Equity Distribution Agreement and
advising the Company with respect to those terms.
All capitalized terms used herein and not otherwise defined herein
shall have the same meaning ascribed to them as in the Standby Equity
Distribution Agreement. The Investor will be granted certain registration rights
with respect to the Common Stock as more fully set forth in the Registration
Rights Agreement between the Company and the Investor dated the date hereof (the
"Registration Rights Agreement"). The documents to be executed and delivered in
connection with the Offering, including, but not limited, to the Company's
latest Quarterly Report on Form 10-QSB as filed with the United States
Securities and Exchange Commission, this Agreement, the Standby Equity
Distribution Agreement, the Registration Rights Agreement, and the Escrow
Agreement dated the date hereof (the "Escrow Agreement"), are referred to
sometimes hereinafter collectively as the "Offering Materials." The Company's
Common Stock purchased by the Investor hereunder or to be issued in connection
with the conversion of any debentures are sometimes referred to hereinafter as
the "Securities." The Placement Agent shall not be obligated to sell any
Securities.
2. Compensation.
A. Upon the execution of this Agreement, the Company
shall issue to the Placement Agent or its designee shares of the Company's
Common Stock in an amount equal to
Ten Thousand U.S. Dollars (US$10,000) divided by the volume weighted average
price of the Company's Common Stock as quoted by Bloomberg, LP on the date
hereof (the "Placement Agent's Shares"). The Placement Agent shall be entitled
to "piggy-back" registration rights, which shall be triggered upon registration
of any shares of Common Stock by the Investor with respect to the Placement
Agent's Shares pursuant to the Registration Rights Agreement dated the date
hereof.
3. Representations, Warranties and Covenants of the Placement
Agent.
A. The Placement Agent represents, warrants and
covenants as follows:
(i) The Placement Agent has the necessary power
to enter into this Agreement and to consummate the transactions contemplated
hereby.
(ii) The execution and delivery by the Placement
Agent of this Agreement and the consummation of the transactions contemplated
herein will not result in any violation of, or be in conflict with, or
constitute a default under, any agreement or instrument to which the Placement
Agent is a party or by which the Placement Agent or its properties are bound, or
any judgment, decree, order or, to the Placement Agent's knowledge, any statute,
rule or regulation applicable to the Placement Agent. This Agreement when
executed and delivered by the Placement Agent, will constitute the legal, valid
and binding obligations of the Placement Agent, enforceable in accordance with
their respective terms, except to the extent that (a) the enforceability hereof
or thereof may be limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws from time to time in effect and affecting the rights of
creditors generally, (b) the enforceability hereof or thereof is subject to
general principles of equity, or (c) the indemnification provisions hereof or
thereof may be held to be in violation of public policy.
(iii) Upon receipt and execution of this
Agreement, the Placement Agent will promptly forward copies of this Agreement to
the Company or its counsel and the Investor or its counsel.
(iv) The Placement Agent will not intentionally
take any action that it reasonably believes would cause the Offering to violate
the provisions of the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934 (the "1934 Act"), the respectie rules and
regulations promulgated thereunder (the "Rules and Regulations") or applicable
"Blue Sky" laws of any state or jurisdiction.
(v) The Placement Agent is a member of the
National Association of Securities Dealers, Inc., and is a broker-dealer
registered as such under the 1934 Act and under the securities laws of the
states in which the Securities will be offered or sold by the Placement Agent
unless an exemption for such state registration is available to the Placement
Agent. The Placement Agent is in material compliance with the rules and
regulations applicable to the Placement Agent generally and applicable to the
Placement Agent's participation in the Offering.
2
4. Representations and Warranties of the Company.
A. The Company represents and warrants as follows:
(i) The execution, delivery and performance of
each of this Agreement, the Standby Equity Distribution Agreement, the Escrow
Agreement, and the Registration Rights Agreement has been or will be duly and
validly authorized by the Company and is, or with respect to this Agreement, the
Standby Equity Distribution Agreement, the Escrow Agreement, and the
Registration Rights Agreement, will be a valid and binding agreement of the
Company, enforceable in accordance with its respective terms, except to the
extent that (a) the enforceability hereof or thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws from time to
time in effect and affecting the rights of creditors generally, (b) the
enforceability hereof or thereof is subject to general principles of equity or
(c) the indemnification provisions hereof or thereof may be held to be in
violation of public policy. The Securities to be issued pursuant to the
transactions contemplated by this Agreement and the Standby Equity Distribution
Agreement have been duly authorized and, when issued and paid for in accordance
with this Agreement, the Standby Equity Distribution Agreement and the
certificates/instruments representing such Securities, will be valid and binding
obligations of the Company, enforceable in accordance with their respective
terms, except to the extent that (1) the enforceability thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or similar laws from time
to time in effect and affecting the rights of creditors generally, and (2) the
enforceability thereof is subject to general principles of equity. All corporate
action required to be taken for the authorization, issuance and sale of the
Securities has been duly and validly taken by the Company.
(ii) The Company has a duly authorized, issued
and outstanding capitalization as set forth herein and in the Standby Equity
Distribution Agreement. The Company is not a party to or bound by any
instrument, agreement or other arrangement providing for it to issue any capital
stock, rights, warrants, options or other securities, except for this Agreement,
the agreements described herein and as described in the Standby Equity
Distribution Agreement, dated the date hereof and the agreements described
therein. All issued and outstanding securities of the Company, have been duly
authorized and validly issued and are fully paid and non-assessable; the holders
thereof have no rights of rescission or preemptive rights with respect thereto
and are not subject to personal liability solely by reason of being security
holders; and none of such securities were issued in violation of the preemptive
rights of any holders of any security of the Company.
(iii) The Common Stock to be issued in accordance
with this Agreement and the Standby Equity Distribution Agreement has been duly
authorized and, when issued and paid for in accordance with this Agreement and
the Standby Equity Distribution Agreement, the certificates/instruments
representing such Common Stock will be validly issued, fully-paid and
non-assessable; the holders thereof will not be subject to personal liability
solely by reason of being such holders; such Securities are not and will not be
subject to the preemptive rights of any holder of any security of the Company.
(iv) The Company has good and marketable title
to, or valid and enforceable leasehold estates in, all items of real and
personal property necessary to conduct its
3
business (including, without limitation, any real or personal property stated in
the Offering Materials to be owned or leased by the Company), free and clear of
all liens, encumbrances, claims, security interests and defects of any material
nature whatsoever, other than those set forth in the Offering Materials and
liens for taxes not yet due and payable.
(v) There is no litigation or governmental
proceeding pending or, to the best of the Company's knowledge, threatened
against, or involving the properties or business of the Company, except as set
forth in the Offering Materials.
(vi) The Company has been duly organized and is
validly existing as a corporation in good standing under the laws of the State
of Utah. Except as set forth in the Offering Materials, the Company does not own
or control, directly or indirectly, an interest in any other corporation,
partnership, trust, joint venture or other business entity. The Company is duly
qualified or licensed and in good standing as a foreign corporation in each
jurisdiction in which the character of its operations requires such
qualification or licensing and where failure to so qualify would have a material
adverse effect on the Company. The Company has all requisite corporate power and
authority, and all material and necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental regulatory
officials and bodies (domestic and foreign) to conduct its businesses (and
proposed business) as described in the Offering Materials. Any disclosures in
the Offering Materials concerning the effects of foreign, federal, state and
local regulation on the Company's businesses as currently conducted and as
contemplated are correct in all material respects and do not omit to state a
material fact. The Company has all corporate power and authority to enter into
this Agreement, the Standby Equity Distribution Agreement, the Registration
Rights Agreement, and the Escrow Agreement, to carry out the provisions and
conditions hereof and thereof, and all consents, authorizations, approvals and
orders required in connection herewith and therewith have been obtained. No
consent, authorization or order of, and no filing with, any court, government
agency or other body is required by the Company for the issuance of the
Securities or execution and delivery of the Offering Materials except for
applicable federal and state securities laws. The Company, since its inception,
has not incurred any liability arising under or as a result of the application
of any of the provisions of the 1933 Act, the 1934 Act or the Rules and
Regulations.
(vii) There has been no material adverse change in
the condition or prospects of the Company, financial or otherwise, from the
latest dates as of which such condition or prospects, respectively, are set
forth in the Offering Materials, and the outstanding debt, the property and the
business of the Company conform in all material respects to the descriptions
thereof contained in the Offering Materials.
(viii) Except as set forth in the Offering
Materials, the Company is not in breach of, or in default under, any term or
provision of any material indenture, mortgage, deed of trust, lease, note, loan
or Standby Equity Distribution Agreement or any other material agreement or
instrument evidencing an obligation for borrowed money, or any other material
agreement or instrument to which it is a party or by which it or any of its
properties may be bound or affected. The Company is not in violation of any
provision of its charter or by-laws or in violation of any franchise, license,
permit, judgment, decree or order, or in violation of any material statute, rule
or regulation. Neither the execution and delivery of the Offering Materials nor
the issuance and sale or delivery of the Securities, nor the consummation of any
of the
4
transactions contemplated in the Offering Materials nor the compliance by the
Company with the terms and provisions hereof or thereof, has conflicted with or
will conflict with, or has resulted in or will result in a breach of, any of the
terms and provisions of, or has constituted or will constitute a default under,
or has resulted in or will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or pursuant to
the terms of any indenture, mortgage, deed of trust, note, loan or any other
agreement or instrument evidencing an obligation for borrowed money, or any
other agreement or instrument to which the Company may be bound or to which any
of the property or assets of the Company is subject except (a) where such
default, lien, charge or encumbrance would not have a material adverse effect on
the Company and (b) as described in the Offering Materials; nor will such action
result in any violation of the provisions of the charter or the by-laws of the
Company or, assuming the due performance by the Placement Agent of its
obligations hereunder, any material statute or any material order, rule or
regulation applicable to the Company of any court or of any foreign, federal,
state or other regulatory authority or other government body having jurisdiction
over the Company.
(ix) Subsequent to the dates as of which
information is given in the Offering Materials, and except as may otherwise be
indicated or contemplated herein or therein and the securities offered pursuant
to the Securities Purchase Agreement dated the date hereof, the Company has not
(a) issued any securities or incurred any liability or obligation, direct or
contingent, for borrowed money, or (b) entered into any transaction other than
in the ordinary course of business, or (c) declared or paid any dividend or made
any other distribution on or in respect of its capital stock. Except as
described in the Offering Materials, the Company has no outstanding obligations
to any officer or director of the Company.
(x) There are no claims for services in the
nature of a finder's or origination fee with respect to the sale of the Common
Stock or any other arrangements, agreements or understandings that may affect
the Placement Agent's compensation, as determined by the National Association of
Securities Dealers, Inc.
(xi) The Company owns or possesses, free and
clear of all liens or encumbrances and rights thereto or therein by third
parties, the requisite licenses or other rights to use all trademarks, service
marks, copyrights, service names, trade names, patents, patent applications and
licenses necessary to conduct its business (including, without limitation, any
such licenses or rights described in the Offering Materials as being owned or
possessed by the Company) and, except as set forth in the Offering Materials,
there is no claim or action by any person pertaining to, or proceeding, pending
or threatened, which challenges the exclusive rights of the Company with respect
to any trademarks, service marks, copyrights, service names, trade names,
patents, patent applications and licenses used in the conduct of the Company's
businesses (including, without limitation, any such licenses or rights described
in the Offering Materials as being owned or possessed by the Company) except any
claim or action that would not have a material adverse effect on the Company;
the Company's current products, services or processes do not infringe or will
not infringe on the patents currently held by any third party.
(xii) Except as described in the Offering
Materials, the Company is not under any obligation to pay royalties or fees of
any kind whatsoever to any third party with respect to any trademarks, service
marks, copyrights, service names, trade names, patents, patent
5
applications, licenses or technology it has developed, uses, employs or intends
to use or employ, other than to their respective licensors.
(xiii) Subject to the performance by the Placement
Agent of its obligations hereunder the offer and sale of the Securities
complies, and will continue to comply, in all material respects with the
requirements of Rule 506 of Regulation D promulgated by the SEC pursuant to the
1933 Act and any other applicable federal and state laws, rules, regulations and
executive orders. Neither the Offering Materials nor any amendment or supplement
thereto nor any documents prepared by the Company in connection with the
Offering will contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. All statements of material facts in the Offering Materials are
true and correct as of the date of the Offering Materials.
(xiv) All material taxes which are due and payable
from the Company have been paid in full or adequate provision has been made for
such taxes on the books of the Company, except for those taxes disputed in good
faith by the Company
(xv) None of the Company nor any of its officers,
directors, employees or agents, nor any other person acting on behalf of the
Company, has, directly or indirectly, given or agreed to give any money, gift or
similar benefit (other than legal price concessions to customers in the ordinary
course of business) to any customer, supplier, employee or agent of a customer
or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or other person who is or may be
in a position to help or hinder the business of the Company (or assist it in
connection with any actual or proposed transaction) which (A) might subject the
Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, or (B) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in any of the financial statements contained in the Offering
Materials, or (C) if not continued in the future, might adversely affect the
assets, business, operations or prospects of the Company in the future.
5. Representations, Warranties and Covenants of the Investor.
A. The Investor represents, warrants and covenants as
follows:
(i) The Investor has the necessary power to
enter into this Agreement and to consummate the transactions contemplated
hereby.
(ii) The execution and delivery by the Investor
of this Agreement and the consummation of the transactions contemplated herein
will not result in any violation of, or be in conflict with, or constitute a
default under, any agreement or instrument to which the Investor is a party or
by which the Investor or its properties are bound, or any judgment, decree,
order or, to the Investor's knowledge, any statute, rule or regulation
applicable to the Investor. This Agreement when executed and delivered by the
Investor, will constitute the legal, valid and binding obligations of the
Investor, enforceable in accordance with their respective terms, except to the
extent that (a) the enforceability hereof or thereof may be limited by
bankruptcy,
6
insolvency, reorganization, moratorium or similar laws from time to time in
effect and affecting the rights of creditors generally, (b) the enforceability
hereof or thereof is subject to general principles of equity, or (c) the
indemnification provisions hereof or thereof may be held to be in violation of
public policy.
(iii) The Investor will promptly forward copies of
any and all due diligence questionnaires compiled by the Investor to the
Placement Agent.
(iv) The Investor is an Accredited Investor (as
defined under the 1933 Act).
(v) The Investor is acquiring the Securities for
the Inventor's own account as principal, not as a nominee or agent, for
investment purposes only, and not with a view to, or for, resale, distribution
or fractionalization thereof in whole or in part and no other person has a
direct or indirect beneficial interest in such Securities. Further, the Investor
does not have any contract, undertaking, agreement or arrangement with any
person to sell, transfer or grant participations to such person or to any third
person, with respect to any of the Securities.
(vi) The Investor acknowledges the Investor's
understanding that the offering and sale of the Securities is intended to be
exempt from registration under the 1933 Act by virtue of Section 3(b) of the
1933 Act and the provisions of Regulation D promulgated thereunder ("Regulation
D"). In furtherance thereof, the Investor represents and warrants as follows:
(a) The Investor has the financial
ability to bear the economic risk of the Investor's investment, has adequate
means for providing for the Inventor's current needs and personal contingencies
and has no need for liquidity with respect to the Investor's investment in the
Company; and
(b) The Investor has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of the prospective investment. The Inventor also represents it
has not been organized for the purpose of acquiring the Securities.
(vii) The Investor has been given the opportunity for a
reasonable time prior to the date hereof to ask questions of, and receive
answers from, the Company or its representatives concerning the terms and
conditions of the Offering, and other matters pertaining to this investment, and
has been given the opportunity for a reasonable time prior to the date hereof to
obtain such additional information in connection with the Company in order for
the Investor to evaluate the merits and risks of purchase of the Securities, to
the extent the Company possesses such information or can acquire it without
unreasonable effort or expense. The Investor is not relying on the Placement
Agent or any of its affiliates with respect to the accuracy or completeness of
the Offering Materials or for any economic considerations involved in this
investment.
7
6. Certain Covenants and Agreements of the Company.
The Company covenants and agrees at its expense and without any expense
to the Placement Agent as follows:
A. During the Registration Period, as this term is
defined in the Registration Rights Agreement dated the date hereof, advise the
Placement Agent and the Investor of any material adverse change in the Company's
financial condition, prospects or business or of any development materially
affecting the Company or rendering untrue or misleading any material statement
in the Offering Materials occurring at any time as soon as the Company is either
informed or becomes aware thereof.
B. To use its commercially reasonable efforts to cause
the Common Stock issuable in connection with the Standby Equity Distribution
Agreement to be qualified or registered for sale on terms consistent with those
stated in the Registration Rights Agreement and under the securities laws of
such jurisdictions as the Placement Agent and the Investor shall reasonably
request. Qualification, registration and exemption charges and fees shall be at
the sole cost and expense of the Company.
C. During the Registration Period, as this term is
defined in the Registration Rights Agreement dated the date hereof, upon written
request, to provide and continue to provide the Placement Agent and the Investor
copies of all quarterly financial statements and audited annual financial
statements prepared by or on behalf of the Company, other reports prepared by or
on behalf of the Company for public disclosure and all documents delivered to
the Company's stockholders.
D. To deliver, during the Registration Period, as this
term is defined in the Registration Rights Agreement dated the date hereof, of
the Standby Equity Distribution Agreement, to the Investor upon the Investor's
request, within forty five (45) days, a statement of its income for each such
quarterly period, and its balance sheet and a statement of changes in
stockholders' equity as of the end of such quarterly period, all in reasonable
detail, certified by its principal financial or accounting officer; (ii) within
ninety (90) days after the close of each fiscal year, its balance sheet as of
the close of such fiscal year, together with a statement of income, a statement
of changes in stockholders' equity and a statement of cash flow for such fiscal
year, such balance sheet, statement of income, statement of changes in
stockholders' equity and statement of cash flow to be in reasonable detail and
accompanied by a copy of the certificate or report thereon of independent
auditors if audited financial statements are prepared; and (iii) a copy of all
documents, reports and information furnished to its stockholders at the time
that such documents, reports and information are furnished to its stockholders.
E. To comply with the terms of the Offering Materials.
F. During the Registration Period, as this term is
defined in the Registration Rights Agreement dated the date hereof, to ensure
that any transactions between or among the Company, or any of its officers,
directors and affiliates be on terms and conditions that are no less favorable
to the Company, than the terms and conditions that would be available in an
"arm's length" transaction with an independent third party.
8
7. Indemnification and Limitation of Liability.
A. The Company hereby agrees that it will indemnify and
hold the Placement Agent and each officer, director, shareholder, employee or
representative of the Placement Agent and each person controlling, controlled by
or under common control with the Placement Agent within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act or the SEC's Rules and
Regulations promulgated thereunder (the "Rules and Regulations"), harmless from
and against any and all loss, claim, damage, liability, cost or expense
whatsoever (including, but not limited to, any and all reasonable legal fees and
other expenses and disbursements incurred in connection with investigating,
preparing to defend or defending any action, suit or proceeding, including any
inquiry or investigation, commenced or threatened, or any claim whatsoever or in
appearing or preparing for appearance as a witness in any action, suit or
proceeding, including any inquiry, investigation or pretrial proceeding such as
a deposition) to which the Placement Agent or such indemnified person of the
Placement Agent may become subject under the 1933 Act, the 1934 Act, the Rules
and Regulations, or any other federal or state law or regulation, common law or
otherwise, arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in (a) Section 4 of this
Agreement, (b) the Offering Materials (except those written statements relating
to the Placement Agent given by the Placement Agent for inclusion therein), (c)
any application or other document or written communication executed by the
Company or based upon written information furnished by the Company filed in any
jurisdiction in order to qualify the Common Stock under the securities laws
thereof, or any state securities commission or agency; (ii) the omission or
alleged omission from documents described in clauses (a), (b) or (c) above of a
material fact required to be stated therein or necessary to make the statements
therein not misleading; or (iii) the breach of any representation, warranty,
covenant or agreement made by the Company in this Agreement. The Company further
agrees that upon demand by an indemnified person, at any time or from time to
time, it will promptly reimburse such indemnified person for any loss, claim,
damage, liability, cost or expense actually and reasonably paid by the
indemnified person as to which the Company has indemnified such person pursuant
hereto. Notwithstanding the foregoing provisions of this Paragraph 7(A), any
such payment or reimbursement by the Company of fees, expenses or disbursements
incurred by an indemnified person in any proceeding in which a final judgment by
a court of competent jurisdiction (after all appeals or the expiration of time
to appeal) is entered against the Placement Agent or such indemnified person
based upon specific finding of fact that the Placement Agent or such indemnified
person's gross negligence or willful misfeasance will be promptly repaid to the
Company.
B. The Placement Agent hereby agrees that it will
indemnify and hold the Company and each officer, director, shareholder, employee
or representative of the Company, and each person controlling, controlled by or
under common control with the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act or the Rules and Regulations, harmless
from and against any and all loss, claim, damage, liability, cost or expense
whatsoever (including, but not limited to, any and all reasonable legal fees and
other expenses and disbursements incurred in connection with investigating,
preparing to defend or defending any action, suit or proceeding, including any
inquiry or investigation, commenced or threatened, or any claim whatsoever or in
appearing or preparing for appearance as a witness in any action, suit or
proceeding, including any inquiry, investigation or pretrial proceeding such as
a deposition) to which the Company or such indemnified person of the Company may
become subject
9
under the 1933 Act, the 1934 Act, the Rules and Regulations, or any other
federal or state law or regulation, common law or otherwise, arising out of or
based upon (i) the material breach of any representation, warranty, covenant or
agreement made by the Placement Agent in this Agreement, or (ii) any false or
misleading information provided to the Company in writing by one of the
Placement Agent's indemnified persons specifically for inclusion in the Offering
Materials.
C. The Investor hereby agrees that it will indemnify and
hold the Placement Agent and each officer, director, shareholder, employee or
representative of the Placement Agent, and each person controlling, controlled
by or under common control with the Placement Agent within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and
Regulations, harmless from and against any and all loss, claim, damage,
liability, cost or expense whatsoever (including, but not limited to, any and
all reasonable legal fees and other expenses and disbursements incurred in
connection with investigating, preparing to defend or defending any action, suit
or proceeding, including any inquiry or investigation, commenced or threatened,
or any claim whatsoever or in appearing or preparing for appearance as a witness
in any action, suit or proceeding, including any inquiry, investigation or
pretrial proceeding such as a deposition) to which the Placement Agent or such
indemnified person of the Placement Agent may become subject under the 1933 Act,
the 1934 Act, the Rules and Regulations, or any other federal or state law or
regulation, common law or otherwise, arising out of or based upon (i) the
conduct of the Investor or its officers, employees or representatives in its
acting as the Investor for the Offering, (ii) the material breach of any
representation, warranty, covenant or agreement made by the Investor in the
Offering Materials, or (iii) any false or misleading information provided to the
Placement Agent by one of the Investor's indemnified persons.
D. The Placement Agent hereby agrees that it will
indemnify and hold the Investor and each officer, director, shareholder,
employee or representative of the Investor, and each person controlling,
controlled by or under common control with the Investor within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act or the Rules and
Regulations, harmless from and against any and all loss, claim, damage,
liability, cost or expense whatsoever (including, but not limited to, any and
all reasonable legal fees and other expenses and disbursements incurred in
connection with investigating, preparing to defend or defending any action, suit
or proceeding, including any inquiry or investigation, commenced or threatened,
or any claim whatsoever or in appearing or preparing for appearance as a witness
in any action, suit or proceeding, including any inquiry, investigation or
pretrial proceeding such as a deposition) to which the Investor or such
indemnified person of the Investor may become subject under the 1933 Act, the
1934 Act, the Rules and Regulations, or any other federal or state law or
regulation, common law or otherwise, arising out of or based upon the material
breach of any representation, warranty, covenant or agreement made by the
Placement Agent in this Agreement.
E. Promptly after receipt by an indemnified party of
notice of commencement of any action covered by Section 7(A), (B), (C) or (D),
the party to be indemnified shall, within five (5) business days, notify the
indemnifying party of the commencement thereof; the omission by one (1)
indemnified party to so notify the indemnifying party shall not relieve the
indemnifying party of its obligation to indemnify any other indemnified party
that has given such notice and shall not relieve the indemnifying party of any
10
liability outside of this indemnification if not materially prejudiced thereby.
In the event that any action is brought against the indemnified party, the
indemnifying party will be entitled to participate therein and, to the extent it
may desire, to assume and control the defense thereof with counsel chosen by it
which is reasonably acceptable to the indemnified party. After notice from the
indemnifying party to such indemnified party of its election to so assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under such Section 7(A), (B), (C), or (D) for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof, but the indemnified party may, at its own expense, participate in such
defense by counsel chosen by it, without, however, impairing the indemnifying
party's control of the defense. Subject to the proviso of this sentence and
notwithstanding any other statement to the contrary contained herein, the
indemnified party or parties shall have the right to choose its or their own
counsel and control the defense of any action, all at the expense of the
indemnifying party if (i) the employment of such counsel shall have been
authorized in writing by the indemnifying party in connection with the defense
of such action at the expense of the indemnifying party, or (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying party; provided, however, that the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstance, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys at any time for all such indemnified parties. No
settlement of any action or proceeding against an indemnified party shall be
made without the consent of the indemnifying party.
F. In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in
Section 7(A) or 7(B) is due in accordance with its terms but is for any reason
held by a court to be unavailable on grounds of policy or otherwise, the Company
and the Placement Agent shall contribute to the aggregate losses, claims,
damages and liabilities (including legal or other expenses reasonably incurred
in connection with the investigation or defense of same) which the other may
incur in such proportion so that the Placement Agent shall be responsible for
such percent of the aggregate of such losses, claims, damages and liabilities as
shall equal the percentage of the gross proceeds paid to the Placement Agent and
the Company shall be responsible for the balance; provided, however, that no
person guilty of fraudulent misrepresentation within the meaning of Section
11(f) of the 1933 Act shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. For purposes of this Section
7(F), any person controlling, controlled by or under common control with the
Placement Agent, or any partner, director, officer, employee, representative or
any agent of any thereof, shall have the same rights to contribution as the
Placement Agent and each person controlling, controlled by or under common
control with the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act and each officer of the Company and each director of
the Company shall have the same rights to contribution as the Company. Any party
entitled to contribution will, promptly after receipt of
11
notice of commencement of any action, suit or proceeding against such party in
respect of which a claim for contribution may be made against the other party
under this Section 7(D), notify such party from whom contribution may be sought,
but the omission to so notify such party shall not relieve the party from whom
contribution may be sought from any obligation they may have hereunder or
otherwise if the party from whom contribution may be sought is not materially
prejudiced thereby.
G. The indemnity and contribution agreements contained
in this Section 7 shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any indemnified person or any
termination of this Agreement.
H. Each of the parties hereby waives, to the fullest
extent permitted by law, any right to or claim of any punitive, exemplary,
incidental, indirect, special, consequential or other damages (including,
without limitation, loss of profits) against the Placement Agent and each
officer, director, shareholder, employee or representative of the other party
and each person controlling, controlled by or under common control with the
other party within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act or the Rules and Regulations arising out of any cause whatsoever
(whether such cause be based in contract, negligence, strict liability, other
tort or otherwise). Notwithstanding anything to the contrary contained herein,
the aggregate liability of the Placement Agent and each officer, director,
shareholder, employee or representative of the Placement Agent and each person
controlling, controlled by or under common control with the Placement Agent
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
or the Rules and Regulations shall not exceed the compensation received by the
Placement Agent pursuant to Section 2 hereof. This limitation of liability shall
apply regardless of the cause of action, whether contract, tort (including,
without limitation, negligence) or breach of statute or any other legal or
equitable obligation.
8. Payment of Expenses.
The Company hereby agrees to bear all of the expenses in connection
with the Offering, including, but not limited to the following: filing fees,
printing and duplicating costs, advertisements, postage and mailing expenses
with respect to the transmission of Offering Materials, registrar and transfer
agent fees, escrow agent fees and expenses, fees of the Company's counsel and
accountants, issue and transfer taxes, if any.
9. Conditions of Closing.
The Closing shall be held at the offices of the Investor or its
counsel. The obligations of the Placement Agent hereunder shall be subject to
the continuing accuracy of the representations and warranties of the Company and
the Investor herein as of the date hereof and as of the Date of Closing (the
"Closing Date") with respect to the Company or the Investor, as the case may be,
as if it had been made on and as of such Closing Date; the accuracy on and as of
the Closing Date of the statements of the officers of the Company made pursuant
to the provisions hereof; and the performance by the Company and the Investor on
and as of the Closing Date of its covenants and obligations hereunder and to the
following further conditions:
A. Upon the effectiveness of a registration statement
covering the Standby Equity Distribution Agreement, the Investor and the
Placement Agent shall receive the opinion
12
of Counsel to the Company, dated as of the date thereof, which opinion shall be
in form and substance reasonably satisfactory to the Investor, their counsel and
the Placement Agent.
B. At or prior to the Closing, the Investor and the
Placement Agent shall have been furnished such documents, certificates and
opinions as it may reasonably require for the purpose of enabling them to review
or pass upon the matters referred to in this Agreement and the Offering
Materials, or in order to evidence the accuracy, completeness or satisfaction of
any of the representations, warranties or conditions herein contained.
C. At and prior to the Closing, (i) there shall have
been no material adverse change nor development involving a prospective change
in the condition or prospects or the business activities, financial or
otherwise, of the Company from the latest dates as of which such condition is
set forth in the Offering Materials; (ii) there shall have been no transaction,
not in the ordinary course of business except the transactions pursuant to the
Securities Purchase Agreement entered into by the Company on the date hereof
which has not been disclosed in the Offering Materials or to the Placement Agent
in writing; (iii) except as set forth in the Offering Materials, the Company
shall not be in default under any provision of any instrument relating to any
outstanding indebtedness for which a waiver or extension has not been otherwise
received; (iv) except as set forth in the Offering Materials, the Company shall
not have issued any securities (other than those to be issued as provided in the
Offering Materials) or declared or paid any dividend or made any distribution of
its capital stock of any class and there shall not have been any change in the
indebtedness (long or short term) or liabilities or obligations of the Company
(contingent or otherwise) and trade payable debt; (v) no material amount of the
assets of the Company shall have been pledged or mortgaged, except as indicated
in the Offering Materials; and (v) no action, suit or proceeding, at law or in
equity, against the Company or affecting any of its properties or businesses
shall be pending or threatened before or by any court or federal or state
commission, board or other administrative agency, domestic or foreign, wherein
an unfavorable decision, ruling or finding could materially adversely affect the
businesses, prospects or financial condition or income of the Company, except as
set forth in the Offering Materials.
D. If requested at Closing the Investor and the
Placement Agent shall receive a certificate of the Company signed by an
executive officer and chief financial officer, dated as of the applicable
Closing, to the effect that the conditions set forth in subparagraph (C) above
have been satisfied and that, as of the applicable closing, the representations
and warranties of the Company set forth herein are true and correct.
E. The Placement Agent shall have no obligation to
insure that (x) any check, note, draft or other means of payment for the Common
Stock will be honored, paid or enforceable against the Investor in accordance
with its terms, or (y) subject to the performance of the Placement Agent's
obligations and the accuracy of the Placement Agent's representations and
warranties hereunder, (1) the Offering is exempt from the registration
requirements of the 1933 Act or any applicable state "Blue Sky" law or (2) the
Investor is an Accredited Investor.
10. Termination.
This Agreement shall be co-terminus with, and terminate upon the same
terms and conditions as those set forth in, the Standby Equity Distribution
Agreement. The rights of the
13
Investor and the obligations of the Company under the Registration Rights
Agreement, and the rights of the Placement Agent and the obligations of the
Company shall survive the termination of this Agreement unabridged for the life
of the Standby Equity Distribution Agreement.
11. Miscellaneous.
A. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all which
shall be deemed to be one and the same instrument.
B. Any notice required or permitted to be given
hereunder shall be given in writing and shall be deemed effective when deposited
in the United States mail, postage prepaid, or when received if personally
delivered or faxed (upon confirmation of receipt received by the sending party),
addressed as follows to such other address of which written notice is given to
the others):
If to Placement Agent, to: Newbridge Securities Corporation
1451 Cypress Creek Road, Suite 204
Fort Lauderdale, Florida 33309
Attention: Doug Aguililla
Telephone: (954) 334-3450
Facsimile: (954) 229-9937
If to the Company, to: Kiwa Bio-Tech Products Group Corporation
17700 Castleton Street - Suite 589
City of Industry, California 91748
Attention: James Zhan
Telephone: (626) 964-3232
Facsimile: (626) 965-9877
With a copy to: Stubbs Alderton & Markiles, LLP
15821 Ventura Blvd., Suite 525
Encino, CA 91436
Attention: V. Joseph Stubbs, Esq.
Telephone: (818) 444-4507
Facsimile: (818) 474-8607
If to the Investor: Cornell Capital Partners, LP
101 Hudson Street - Suite 3700
Jersey City, New Jersey 07302
Attention: Mark A. Angelo
Portfolio Manager
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
14
With copies to: Butler Gonzalez LLP
1416 Morris Avenue - Suite 207
Union, New Jersey 07083
Attention: David Gonzalez, Esq.
Facsimile: (908) 810-0973
C. This Agreement shall be governed by and construed in
all respects under the laws of the State of Delaware, without reference to its
conflict of laws rules or principles. Any suit, action, proceeding or litigation
arising out of or relating to this Agreement shall be brought and prosecuted in
such federal or state court or courts located within the State of New Jersey as
provided by law. The parties hereby irrevocably and unconditionally consent to
the jurisdiction of each such court or courts located within the State of New
Jersey and to service of process by registered or certified mail, return receipt
requested, or by any other manner provided by applicable law, and hereby
irrevocably and unconditionally waive any right to claim that any suit, action,
proceeding or litigation so commenced has been commenced in an inconvenient
forum.
D. This Agreement and the other agreements referenced
herein contain the entire understanding between the parties hereto and may not
be modified or amended except by a writing duly signed by the party against whom
enforcement of the modification or amendment is sought.
E. If any provision of this Agreement shall be held to
be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
15
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
COMPANY:
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
/s/ Wei Li
By: --------------------------------------
Name: Wei Li
Title: President and Chief Executive
Officer
PLACEMENT AGENT:
NEWBRIDGE SECURITIES CORPORATION
/s/ Guy S. Amico
By: --------------------------------------
Name: Guy S. Amico
Title: President
INVESTOR:
CORNELL CAPITAL PARTNERS, LP
By: Yorkville Advisors, LLC
Its: General Partner
/s/ Mark A. Angelo
By: --------------------------------------
Name: Mark A. Angelo
Title: Portfolio Manager
16
EXHIBIT 10.3
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of July 6,
2004 by and between KIWA BIO-TECH PRODUCTS GROUP CORPORATION, a Utah corporation
in the process of reincorporating in Delaware, with its principal office located
at 17700 Castleton Street - Suite 589 City of Industry, California 91748 (the
"Company"), and CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership
(the "Investor").
WHEREAS:
A. In connection with the Standby Equity Distribution Agreement
by and between the parties hereto of even date herewith (the "Standby Equity
Distribution Agreement"), the Company has agreed, upon the terms and subject to
the conditions of the Standby Equity Distribution Agreement, to issue and sell
to the Investor that number of shares of the Company's common stock, par value
US$0.001 per share (the "Common Stock"), which can be purchased pursuant to the
terms of the Standby Equity Distribution Agreement for an aggregate purchase
price of up to Ten Million U.S. Dollars ($10,000,000). Capitalized terms not
defined herein shall have the meaning ascribed to them in the Standby Equity
Distribution Agreement.
B. To induce the Investor to execute and deliver the Standby
Equity Distribution Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and the rules
and regulations thereunder, or any similar successor statute (collectively, the
"1933 Act"), and applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Investor hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the following
meanings:
a. "Person" means a corporation, a limited liability
company, an association, a partnership, an organization, a business, an
individual, a governmental or political subdivision thereof or a governmental
agency.
b. "Register," "registered," and "registration" refer to
a registration effected by preparing and filing one or more Registration
Statements (as defined below) in compliance with the 1933 Act and pursuant to
Rule 415 under the 1933 Act or any successor rule providing for offering
securities on a continuous or delayed basis ("Rule 415"), and the declaration or
ordering of effectiveness of such Registration Statement(s) by the United States
Securities and Exchange Commission (the "SEC").
c. "Registrable Securities" means the Investor's Shares,
as defined in the Standby Equity Distribution Agreement and shares of Common
Stock issuable to Investors pursuant to the Standby Equity Distribution
Agreement.
d. "Registration Statement" means a registration
statement under the 1933 Act which covers the Registrable Securities.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare and
file with the SEC a Registration Statement on Form S-1, SB-2 or on such other
form as is available. The Company shall cause such Registration Statement to be
declared effective by the SEC prior to the first sale to the Investor of the
Company's Common Stock pursuant to the Standby Equity Distribution Agreement.
b. Sufficient Number of Shares Registered. In the event
the number of shares available under a Registration Statement filed pursuant to
Section 2(a) is insufficient to cover all of the Registrable Securities which
the Investor has purchased pursuant to the Standby Equity Distribution
Agreement, the Company shall amend the Registration Statement, or file a new
Registration Statement (on the short form available therefore, if applicable),
or both, so as to cover all of such Registrable Securities which the Investor
has purchased pursuant to the Standby Equity Distribution Agreement as soon as
practicable, but in any event not later than fifteen (15) days after the
necessity therefore arises. The Company shall use commercially reasonable
efforts to cause such amendment and/or new Registration Statement to become
effective as soon as practicable following the filing thereof. For purposes of
the foregoing provision, the number of shares available under a Registration
Statement shall be deemed "insufficient to cover all of the Registrable
Securities" if at any time the number of Registrable Securities issuable on an
Advance Notice Date is greater than the number of shares available for resale
under such Registration Statement.
3. RELATED OBLIGATIONS.
a. The Company shall keep the Registration Statement
effective pursuant to Rule 415 at all times until the date on which the Investor
shall have sold all the Registrable Securities covered by such Registration
Statement (the "Registration Period"), which Registration Statement (including
any amendments or supplements thereto and prospectuses contained therein) shall
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein, or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading.
b. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to a
Registration Statement and the prospectus used in connection with such
Registration Statement, which prospectus is to be filed pursuant to Rule 424
promulgated under the 1933 Act, as may be necessary to keep such Registration
Statement effective at all times during the Registration Period, and, during
such period, comply with the provisions of the 1933 Act with respect to the
disposition of all Registrable Securities of the Company covered by such
Registration Statement until such time as all of such Registrable Securities
shall have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in such Registration
Statement. In the case of amendments and supplements to a Registration Statement
which are required to be filed pursuant to this Agreement (including pursuant to
this Section 3(b)) by reason of the
2
Company's filing a report on Form 10-KSB, Form 10-QSB or Form 8-K or any
analogous report under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the Company shall have incorporated such report by reference into
the Registration Statement, if applicable, or shall file such amendments or
supplements with the SEC on the same day on which the 1934 Act report is filed
which created the requirement for the Company to amend or supplement the
Registration Statement.
c. The Company shall furnish to the Investor without
charge, (i) at least one copy of such Registration Statement as declared
effective by the SEC and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference, all
exhibits and each preliminary prospectus, (ii) ten (10) copies of the final
prospectus included in such Registration Statement and all amendments and
supplements thereto (or such other number of copies as such Investor may
reasonably request) and (iii) such other documents as such Investor may
reasonably request from time to time in order to facilitate the disposition of
the Registrable Securities owned by such Investor.
d. The Company shall use its best efforts to (i)
register and qualify the Registrable Securities covered by a Registration
Statement under such other securities or "blue sky" laws of such jurisdictions
in the United States as the Investor reasonably requests, (ii) prepare and file
in those jurisdictions, such amendments (including post-effective amendments)
and supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (w) make any change to its certificate of incorporation or by-laws,
(x) qualify to do business in any jurisdiction where it would not otherwise be
required to qualify but for this Section 3(d), (y) subject itself to general
taxation in any such jurisdiction, or (z) file a general consent to service of
process in any such jurisdiction. The Company shall promptly notify the Investor
of the receipt by the Company of any notification with respect to the suspension
of the registration or qualification of any of the Registrable Securities for
sale under the securities or "blue sky" laws of any jurisdiction in the United
States or its receipt of actual notice of the initiation or threat of any
proceeding for such purpose.
e. As promptly as practicable after becoming aware of
such event or development, the Company shall notify the Investor in writing of
the happening of any event as a result of which the prospectus included in a
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (provided that in no event shall such
notice contain any material, nonpublic information), and promptly prepare a
supplement or amendment to such Registration Statement to correct such untrue
statement or omission, and deliver ten (10) copies of such supplement or
amendment to each Investor. The Company shall also promptly notify the Investor
in writing (i) when a prospectus or any prospectus supplement or post-effective
amendment has been filed, and when a Registration Statement or any
post-effective amendment has become effective (notification of such
effectiveness shall be delivered to the Investor by
3
facsimile on the same day of such effectiveness), (ii) of any request by the SEC
for amendments or supplements to a Registration Statement or related prospectus
or related information, and (iii) of the Company's reasonable determination that
a post-effective amendment to a Registration Statement would be appropriate.
f. The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, or the suspension of the qualification of any of the
Registrable Securities for sale in any jurisdiction within the United States of
America and, if such an order or suspension is issued, to obtain the withdrawal
of such order or suspension at the earliest possible moment and to notify the
Investor of the issuance of such order and the resolution thereof or its receipt
of actual notice of the initiation or threat of any proceeding for such purpose.
g. At the reasonable request of the Investor, the
Company shall furnish to the Investor, on the date of the effectiveness of the
Registration Statement and thereafter from time to time on such dates as the
Investor may reasonably request (i) a letter, dated such date, from the
Company's independent certified public accountants in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, and (ii) an opinion, dated as of such date, of
counsel representing the Company for purposes of such Registration Statement, in
form, scope and substance as is customarily given in an underwritten public
offering, addressed to the Investor.
h. The Company shall make available for inspection by
(i) the Investor and (ii) one firm of accountants or other agents retained by
the Investor (collectively, the "Inspectors") all pertinent financial and other
records, and pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably deemed necessary by each
Inspector, and cause the Company's officers, directors and employees to supply
all information which any Inspector may reasonably request; provided, however,
that each Inspector shall agree, and the Investor hereby agrees, to hold in
strict confidence and shall not make any disclosure (except to an Investor) or
use of any Record or other information which the Company determines in good
faith to be confidential, and of which determination the Inspectors are so
notified, unless (a) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission in any Registration Statement or is otherwise
required under the 1933 Act, (b) the release of such Records is ordered pursuant
to a final, non-appealable subpoena or order from a court or government body of
competent jurisdiction, or (c) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other agreement of which the Inspector and the Investor has knowledge.
The Investor agrees that it shall, upon learning that disclosure of such Records
is sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to the Company and allow the Company, at
its expense, to undertake appropriate action to prevent disclosure of, or to
obtain a protective order for, the Records deemed confidential.
i. The Company shall hold in confidence and not make any
disclosure of information concerning the Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration
4
Statement, (iii) the release of such information is ordered pursuant to a
subpoena or other final, non-appealable order from a court or governmental body
of competent jurisdiction, or (iv) such information has been made generally
available to the public other than by disclosure in violation of this Agreement
or any other agreement. The Company agrees that it shall, upon learning that
disclosure of such information concerning the Investor is sought in or by a
court or governmental body of competent jurisdiction or through other means,
give prompt written notice to the Investor and allow the Investor, at the
Investor's expense, to undertake appropriate action to prevent disclosure of, or
to obtain a protective order for, such information.
j. The Company shall use commercially reasonable efforts
either to cause all the Registrable Securities covered by a Registration
Statement (i) to be listed on each securities exchange on which securities of
the same class or series issued by the Company are then listed, if any, if the
listing of such Registrable Securities is then permitted under the rules of such
exchange or to secure the inclusion for quotation on the National Association of
Securities Dealers, Inc. OTC Bulletin Board for such Registrable Securities. The
Company shall pay all fees and expenses in connection with satisfying its
obligation under this Section 3(j).
k. The Company shall cooperate with the Investor to the
extent applicable, to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legend) representing the Registrable
Securities to be offered pursuant to a Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as the
Investor may reasonably request and registered in such names as the Investor may
request.
l. The Company shall use its best efforts to cause the
Registrable Securities covered by the applicable Registration Statement to be
registered with or approved by such other governmental agencies or authorities
as may be necessary to consummate the disposition of such Registrable
Securities.
m. The Company shall make generally available to its
security holders as soon as practical, but not later than ninety (90) days after
the close of the period covered thereby, an earnings statement (in form
complying with the provisions of Rule 158 under the 1933 Act) covering a
twelve-month period beginning not later than the first day of the Company's
fiscal quarter next following the effective date of the Registration Statement.
n. The Company shall otherwise use its best efforts to
comply with all applicable rules and regulations of the SEC in connection with
any registration hereunder.
o. Within two (2) business days after a Registration
Statement which covers Registrable Securities is ordered effective by the SEC,
the Company shall deliver, and shall cause legal counsel for the Company to
deliver, to the transfer agent for such Registrable Securities (with copies to
the Investor) confirmation that such Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
p. The Company shall take all other reasonable actions
necessary to expedite and facilitate disposition by the Investor of Registrable
Securities pursuant to a Registration Statement.
5
4. OBLIGATIONS OF THE INVESTOR.
The Investor agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(f) or the first
sentence of 3(e), the Investor will immediately discontinue disposition of
Registrable Securities pursuant to any Registration Statement(s) covering such
Registrable Securities until the Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e) or receipt of
notice that no supplement or amendment is required. Notwithstanding anything to
the contrary, the Company shall cause its transfer agent to deliver unlegended
certificates for shares of Common Stock to a transferee of the Investor in
accordance with the terms of the Standby Equity Distribution Agreement in
connection with any sale of Registrable Securities with respect to which the
Investor has entered into a contract for sale prior to the Investor's receipt of
a notice from the Company of the happening of any event of the kind described in
Section 3(f) or the first sentence of 3(e) and for which the Investor has not
yet settled.
5. EXPENSES OF REGISTRATION.
All expenses incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers, legal and accounting
fees shall be paid by the Company.
6. INDEMNIFICATION.
With respect to Registrable Securities which are included in a
Registration Statement under this Agreement:
a. To the fullest extent permitted by law, the Company
will, and hereby does, indemnify, hold harmless and defend the Investor, the
directors, officers, partners, employees, agents, representatives of, and each
Person, if any, who controls the Investor within the meaning of the 1933 Act or
the 1934 Act (each, an "Indemnified Person"), against any losses, claims,
damages, liabilities, judgments, fines, penalties, charges, costs, reasonable
attorneys' fees, amounts paid in settlement or expenses, joint or several
(collectively, "Claims") incurred in investigating, preparing or defending any
action, claim, suit, inquiry, proceeding, investigation or appeal taken from the
foregoing by or before any court or governmental, administrative or other
regulatory agency, body or the SEC, whether pending or threatened, whether or
not an indemnified party is or may be a party thereto ("Indemnified Damages"),
to which any of them may become subject insofar as such Claims (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out of
or are based upon: (i) any untrue statement or alleged untrue statement of a
material fact in a Registration Statement or any post-effective amendment
thereto or in any filing made in connection with the qualification of the
offering under the securities or other "blue sky" laws of any jurisdiction in
which Registrable Securities are offered ("Blue Sky Filing"), or the omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; (ii) any untrue
statement or alleged untrue statement of a material fact contained in any final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements
6
therein were made, not misleading; or (iii) any violation or alleged violation
by the Company of the 1933 Act, the 1934 Act, any other law, including, without
limitation, any state securities law, or any rule or regulation there under
relating to the offer or sale of the Registrable Securities pursuant to a
Registration Statement (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). The Company shall reimburse the Investor and
each such controlling person promptly as such expenses are incurred and are due
and payable, for any legal fees or disbursements or other reasonable expenses
incurred by them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (x) shall not apply to a Claim by an
Indemnified Person arising out of or based upon a Violation which occurs in
reliance upon and in conformity with information furnished in writing to the
Company by such Indemnified Person expressly for use in connection with the
preparation of the Registration Statement or any such amendment thereof or
supplement thereto; (y) shall not be available to the extent such Claim is based
on a failure of the Investor to deliver or to cause to be delivered the
prospectus made available by the Company, if such prospectus was timely made
available by the Company pursuant to Section 3(e); and (z) shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of the Company, which consent shall not be
unreasonably withheld. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of the Indemnified Person.
b. In connection with a Registration Statement, the
Investor agrees to indemnify, hold harmless and defend, to the same extent and
in the same manner as is set forth in Section 6(a), the Company, each of its
directors, each of its officers who signs the Registration Statement and each
Person, if any, who controls the Company within the meaning of the 1933 Act or
the 1934 Act (each an "Indemnified Party"), against any Claim or Indemnified
Damages to which any of them may become subject, under the 1933 Act, the 1934
Act or otherwise, insofar as such Claim or Indemnified Damages arise out of or
is based upon any Violation, in each case to the extent, and only to the extent,
that such Violation occurs in reliance upon and in conformity with written
information furnished to the Company by the Investor expressly for use in
connection with such Registration Statement; and, subject to Section 6(d), the
Investor will reimburse any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such Claim; provided, however,
that the indemnity agreement contained in this Section 6(b) and the agreement
with respect to contribution contained in Section 7 shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of the Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall be liable under
this Section 6(b) for only that amount of a Claim or Indemnified Damages as does
not exceed the net proceeds to the Investor as a result of the sale of
Registrable Securities pursuant to such Registration Statement. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of such Indemnified Party. Notwithstanding anything to the contrary
contained herein, the indemnification agreement contained in this Section 6(b)
with respect to any prospectus shall not inure to the benefit of any Indemnified
Party if the untrue statement or omission of material fact contained in the
prospectus was corrected and such new prospectus was delivered to the Investor
prior to the Investor's use of the prospectus to which the Claim relates.
7
c. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action or proceeding (including any governmental action or proceeding) involving
a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in
respect thereof is to be made against any indemnifying party under this Section
6, deliver to the indemnifying party a written notice of the commencement
thereof, and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel mutually satisfactory to the indemnifying party and the Indemnified
Person or the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses of not more than one counsel for such
Indemnified Person or Indemnified Party to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Indemnified
Party or Indemnified Person shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the Indemnified Party or Indemnified Person which
relates to such action or claim. The indemnifying party shall keep the
Indemnified Party or Indemnified Person fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. No
indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its prior written consent, provided, however, that
the indemnifying party shall not unreasonably withhold, delay or condition its
consent. No indemnifying party shall, without the prior written consent of the
Indemnified Party or Indemnified Person, consent to entry of any judgment or
enter into any settlement or other compromise which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party or Indemnified Person of a release from all liability in
respect to such claim or litigation. Following indemnification as provided for
hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
d. The indemnification required by this Section 6 shall
be made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or Indemnified Damages
are incurred.
e. The indemnity agreements contained herein shall be in
addition to (i) any cause of action or similar right of the Indemnified Party or
Indemnified Person against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.
8
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no seller of Registrable Securities guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investor the benefits of Rule
144 promulgated under the 1933 Act or any similar rule or regulation of the SEC
that may at any time permit the Investors to sell securities of the Company to
the public without registration ("Rule 144") the Company agrees to:
a. make and keep public information available, as those
terms are understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and
other documents required of the Company under the 1933 Act and the 1934 Act so
long as the Company remains subject to such requirements (it being understood
that nothing herein shall limit the Company's obligations under Section 6.3 of
the Standby Equity Distribution Agreement) and the filing of such reports and
other documents is required for the applicable provisions of Rule 144; and
c. furnish to the Investor so long as the Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the Investor to sell such securities pursuant to Rule 144 without
registration.
9. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof
may be waived (either generally or in a particular instance and either
retroactively or prospectively), only by a written agreement between the Company
and the Investor. Any amendment or waiver effected in accordance with this
Section 9 shall be binding upon the Investor and the Company. No consideration
shall be offered or paid to any Person to amend or consent to a waiver or
modification of any provision of any of this Agreement unless the same
consideration also is offered to all of the parties to this Agreement.
9
10. MISCELLANEOUS.
a. A Person is deemed to be a holder of Registrable
Securities whenever such Person owns or is deemed to own of record such
Registrable Securities. If the Company receives conflicting instructions,
notices or elections from two or more Persons with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
b. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered: (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); or (iii) one business day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
If to the Company, to: Kiwa Bio-Tech Products Group Corporation
17700 Castleton Street - Suite 589
City of Industry, CA 91748
Attention: James Zhan
Telephone: (626) 964-3232
Facsimile: (626) 965-9877
With a copy to: Stubbs Alderton & Markiles, LLP
15821 Ventura Blvd., Suite 525
Encino, CA 91436
Attention: V. Joseph Stubbs, Esq.
Telephone: (818) 444-4507
Facsimile: (818) 474-8607
If to the Investor, to: Cornell Capital Partners, LP
101 Hudson Street - Suite 3700
Jersey City, NJ 07302
Attention: Mark Angelo
Portfolio Manager
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
With a copy to: Butler Gonzalez LLP
1416 Morris Avenue - Suite 207
Union, NJ 07083
Attention: David Gonzalez, Esq.
Telephone: (908) 810-8588
Facsimile: (908) 810-0973
10
Any party may change its address by providing written notice to the other
parties hereto at least five days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by a courier or overnight courier service shall be rebuttable evidence
of personal service, receipt by facsimile or receipt from a nationally
recognized overnight delivery service in accordance with clause (i), (ii) or
(iii) above, respectively.
c. Failure of any party to exercise any right or remedy
under this Agreement or otherwise, or delay by a party in exercising such right
or remedy, shall not operate as a waiver thereof.
d. The corporate laws of the State of Delaware shall
govern all issues concerning the relative rights of the Company and the
Investor. All other questions concerning the construction, validity, enforcement
and interpretation of this Agreement shall be governed by the internal laws of
the State of New Jersey, without giving effect to any choice of law or conflict
of law provision or rule (whether of the State of New Jersey or any other
jurisdiction) that would cause the application of the laws of any jurisdiction
other than the State of New Jersey. Each party hereby irrevocably submits to the
non-exclusive jurisdiction of the Superior Courts of the State of New Jersey,
sitting in Hudson County, New Jersey and the Federal District Court for the
District of New Jersey sitting in Newark, New Jersey, for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.
e. This Agreement, the Standby Equity Distribution
Agreement, the Escrow Agreement, and the Placement Agent Agreement constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof and thereof. There are no restrictions, promises, warranties or
undertakings, other than those set forth or referred to herein and therein. This
Agreement, the Standby Equity Distribution Agreement, the Escrow Agreement, and
the Placement Agent Agreement supersede all prior agreements and understandings
among the parties hereto with respect to the subject matter hereof and thereof.
11
f. This Agreement shall inure to the benefit of and be
binding upon the permitted successors and assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by facsimile transmission of a copy
of this Agreement bearing the signature of the party so delivering this
Agreement.
i. Each party shall do and perform, or cause to be done
and performed, all such further acts and things, and shall execute and deliver
all such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. The language used in this Agreement will be deemed to
be the language chosen by the parties to express their mutual intent and no
rules of strict construction will be applied against any party.
k. This Agreement is intended for the benefit of the
parties hereto and their respective permitted successors and assigns, and is not
for the benefit of, nor may any provision hereof be enforced by, any other
Person.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
12
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY:
KIWA BIO-TECH PRODUCTS GROUP CORPORATION
/s/ Wei Li
By: --------------------------------------
Name: Wei Li
Title: President and Chief Executive
Officer
INVESTOR:
CORNELL CAPITAL PARTNERS, LP
By: Yorkville Advisors, LLC
Its: General Partner
/s/ Mark Angelo
By: --------------------------------------
Name: Mark Angelo
Title: Portfolio Manager
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
Attention:
Re: KIWA BIO-TECH PRODUCTS GROUP CORPORATION.
Ladies and Gentlemen:
We are counsel to Kiwa Bio-Tech Products Group Corporation., a Delaware
corporation (the "Company"), and have represented the Company in connection with
that certain Standby Equity Distribution Agreement (the "Standby Equity
Distribution Agreement") entered into by and between the Company and Cornell
Capital Partners, LP (the "Investor") pursuant to which the Company issued to
the Investor shares of its Common Stock, par value US$____ per share (the
"Common Stock"). Pursuant to the Standby Equity Distribution Agreement, the
Company also has entered into a Registration Rights Agreement with the Investor
(the "Registration Rights Agreement") pursuant to which the Company agreed,
among other things, to register the Registrable Securities (as defined in the
Registration Rights Agreement) under the Securities Act of 1933, as amended (the
"1933 Act"). In connection with the Company's obligations under the Registration
Rights Agreement, on ____________ ____, the Company filed a Registration
Statement on Form ________ (File No. 333-_____________) (the "Registration
Statement") with the Securities and Exchange Commission (the "SEC") relating to
the Registrable Securities which names the Investor as a selling stockholder
thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
By:
cc: Cornell Capital Partners, LP
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT OF
GROBSTEIN, HORWATH & COMPANY LLP
We hereby consent to the incorporation by reference in this Form SB-2 of our
report dated March 19, 2004, except notes 13 and 16 which are as of April 30,
2004, with respect to the consolidated balance sheet of Kiwa Bio-Tech Products
Group Ltd. as of December 31, 2003, and the related consolidated statements of
operations and deficit accumulated during the development stage, cash flows and
stockholders' equity (deficit) for the year ended December 31, 2003.
We also consent to the reference to our Firm under the captions "Experts" in
such Prospectus.
/S/ GROBSTEIN, HORWATH & COMPANY LLP
July 30, 2004
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