This
prospectus relates to the resale by the selling stockholders of up to 3,818,275
shares of our common stock, par value $0.001 per share, including up to
1,796,835 shares of common stock issuable upon the exercise of common stock
purchase warrants. The selling stockholders may sell common stock from time to
time in the principal market on which the stock is traded at the prevailing
market price or in negotiated transactions. The selling stockholders may be
deemed underwriters of the shares of common stock, which they are offering. We
will pay the expenses of registering these shares.
We are not selling any shares of common stock in this offering and therefore
will not receive any proceeds from the sale of common stock hereunder. We may
receive proceeds from any exercise of outstanding warrants. The warrants may
also be exercised by surrender of the warrants in exchange for an equal value of
shares in accordance with the terms of the warrants. Our common stock is
currently traded on the NASDAQ under the symbol “CHLN”. The last reported sales
price per share of our common stock as reported by the NASDAQ on December 3,2009 was $4.52.
Investing
in these securities involves significant risks. See “Risk Factors” beginning on
page 6.
No
other underwriter or person has been engaged to facilitate the sale of shares of
common stock in this offering. None of the proceeds from the sale of stock by
the selling stockholders will be placed in escrow, trust or any similar
account.
We
may amend or supplement this prospectus from time to time by filing amendments
or supplements as required. You should read the entire prospectus and any
amendments or supplements carefully before you make your investment
decision.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this Prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
Market
for China Housing & Land Development, Inc.'s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
31
Management
32
Compensation
Committee Interlocks and Insider Participation
46
Security
Ownership of Certain Beneficial Owners and Management
46
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
47
Other
Expenses of Issuance and Distribution
80
Description
of Property
80
Penny
Stock
80
Legal
Proceedings
81
Disclosure
of Commission Position of Indemnification for Securities Act
Liabilities
83
Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure
83
Transfer
Agent
84
Additional
Information
84
Financial
Statements
F-1
Part
II. Information Not Required in Prospectus
II-1
Exhibit
Index
II-2
You
may only rely on the information contained in this prospectus. We have not
authorized anyone to provide you with different information. This prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the shares of common stock offered by this prospectus.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of common stock in any circumstances in which such
offer or solicitation is unlawful. Neither the delivery of this prospectus nor
any sale made in connection with this prospectus shall, under any circumstances,
create any implication that there has not been a change in our affairs since the
date of this prospectus or that the information contained in this prospectus is
correct as of any time after its date.
1
PROSPECTUS
SUMMARY
The
following summary highlights selected information contained in this prospectus.
This summary does not contain all the information you should consider before
investing in the securities. Before making an investment decision, you should
read the entire prospectus carefully, including the “risk factors” section,
the financial statements and the notes to the financial statements. As used
throughout this prospectus, the terms “China Housing,”“CHLN,” the “Company,”“we,”“us,” and “our” refer to China Housing & Land Development,
Inc.
OUR
COMPANY
Overview
We
are a real estate development company doing business primarily in Xi’an, Shaanxi
province, located in the northwest part of China.
Through
our subsidiaries, Xi’an Tsining Housing Development Co., Ltd. (“Tsining”), Xi’an
New Land Development Co., Ltd (“New Land”), Xi'an Hao Tai Housing Development
Company Inc. ("Hao Tai"), Manstate Assets Management
Limited (“Manstate”), Xi’an Xinxing Property Management Co., Ltd.
(“Xinxing Property”), Puhua (Xi’an) Real Estate Development Co., Ltd (75%
interest) (“Puhua”) and Success Hill Investments Limited (60% interest), we
are engaged in the development, construction, and sale of residential and
commercial real estate units, as well as land development in Shaanxi province,
China. Tsining has completed a number of significant real estate development and
construction projects in Xi’an, the capital of Shaanxi province. Tsining aims to
expand its business into other developing urban markets in western China. New
Land develops land and performs infrastructure projects for local governments.
The infrastructure projects include but not limited to engineering and
installation of water systems, roads, sewer systems, waterway dams and bridges,
and public park facilities.
Our
marketing campaign uses various advertising media to market our property
developments, including newspapers, magazines, television, radio, e-marketing
and outdoor billboards. In addition, we run a successful membership program
which allows existing and potential customers to receive “points” at a discount
that can be redeemed for the purchase of our future property. The program
provides good indication of project sales and better cash liquidity for our
company. After our units are sold or leased, we subcontract property
companies to provide management services. To continue to promote brand quality
and recognition among customers, we have hired a third-party evaluation company
to survey both existing and potential customers in terms of our services and
recognition of our “Tsining” brand.
Our
corporate offices are located at 6 Youyi Lu, Han Yuan 4th Floor, Xi’an, China.
Our telephone number at that location is +86-29-8258-2632.
On
March 9, 2007, the Registrant entered into a Shares Transfer Agreement with the
shareholders of Xi’an New Land Development Co., Ltd. (“New Land”), pursuant to
which the Registrant has acquired 32,000,000 shares of New Land, constituting
100% equity ownership of New Land. The total purchase price for the shares
acquisition is 270 million Renminbi, estimated to be approximately US$34 million
at the current currency exchange rate which is subject to change. The total
purchase price includes the initial cash payment of 5 million Renminbi,
estimated to be approximately US$610,000, payable within 20 days after the
signing of the Shares Transfer Agreement, an additional cash payment of
57 million Renminbi, estimated to be approximately US$7.2 million, payable
within 30 days after the Registrant has received a satisfactory audit report of
New Land, and the issuance of 10% promissory note of the aggregate amount of 208
million Renminbi, estimated to be approximately US$26.2 million, with a maturity
date of January 30, 2009. As of June 30, 2009, the remaining balance
of the note and its interest totaling amounted to $6,929,469 and New Land’s
original shareholders have agreed to extend the maturity date to December 31,2009.
On
May 7, 2007, China Housing & Land Development, Inc. (the “Company”), entered
into securities purchase agreements with accredited investors, and on May 9,2007 (the “Closing Date”), the Company completed the sale of $25,006,978 of
common stock of the Company and common stock purchase warrants. The securities
sold were an aggregate of 9,261,847 shares of common stock and 2,778,554
warrants. Each warrant is exercisable for a period of five (5) years at an
exercise price of $4.50 per share. Cantor Fitzgerald & Co. acted as the
placement agent of the private placement. All of these securities were sold
pursuant to the exemption provided by Section 4(2) under the Securities Act for
a transaction not involving a public offering, and Regulation D promulgated
thereunder.
The
Company is obligated to file a registration statement to register the resale of
shares of the common stock issued in the private placement and the shares of
common stock issuable upon exercise of the warrants granted in the private
placement. If the registration statement is not filed within 45 days from the
Closing Date, or declared effective within 180 days following the Closing Date,
or if the registration ceases to be effective for more than thirty (30) trading
days, the Company is obligated to pay the investors certain fees per month in
the amount of 1% of the principal amount invested. In connection with the
offering, the Company paid a placement fee of 7% of the proceeds in
cash.
The
Company filed a registration statement to register the resale of shares of the
common stock issued in the private placement and the shares of common stock
issuable upon exercise of the warrants granted in the private placement on June22, 2007, which was declared effective on July 5, 2007. The current prospectus
is not offering the shares issued in connection with this private
placement
On January 28, 2008, China Housing & Land Development, Inc. (the “Company”)
entered into a Securities Purchase Agreement (the “Agreement”) with certain
investors (the “Investors”). Pursuant to the Agreement, the Company agreed to
sell to Investors 5.0% Senior Secured Convertible Debt, which is convertible
into shares of the Company’s common stock, for an aggregate purchase price of
US$20,000,000 and to receive, in consideration for such purchase, warrants to
acquire additional shares of common stock. The 5% Senior Secured Convertible
Debt (the “Convertible Debt”) shall bear interest at a rate of 5% per annum
(computed based on the actual days elapsed in a period of 360 days) of the RMB
Notional Principal Amount, payable quarterly in arrears in lawful money of the
United States (“U.S. Dollars”) on the first business day of each calendar
quarter and on the maturity date, in each case in an amount equal to the amount
of such interest as expressed in RMB multiplied by the US$/RMB exchange rate as
of the applicable interest exchange rate determination date. Only US$9 million
of the Convertible Debt is convertible into shares of common stock.
The Convertible Debt is secured by a first priority, perfected
security interest in certain shares of common stock of Pingji Lu, as
evidenced by the pledge agreement (the “Pledge Agreement”). The Convertible
Debt is subject to events of default customary for convertible securities
and for a secured financing. The warrants grant the Investors the
right to acquire shares of common stock at $6.07 per share of common stock,
subject to customary anti-dilution adjustments. The warrants may be exercised to
purchase common stock at any time after January 28, 2008 to and including
February 28, 2013, the expiration date of the warrants.
In
connection with this transaction, the Company and the Investors entered into a
registration rights agreement (the “Registration Rights Agreement”). Pursuant to
the terms and conditions of the Registration Rights Agreement, the Company
agreed to register within 60 calendar days after closing shares of common stock
issuable to the Investors for resale on a Form S-3 Registration Statement to be
effective no later than the 180th day after the closing date of the transaction.
If the Form S-3 is not available at that time, then the Company will file a
Registration Statement on such form as is then available to affect a
registration of the registrable securities, subject to the consent of the
Investors, which consent will not be unreasonably withheld. The Company shall
register an amount of common stock for resale that equals at least 125% of the
sum of shares issuable upon conversion of the Convertible Debt and the exercise
of the warrants. The registration rights granted under the Registration Rights
Agreement are subject to customary exceptions and qualifications and compliance
with certain registration procedures. The Company is subject to the late
registration penalty payment equal to the product of (i) the Investor’s
outstanding principal amount and (ii) the quotient obtained by dividing 12% by
360 (the “Late Payments”).
The
Company commenced negotiations with the Investors in December 2008 for a waiver
for the Late Payments, as the Company and the Investors believed that the
registration would become effective within a short period of time. However, as
the registration has not become effective as of September 2009, the Company has
accrued for the Late Payments. On September 28, 2009, the Company reached a
First Amendment (the “Amendment”) with the Investors to settle the Late
Payments, in the amount of $2,400,000, by the issuance of 614,290 shares of
common stock. The 614,290 common stock was determined by dividing $2,400,000,
the total Late Payments up to September 28, 2009, by 95% of the historical
volume weighted average price (“VWAP”) of the common stock, as determined by
using Bloomberg function VWAP, for the immediate preceding 30 days period. In
accordance with the Amendment, the Investors waived any further Late Payments
against the Company under the Registration Rights Agreement.
In
connection with the offering, the Company paid Merriman Curhan Ford & Co.,
who acted as financial advisor, an advisory fee of 2% of the proceeds in
cash.
Joint
Venture in November 2008
In
November 2008, the Company agreed to form a joint venture with Prax Capital Real
Estate Holding Ltd., to finance the development of the first 79 acres within the
Baqiao project. As planned, the joint venture was formed in late December,
subject to certain conditions and approvals, which were subsequently satisfied;
the completion of the joint venture’s formation was announced in January
2009.
Prax
Capital Real Estate Holdings Limited invested US$29.3 million cash in the joint
venture. The joint venture acquired the land use rights of the 79 acres of land
early in the first quarter 2009 and the joint venture is proceeding with the
project.
On
January 21, 2009, the Company completed the acquisition of Xi’an Xinxing
Property Management Co., Ltd., (“Xinxing”). Xinxing was privately owned and
provides property management services to most of China Housing’s residential and
commercial projects, as well as to other prominent customers such as the
Xi’an branch office building of the People’s Bank of China, China Xi’an
Electric Group headquarters, Shaanxi Bureau of State Taxation offices, and the
Xi’an University of International Studies. Xinxing’s current service area totals
1.67 million square meters in 43 facilities that include residential,
commercial, and school buildings and parks. Xinxing’s revenues in 2008 were RMB
15.42 million, estimated to be approximately US$2.22million, net income was RMB
1.82 million, estimated to be approximately US$0.26 million, and assets at year
end 2008 totaled RMB 11.29 million, estimated to be approximately US$1.65
million. Total consideration for the acquisition was RMB 12.00
million, estimated to be approximately US$1.76 million.
3
ABOUT
OUR RECENT PRIVATE PLACEMENT
On
January 28, 2008, China Housing & Land Development, Inc. (the “Company”)
entered into a Securities Purchase Agreement (the “Agreement”) with certain
investors (the “Investors”). Pursuant to the Agreement, the Company agreed to
sell to Investors 5.0% Senior Secured Convertible Debt, which are convertible
into shares of the Company’s common stock, for an aggregate purchase price of
US$ 20,000,000 and to receive, in consideration for such purchase, warrants to
acquire additional shares of common stock. The 5% Senior Secured
Convertible Debt (the “Convertible Debt”) shall bear interest at a rate of 5%
per annum (computed based on the actual days elapsed in a period of 360 days) of
the RMB Notional Principal Amount, payable quarterly in arrears in lawful money
of the United States (“U.S. Dollars”) on the first business day of each calendar
quarter and on the maturity date, in each case in an amount equal to the amount
of such interest as expressed in RMB multiplied by the US$/RMB
exchange rate as of the applicable interest exchange rate determination
date. Only US$9 million of the Convertible Debt is convertible into shares of
common stock. The conversion price for the Convertible Debt is US$5.57 per
share. The Notes are secured by a first priority, perfected security
interest in certain shares of common stock of Pingji Lu, as evidenced by
the pledge agreement (the “Pledge Agreement”). The Convertible Debt is
subject to events of default customary for convertible securities and for a
secured financing. The warrants grant the Investors the right to
acquire shares of common stock at US$6.07 per share of common stock, subject to
customary anti-dilution adjustments. The warrants may be exercised to purchase
common stock at any time after January 28, 2008 to and including February28, 2013, the expiration date of the warrants.
In
connection with this transaction, the Company and the Investors entered into a
registration rights agreement (the “Registration Rights Agreement”). Pursuant to
the terms and conditions of the Registration Rights Agreement, the Company
agreed to register within 60 calendar days after closing shares of common stock
issuable to the Investors for resale on a Form S-3 Registration Statement to be
effective no later than the 180th day after the closing date of the transaction.
If the Form S-3 is not available at that time, then the Company will file a
Registration Statement on such form as is then available to affect a
registration of the registrable securities, subject to the consent of the
Investors, which consent will not be unreasonably withheld. The Company shall
register an amount of common stock for resale that equals at least 125% of the
sum of shares issuable upon conversion of the Convertible Debt and the exercise
of the warrants. The registration rights granted under the Registration Rights
Agreement are subject to customary exceptions and qualifications and compliance
with certain registration procedures. The Company is subject to the late
registration penalty payment equal to the product of (i) the Investor’s
outstanding principal amount and (ii) the quotient obtained by dividing 12% by
360 (the “Late Payments”).
The
Company commenced negotiations with the Investors in December 2008 for a waiver
for the Late Payments, as the Company and the Investors believed that the
registration would become effective within a short period of time. However, as
the registration has not become effective as of September 2009, the Company has
accrued for the Late Payments. On September 28, 2009, the Company reached a
First Amendment (the “Amendment”) with the Investors to settle the Late
Payments, in the amount of $2,400,000, by the issuance of 614,290 common stock.
The 614,290 common stock was determined by dividing $2,400,000, the total Late
Payments up to September 28, 2009, by 95% of the historical volume weighted
average price (“VWAP”) of the common stock, as determined by using
Bloomberg function VWAP, for the immediate preceding 30 days period. In
accordance with the Amendment, the Investors waived any further Late Payments
against the Company under the Registration Rights Agreement.
Under
this private placement, we received $20,000,000 in the aggregate, with net
proceeds of $19,056,681.49 after deducting $939,808.51 paid for commissions and
legal expenses.
THIS
OFFERING
Common
stock outstanding prior to this offering (on December 3,2009)
31,884,969
(1)
Common
stock being offered for resale to the public
3,818,275
(2)
Common
stock outstanding after this offering
35,703,244
(3)
Percentage
of common stock outstanding before this offering that shares being
registered for resale represent
11.98
%
(1) Excludes
the 2,021,440 conversion shares we are registering under this Registration
Statement in connection with the private placement completed on January 28,2008.
(2) Includes
both the 2,021,440 conversion shares in connection with the private placement
completed on January 28, 2008 and the 1,796,835 shares of common stock to be
issued upon the exercise of the warrants pursuant to the Securities Purchase
Agreement. Of the US$20 million Convertible Debt, only US$9 million of the debt
is convertible into shares of common stock. Based on a conversion price of
approximately $5.57 per share, the US$9 million of debt would be convertible
into 1,617,152 shares. The total number of the warrants we issued in connection
with the placement of the Convertible Debt is exercisable for 1,437,468 shares.
We are registering 125% of both the conversion shares (or 2,021,440 shares) and
the shares issuable upon the exercise of the warrants (or 1,796,835 shares) for
resale as required by the Registration Rights Agreement.
4
(3) Includes
the total of shares being registered in the private placement pursuant to the
Registration Rights Agreement.
Total proceeds raised in the
offering: We will not receive any proceeds from the resale of our common
stock pursuant to this offering. We have received $20,000,000 in gross proceeds
from the Investors under the Securities Purchase Agreement. We may also receive
some proceeds if any of the selling shareholders exercise their Warrants through
cash exercise.
Warrants
Each investor who has been issued a warrant is granted the right to purchase in
the aggregate 1,437,467 shares of our common stock. We have agreed to register
125% of this number, or 1,796,835 shares, according to the registration rights
agreement. The warrant entitles its holder to one share of our common stock upon
exercise. The warrants may be exercised at any time on or after the initial
exercise eligibility date of January 28, 2008 to and including February 28,2013, at an exercise price of $6.07 per share. The exercise price was negotiated
based on the price of the then current underlying common stock of the Company
quoted on the OTC Bulletin Board.
Some of
the statements contained in this Form S-1 that are not historical facts are
“forward-looking statements” which can be identified by the use of terminology
such as “estimates,”“projects,”“plans,”“believes,”“expects,”“anticipates,”“intends,” or the negative or other variations, or by discussions of strategy
that involve risks and uncertainties. We urge you to be cautious of the
forward-looking statements, that such statements, which are contained in this
Form S-1, reflect our current beliefs with respect to future events and
involve known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can be
given regarding the achievement of future results, as actual results may differ
materially as a result of the risks we face, and actual events may differ from
the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance
or achievements, or industry results, to differ materially from those
contemplated by such forward-looking statements include without
limitation:
•
Our
ability to attract and retain management, and to integrate and maintain
technical information and management information
systems;
•
Our
ability to raise capital when needed and on acceptable terms and
conditions;
•
The
intensity of competition; and
•
General
economic conditions.
All
written and oral forward-looking statements made in connection with this Form
S-1 that are attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.
5
RISK
FACTORS
This
investment has a high degree of risk. Before you invest you should carefully
consider the risks and uncertainties described below and the other information
in this prospectus. If any of the following risks actually occur, our business,
operating results and financial condition could be harmed and the value of our
stock could go down. This means you could lose all or a part of your
investment.
Risks
Related to Our Business
Our
home sales and operating revenues could decline due to macro-economic and other
factors outside of our control, such as changes in consumer confidence and
declines in employment levels.
Changes
in national and regional economic conditions, as well as local economic
conditions where the Company conducts its operations and where prospective
purchasers of its homes live, may result in more caution on the part of
homebuyers and consequently fewer home purchases. These economic uncertainties
involve, among other things, conditions of supply and demand in local
markets and changes in consumer confidence and income, employment levels, and
government regulations. These risks and uncertainties could periodically have an
adverse effect on consumer demand for and the pricing of our homes, which could
cause its operating revenues to decline. In addition, builders are subject to
various risks, many of them outside the control of the homebuilder including
competitive overbuilding, availability and cost of building lots, materials and
labor, adverse weather conditions which can cause delays in construction
schedules, cost overruns, changes in government regulations, and increases in
real estate taxes and other local government fees. A reduction in its revenues
could in turn negatively affect the market price of its securities.
An
increase in mortgage interest rates or unavailability of mortgage financing may
reduce consumer demand for the Company’s homes.
Virtually
all purchasers of our homes finance their acquisitions through lenders providing
mortgage financing. A substantial increase in mortgage interest rates or
unavailability of mortgage financing would adversely affect the ability of
prospective homebuyers to obtain the financing they would need in order to
purchase our homes, as well as adversely affect the ability of prospective
move-up homebuyers to sell their current homes. For example, if mortgage
financing became less available, demand for its homes could decline. A reduction
in demand could also have an adverse effect on the pricing of our homes because
we and our competitors may reduce prices in an effort to better compete for home
buyers. A reduction in pricing could result in a decline in revenues and in our
margins.
We
could experience a reduction in home sales and revenues or reduced cash flows if
we are unable to obtain reasonably priced financing to support its homebuilding
and land development activities.
The
real estate development industry is capital intensive, and development requires
significant up-front expenditures to acquire land and begin development.
Accordingly, we incur substantial indebtedness to finance its homebuilding and
land development activities. Although we believe that internally generated funds
and current borrowing capacity will be sufficient to fund our capital and other
expenditures (including land acquisition, development and construction
activities), the amounts available from such sources may not be adequate to meet
our needs. If such sources are not sufficient, we would seek additional capital
in the form of debt or equity financing from a variety of potential sources,
including bank financing and/or securities offerings. The availability of
borrowed funds, to be utilized for land acquisition, development and
construction, may be greatly reduced, and the lending community may require
increased amounts of equity to be invested in a project by borrowers in
connection with new loans. The failure to obtain sufficient capital to fund its
planned capital and other expenditures could have a material adverse effect on
our business.
We
are subject to extensive government regulation which could cause it to incur
significant liabilities or restrict it business activities.
Regulatory
requirements could cause us to incur significant liabilities and operating
expenses and could restrict its business activities. We are subject to statutes
and rules regulating, among other things, certain developmental matters,
building and site design, and matters concerning the protection of health and
the environment. Our operating expenses may be increased by governmental
regulations such as building permit allocation ordinances and impact and other
fees and taxes, which may be imposed to defray the cost of providing certain
governmental services and improvements. Any delay or refusal from government
agencies to grant us necessary licenses, permits and approvals could have
an adverse effect on our operations.
6
We
may require additional capital in the future, which may not be available on
favorable terms or at all.
Our
future capital requirements will depend on many factors, including industry and
market conditions, our ability to successfully implement our new branding and
marketing initiative and expansion of our production capabilities. We anticipate
that we may need to raise additional funds in order to grow our business and
implement our business strategy. We anticipate that any such additional funds
would be raised through equity or debt financings. In addition, we may enter
into a revolving credit facility or a term loan facility with one or more
syndicates of lenders. Any equity or debt financing, if available at all, may be
on terms that are not favorable to us. Even if we are able to raise capital
through equity or debt financings, as to which there can be no assurance, the
interest of existing shareholders in our company may be diluted, and the
securities we issue may have rights, preferences and privileges that are senior
to those of our common stock or may otherwise materially and adversely effect
the holdings or rights of our existing shareholders. If we cannot obtain
adequate capital, we may not be able to fully implement our business strategy,
and our business, results of operations and financial condition would be
adversely affected. See also “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources.” In
addition, we have and will continue to raise additional capital through private
placements or registered offerings, in which broker-dealers will be engaged. The
activities of such broker-dealers are highly regulated and we cannot assure that
the activities of such broker-dealers will not violate relevant regulations and
generate liabilities despite our expectation otherwise.
We
depend on the availability of additional human resources for future
growth.
We
are currently experiencing a period of significant growth in our sales volume.
We believe that continued expansion is essential for us to remain competitive
and to capitalize on the growth potential of our business. Such expansion may
place a significant strain on our management and operations and financial
resources. As our operations continue to grow, we will have to continually
improve our management, operational and financial systems, procedures and
controls, and other resources infrastructure, and expand our workforce. There
can be no assurance that our existing or future management, operating and
financial systems, procedures and controls will be adequate to support our
operations, or that we will be able to recruit, retain and motivate
our personnel. Further, there can be no assurance that we will be able to
establish, develop or maintain the business relationships beneficial to our
operations, or to do so or to implement any of the above activities in a timely
manner. Failure to manage our growth effectively could have a material
adverse effect on our business and the results of our operations and financial
condition.
We
may be adversely affected by the fluctuation in raw material prices and selling
prices of our products.
Our
projects and the raw materials we use have experienced significant price
fluctuations in the past. There is no assurance that they will not be subject to
future price fluctuations or pricing control. The land and raw materials we use
may experience price volatility caused by events such as market fluctuations or
changes in governmental programs. The market price of land and raw materials may
also experience significant upward adjustment, if, for instance, there is a
material under-supply or over-demand in the market. These price changes may
ultimately result in increases in the selling prices of our products, and may,
in turn, adversely affect our sales volume, revenue and operating
profit.
We
could be adversely affected by the occurrence of natural disasters.
From time
to time, our developed sites may experience strong winds, storms, flooding and
earth quakes. Natural disasters could impede operations, damage infrastructure
necessary to our constructions and operations. The occurrence of natural
disasters could adversely affect our business, the results of our operations,
prospects and financial condition, even though we currently have insurance
against damages caused by natural disasters, including typhoons, accidents or
similar events.
We
are dependent on third-party subcontractors, manufacturers, and distributors for
all construction services and supply construction materials, and a discontinued
supply of such services and materials will adversely affect our construction
projects.
The
Company is dependent on third-party subcontractors, manufacturers, and
distributors for all construction services and supply construction materials.
Construction services or products purchased from the Company’s five largest
subcontractors/suppliers accounted for 30% for the year ended December 31,2008. A discontinued supply of such services and materials will adversely
affect our construction projects.
7
Intense
competition from existing and new entities may adversely affect our revenues and
profitability.
In
general, the property development industry is intensely competitive and highly
fragmented. We compete with various companies. Many of our competitors are more
established than we are and have significantly greater financial, technical,
marketing and other resources than we presently possess. Some of our
competitors have greater name recognition and a larger customer base. These
competitors may be able to respond more quickly to new or changing opportunities
and customer requirements and may be able to undertake more extensive
promotional activities, offer more attractive terms to customers, and adopt more
aggressive pricing policies. We intend to create greater awareness for our brand
name so that we can successfully compete with our competitors. We cannot assure
you that we will be able to compete effectively or successfully with current or
future competitors or that the competitive pressures we face will not harm our
business.
Our
operating subsidiary must comply with environmental protection laws that could
adversely affect our profitability.
We
are required to comply with the environmental protection laws and regulations
promulgated by the national and local governments of the People’s Republic of
China (“PRC or “China”). Some of these regulations govern the level of fees
payable to government entities providing environmental protection services and
the prescribed standards relating to the constructions. Although our
construction technologies allow us to efficiently control the level of pollution
resulting from our construction process, due to the nature of our business,
wastes are unavoidably generated in the processes. If we fail to comply with any
of these environmental laws and regulations in the PRC, depending on the types
and seriousness of the violation, we may be subject to, among other things,
warning from relevant authorities, imposition of fines, specific performance
and/or criminal liability, forfeiture of profits made, being ordered to close
down our business operations and suspension of relevant
permits.
Our
success depends on our management team and other key personnel, the loss of any
of whom could disrupt its business operations.
Our
future success will depend in substantial part on the continued service of our
senior management, including Mr. Pingji Lu, our Chairman, and Mr. Feng Xiaohong,
our Chief Executive Officer. The loss of the services of one or more of our key
personnel could impede implementation of our business plan and result in reduced
profitability. We do not carry key person life or other insurance in respect of
any of its officers or employees. Our future success will also depend on the
continued ability to attract, retain and motivate highly qualified technical
sales and marketing customer support. Because of the rapid growth of the economy
in the People’s Republic of China, competition for qualified personnel is
intense. We cannot guarantee that we will be able to retain our key personnel or
that we will be able to attract, assimilate or retain qualified personnel
in the future.
Risk
Relating to the Residential Property Industry in China
We
are heavily dependent on the performance of the residential property market in
China, which is at a relatively early development stage.
The
residential property industry in the PRC is still in a relatively early stage of
development. Although demand for residential property in the PRC has been
growing rapidly in recent years, such growth is often coupled with volatility in
market conditions and fluctuation in property prices. It is extremely difficult
to predict how much and when demand will develop, as many social,
political, economic, legal and other factors, most of which are beyond our
control, may affect the development of the market. The level of uncertainty is
increased by the limited availability of accurate financial and market
information as well as the overall low level of transparency in the PRC,
especially in Tier II cities which have lagged in progress in these aspects when
compared to Tier I cities.
8
The lack
of a liquid secondary market for residential property may discourage investors
from acquiring new properties. The limited amount of property mortgage financing
available to PRC individuals may further inhibit demand for residential
developments.
We
face intense competition from other real estate developers.
The
property industry in the PRC is highly competitive. In the Tier II cities we
focus on, local and regional property developers are our major competitors, and
an increasing number of large state-owned and private national property
developers have started entering these markets. Many of our competitors,
especially the state-owned and private national property developers, are well
capitalized and have greater financial, marketing and other resources than we
have. Some also have larger land banks, greater economies of scale, broader name
recognition, a longer track record and more established relationships in certain
markets. In addition, the PRC government’s recent measures designed to
reduce land supply further increased competition for land among property
developers.
Competition
among property developers may result in increased costs for the acquisition of
land for development, increased costs for raw materials, shortages of skilled
contractors, oversupply of properties, decrease in property prices in certain
parts of the PRC, a slowdown in the rate at which new property developments will
be approved and/or reviewed by the relevant government authorities and an
increase in administrative costs for hiring or retaining qualified personnel,
any of which may adversely affect our business and financial condition.
Furthermore, property developers that are better capitalized than we are may be
more competitive in acquiring land through the auction process. If we cannot
respond to changes in market conditions as promptly and effectively as our
competitors, or effectively compete for land acquisition through the auction
systems and acquire other factors of production, our business and financial
condition will be adversely affected.
In
addition, risk of property over-supply is increasing in parts of China, where
property investment, trading and speculation have become overly active. We are
exposed to the risk that in the event of actual or perceived over-supply,
property prices may fall drastically, and our revenue and profitability will be
adversely affected.
The
PRC government may adopt further measures to curtail the overheating of the
property sector.
Along
with the economic growth in China, investments in the property sectors have
increased significantly in the past few years. In response to concerns over the
scale of the increase in property investments, the PRC government has introduced
policies to curtail property development. We believe the following regulations,
among others, significantly affect the property industry in China.
In May
2006, the Ministry of Construction, National Development and Reform Commission,
or the NDRC, People’s Bank of China (“PBOC”) and other relevant PRC government
authorities jointly issued the Opinions on Adjusting the Housing Supply
Structure and Stabilizing the Property Prices, which introduced measures to
limit resources allocated to the luxury residential market. For instances, the
new measures require that at least 70% of a residential project must consist of
units with a Gross Floor Area (“GFA”) of less than 90 square meters per unit,
and the minimum amount of down payment was increased from 20% to 30% of the
purchase price of the underlying property if it has a unit GFA of 90 square
meters or more. In September 2007, PBOC and China Banking Regulatory Commission
issued the Circular on Strengthening the Management of Commercial Real Estate
Credit Facilities, which increased the minimum down payment for any
purchase of second or subsequent residential property to 40% of the purchase
price if the purchaser had obtained a bank loan to finance the purchase of his
or her first property.
In July
2006, the Ministry of Construction, the Ministry of Commerce, NDRC, PBOC, the
State Administration for Industry and Commerce and State Administration of
Foreign Exchange (“SAFE”) issued Opinions on Regulating the Entry and
Administration of Foreign Investment in Real Property Market, which impose
significant requirements on foreign investment in the PRC real estate sector.
For instance, these opinions set forth requirements of registered capital of a
foreign invested real property enterprise as well as thresholds for a foreign
invested real property enterprise to borrow domestic or overseas loans. In
addition, since June 2007, a foreign invested real property enterprise approved
by local authorities is required to register such approvals with the Ministry of
Commerce.
9
The PRC
government’s restrictive regulations and measures to curtail the overheating of
the property sector could increase our operating costs in adapting to these
regulations and measures, limit our access to capital resources or even restrict
our business operations. We cannot be certain that the PRC government will not
issue additional and more stringent regulations or measures, which could further
slow down property development in China and adversely affect our business and
prospects.
Our
sales will be affected if mortgage financing becomes more costly or otherwise
becomes less attractive.
Substantially
all purchasers of our residential properties rely on mortgages to fund their
purchases. An increase in interest rates may significantly increase
the cost of mortgage financing, thus affecting the affordability of
residential properties. In 2008, PBOC changed the lending rates five times.
The benchmark lending rate for loans with a term of over five years,
which affects mortgage rates, has been increased to 5.94 percent on
December 31, 2008. The PRC government and commercial banks may also
increase the down payment requirement, impose other conditions or otherwise
change the regulatory framework in a manner that would make
mortgage financing unavailable or unattractive to potential property
purchasers. Under current PRC laws and regulations, purchasers of residential
properties generally must pay at least 20 percent of the purchase price of
the properties before they can finance their purchases through mortgages. In May
2006, the PRC government increased the minimum amount of down payment
to 30 percent of the purchase price of the underlying property if such property
has a unit GFA of 90 square meters or more. In September 2007, the minimum
down payment for any purchase of second or subsequent residential property was
increased to 40 percent of the purchase price if the purchaser had obtained
a bank loan to finance the purchase of his or her first property. Moreover, the
interest rate for bank loans of such purchase shall not be less than 110
percent of the PBOC benchmark rate of the same term and category. For further
purchases of properties, there would be upward adjustments on the minimum
down payment and interest rate for any bank loan. In addition, mortgagee banks
may not lend to any individual borrower if the monthly repayment of the
anticipated mortgage loan would exceed 50 percent of the individual borrower’s
monthly income or if the total debt service of the individual borrower
would exceed 55 percent of such individual’s monthly income. If the availability
or attractiveness of mortgage financing is reduced or limited, many of
our prospective customers may not be able to purchase our properties and, as a
result, our business, liquidity and results of operations could
be adversely affected.
In line
with industry practice, we provide guarantees to PRC banks with respect to loans
procured by the purchasers of our properties for the total amount
of mortgage loans. Such guarantees expire upon the completion of the
registration of the mortgage with the relevant mortgage registration
authorities. If there are changes in laws, regulations, policies, and
practices that would prohibit property developers from providing guarantees to
banks in respect of mortgages offered to property purchasers and as a
result, banks would not accept any alternative guarantees by third parties,
or if no third party is available or willing in the market to provide such
guarantees, it may become more difficult for property purchasers to obtain
mortgages from banks and other financial institutions during sales
and pre-sales of our properties. Such difficulties in financing could
result in a substantially lower rate of sale and pre-sale of our properties,
which would adversely affect our cash flow, financial condition, and
results of operations. We are not aware of any impending changes in laws,
regulations, policies, or practices that will prohibit such practice in
China. However, there can be no assurance that such changes in laws,
regulations, policies, or practices will not occur in China in the
future.
Risks
Related to China
China’s
economic policies could affect our business.
Substantially
all of our assets are located in China and substantially all of our revenue is
derived from our operations in China. Accordingly, our results of operations and
prospects are subject, to a significant extent, to the economic, political and
legal developments in China.
While
China’s economy has experienced significant growth in the past twenty years,
such growth has been uneven, both geographically and among various sectors of
the economy. The Chinese government has implemented various measures to
encourage economic growth and guide the allocation of resources. Some of these
measures benefit the overall economy of China, but they may also have a negative
effect on us. For example, operating results and financial condition may be
adversely affected by the government control over capital investments or changes
in tax regulations.
The
economy of China has been changing from a planned economy to a more
market-oriented economy. In recent years the Chinese government has implemented
measures emphasizing the utilization of market forces for economic reform and
the reduction of state ownership of productive assets, and the establishment of
corporate governance in business enterprises; however, a substantial portion of
productive assets in China are still owned by the Chinese government. In
addition, the Chinese government continues to play a significant role in
regulating industry development by imposing industrial policies. It also
exercises significant control over China’s economic growth through the
allocation of resources, the control of payment of foreign currency- denominated
obligations, the setting of monetary policy and the provision of preferential
treatment to particular industries or companies.
Capital
outflow policies in China may hamper our ability to remit income to the United
States.
The
People’s Republic of China has adopted currency and capital transfer
regulations. These regulations may require us to comply with complex regulations
for the movement of capital. Although our directors believe that it is currently
in compliance with these regulations, should these regulations or
the interpretation of them by courts or regulatory agencies change; we may
not be able to remit all income earned and proceeds received in connection with
our operations or from the sale of our operating subsidiary to our
stockholders.
The
fluctuation of the Renminbi may materially and adversely affect your
investment.
The
value of the Renminbi against the U.S. dollar and other currencies may fluctuate
and is affected by, among other things, changes in the PRC’s political and
economic conditions. Any significant revaluation of the Renminbi may materially
and adversely affect our cash flows, revenues and financial condition. For
example, to the extent that we need to convert U.S. dollars we receive from this
offering of our common stock into Renminbi for our operations, appreciation
of the Renminbi against the U.S. dollar could have a material adverse effect on
our business, financial condition and results of operations.
Conversely,
if we decide to convert our Renminbi into U.S. dollars for the purpose of making
payments for dividends on our common shares or for other business purposes and
the U.S. dollar appreciates against the Renminbi, the U.S. dollar equivalent of
the Renminbi we convert would be reduced. Any significant devaluation of
Renminbi may reduce our operation costs in U.S. dollars but may also reduce our
earnings in U.S. dollars. In addition, the depreciation of significant U.S.
dollar denominated assets could result in a charge to our income statement and a
reduction in the value of these assets.
10
Since
1994 the PRC has pegged the value of the Renminbi to the U.S. dollar. We do not
believe that this policy has had a material effect on our business. There can be
no assurance that Renminbi will not be subject to devaluation. We may not be
able to hedge effectively against Renminbi devaluation, so there can be no
assurance that future movements in the exchange rate of Renminbi and other
currencies will not have an adverse effect on our financial
condition.
In
addition, there can be no assurance that we will be able to obtain sufficient
foreign exchange to pay dividends or satisfy other foreign exchange requirements
in the future.
It
may be difficult to effect service of process and enforcement of legal judgments
upon our company and our officers and directors because some of them reside
outside the United States.
As
our operations are presently based in China and some of our key directors and
officers reside outside the United States, service of process on our key
directors and officers may be difficult to effect within the United States.
Also, substantially all of our assets are located outside the United States and
any judgment obtained in the United States against us may not be enforceable
outside the United States. We have appointed Pingji Lu, our Chairman and Chief
Executive Officer, as our agent to receive service of process in any action
against our company in the United States.
If
relations between the United States and China worsen, our stock price may
decrease and we may have difficulty accessing the U.S. capital
markets.
At
various times during recent years, the United States and China have had
disagreements over political and economic issues. Controversies may arise in the
future between these two countries. Any political or trade controversies between
the United States and China could adversely affect the market price of our
common stock and our ability to access U.S. capital markets.
We
may face obstacles from the communist system in China.
Foreign
companies conducting operations in China face significant political, economic
and legal risks. The political system in China, including a cumbersome
bureaucracy, may hinder Western investment.
We
may have difficulty establishing adequate management, legal and financial
controls in China.
China
historically has not adopted a Western style of management and financial
reporting concepts and practices, modern banking, computer or other control
systems. We may have difficulty in hiring and retaining a sufficient number of
qualified employees to work in China. As a result of these factors, we may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet Western
standards.
It will
be extremely difficult to acquire jurisdiction and enforce liabilities against
our officers, directors, and assets based in China. Because the Company’s
executive officers and directors, including, the chairman of its board of
directors, are Chinese citizens, it may be difficult, if not impossible, to
acquire jurisdiction over these persons in the event a lawsuit is
initiated against us and or our officers and directors by a
stockholder or group of stockholders in the United States. Also, because
the majority of our assets are located in China, it would also be extremely
difficult to access those assets to satisfy an award entered against it in
a United States court.
We
may face judicial corruption in the People’s Republic of China.
Another
obstacle to foreign investment in the People’s Republic of China is corruption.
There is no assurance that we will be able to obtain recourse, if desired,
through the People’s Republic of China’s poorly developed and sometimes corrupt
judicial systems.
Risks
Related to This Offering
There
is no assurance of an established public trading market, which would adversely
affect the ability of investors in our company to sell their securities in the
public markets.
Although our common stock trades on the NASD’s automated quotation system (the
“NASDAQ Stock Market”), a regular trading market for the securities may not be
sustained in the future. Market prices for our common stock will be influenced
by a number of factors, including:
11
•
the
issuance of new equity securities;
•
changes
in interest rates;
•
competitive
developments, including announcements by competitors of new products or
services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital
commitments;
•
variations
in quarterly operating results;
•
change
in financial estimates by securities
analysts;
•
the
depth and liquidity of the market for our common
stock;
•
investor
perceptions of our company and the technologies industries generally;
and
•
general
economic and other national
conditions.
The
limited prior public market and trading market may cause volatility in the
market price of our common stock.
Our
common stock is currently traded on the NASDAQ under the symbol “CHLN.” The
quotation of our common stock on the NASDAQ does not assure that a meaningful,
consistent and liquid trading market currently exists, and in recent years such
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of many smaller companies like us. Our
common stock is thus subject to volatility. In the absence of an active trading
market:
•
investors
may have difficulty buying and selling or obtaining market
quotations;
•
market
visibility for our common stock may be limited;
and
•
a
lack of visibility for our common stock may have a depressive effect on
the market for our common stock.
Our
principal stockholders, current executive officers and directors own a
significant percentage of our company and will be able to exercise significant
influence over our company.
Our
executive officers and directors and principal stockholders together will
beneficially own a majority of the total voting power of our outstanding voting
capital stock. These stockholders will be able to determine the composition of
our Board of Directors, will retain the voting power to approve all matters
requiring stockholder approval and will continue to have significant influence
over our affairs. This concentration of ownership could have the effect of
delaying or preventing a change in our control or otherwise discouraging a
potential acquirer from attempting to obtain control of us, which in turn could
have a material and adverse effect on the market price of the common stock or
prevent our stockholders from realizing a premium over the market prices for
their shares of common stock. See “Principal Stockholders” for information about
the ownership of common by our executive officers, directors and principal
stockholders.
We
do not anticipate paying dividends on our common stock.
We
have never paid dividends on our common stock and do not anticipate paying
dividends in the foreseeable future. Our directors intend to follow a policy of
retaining all of our earnings, if any, to finance the development and expansion
of our business.
12
Our
common stock could be considered to be a “penny stock.”
Our
common stock could be considered to be a “penny stock” if it meets one or more
of the definitions in Rules 15g-2 through 15g-6 promulgated under Section 15(g)
of the Securities Exchange Act of 1934, as amended. These include but are not
limited to the following: (i) the stock trades at a price less than $5.00 per
share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it is
NOT quoted on the NASDAQ Stock Market, or even if so, has a price less than
$5.00 per share; or (iv) is issued by a company with net tangible assets less
than $2.0 million, if in business more than a continuous three years, or with
average revenues of less than $6.0 million for the past three years. The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers cannot recommend the stock but must trade in it on an
unsolicited basis.
As
of December 3, 2009, our stock is quoted on the NASDAQ Stock Market and has
a price of $4.52 per share.
Broker-dealer
requirements may affect trading and liquidity.
Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated thereunder by the SEC require broker-dealers dealing in penny stocks
to provide potential investors with a document disclosing the risks of penny
stocks and to obtain a manually signed and dated written receipt of the document
before effecting any transaction in a penny stock for the investor’s
account.
Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be “penny stock.”
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of our restricted stock in the
public marketplace could reduce the price of our common stock.
From
time to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act (“Rule
144”), subject to certain limitations. The SEC has recently adopted amendments
to Rule 144 which became effective on February 15, 2008. Under these
amendments, a person who has beneficially owned restricted shares of our common
stock or warrants for at least six months would be entitled to sell their
securities provided that (i) such person is not deemed to have been one of
our affiliates at the time of, or at any time during the three months preceding,
a sale and (ii) we are subject to the Exchange Act periodic reporting
requirements for at least three months before the sale.
Persons
who have beneficially owned restricted shares of our common stock or warrants
for at least six months but who are our affiliates at the time of, or at any
time during the three months preceding, a sale, would be subject to additional
restrictions, by which such person would be entitled to sell within any
three-month period only a number of securities that does not exceed the greater
of either of the following:
•
1%
of the total number of securities of the same class then outstanding;
or
•
the
average weekly trading volume of such securities during the four calendar
weeks preceding the filing of a notice on Form 144 with respect to the
sale;
provided,
in each case, that we are subject to the Exchange Act periodic reporting
requirements for at least three months before the sale.
Such
sales both by affiliates and by non-affiliates must also comply with the manner
of sale, current public information and notice provisions of Rule
144.
13
THIS
OFFERING
We
are registering in this Form S-1 the shares of common stock underlying the 5.0%
Senior Secured Convertible Debt and the Warrants.
Common
stock outstanding prior to this offering ( on December 3, 2009
)
31,884,969
(1)
Common
stock being offered for resale to the public
3,818,275
(2)
Common
stock outstanding after this offering
35,703,244
(3)
Percentage
of common stock outstanding before this offering that shares being
registered for resale represent
11.98
%
(1) Excludes
the 2,021,440 conversion shares we are registering under this Registration
Statement in connection with the private placement completed on January 28,2008.
(2) Includes
both the 2,021,440 conversion shares in connection with the private placement
completed on January 28, 2008 and the 1,796,835 shares of common stock to be
issued upon the exercise of the warrants pursuant to the Securities Purchase
Agreement. Of the US$20 million Convertible Debt, only US$9 million of the debt
is convertible into shares of common stock. Based on a conversion price of
approximately $5.57 per share, the US$9 million of debt would be convertible
into 1,617,152 shares. The total number of the warrants we issued in connection
with the placement of the Convertible Debt is exercisable for 1,437,468 shares.
We are registering 125% of both the conversion shares (or 2,021,440 shares) and
the shares issuable upon the exercise of the warrants (or 1,796,835 shares) for
resale as required by the registration rights agreement.
(3) Includes
the total of shares being registered in the private placement pursuant to the
Registration Rights Agreement.
Total proceeds raised in the
offering: We will not receive any proceeds from the resale of our common
stock pursuant to this offering. We have received $20,000,000 in gross proceeds
from the Investors under the Securities Purchase Agreement. We may also receive
some proceeds if any of the selling shareholders exercise their warrants through
cash exercise.
USE
OF PROCEEDS
We
will not receive any proceeds from the sale of shares to be offered by the
selling stockholders. The proceeds from the sale of each selling stockholders’
common stock will belong to that selling stockholder. However, we may receive
the sale price of any common stock we sell to the selling stockholders upon
exercise of outstanding warrants.
We may also receive proceeds from the issuance of shares of common stocks to the
Investors if they exercise their warrants or Notes through a cash exercise. If
each of the warrants is exercised through a cash exercise at an exercise price
of US $6.07 per share and each note is exercised through a cash
exercise price of US $5.57, we estimate that we may receive up to an additional
US $8,727,270.72 or US $9,000,000, respectively.
This prospectus relates to the resale by the selling stockholders of up to
3,818,275 shares of our common stock, per value $0.001 per share, including up
to 1,795,835 shares of common stock issuable upon the exercise of common stock
purchase warrants. Unless otherwise indicated in the applicable prospectus
supplement, we anticipate that any net proceeds from the sale of the
securities that we may offer under this prospectus and any accompanying
prospectus supplement will be used for general corporate purposes. General
corporate purposes may include acquisitions, investments, repayment
of debt, capital expenditures, repurchase of our capital stock and any
other purposes that we may specify in any prospectus supplement. We may invest
the net proceeds temporarily until we use them for their stated
purpose.
14
SELLING
STOCKHOLDERS
The following table sets forth the common stock ownership of the selling
stockholders as of December 3, 2009. The selling stockholders acquired their
securities through a private placement offering which closed on January 28,2008.
We
will not receive any proceeds from the resale of the common stock by the selling
stockholders. Assuming all the shares registered below are sold by the selling
stockholders, none of the selling stockholders will continue to own any shares
of our common stock. Other than as set forth in the following table, the selling
stockholders have not held any position or office or had any other material
relationship with us or any of our predecessors or affiliates within the past
three years. In addition, the selling stockholders are not registered
broker-dealers.
We
are registering 125% of the shares underlying Convertible Debt and
warrants for resale as required by the registration rights
agreement
*
indicates percentages that are below 1%.
OUR
RECENT PRIVATE PLACEMENT
EXEMPTION
FROM REGISTRATION. As described under “Prospectus
Summary — About Our Recent Private Placement”, we issued in connection with our
private placement senior secured convertible debt and related warrants with an
aggregate principal amount of $20 million, in accordance with and in reliance
upon the exemption from securities registration afforded by Regulation D, Rule
506 promulgated by the Securities and Exchange Commission (the “SEC” or the
“Commission”).
PURCHASE
PRICE. Our senior secured convertible debt and related
warrants were offered for an aggregate purchase price of $20,000,000 to be
purchased by Investors at the Closing.
NUMBER OF
SHARES BEING REGISTERED IN CONNECTION WITH THE SECURITIES PURCHASE AGREEMENT.
The Securities Purchase Agreement provides that the
Company shall file with the Commission a registration statement registering the
shares of common stock issued in connection with the private placement (the
“Registrable Securities”) for unrestricted distribution and public resale by the
holders of such Registrable Securities, namely a total of 3,818,275 shares of
common stock, including 1,796,835 for shares underlying the
warrants.
15
SENIOR
CONVERTIBLE DEBT ISSUED IN CONNECTION WITH THE SECURITIES PURCHASE
AGREEMENT. The debt with an aggregate principal amount
of $20 million bear initial interest at 5% per annum of the RMB Notional
Principal Amount, which begins accruing on the issuance date and shall be
computed on the basis of a 360-day year and twelve 30-day months. They will be
payable quarter-annually in lawful money of the United States on each calendar
quarter and on the maturity date, in each case in an amount equal to the amount
of such interest as expressed in RMB multiplied by the US$/RMB exchange rate as
of the applicable interest exchange rate determination date, as set forth on the
debt. US$9 million of the debt is convertible into common stock and carry
an initial conversion price of US$5.57 per share, which can be increased if
certain stock price thresholds are met. Additionally, forced conversion can also
occur at the Company’s discretion if certain stock price thresholds are met.
Based on a conversion price of approximately US$5.57 per share, the US$9 million
of debt would be convertible into 1,617,152 shares. We are registering 125% of
the conversion shares, or 2,021,440 shares, in this Registration
Statement.
WARRANTS
ISSUED IN CONNECTION WITH THE SECURITIES PURCHASE
AGREEMENT. Each investor who has been issued a warrant
is granted the right to purchase in the aggregate 1,437,467 shares of our common
stock. We have agreed to register 125% of this number, or 1,796,835 shares,
according to the Registration Rights Agreement. The warrant entitles its holder
to one share of our common stock upon exercise. The warrants may be exercised at
any time on or after the initial exercise eligibility date of January 28, 2008
to and including February 28, 2013, at an exercise price of US$6.07 per
share. The exercise price was negotiated based on the price of the then current
underlying common stock of the Company quoted on the OTC Bulletin Board. The
number of shares attached to the warrants will be adjusted due to dividends and
changes in our capital stock structure.
INDEMNIFICATION.
In consideration of each Investor’s execution and delivery of the Securities
Purchase Agreement and its acquisition of the securities hereunder, and in
addition to all of the Company’s other obligations under the Securities Purchase
Agreement, the Registration Rights Agreement, the warrants, the Convertible Debt
and certain security documents, the Company will defend, protect, indemnify and
hold harmless each Investor and each other holder of the Securities and all of
their shareholders, officers, directors, employees, advisors and direct or
indirect investors and any of the foregoing person’s agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by the Securities Purchase Agreement) from
and against any and all actions, causes of action, suits, claims, losses, costs,
penalties, fees, liabilities and damages, and expenses in connection
therewith.
CALL
OPTION. At any time, the Company shall have the option
to redeem, in its sole and absolute discretion, up to 55% of the face amount of
the Convertible Debt at par (the “Redemption Amount”), plus any accrued and
unpaid interest to the redemption date. To make such prepayment, the Company
must give written irrevocable notice to the holder of its intent to redeem the
Convertible Debt not later than 20 days prior to the redemption date. Such
redemption shall be applied to all Convertible Debt, pro rata, based on the
respective face amounts thereof.
PIGGYBACK
REGISTRATIONS. If we register any securities for public
sale, holders of registration rights will have the right to include their shares
in the registration statement. The underwriters of any underwritten offering
will have the right, subject to specified conditions, to limit the number of
registrable securities such holders may include. Additionally, piggyback
registration rights are subject to delay or termination under certain
circumstances.
MANDATORY
REGISTRATIONS
In
connection with this transaction, the Company and the Investors entered into a
registration rights agreement (the “Registration Rights Agreement”). Pursuant to
the terms and conditions of the Registration Rights Agreement, the Company
agreed to register within 60 calendar days after closing shares of common stock
issuable to the Investors for resale on a Form S-3 Registration Statement to be
effective no later than the 180th day after the closing date of the transaction.
If the Form S-3 is not available at that time, then the Company will file a
Registration Statement on such form as is then available to affect a
registration of the registrable securities, subject to the consent of the
Investors, which consent will not be unreasonably withheld. The Company shall
register an amount of common stock for resale that equals at least 125% of the
sum of shares issuable upon conversion of the Convertible Debt and the exercise
of the warrants. The registration rights granted under the Registration Rights
Agreement are subject to customary exceptions and qualifications and
compliance with certain registration procedures. The Company is subject to the
late registration penalty payment equal to the product of (i) the Investor’s
outstanding principal amount and (ii) the quotient obtained by dividing 12% by
360 (the “Late Payments”).
The
Company commenced negotiations with the Investors in December 2008 for a waiver
for the Late Payments, as the Company and the Investors believed that the
registration would become effective within a short period of time. However, as
the registration has not become effective as of September 2009, the Company has
accrued for the Late Payments. On September 28, 2009, the Company reached a
First Amendment (the “Amendment”) with the Investors to settle the Late
Payments, in the amount of $2,400,000, by the issuance of 614,290 common stock.
The 614,290 common stock was determined by dividing $2,400,000, the total Late
Payments up to September 28, 2009, by 95% of the historical volume weighted
average price (“VWAP”) of the common stock, as determined by using Bloomberg
function VWAP, for the immediate preceding 30 days period. In accordance with
the Amendment, the Investors waived any further Late Payments against the
Company under the Registration Rights Agreement.
To the
extent allowable under the Securities Act and the rules promulgated thereunder
(including Rule 416), the Registration Statement will include the registrable
securities and such indeterminate number of additional shares of common stock as
may become issuable upon conversion of the Convertible Debt and exercise of the
warrants (i) to prevent dilution resulting from stock splits, stock dividends or
similar transactions, or (ii) by reason of changes in the conversion price of
the Convertible Debt or the exercise price of the warrants in accordance with
the terms thereof. The number of shares of registrable securities initially
included in the Registration Statement will be no less than 125% of the
aggregate number of common stock that are issuable upon conversion of the
Convertible Debt at the conversion price and exercise of the warrants at the
exercise price.
16
PLAN
OF DISTRIBUTION
The
selling stockholders and any of their respective pledgees, donees, assignees and
other successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
•
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits the purchaser;
•
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
•
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
•
an
exchange distribution in accordance with the rules of the applicable
exchange;
•
privately-negotiated
transactions;
•
short
sales that are not violations of the laws and regulations of any state or
the United States;
•
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per
share;
•
through
the writing of options on the
shares;
•
a
combination of any such methods of sale;
and
•
any
other method permitted pursuant to applicable
law.
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus. The selling stockholders
shall have the sole and absolute discretion not to accept any purchase offer or
make any sale of shares if they deem the purchase price to be unsatisfactory at
any particular time.
The
selling stockholders may also engage in short sales against the box, puts and
calls and other transactions in our securities or derivatives of our securities
and may sell or deliver shares in connection with these trades.
17
The
selling stockholders or their respective pledgees, donees, transferees or other
successors in interest, may also sell the shares directly to market makers
acting as principals and/or broker-dealers acting as agents for themselves or
their customers. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a selling stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
selling stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the selling stockholders. The selling
stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed to be “underwriters” as
that term is defined under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, or the rules and regulations under
such acts. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act. We
are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the selling stockholders,
but excluding brokerage commissions or underwriter discounts.
The
selling stockholders, alternatively, may sell all or any part of the shares
offered in this prospectus through an underwriter. No selling stockholder has
entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into.
The
selling stockholders may pledge their shares to their brokers under the margin
provisions of customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer and sell the pledged shares. The
selling stockholders and any other persons participating in the sale or
distribution of the shares will be subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations under
such act, including, without limitation, Regulation M. These provisions may
restrict certain activities of, and limit the timing of purchases and sales of
any of the shares by, the selling stockholders or any other such person. In the
event that the selling stockholders are deemed affiliated purchasers or
distribution participants within the meaning of Regulation M, then the selling
stockholders will not be permitted to engage in short sales of common stock.
Furthermore, under Regulation M, persons engaged in a distribution
of securities are prohibited from simultaneously engaging in market making
and certain other activities with respect to such securities for a specified
period of time prior to the commencement of such distributions, subject to
specified exceptions or exemptions. In regards to short sells, the selling
stockholder can only cover its short position with the securities they receive
from us upon conversion. In addition, if such short sale is deemed to be a
stabilizing activity, then the selling stockholder will not be permitted to
engage in a short sale of our common stock. All of these limitations may affect
the marketability of the shares.
We
have agreed to indemnify the selling stockholders, or their transferees or
assignees, against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the selling
stockholders or their respective pledgees, donees, transferees or other
successors in interest, may be required to make in respect of such
liabilities.
If
the selling stockholders notify us that they have a material arrangement with a
broker-dealer for the resale of the common stock, then we would be required to
amend the registration statement of which this prospectus is a part, and file a
prospectus supplement to describe the agreements between the selling
stockholders and the broker-dealer.
18
DIVIDEND
POLICY
We have
never declared or paid any cash dividends on our common stock. We currently
intend to retain future earnings, if any, to finance the expansion of our
business. As a result, we do not anticipate paying any cash dividends in the
foreseeable future.
DESCRIPTION
OF SECURITIES
Our
authorized capital stock consists of 100,000,000 shares of common stock at a par
value of $0.001 per share. As of December 3, 2009, there were 31,884,969
shares of our common stock issued and outstanding.
Holders
of our common stock are entitled to one vote for each share on all matters
submitted to a stockholder vote. Holders of common stock do not have cumulative
voting rights. Therefore, holders of a majority of the shares of common stock
voting for the election of directors can elect all of the directors.
Holders of our common stock representing a majority of the voting power of our
capital stock issued, outstanding and entitled to vote, represented in person or
by proxy, are necessary to constitute a quorum at any meeting of stockholders. A
vote by the holders of a majority of our outstanding shares is required to
effectuate certain fundamental corporate changes such as liquidation, merger or
an amendment to the Company’s articles of incorporation.
Holders
of our common stock are entitled to share in all dividends that the board of
directors, in its discretion, declares from legally available funds. In the
event of liquidation, dissolution or winding up, each outstanding share entitles
its holder to participate pro rata in all assets that remain after payment of
liabilities and after providing for each class of stock, if any, having
preference over the common stock. Our common stock has no pre-emptive rights, no
conversion rights and there are no redemption provisions applicable to our
common stock.
INTERESTS
OF NAMED EXPERTS AND COUNSELS
Legal
Matters
Dennis
Brovarone, Esq. will issue an opinion with respect to the validity of the shares
of common stock being offered hereby.
Experts
Our
financial statements as of December 31, 2007 and 2008 and the related
consolidated statements of operations, stockholders’ equity and cash flows for
the period of December 31, 2007, and 2008 appearing in this prospectus and
registration statement have been audited by MSCM LLP., independent registered
public accountants, as set forth on their report thereon appearing elsewhere in
this prospectus, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
BUSINESS
Industry
Overview
China’s
economic growth
China
has experienced rapid economic growth in the last 20 years. According to
China’s Department of Commercial Affairs, China’s gross domestic product
(GDP) achieved an annual growth rate of 17.1 percent from 2004 to 2008.
According to the National Statistics Bureau of China, the GDP
of China in 2008 was RMB 30.1 billion, up 9.0 percent over 2007.
Despite the current global economic crisis, China is expected to achieve
relatively good economic growth in the next several years, compared to
many other major economies in the world.
Sources:
World Economic Outlook database, IMF.
Xi’an:
economic growth higher than China
Xi’an
served as the capital of China during 13 dynasties (from West Zhou in 1066
BC to Tang in 907 AD) and is well known for its Terracotta Army and other
famous historic landmarks. It is now the largest metropolis in
northwestern China, and one of the ten largest nationwide. A new wave of
economic growth is occurring in tier two cities, and Xi’an has benefitted
from the government’s “Go West” policy, which plans to develop Xi’an into
a regional economic center.
With
this rich heritage as a foundation, today the city’s economic leadership
is based on its high-technology, pharmaceutical, military, aerospace,
tourism, and advanced education industries. Xi’an recorded a CAGR of 16.0
percent for GDP and a CAGR of 12.3 percent for GDP per capita between 2001
and 2007.
Source:
Xi’an Municipal Bureau of Statistics.
19
Driven by
the government’s “Go West” policy and the city’s highly productive workforce,
Xi’an has experienced a relatively stronger growth compared with other
second-tier cities in 2008. Xi’an’s gross domestic product grew 15.6 percent in
2008, compared with 9.0 percent in 2008 for all of China. Similar to other tier
two cities, the historically significant city of Xi’an in northwestern China is
experiencing an economic renaissance. Compared to tier one cities, we believe
Xi’an will continue its growth momentum in the next few years, and we also
expect that its strong economic fundamentals, compared to other tier two cities,
will provide a solid foundation for growth in the real estate
sector.
Source:
The Municipal Bureau of Statistics for the cities shown above.
China
Real Estate Industry Factors
Structural
long-term growth
China’s
real estate sector is in the early stage of a long-term growth cycle, supported
by growth in its gross domestic product (GDP), rising demand for housing, and
substantial structural changes similar to those of Japan in the early 1970s and
Hong Kong of early 1980s. Hong Kong’s property market, for example, increased in
value by 8 times between 1980 and 1997, or a compound annual growth rate of
about 15 percent, while Japan’s property boom ran for more than 20 years from
early 1970s to the early 1990s. There are many fundamental similarities among
the growth paths of these three economies.
China’s
real estate bull market began more than six years ago. Despite the moderations
in growth caused by the global economic weakness, we believe the fundamental
structural forces in China support continued growing demand for real estate in
China during the next 10 years. The two key industry drivers for this long-term
real estate demand in China are the dramatic migration of people from rural to
urban areas and the rising disposable income per capita in the
cities.
China is
continuing its rapid urbanization process. In 2006, there were more than
577 million Chinese living in urban areas, accounting for about 44 percent of
total population of about 1.31 billion. According to the National Bureau of
Statistics of China, by the end of 2008, China’s urban population had reached
600 million. The State Council of China estimated in 2007 that China’s urban
population in 2020 would comprise about 870 million people or about 60 percent
of the total population of 1.45 billion.
Another
source, the United Nations’ State of World Population 2007, reports that about
18 million people in China are expected to migrate from rural to urban areas
each year, and that the urban population would reach about 877 million in the
next 10 years.
Sources:
The World Bank’s World Development Indicators and National Bureau of
Statistics.
Regardless
of which projection you prefer, it is reasonable to expect that the migration
into urban areas is likely to continue, both because of the potential for higher
income and greater wealth accumulation, and because of the evolution of China’s
farming toward larger-scale and more efficient methods that require fewer people
to do the agricultural work.
With the
substantial housing demand created by the structural shift of the migration, the
urban real estate market has been thriving, and that long-term trend is expected
to continue.
Higher
disposable incomes encourage home ownership
Rural
dwellers are drawn to cities primarily by the potential of higher incomes and
greater wealth, because urban jobs generally pay higher wages and
salaries.
The data
below from the National Bureau of Statistics of China shows that both disposable
income and wealth accumulation are higher for urban dwellers and confirms the
economic attractiveness of the migration from rural to urban areas.
Annual
per capita
disposable
income and
expenses
(RMB)
2002
2003
2004
2005
2006
2007
Urban
per capita
Disposable
income of urban households
7703.00
8472.00
9422.00
10493.00
11759.45
13786.00
Consumption
expenditures of urban households
6030.00
6511.00
7182.00
7943.00
8696.55
9997.50
Net
increase in wealth, urban
1673.00
1961.00
2240.00
2550.00
3062.90
3788.50
Rural
per capita
Net
income of rural households
2476.00
2622.00
2936.00
3255
3587.0
4140.36
Living
expenditures of rural households
1834.00
1943.00
2185.00
2555.00
2829
3223.85
Net
increase in wealth, rural
642.00
679.00
751.00
700.00
758.00
916.51
Source:
The National Bureau of Statistics of China.
20
China
real estate: Quite warm but still comparatively undervalued
Despite
the significant appreciation of property prices in China in recent years,
comparative analysis of fundamental factors indicate that prices are still
reasonable.
Studies
have shown that a key underlying driver for property market growth is per capita
GDP. Recent International Monetary Fund studies report that China’s recent
property appreciation is supported by strong personal economic growth. When
compared using “price per capita GDP” in the U.S. and India, China’s property
market appears undervalued. For example, although Shanghai represents the
most expensive property market in China, India’s Mumbai (Bombay) has seen real
estate prices grow to more than twice those of Shanghai, even though China has
higher economic growth.
Growth in
second-tier and third-tier markets
Just as
the rapid economic growth in eastern China’s large cities has created a healthy
demand in the east coast real estate property market in recent years, the
economic multiplier effect of economic growth moving from the first-tier cities
to the second- and third-tier cities is likely to create increases in growth for
the real estate markets in those cities.
In search
of lower costs, an educated talent pool, and new markets, multinational
corporations have been expanding out of mega cities, like Beijing, Shanghai, and
Shenzhen, into neighboring and inland cities.
Intel,
for example, has opened a development center in Chengdu, while the Liberty
Mutual Group, the U.S. insurance giant, has chosen Chongqing for its Chinese
headquarters. Unilever has relocated its Chinese headquarters from Shanghai to
the neighboring province of Hefei due to the lower labor and land costs and its
strategic location.
The
wealth gap is expected to narrow between the first-tier and second-tier
cities.
Rising
disposable income in the second-tier cities has lured top luxury goods
manufacturers, including LVMH Group, to expand aggressively into key second-tier
cities. The Chinese government has also been instrumental in stimulating
regional growth by designating certain second-tier regions as priority zones.
These actions are benefitting Xi’an, the Company’s primary market. Xi’an’s urban
disposable income grew 20.1 percent in 2008.
Source:
The Municipal Bureau of Statistics for the cities shown above.
Xi’an
Real Estate Market Factors
City of
Xi’an: first class in the second tier
As the
ripple effect of economic growth continues to permeate second-tier cities and
create a healthy environment for real estate development, leading indicators are
signaling continuing moderate growth in local property markets.
Source:
Xi’an Municipal Bureau of Statistics.
Growth
factors include the transition of certain industries to higher value-added
business, especially high-technology and services, rising GDP per capita (shown
above), increasing foreign investments, and expanding foreign retailing and
hotel operations. In addition, concerted efforts by the local governments to
create clear strategies, institute attractive policies, and invest in the
necessary infrastructure are all focused on creating favorable investment
environments in their cities.
The city
of Xi’an has demonstrated all of these characteristics.
Transformation
and urbanization
Xi’an
served as the capital of China during 13 dynasties (from West Zhou in 1066 BC to
Tang in 907 AD) and is well known for its Terracotta Army and other famous
historic landmarks. With that rich heritage as a foundation, today the city’s
economic leadership is based on its high-technology, pharmaceutical, military,
aerospace, tourism, and advanced education industries.
21
Xi’an
also is being transformed into a high-tech international city that offers a
large and educated work force. The city has China’s third largest
university-educated workforce, making it a hotbed for research &
development, high-technology manufacturing, and information technology
solutions.
Xi’an has
begun to attract well-known high-tech companies, including IBM, Applied
Materials, Micron Technology, and Infineon. Applied Materials, for example,
selected Xi’an for its $255 million phase one R&D center that will design
and develop equipment for semiconductor chip manufacturing. In addition, Micron
Technology has invested $250 million in Xi’an for packaging and testing of
semiconductor chips.
China has
announced its intention to become a world-class center for information
technology research and development, production, outsourcing, and services to
rival and perhaps surpass the success of India’s IT industry. Xi’an plays an
important role in that effort, having been designated by the government as one
of five China Outsourcing Bases. Similar to Bangalore and Hyderabad, the Xi’an
government is carving out a niche in IT outsourcing by creating the 400,000
square-meter Xi’an Software Park. The park has already attracted top software
and technology companies, including IBM, which is the government’s joint venture
partner in creating the software park. Sybase, SPSS, Nortel, Fujouru, and NEC
are already operating in the park. The Xi’an government anticipates that
the city’s IT outsourcing workforce will grow to 200,000 by 2010.
The Xi’an
government has a clear master plan through the year 2020 to foster economic
transformation and urbanization. For example, Xi’an is now limiting development
in the city’s famous historical Gated Wall City (or Inner Ring), which will be
revamped primarily for tourism. The city plans to relocate about 450,000
residents from the Inner Ring to the second, third, and fourth rings of the city
and beyond.
One of
the most ambitious plans is the development of a new satellite city in the
Baqiao district, about 8 kilometers from Xi’an’s center. The Xi’an government is
developing the Baqiao district into the “First Water City of the West”, complete
with high-end residential properties and hotels, international convention
centers, and a high-technology industry center. The new urban area will be home
for 900,000 middle-to-upper income residents and for firms in industries that
include R&D, services, and high-technology, plus the
potential headquarters for the Chinese operations of multinational
corporations.
Emerging
as an international city
Xi’an’s
government has been proactive in enhancing the city’s international image by
hosting world class events like the Euro-Asia Economic Forum every second year
and the Formula One Powerboat World Championship. In November 2007, Xi’an hosted
the Euro-Asia Economic Forum in the Baqiao district, where high level delegates
held discussions on economic issues related to energy, finance, tourism, and
other cooperative industries. Baqiao is the permanent venue for the Euro-Asia
Economic Forum. On October 5, 2007, Xi’an hosted the Formula One Powerboat World
Championship on the Ba River near China Housing’s development site.
To
attract international tourists, Xi’an is leveraging its famous historical and
cultural significance. Xi’an has revamped its tourism infrastructure in numerous
ways, including the redevelopment of the famous Terracotta theme park. It also
has selected China’s largest construction company to build a RMB 20 billion
($2.5 billion) theme park and a residential and commercial redevelopment project
on the grounds of the famous Da Ming Gong Palace that was built 1,300 years ago
during the Tang Dynasty.
The city
has also revamped its tourism infrastructure to attract international travelers
and is drawing large foreign retailers. The big box retailers have entered
Xi’an, including Wal-mart, Carrefour of France, and Metro of Germany. Xi’an’s
historic mystique and economic potential has also lured top luxury brands,
including Louis Vuitton, Gucci, Prada, and Versace to Xi’an.
Attracting
world-class investors
Property
markets in nearly all of China’s major cities have benefitted from capital
investments by major international developers, especially those from Hong Kong.
Xi’an is no exception.
Top Hong
Kong developer Henderson Land has signed agreements to develop two residential
projects in Xi’an. Partnering with Surbana, a unit of Singapore’s Temasek,
Henderson plans to develop a 30,000 unit residential project with a GFA of 1.5
million square meters and a budgeted cost of RMB 5 billion. Henderson will
develop 1,200 units for its second project with an estimated cost of RMB 1.3
billion. The projects give Baqiao a major vote of confidence because Henderson
Land and Temasek are two of the leading property developers and investors in
Asia. With developments adjacent to China Housing’s site, Henderson &
Temasek’s second project should benefit China Housing’s JunJing II residential
project. Because China Housing’s land was acquired at a substantially lower
cost, China Housing expects healthy margins from the JunJing II project when the
construction is finished.
Prices
catching up to fundamentals
Good
demographic and economic factors, including emerging high-tech industries and
increasing foreign capital inflow, bode well for Xi’an’s future
growth.
In 2007,
the average urban living area per person was 23.4 square meters in
Xi’an, slightly higher than China’s urban average of 22.6 square meters per
person in the same year. Xi’an has announced plans to increase the average
living area per person to 31.1 square meters by 2020, which will require an
additional 130 million square meters of new development by 2020. That growth
target is already creating significant opportunity for property
developers.
Despite
the solid economic growth and rising housing demand, real estate prices in Xi’an
are still less than half of those in the mega cities such
as Shanghai, Beijing, and Shenzhen. As shown below, land appreciation
since 2001 is lower than the national average and the gap of property
appreciation between Xi’an and tier-one cities has widened since
2002.
Sources:
National Bureau of Statistics and E-House China Real Estate Research Institute,
Xi’an Branch.
22
Xi’an:
Growing, leading, and still affordable
The
central government’s “Go West” policy has designated Xi’an as the regional
economic center of western China. To further encourage western China’s
development, the central government has planned to establish the Central Shanxi
Plain Economic region that will help enable the free flow of people, skills,
capital, and trade among the western provinces. Xi’an, as the economic center of
the west, will play a unique leadership role among the western tier-two
cities.
Despite
its role as the economic center of the west, compared with other tier-two
cities, shown below, Xi’an’s new-property price appreciation since 2002 is
relatively modest, making Xi’an still a very affordable city.
Sources:
E-House China Real Estate Research Institute.
2008 and
Early 2009 Xi’an market update
In 2007,
China experienced the highest rise in residential property prices in the world.
The first half of 2008, however, saw a marked slowdown. The housing price index
for 70 major cities rose 7 percent in July 2008 from July 2007, the smallest
increase yet in 2008, following by a decline in those 70 cities in the fourth
quarter of 2008.
The real
estate sector in Xi’an was influenced by that broader market decline, with both
prices and volume in Xi’an falling in the fourth quarter 2008. Given the global
economic uncertainty, we believe many consumers chose to delay their new housing
decisions until the falling prices stabilized.
The Xi’an
real estate market warmed in January and February 2009, with consumers
apparently sensing that it was time to buy. Both sales volume and prices were up
as illustrated below.
Residential
pre-sales volume, measured by per square meter sold in the January-February 2009
period, increased 5.9 percent from the same two-month period of 2007, perhaps
indicating that the outlook for the Xi’an housing market may be
improving.
Residential
pre-sales average price per square meter increased by 4.5 percent in
January and by 7.0 percent in February 2009 compared with January and February
of 2008.
China
Housing’s pre-sales volume and prices in January and February 2009 were up over
the same periods of 2007, as well.
While the
volume and price increases in January and February are good news, it is still
too early to determine if the increases were caused by a temporary release of
pent up demand or by a sustainable upturn in the Xi’an housing
market.
Sources:
E-House China Real Estate Research Institute, Xi’an
Branch.
February
2007 and January 2008 reflect the holiday Lunar
New Year
and Spring Festival periods in China.
Sources:
E-House China Real Estate Research Institute, Xi’an Branch.
Economic
and Industry Stimulus Programs of 2008 and early 2009
Xi’an’s
real estate stimulation in 2008
To
stimulate its housing market, in August 2008, the Xi’an municipal government
announced a series of favorable new policies to encourage the growth of its
housing market by making homes more available and more affordable for Xi’an
citizens and by providing support and improvements for real estate
developers.
The Xi’an
municipal government’s new policy consists of three broad actions, which will be
in effect through the end of 2009. First, the Xi’an government is providing
subsidy discounts to consumers for housing purchases that will vary primarily by
the size of the home. Buyers will receive subsidized discounts on their home
purchase prices, with a 1.5 percent subsidy on apartments less than 90 square
meters, a 1.0 percent on medium-sized homes, and a 0.5 percent for apartments
larger than 144 square meters.
23
Second,
the Xi’an city government is relaxing qualifications for residential housing
loans, increasing the total RMB available for each loan, and reducing the
interest rates on the loans.
And
third, real estate developers will be able to receive subsidies and supports on
loans and land rights purchases, plus reductions in fees and taxes, and will
also benefit from streamlined project planning, approval, and oversight
processes by the city.
China’s 4
trillion RMB stimulation package of 2008
In
response to the global financial crisis, the People’s Republic of China
announced a 4 trillion RMB stimulation program on November 27, 2008.
Subsequently, on March 6, 2009, the National Development and Reform Commission
Director, Mr. Zhang Ping, announced a reshaping of that economic stimulus
package that retained the investment total of 4 trillion RMB but adjusted its
focus. Within the 4 trillion RMB package, about 400 billion RMB will go toward
civil works, including low-income housing and renovation. Two additional
categories (technology advances & industry restructuring for 370 billion RMB
and infrastructure for 1.5 trillion RMB) are also expected to benefit Xi’an’s
industries, and therefore further support demand in the city’s real estate
market.
Source:
Zhang Ping, National Development and Reform Commission, press conference, March6, 2009.
China’s
10-industry stimulation of 2009
On
February 26, 2009, China’s State Council reinforced China’s 2008 stimulation
package by further measures to stimulate specific industries in 2009. The
industries include automobile, iron and steel, textiles, equipment
manufacturing, shipbuilding, electronics and information technology,
petrochemicals, light industries, nonferrous metals, and logistics.
Cautionary
disclaimer
Although
the individuals and governments around the world hope that government
stimulation efforts will have the desired effects, the global economy and global
financial markets have not yet stabilized, so the true effects of these and
perhaps additional stimulation efforts by local, provincial, and
national governments in China, as well as by other countries, remain
unknowable at the moment.
OUR
COMPANY
We were
incorporated in the state of Nevada on July 6, 2004, as Pacific Northwest
Productions Inc. On April 21, 2006, we entered into and closed a share purchase
agreement with Xian Tsining Housing Development Co., Ltd., a corporation formed
under the laws of the People’s Republic of China, and each of Tsining’s
shareholders. Pursuant to the Agreement, we acquired all of the issued and
outstanding capital stock of Tsining from the Tsining shareholders in exchange
for 2,000,000 shares of our common stock. On May 4, 2006, we changed our name to
China Housing & Land Development, Inc.
On March9, 2007, we entered into a Shares Transfer Agreement with the shareholders of
Xi’an New Land Development Co., Ltd. (“New Land”), pursuant to which we have
acquired 32,000,000 shares of New Land, constituting 100% equity ownership of
New Land. The total purchase price for the shares acquisition is 270 million
Renminbi, estimated to be approximately US$34 million at the current currency
exchange rate which is subject to change. The total purchase price includes the
initial cash payment of 5 million Renminbi, estimated to be approximately
US$610,000, payable within 20 days after the signing of the Shares Transfer
Agreement, an additional cash payment of 57 million Renminbi, estimated to be
approximately US$7.2 million, payable within 30 days after the Registrant has
received a satisfactory audit report of New Land, and the issuance of 10%
promissory note of the aggregate amount of 208 million Renminbi, estimated to be
approximately US$26.2 million, with a maturity date of January 30, 2009. As of
June 30, 2009, the remaining balance of the note and its interest totaling
amounted to $6,929,469 and New Land’s original shareholders have agreed to
extend the maturity date to December 31, 2009.
JunJing II: JunJing II is
located at 38 East Hujiamiao, Xi’an, with total GFA about 248,568 square meters.
It is the first Canadian style residential community with “green and
energy-saving” characteristics, and won the “National Energy Saving Project.”
The project is divided into 2 phases, namely JunJing II phase one and
JunJing II phase two. We started the construction of JunJing II phase one in the
third quarter of 2007 and started the presale campaign in the second quarter of
2007.
As of
September 30, 2009, our customers have signed pre-sale purchase agreements for
apartments with purchase prices totaling $68.5million, of which we have
recognized $66.5 million in revenues, based on the percentage of completion
method of accounting.
The
construction of Phase Two commenced in the second quarter of 2009 and pre-sales
started within the same quarter. As of September 30, 2009, the contract
revenue for Phase Two is $ 19.1 million, of which we have recognized $ 9.8
million in revenues. Revenue will continue to be recognized as construction
advances.
For
JunJing II and Puhua projects approximately $8.7 million of pre-sale payments
were booked as advances from costumers and will be recognized as revenues as
construction advances.
Puhua: The Puhua project, the
Company’s 79 acre joint venture located in the Baqiao project, has a total land
area of 192,582 square meters and an expected gross floor area of
approximately 610,000 square meters. In November 2008, the Company entered into
an agreement with Prax Capital China Real Estate Fund I, Ltd., to form a
joint venture. The joint venture was formed in late 2008, subject to certain
conditions and approvals, which have been satisfied. Prax Capital Real
Estate Holdings Limited invested US$29.3 million in cash in the joint venture,
the joint venture acquired the land use rights early in the first quarter
of 2009, and the joint venture is proceeding with the project.
25
The
construction of the Puhua project began in June 2009. The whole project, which
consists of four phases, is expected to be completed in the third quarter of
2014, with estimated revenues of $700 million. The Company began accepting
pre-sale contracts for units in the Puhua Phase One project on October 24
th . During the inaugural sales weekend, the Company sold 133 out of 192
residential units made available with a total gross floor area ("GFA") of
approximately 16,388 sq. meters. The contract amount for the units sold totaled
$10.53 million and included residential space within a high-rise building,
a mid- rise building and three garden homes.
Projects
under planning and in process
Project
name
Type of Projects
Estimated
Construction
Period
Estimated Pre-
sale
Commencement
Total Site
Area
(m2)
Total GFA
(m2)
Total
Number of
Units
Baqiao
New Development Zone
Land
Development
2009-
2020
N/A
N/A
N/A
N/A
JunJing
III
Multi-Family
residential
& Commercial
Q4/2009
- Q4/2011
Q1/2010
8,094
47,586
434
Park
Plaza
Multi-Family
residential
& Commercial
Q3/2010
- Q4/2014
Q4/2010
44,250
180,000
2,000
Golden
Bay
Multi-Family
residential
& Commercial
Q4/2010
- Q4/2014
Q1/2011
146,099
378,887
N/A
Baqiao New Development Zone: On
March 9, 2007, we entered into a Shares Transfer Agreement with the shareholders
of Xi’an New Land Development Co., Ltd. (New Land), under which the Company
acquired 32,000,000 shares of New Land, constituting 100 percent equity
ownership of New Land. This acquisition gave the Company the exclusive right to
develop and sell 487 acres of land in a newly designated satellite city of
Xi’an. We believe this represents a major growth opportunity for the
Company.
Xi’an has
designated the Baqiao District as a major resettlement zone where the city
expects 900,000 middle to upper income people to settle. The Xi’an government
intends to generate a success similar to that created by Pudong for Shanghai,
which has resulted in new economic opportunities and provided housing for
Shanghai’s growing population.
The Xi’an
municipal government plans to invest 50 billion RMB (over $6 billion) in
infrastructure in the Baqiao New Development Zone. The construction of a
large-scale public wetland park is well underway; it will embellish the natural
environment adjacent to China Housing’s Baqiao project.
26
Through
its New Land subsidiary, China Housing sold 18.4 acres to another
developer in 2007 and generated about $24.41 million in
revenue.
In
2008, we established a joint venture with Prax Capital Real Estate
Holdings Limited (Prax Capital) to develop 79 acres within the Baqiao
project, which will be the first phase of the Baqiao project’s
development. Prax Capital invested $29.3 million cash in the joint
venture. The project is further described in Puhua section
below.
After
selling 18.4 acres and placing 79 acres in the joint venture, about 390
acres remained available for the Company to develop in the Baqiao
project.
JunJing III: JunJing
III is near our JunJing II project and the city expressway. It will
have an expected total gross floor area of about 47,586 square
meters. The project will consist of 3 high rise buildings, each 28 to 30
stories high. The project is targeting middle to high income customers who
require a high quality living environment and convenient transportation to
the city center. We plan to start construction during the
fourth quarter 2009 and expect pre-sales to begin during the first
quarter of 2010.The total estimated revenue from this project is about $46
million.
Park Plaza: In July 2009, the
Company entered into a Letter of Intent to acquire 44,250 square meters of land
in the center of Xi'an for the Park Plaza project. The Company intends to
develop a large mid-upper income residential and commercial development project
on this site, with a gross floor area of 180,000 square meters. The four-year
construction of Park Plaza is expected to begin in the fourth quarter 2010. We
anticipate accepting pre-sale purchase agreements in the second quarter of 2010,
and revenues from pre-sale agreements will be begin to be recognized when all
revenue recognition criteria have been met. The total revenue from Park Plaza is
estimated to be $206 million.
Golden Bay: The Golden Bay
project is located within the Baqiao project, with a total gross floor area of
378,887 square meters. The Golden Bay project will consist of residential
buildings as well as a commercial area. Construction is anticipated to begin in
the fourth quarter of 2010, and we expect to begin accepting pre-sale purchase
agreements in the first quarter of 2011. Revenue will be recognized when
all revenue recognition criteria have been met.
Tsining Home IN: 88 North
Xingqing Road, Xi’an. Located near the city center, the Home IN project consists
of 215 two and three bedroom western-style apartments. Total construction area
is 30,072 square meters. The project, completed in December 2003, generated
total sales of $12.79 million.
Tsining-24G: 133 Changle Road,
Xi’an. 24G is a redevelopment of an existing 26 floor building, located in the
center of the most mature and developed commercial belt of the city. This
upscale development includes secured parking, cable TV, hot water, air
conditioning, natural gas access, internet connection, and exercise facilities.
This project was awarded “The Most Investment Potential Award in Xi’an
city” in 2006, Its target Customer were white-collar workers, small
business owners and traders, entrepreneurs. Total area available for residential
use was 43,563 square meters, covering 773 one to three bedroom serviced
apartments. The project started construction in June 2005 and was completed in
June 2006. Sales totaled $41.68 million.
Tsining JunJing Garden I: 369
North Jinhua Road, Xi’an. It is the first German style residential &
commercial community in Xi’an, designed by the world-famous WSP architectural
design house. Its target Customer is local middle income families. The project
has 15 residential apartment buildings consisting of 1,671 one to five bedroom
apartments. The Garden features secured parking, cable TV, hot water, heating
systems, and access to natural gas. Total GFA available was 167,931 square
meters. JunJing Garden I was also a commercial venture that houses small
businesses serving the needs of JunJing Garden I residents and surrounding
residential communities. The project was completed in September 2006 and
generated total revenue $50.38 million.
28
MARKETING
Similar
advertising methods are used for both commercial and residential marketing
initiatives. Local television, billboards, internet, and radio advertising are
all utilized to reach our target demographic. A sales force is on-site to handle
all prospective customer inquiries.
LAND USE
RIGHTS
The
supply of land is controlled by the government. There are generally three ways
in which we acquire land.
•
Purchase
by auction held by the Land Consolidation and Rehabilitation
Center;
•
Purchase
by auction held by court under bankruptcy
proceedings;
•
Merger
with or acquisition of a state-owned enterprise that controls developable
land.
All such
purchases of land are required to be reported to and authorized by the Xian
Bureau of Land and Natural Resources.
As for
other suppliers of design and construction services, we typically select
the lowest-cost provider through an open bidding process. Such service providers
are numerous in China and we foresee no difficulties in securing alternative
sources of services as needed.
INTELLECTUAL
PROPERTY
We
currently have no registered intellectual property.
SEASONALITY
Our
business is not seasonal.
RESEARCH
AND DEVELOPMENT
We have
not had any material research and development expenses over the past three
years. Due to the characteristics of the housing and land development industry,
“R&D” primarily consists of marketing study. The funding of our marketing
study comes from our operating cash flow and the expenses have not
been material.
GOVERNMENTAL
AND ENVIRONMENTAL REGULATION
To date,
we have been compliant with all registrations and requirements for the issuance
and maintenance of all licenses required by the applicable governing authorities
in China. These licenses include:
•
“Qualification
Certificate for Real Estate Development” authorized by the Shaanxi
Construction Bureau, effective from December 20, 2006 to December 20,2009. License No: JianKaiQi (2006) 603. The housing & land development
process is regulated by the Ministry of Construction and
authorized by the local offices of the Ministry. Each development
project must obtain the following
licenses:
•
“License
for Construction Area Planning” and “License for Construction Project
Planning”, authorized by Xian Bureau of Municipal
Design;
•
“Building
Permit” authorized by the Committee of Municipal and Rural
Construction;
After
construction is complete, the project must obtain a validation certificate and
there are various standards that must be met to obtain this certificate. These
standards are regulated by Local Ministry of Construction
Bureau.
29
Housing
and land development sales companies are regulated by the Ministry of Land &
Natural Resources and authorized by the local office of the Ministry. Each
project also has to be authorized and must obtain a “Commercial License for
Housing Sale” from the Real Estate Bureau.
COMPETITION
The real
estate development business in China is organized into four levels under the
structure of the “Qualification Certificate for Real Estate Development
Enterprise.” The starting level is Level 4 (see table below). Dependent upon its
registered capital, the number of years of industry experience, the area of land
it has developed and its safety record, a company may climb the scale to
participate in larger projects. However, only one level may be ascended per
year.
Registered
Capital
(million)
Experience
(years)
Developed
Are
(square
feet)
Other
Time for
license to
be
authorized
Level
1
US$
6.25
5
3,229,278
No
Level
2
US$
2.5
3
1,614,639
Severe
20
Days
Level
3
US$
1
2
538,213
Accident
Level
4
US$
0.125
1
N/A
On the
national level, there are numerous Level 1 companies that have real estate
projects across China (to develop in multiple regions a Level 1 status is
required). There are 79 housing and land development companies listed on the
Shanghai, Shenzhen and Hong Kong Stock Exchanges. However, such companies
usually undertake large scale projects and are unlikely to compete with us for
business as we target small to medium size projects.
We had
gained Level 1 status under the China Ministry of Construction licensing policy
in December 20 2006. Typically, the housing and land development industry is a
regional business with mostly local players competing with us for small to
medium size projects. In Xian the direct competition includes Xian Hi-Tech
Industrial District Real Estate Development Co. Ltd. (Level 1), the largest real
estate developer in Xian and in the top five for Northwest China, (Tiandiyuan:
600665, Shanghai Exchange). This company generally undertakes larger scale
projects. This company is a state-owned enterprise established in May 1991. The
company is now operating four projects in Xian with a total construction area of
14,598,191 square feet.
We are
aware of two privately owned companies in Xian which may be considered to be
direct competitors in the small to medium sized project sector:
Xian Yahe
Real Estate Development Co. Ltd. (Level 2) Established in 1993, this company has
a development portfolio of six projects with a total construction area of
5,279,860 square feet. These projects are mainly in North Xian. The company has
a similar profile to Tsining, however, since it is headquartered in North Xian,
a relatively less desirable area, the marketability and price of its
projects are not as high as Tsining developments. Moreover, while the cost of
development is similar to other areas of the city, the selling price of property
is lower than the Xian average.
Xian
Yanta District Rural & Urban Construction Development Company (Level 2) A
state-owned enterprise established in 1985. It has five projects developed with
a total construction area of 7,212,055 square feet. It has two projects
currently under development with a total construction area of 1,340,258 square
feet. Since the company is controlled by the Xian Yanta District Government most
of the company’s developments are municipal reform projects in the Yanta
District.
We are
the third-ranked housing and land development company in Shaanxi Province and
ranked as the number one private housing and land development company in Xian
(ranking assigned in 2005 by the China Enterprise Confederation and China
Enterprise Directors’ Association). We are also an “AAA Enterprise in the
Shaanxi Construction Industry” as recognized by the Shaanxi Province Enterprise
Credit Association, which is consisted by 27 banks and financial institutes. Our
principal methods of competition include lower price and high quality of
construction standard and services. We engage in large scale real estate
development so that we can build and offer to sell on an economic
scale.
Employees
As
of December 2, 2009, we had 573 employees, including 38 in China
Housing and Land Development, inc, 29 in Tsining, 5 in New Land, 30 in
Puhua and 473 in Xinxing Property Management.
We
believe we have a good working relationship with our employees. We are not a
party to any collective bargaining agreements. At present, no significant change
in our staffing is expected over the next 12 months, except for our acquisition
of the property management company we acquired in January 2009. All employees
are eligible for performance-based compensation.
30
MARKET
FOR CHINA HOUSING & LAND DEVELOPMENT, INC.’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our
common stock is traded on NASDAQ under the symbol CHLN. The following table
shows, for the periods indicated, the high and low trading prices for our common
stock as reported by the National Quotation Bureau, Inc., from the second
quarter of 2006 through May 15, 2008 when our stock traded on the OTC Bulletin
Board, and as reported by NASDAQ from May 16, 2008 onward.
High & Low
Stock Price
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2009
High
1.86
5.76
6.41
Low
1.02
0.78
3.35
2008
High
6.10
5.65
4.25
2.33
Low
3.30
3.80
1.85
0.75
2007
High
3.85
5.20
5.00
8.20
Low
2.00
3.15
3.20
4.25
2006
High
N/A
4.25
3.75
3.10
Low
N/A
3.50
1.70
1.55
On
December 3, 2009, the closing price of our common stock was $4.52.
As of
December 3, 2009, there were approximately 210 shareholders of record of
our common stock, excluding shareholders who have their shares held in street
name (by their stock brokerage firms).
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The
company is subject to the following market risks, including but not limit
to:
General
Real Estate Risk
There is
a risk that the company’s property values could go down due to general economic
conditions, a weak market for real estate generally, or changing supply and
demand. The company’s property held for sale value, approximately $108 million
at the end of September 2009, may change due to market fluctuations. Currently,
it is valued at its cost which is significantly below the market
value.
Risk
Relating to Property Sales
The
company may not be able to sell a property at a particular time for its full
value, particularly in a poor market.
Foreign
Currency Exchange Rate Risk
The
company is doing all its business in P.R. China. All the revenue and profit is
denominated in RMB. When RMB depreciates, it may adversely affect the company’s
financial performance. Specifically, since the company’s recent $20 million
senior Convertible Debt interest payment is denominated in US dollars, the
depreciation of RMB may incur additional cost to its financial
cost.
31
MANAGEMENT
Directors
and executive officers
Below
are the names and certain information regarding our executive officers and
directors.
Name
First
Last
Age
Title
Pingji
Lu
57
Chairman
Xiaohong
Feng
43
Chief
Executive Officer and Director
Jing
Lu
29
Chief
Operating Officer & Board Secretary
Michael
Marks
36
Independent
Director
Carolina
Woo
68
Independent
Director
Albert
McLelland
50
Independent
Director
Suiyi
Gao
54
Independent
Director
Cangsang
Huang
31
Chief
Financial Officer and
Director
Officers
are elected annually by the Board of Directors, at the Company’s annual meeting,
to hold such office until an officer’s successor has been duly appointed and
qualified, unless an officer sooner dies, resigns or is removed by the
Board.
Background
of Executive Officers and Directors
Mr.
Pingji Lu, Chairman
Mr.
Pingji Lu, 57, has served as the Chairman of the Board of Directors and Chief
Executive Officer since joining the Company in September 1999. In addition, Mr.
Lu was the founder of Lanbo Financial Investment Company Group Limited, where he
was the Chairman of the Board and Chief Executive Officer from our formation in
September 2003 until it’s merger with Lanbo Financial Group, Inc., when Mr. Lu
served as the Chairman of the Board and Chief Executive Officer of Lanbo
Financial Group, Inc. until December 2005. Prior to that Mr. Lu was the Chairman
of the Board and Chief Executive Officer of Xian Newstar Real Estate Development
Co., Ltd. from 1998 and previously served as General Manager from 1992 to 2003.
From February 1968 to December 1999, Mr. Lu held various positions in the
Chinese military, including soldier, Director of Barrack Administration,
supervisor, and Senior Colonel. Mr. Lu is member of the Enterprise Credit
Association of Shaanxi Province. Mr. Lu graduated from Xi’an Army College with a
major in architectural engineering. On January 12, 2009, Mr. Lu resigned as
Chief Executive Officer but has remained as Chairman of the
Company.
Mr.
Xiaohong Feng, Chief Executive Officer & Director
Mr.
Xiaohong Feng, 43, has been Chief Operating Officer and a Board Member of the
Company since joining in January 2003. In addition, Mr. Xiao Feng was a director
of Lanbo Financial Group, Inc. from November 2004 until December 2005.
Previously Mr. Feng served as President and a director of Xian Newstar Real
Estate Development Co., Ltd. from 2003 to 2004. From June 1996 to December 2002,
Mr. Feng was general manager and president of Xi’an Honghua Industry, Inc. He is
a member of the China Architecture Association, vice-president of Shaanxi
Province Real Estate Association, and vice director of Xi’an Decoration
Association. Mr.Feng received an M.S. of Architecture Science from Xi’an
Architecture & Technology University in 1990. On January 12, 2009, Mr. Feng
was appointed as Chief Executive Officer of the Company.
Mr.
Cangsang Huang, Chief Financial Officer and Director
Mr.
Huang most recently served as Assistant CFO of the Company, a position he had
held since October 2008, a director since October 2009. Mr. Huang worked at
Cantor Fitzgerald from 2006 and played an active role in several public
financings for companies in the transportation/shipping sectors as well as
several U.S. listed publicly-traded Chinese companies. Since 2007, Mr.
Huang worked for Merriman Curhan & Ford Inc. followed by Collins Stewart
LLC. He helped set up Merriman and Collins Stewart’s China banking
practice and participated in several China related financing transactions,
including General Steel (NYSE: GSI) and FUQI International (Nasdaq:
FUQI). From 2001 to 2004, Mr. Huang worked in Guangzhou, China with
China Communication Construction Company Limited (1800.HK) as a project manager
where he provided financial advisory services to both private and state-owned
companies and participated in multiple multi-billion RMB infrastructure
projects. Mr. Huang graduated from Shanghai Maritime University with a
degree in transportation economics and has a Master’s degree in Statistics from
Columbia University. Mr. Huang is a CFA Level III candidate and has his
NASD Series 7 & 63 licenses.
Ms. Lu,
age 29, was elected to her current position on January 12, 2009. She previously
served as Vice President of the company from 2004 through 2008. Ms. Lu continues
to serve as Board Secretary, which she has done since 2004, and is the company's
primary spokesperson with investors and security analysts. She received her
Master’s degree from King's College in London in September 2004. Ms. Lu is the
daughter of Mr. Pingji Lu.
Ms.
Carolina Woo, Independent Director
Ms.
Carolina Woo, 68, servers as independent Director of our Company on October 10,2007. She is currently the owner of CW Group, a consulting firm focused in real
estate development, planning and design. Ms. Woo is also a member of the Board
of Trustees of the Rhode Island School of Design. Previously, Ms. Woo worked at
Skidmore, Owings & Merrill LLP (SOM) beginning in 1969, and retired as a
partner of the international architecture-engineering office of SOM where
she served as the President of SOM International Ltd. with overall
responsibility for SOM’s work in China, Hong Kong, Taiwan, and the Asia-Pacific
region. Ms. Woo received her Master’s Degree from Columbia University
Graduate School of Business and her Bachelor’s Degree in Architecture from the
Road Island School of Design.
Mr.
Michael Marks, Independent Director
Mr.
Michael Marks, 36, has served as independent Director of our Company on October10, 2007. Until December 2007 he was a managing director and principal of
Sonnenblick Goldman Asia Pacific Limited, a firm that provides advisory services
in real estate investments. Mr. Marks is also the President and Director of
Middle Kingdom Alliance Corp., a special purpose acquisition corporation
listed on Over-the-Counter Bulletin Board. Previously, Mr. Marks served as a
director of Horwath Asia Pacific from January 2002 to December 2005 and was the
Chief Executive Officer and Director at B2Gglobe (Pty) Limited from May 2001 to
December 2002. Mr. Marks received both Bachelor’s and Master’s Degrees in
Commerce from the University of the Witwatersrand in Johannesburg, South Africa
in 1994 and 1997, respectively, and also received a Bachelor’s Degree in
Psychology from the University of South Africa in 1998. In 1997, Mr. Marks
qualified as a Chartered Accountant in South Africa, and in 1999 as a Fellow of
the Association of International Accountants in the United Kingdom.
Mr.
Suiyin Gao, Independent Director
Mr.
Suiyin Gao, 54, servers as independent Director of our Company on October 10,2007. He has over 30 years experience in human resource and management
consultant area. Mr. Gao is currently the head of the Shaanxi Senior Talent
Office, which is affiliated with Shaanxi Provincial government and focused on
corporation management, consultation and human resources services. Mr. Gao is
the founder and chairman of Shanxi management Member Club, one of the largest
manager clubs in Shanxi province. Mr. Gao is currently an independent director
of six enterprises, and also acted as senior consultant for more than twenty
enterprises. Previously, Mr. Gao worked)government since 1973. In 1998, Mr. Gao
received his degree in Master of Business Administration from Northwest
University in China.
Mr.
Albert McLelland, Independent Director
Mr.
Albert McLelland began serving as an independent director in February 2009. He
also serves as the Chairman of the Board's Audit Committee. Mr. McLelland has
been Senior Managing Director of AmPac Strategic Capital LLC since 2003. He is
also a founder and Managing Director of AmPac-TDJ LLC. Prior to founding AmPac
Strategic Capital, Mr. McLelland was responsible for the day to day cross-border
transactions practice of PricewaterhouseCoopers’ Financial Advisory Services.
Mr. McLelland has extensive investment and merchant banking experience, has
built two Asian-based financial service firms, and has led the corporate finance
department at CEF Taiwan Limited. He began his investment banking career in
Public Finance at Shearson Lehman. He holds an M.B.A. degree from the University
of Chicago and a Master of International Affairs degree from Columbia
University. He completed his undergraduate studies at the University of South
Florida and studied Mandarin at the National Normal University in Taiwan. Since
September 2008, Mr. McLelland has served as an independent director and Chairman
of the audit committee of the Board of Directors for China Fire & Security
Group, Inc. On March 9, 2009, Mr. McLelland became an independent director
and Chairman of the audit committee of the Board of Directors for Yanglin
Soybean, Inc.
33
The
following table sets forth all our independent directors of the Board of
Directors and their positions at the Compensation, Nominating and Audit
Committees:
Independent
Directors
Title
Service
in committee
Mr.
Michael Marks
Independent
Director
Chairman
of Compensation Committee; Member of Audit Committee
Ms.
Carolina Woo
Independent
Director
Member
of Audit Committee; Member of Nominating and Governance Committee
Mr.
Albert McLelland
Independent
Director
Chairman
of Audit Committee; Member of Compensation Committee
Mr.
Suiyin Gao
Independent
Director
Chairman
of Nominating and Governance Committee; Member of Compensation Committee
EXECUTIVE
COMPENSATION
COMPENSATION
DISCUSSION AND ANALYSIS
The
primary objective of our executive compensation program is to attract and retain
an excellent management team that has key attributes such as business acumen,
industry experience, personal integrity, the ability to recognize and make the
most of the talent within the Company, and is motivated to work as a team
and achieve results. A further objective of our compensation program is to
provide incentives and reward each member of the management team for their
contribution. In addition, we strive to promote an ownership mentality among key
leadership and the Board of Directors.
Currently,
all our executive officers’ compensation package is basically comprised of two
parts, Annual Salary Plan (“ASP”) and Share Incentive Plan (“SIP”). The ASP is
designed by our HR department and approved by our compensation committee. The
ASP includes an annual targets agreement signed between executive officers and
the company at the beginning of every year and the HR department will measure
how many targets have been met during the covered period. At the end of every
year, our HR department will provide a measure score report and obtain approval
from our Compensation committee for overall bonuses distributable for the
covered period. Besides the ASP, we have a separate SIP, 2007 Stock Incentive
Plan (the 2007 Plan) outstanding, which sets up total number of stock available
for distribution for fiscal year 2007 and thereafter. The 2007 Plan was approved
in 2007 and the individual’s entitlement was not approved until July 2,2008.
ASP:
The
key elements of ASP for the executive officers are a base monthly salary, a
monthly bonus and a annual bonus paid in cash and/or in shares of the Company’s
common stock according to each executive officer’s employment
agreement. The Company’s salary and bonus has been paid in cash
(except Mr Xin, former CFO’s package which contains shares of common stock for
ASP) in the past.
At the
beginning of every year, our HR department signs an annual target agreement with
each executive officer which sets forth the major targets that need to be
met during that year and at the beginning of each month, a monthly target
agreement that includes the major targets during that month will be signed with
each executive officer also. HR department will perform the monthly and annual
performance measurement based on the month and annual target agreements and give
out corresponding measure score. Our compensation committee approves the annual
target agreement.
Our
compensation program is designed to reward performance. The base salary is paid
to provide for basic living expenses and bonuses are paid to reward performance.
The amount of the payment has been determined based on work performance,
importance of position and individual credentials. The guidance for the
executive officers’ performance evaluation and performance assessment has been
set forth in the Company’s Guidelines for Performance Evaluation and Performance
Assessment Rule (the “Guidelines”). The Guidelines were established by the HR
and the Compensation Committee from inception of the Company and has been
revised and updated annually. Our compensation elements are a business
decision under the supervision of the Compensation Committee which
evaluates the effectiveness of such elements on an annual basis, and are set
forth in the Guidelines.
Based on
the Guidelines, the general principle for executive compensation is that annual
compensation equals (monthly base salary + monthly bonus) * 12 + annual bonus.
Annual compensation is a fixed amount determined by the Compensation Committee
at the beginning of the year based on the business operation condition, market
and individual positions and capabilities. Every month, each individual is paid
a certain amount of base and monthly bonus, which, for 12 months, constitutes
40-60% of the total annual compensation (the percentage is determined by the
amount of annual compensation under ASP ; the smaller the amount is, the bigger
the percentage will be allocated). The rest of the compensation, based on the
performance evaluation at year end, will be paid to executive officers all at
once.
The
monthly base salary is the minimum amount of salary permitted by the Chinese
labor and employment law. Because the Compensation Committee
understands that it is not sufficient to cover the basic life expenses of the
executive officers and keep them motivated, the monthly bonus is paid to
complement the base salary. However, the ability to keep the monthly bonus
depends on whether the executive officers can meet their monthly performance
targets. If the required performance targets have not been
accomplished, the monthly bonus already paid to the executive officers will be
recouped to the Company. As a result, the so-called “monthly bonus” is in fact a
contingent part of salary which can be taken away by the Company at year end.
The annual bonus is the bonus we pay for those who meet their annual performance
targets. It is unrelated to the monthly bonus and once awarded,
cannot be taken away. The salary, plus the bonus at year end, may exceed
the annual compensation fixed at the beginning of the year if certain
performance targets significant to the Company have been accomplished pursuant
to the principles of the Guidelines.
SIP:
Currently
we have one SIP approved and outstanding, the 2007 Plan, which was approved in
July, 2007. The detailed performance goal for eligible executive officers under
the plan for fiscal year 2007 was reviewed and approved by our Board of
Directors on July 2, 2008.
The
2007 Plan was proposed by the Board of Directors in early 2007 and was approved
by a majority of our shareholders in July 2007. The 2007 Plan covers fiscal
year 2007 and 2008 and if the restricted shares were not fully utilized, the
2007 Plan will continue to fiscal year 2009. The total number of restricted
shares that may be granted under the 2007 Plan is 1,000,000 shares. However, the
Board of Directors and the majority shareholders only approved the maximum
aggregate number of 1,000,000 shares that may be issued under the 2007
Plan. The detailed SIP for fiscal year 2007 which specified a performance goal
of $16.3 million net profit without stock-based compensation, the
calculation formula, the discretionary individual’s performance
assessment scores in 2007 and the 750,000 restricted shares to be issued
for 2007 performance, calculated in accordance with the Company’s Detailed
Implementation Rule for the 2007 Plan, were not reviewed by the
Compensation Committee until June 6, 2008, and not approved by the Board of
Directors until July 2, 2008. In addition, all employees under the 2007 Plan
were notified of the general framework of the 2007 Plan but were not fully aware
of the detailed calculation formula and the performance goal for fiscal
year 2007 until July 2, 2008. Therefore, July 2, 2008 is considered the grant
date.
The
750,000 restricted shares of common stock to members of management vested
immediately on July 2, 2008. The Company recognized a $3,000,000 stock based
compensation expense for the year ended December 31, 2008, based on the stock
price on the grant date.
We are
a relatively small company compared to many listed companies with limited
resources and management manpower to engage in very sophisticated and
complicated executive compensation calculation system. We have to spend our
limited management resources on running our business operations rather than
trying to achieve a sophisticated compensation system and depend on the business
judgment of our compensation committee to make business judgment calls on the
overall policies and treatment of executive compensation issues. We engaged an
independent compensation advisor in September 1999 but had to terminate the
engagement due to cost considerations in October 2007. Before the termination,
no substantive services were provided for many years due to non-performance of
certain services to be provided by the consultant.
34
Our
Compensation Committee reviews and approves, or in some cases recommends for the
approval of the full Board of Directors, the annual compensation for our
executive officers. Regarding most compensation matters, including executive and
director compensation, our management provides recommendations to the
Compensation Committee. Typically, our human resource department recommends to
the Compensation Committee of the Board of Directors compensation package
proposals based on prevailing compensation standards in our industry, which in
turn reviews and approves such proposals. Our Compensation Committee may consult
with the executive officers to form consensus on such packages. Our executive
officers may discuss any disagreements and needed amendment to such proposals
with our Compensation Committee before such proposals are finalized and approved
by the Compensation Committee and finally by the entire board. It is a
transparent process initiated by the human resource department that makes such
recommendation directly to the Compensation Committee. The Compensation
Committee does not delegate any of its functions to others in setting
compensation. Our Compensation Committee does not include any executive
officers.
In
measuring our executive officers’ contributions, the Compensation Committee
considers numerous factors including our growth, strategic business
relationships and financial performance. The Compensation Committee takes the
following actions in determining the compensation of our executive
officers:
•
Reviewing
the peer group to help decide Company performance and executive officer
compensation. In this case we typically refer to our competitors in our
market such as Xian Hi-Tech Industrial District Real Estate Development
Co. Ltd, Xian Yahe Real Estate Development Co. Ltd, Xian Yanta District
Rural & Urban Construction Development Company to compare and
use as reference. We do not engage in benchmarking compensation
against other companies.
•
Reviews
executive officer compensation to ensure that a significant portion is
performance-based to create incentives for above-target performance and
consequences for below-target
performance,
•
Reviews
tally sheets of total compensation and benefits for each executive officer
to ensure the Committee understands all aspects of each executive
officer’s total compensation,
•
Approves
incentive plans’ performance targets, which are linked to Company
performance,
•
Ensure
that total compensation paid to the Chief Executive Officer and the other
executive officers is appropriate based on the Company’s performance
relative to that of the peer group,
and
•
Approves
base salary adjustments and also approves annual award payouts for each
year based on actual performance achieved relative to the pre-established
performance targets and evaluation of individual
performance.
We have
no individual agreements, arrangements or other programs in which additional
compensation is paid upon entering into or completing a change-in-control of the
Company, nor is additional compensation or severance payable in the event of
termination of employment following a change-in-control of the Company beyond
amounts otherwise payable upon termination of employment.
The
Company has entered into employment agreements and severance compensation
arrangements with some of the named executive officers. Based on research on the
peer group and general industry conducted by the consultant and the Committee’s
own experience, the Company believes that pre-established severance arrangements
provide assurances of fair treatment to the executives and help retain key
executives for the benefit of the Company. Such agreements support the
development of an experienced management team and are competitive with practices
among the peer group.
The
Committee has developed the following guidelines for the Company to limit
compensation in severance agreements:
•
Employment
and severance agreements are used only for a limited group of
executives.
•
Termination
of employment for cause should result in the forfeiture of all unpaid
compensation, all unpaid cash or stock incentive compensation, and the
Company may consider forfeiture of certain benefits that are not protected
by federal or state law.
•
Death
or disability should normally result in payment of compensation earned
through that date, plus cash and stock compensation and other employee
benefits under the terms and conditions of those
plans.
•
Voluntary
termination of employment or retirement should normally result in payment
of compensation earned through that date, plus other vested employee
benefits under the terms of the applicable plans and, in the case of
retirement, accrued bonus and stock compensation under the terms of the
applicable plans.
•
For
involuntary termination of employment without cause, the value of cash
severance arrangements should be limited to compensation normally payable
through the end of the employment agreement, but generally not less than
one year’s base salary and target bonus. Stock compensation should follow
the vesting rules set by the Committee in the stock grant’s terms and
conditions, although the Committee varies from this practice depending on
the facts and circumstances. Employee benefits remain payable under the
terms and conditions of the benefit
plans.
35
Stock
vesting status
The
awards of restricted shares of common stock under the 2007 Plan are immediately
vested upon issuance due to the fact that they were issued retrospectively post
the achievement of performance goals in 2007.
In
addition, we have agreed to issue a total of 72,222 shares of the Company’s
common stock to our former Chief Financial Officer, William Xin. Of which 33,333
shares, as part of his 2008 compensation, have vested and issued; 22,222 shares,
as part of his 2009 compensation from January 1, 2009 to September 1, 2009, have
vested on September 1, 2009 and will be issued; and 16,667 shares, as agreed as
a part of Mr. Xin’s severance package, will vest on December 31,2009.
Other
than the shares issued under Stock Incentive Plan and the shares issued to
Mr. Xin as a part of his compensation and severance packages, we have not issued
any compensation shares subject to vesting.
SUMMARY
COMPENSATION TABLE
SUMMARY
COMPENSATION TABLE
The
following table sets forth all compensation paid in respect of our Chief
Executive Officer, Chief Financial Officer and all other executive officers for
services rendered during the preceding two fiscal years. The compensation
comprises base salary and bonus.
Bonus
(2)
Name and Principal
Position
Year
Base
Salary
($) (1)
Monthly
Bonus
Cash ($)
Annual
Bonus
Cash ($)
Stock
Awards ($)
(3)
Option
Awards
($)
Total ($)
Pingji
Lu (4)
2008
3,868
30,066
0
1,641,626
N/A
1,675,560
Chairman
2007
2,174
5,540
11,571
N/A
N/A
19,285
Genxiang
Xiao*
2008
3,516
16,670
0
348,730
N/A
368,916
Managing
Director
2007
2,174
3,182
6,547
N/A
N/A
11,903
Xiaohong
Feng
2008
3,516
21,928
0
427,006
N/A
452,450
CEO
& Managing Director
2007
2,174
6,295
10,352
N/A
N/A
18,821
Yulong
Wan
2008
N/A
N/A
N/A
73,815
N/A
73,815
Former
CFO (Jan to Apr 2007)
2007
1,777
0
0
N/A
N/A
1,777
Zhiyong
Shi
2008
3,516
12,756
0
N/A
N/A
16,272
Chief
Legal Counsel &
2007
725
16
741
N/A
N/A
1482
Managing
Director (Jan to Apr 2007)
William
Xin (5) **
2008
36,000
0
0
43,000
N/A
79,000
Former
CFO
2007
N/A
N/A
N/A
N/A
N/A
N/A
Jing
Lu
2008
2,813
8,626
0
312,082
N/A
323,521
Chief
Operating Officer &
2007
6,957
696
6,261
N/A
N/A
13,914
Board
Secretary
* Mr.
Genxiang Xiao served as our Chief Administrative Officer from September 1999 to
January 2009.
** Mr.
Xin served as our Chief Financial Officer from January 2008 to June
2009.
36
1.
The
Company pays salaries in RMB to all executive officers every month. The
RMB amount is translated into USD when the Company files SEC documents.
The exchange rates used were the average rates of 2008 and 2007. They were
0.1465 and 0.1449, respectively. The stock awards were valued based
on the closing price of our common stock on the NASDAQ on July 2,2008.
2.
The
Company’s bonus has been mostly in cash. Whether the bonus can be issued
in stock is discretionary with the Compensation Committee. Other than the
stocks issued under the 2007 Stock Incentive Plan, we have not issued any
stock bonus. The dollar value of stock is based on the stock price of
$3.99 per share, the closing price of our common stock on the NASDAQ on
July 2, 2008. Based on the Guidelines, the general principle for the
executive compensation is that annual compensation equals to (monthly base
salary + monthly bonus) * 12 + annual bonus. Annual compensation is a
fixed amount determined by the Compensation Committee at the beginning of
the year based on the business operation condition, market and individual
positions and capabilities. Every month, each individual is paid a
certain amount of base and monthly bonus, which, for 12 months,
constitutes 40-60% of the total annual compensation (the percentage
is determined by the amount of annual compensation; the smaller the amount
is, the bigger the percentage will be allocated). The rest of the
compensation, based on the performance evaluation at year end, will be
paid to executive officers all at once, independent of whether the
executive officers can meet their monthly performance targets. The
annual bonus is the bonus paid to those who meet their annual performance
targets. It is unrelated to the monthly
bonus.
3.
The
stock awards column shows all stocks paid to our executives, which
includes the stocks paid in 2008 for their 2007 performance and the bonus
shares of the common stock mortgaged for the make-good provision payment
pursuant to the Share Purchase Agreement in connection with the private
placement on May 9, 2007. The stock awards amount is based on the stock
price of $3.99 per share, the closing price of our common stock on the
NASDAQ on July 2, 2008.
4.
On
June 1st, 2008, the Compensation Committee approved a proposal to increase
Chairman Lu’s total annual compensation, including year end bonus, to
$200,000 USD. The Company accrued $100,000 for half of fiscal 2008.
But the amount was not distributed until the second quarter of fiscal year
2009 and therefore not included in the compensation table
above.
5.
William
Xin’s compensation package includes base salary and a total of 100,000
shares of the Company’s common stock which will be vested equally over the
three year employment period by 33.33% each year and are not based on the
performance evaluation at the year end. For 2008, the stock amount he
received as part of his compensation is based on the stock price of $1.29,
the closing price of our common stock on the NASDAQ on December 31, 2008.
See Note of the Consolidated Financial Statements as of December 31, 2008
for additional discussion on SFAS 123R valuation
methodology.
On
June 3, 2009, the Company entered into a settlement agreement and general
release (the “Settlement Agreement”) with William Xin, the Company’s former
Chief Financial Officer. Pursuant to the Settlement Agreement, the Company paid
Mr. Xin US$18,000, which represented six months of his base salary, less
applicable payroll deductions. In addition, the Company will pay Mr. Xin
US$82,000, upon, based on the Company’s sole discretion, the satisfactory
performance of the Settlement Agreement within 30 days after September 1, 2009.
The amount has been accrued and will be paid. Mr. Xin provided the Company and
its affiliates with a general release of claims and covenants not to sue. Mr.
Xin did not have any disagreements with the Company prior to his
termination from the Chief Financial Officer position. In addition, vesting
of the Company’s stock granted by the Company to Mr. Xin shall cease as of
September 1, 2009 and the Company shall grant to Mr. Xin 16,667 shares of the
Company’s stock (the “Severance Shares”) and such Severance Shares shall become
fully vested on December 31, 2009.
COMPENSATION
OF NAMED EXECUTIVES
On June1, 2008, the Company entered into a one-year employment agreement with Pingji Lu
as President and Chief Executive Officer. The total annual compensation for Mr.
Lu under this agreement is US$200,000. The agreement provides for a monthly base
salary of RMB 2,200 (or USD$301, determined based on the minimum base salary
requirements by the Employment Law of the PRC), and a monthly bonus of RMB
22,000 (or USD$3,010), which for 12 months, constitutes 20% to 40% of the annual
compensation based on the Guidelines. The performance or bonus payment is given
pursuant to the Guidelines in accordance with relevant laws. The Company
has the right to adjust Mr. Lu’s salary according to his production operations,
alteration of his post and distribution methods for labor remuneration
established under the law. Mr. Lu is entitled to pension insurance, unemployment
insurance, medical insurance, overall-planned medical care for serious
illnesses, housing fund and other social insurance of the Company pursuant to
relevant regulations of the province and Xi’an city. In the event the Company
terminates Mr. Lu’s employment in violation of the agreement, the Company shall
be required to pay Mr. Lu, in addition to paying the salaries for the remaining
months of the term in full, economic compensation equal to 25% of the
corresponding salaries. The Company has set up both monthly and annual personal
performance target for Mr. Pingji Lu. The monthly bonus is measured in
accordance with his contribution to the Company and reviewed and is subject to
adjustment in his total annual compensation by the Compensation Committee
periodically.
37
For
Mr.Lu’s ASP, our HR department measured Mr. Lu’s performance scores in
accordance with his annual targets agreement. Mr. Lu signed his annual
targets agreement with the Company at the beginning of 2007. At the
beginning of 2008, the HR department reviewed the targets agreement to measure
how many targets had been met by Mr. Lu and then set his targets score
accordingly. The result was then sent to our compensation committee to get
approval. All cash bonuses for 2007 and 2008 have been paid. For Mr. Lu’s stock
incentive plan, he was paid 60,000 shares at a value of $239,400 as his 2007
performance bonus based on the Compensation Committee’s decision in view of the
audited financial statements of 2007.
On
January 2, 2008the Company entered into a three-year employment agreement with
William Xin as Chief Financial Officer. The agreement provides for an annualized
base salary to Mr. Xin of $36,000 before tax. The base salary will be reviewed
annually by the Board of Directors of the Company, provided, however, that the
base salary shall not be decreased below the amount set forth in the first year.
During Mr. Xin’s term of three year, a total of 100,000 shares of the Company’s
common stock should be granted to him. All of the shares of common stock shall
be vested equally over the three year employment period by 33.33% each year with
pro rata vesting if it is less than a full year. On June 3, 2009, however,
the Company entered into a settlement agreement and general release (the
“Settlement Agreement”) with Mr. Xin. Pursuant to the Settlement Agreement, the
Company paid Mr. Xin US$18,000, which represented six months of his base
salary, less applicable payroll deductions. In addition, the Company will pay
Mr. Xin US$82,000, upon, based on the Company’s sole discretion, the
satisfactory performance of this Settlement Agreement within 30 days after
September 1, 2009. Mr. Xin provided the Company and its affiliates with a
general release of claims and covenant not to sue. Mr. Xin did not have any
disagreements with the Company prior to his termination from the Chief Financial
Officer position. In addition, we have agreed to issue a total of 72,222
shares of the Company’s common stock to our former Chief Financial Officer,
William Xin. Of which 33,333 shares, as part of his 2008 compensation, have
vested and issued; 22,222 shares, as part of his 2009 compensation from January1, 2009 to September 1, 2009, have vested on September 1, 2009 and will be
issued; and 16,667 shares, as agreed as a part of Mr. Xin’s severance
package, will vest on December 31, 2009.
On
January 12, 2009, Mr. Xiaohong Feng was appointed as the new Chief Executive
Officer of the Company. Mr. Feng's employment agreement is still in negotiation
and the Company will file a Form 8-K to disclose the agreement as soon as it is
approved by the Compensation Committee.
38
DIRECTOR
COMPENSATION
The table
below sets forth the salary our independent director received for the services
performed in the last completed fiscal year. Our directors’ salary comprises of
both cash and stock. For 2008, the stock value is based on the stock price of
$1.29, the closing price at December 31, 2008. The cash salary is paid to all
directors in USD every quarter.
Salary
Name and Principal Position
Year
Cash
($)
Stock
($)
Total
($)
Carolina
Woo
2008
$
20,000
9,675
29,675
Independent
director of the Board
Edward
Meng (1)
2008
$
23,333
4,838
28,171
Independent
director of the Board
Michael
Marks
2008
$
15,000
6,450
21,450
Independent
director of the Board
Suiyin
Gao
2008
$
15,000
6,450
21,450
Independent
director of the Board
(1)
Edward
Meng resigned as independent director on October 10,2008.
THE
STOCK INCENTIVE PLAN
The Board
of Directors (the “Board”) and the majority shareholders have adopted the 2007
Plan. Since the adoption of the 2007 Plan, we have paid out the first round of
incentive compensation based on restricted common shares of the company, which
was disclosed on Form 8K dated July 14, 2008. The restricted shares were paid in
2008 in consideration of the performance of the employees in 2007 and were
vested immediately upon payment. No other payment was made under the
Plan.
The
purpose of the Plan is to increase our ability to attract and retain talented
employees, officers, consultants and directors and thereby enhance our growth
and profitability. The Plan provides for the grant of awards of restricted stock
to those of our employees, officers, consultants and directors as may be
designated by the Board or the committee appointed by the Board. Awards of
restricted stock are rights to receive shares of common stock which are subject
to a substantial risk of forfeiture and restrictions on
transferability.
The
following is a summary of the principal features of the 2007 Plan.
39
ADMINISTRATION
OF THE PLAN
The Board
or a committee appointed by the Board shall administer the 2007 Plan. The
committee shall consist of such number of “non-employee directors” (as defined
in Rule 16b-3 of the Exchange Act) as may be required and each such non-employee
director shall satisfy such requirements as may be necessary to qualify for
exemptions under Rule 16b-3. To the extent required for compensation realized
from the restricted stock issued under the 2007 Plan to be deductible by us or
any of our subsidiaries pursuant to Section 162(m) of the Code, the members of
such committee shall also be comprised solely of “outside directors” within the
meaning of Section 162(m) of the Code. Subject to the express provisions of the
2007 Plan, the Board or the committee has the complete authority to interpret
the 2007 Plan, to prescribe, amend and rescind rules and regulations relating to
the 2007 Plan, and to make all other determinations deemed necessary or
advisable for the administration of the 2007 Plan. The Board or the committee
has the authority to determine, among other things, the persons to whom awards
of restricted stock will be granted, the number of shares to be granted, and the
terms and conditions of each award, including the period during which an
award will be subject to restrictions. In addition, the committee shall
determine whether any such grant is intended to qualify as performance-based
compensation under Section 162(m) of the Code.
SHARES
AVAILABLE
The
maximum aggregate number of shares of common stock that may be issued pursuant
to awards of restricted stock under the Plan is 1,000,000 shares. No awards of
restricted stock can be granted under the Plan after the earlier of the date
that is ten (10) years after the date on which the Plan is adopted by the Board
or approved by our stockholders. Shares underlying awards that expire or are
forfeited will again be available for the grant of additional awards within the
limits provided in the Plan. Appropriate adjustments will be made to the shares
subject to outstanding awards in the event of any reorganization,
recapitalization, share split or other change in our capital structure to
account for the changed circumstances. Shares granted to satisfy awards under
the Plan may be authorized and unissued shares, or shares held in our
treasury.
PERFORMANCE
GOALS
Normally,
the vesting of the Restricted Shares occurs over one year (the “Performance
Period”). Within ninety (90) days after the beginning of each year of service to
which the performance goal relates during the Performance Period. The
Compensation Committee will establish a performance goal for such fiscal year
based upon the Company’s annual net profits as set forth in the 2007 Plan’s
implementation rules (each such goal is hereinafter referred to as the
“Performance Measure” for the applicable year of the Performance Period). If the
Performance Measure for an applicable year of the Performance Period is
attained, and if the grantee remains employed or continuously provides services
to the Company or any of its Subsidiaries through December 31 of the applicable
year of the Performance Period, then 100% (750,000 shares for fiscal year 2007)
of the restricted shares will vest as of the date the Compensation Committee
reviews and determines that the Performance Measure has been attained and the
Board of Directors approves the grant. If the relevant performance goal is not
attained, the issuance of the award shares will be postponed until the following
year. The restricted shares will not be awarded for years in which the
performance goals are not met.
Since
fiscal year 2007 was the first year in which the Company implemented such a
plan, the Performance Measure of an annual net profit no less than $16.3 million
were determined in 2008.
RESTRICTED
STOCK AWARDS
Under the
terms of the Plan, an award will be made in the form of restricted stock. All
shares of restricted stock are subject to the following restrictions: (i) except
as provided below, all restricted stock will be forfeited to us unless the
recipient of the restricted stock remains in our employ or service during the
restriction period established by the Board or committee; and (ii) during such
restriction period, the recipient may not sell, transfer, pledge, exchange or
otherwise encumber the shares of restricted stock. Certificates representing
restricted stock granted under the Plan will be held by us in escrow until the
restrictions lapse and the shares vest. Upon the grant of restricted stock, the
recipient will have the rights of a stockholder with respect to such restricted
stock, including the right to vote the restricted stock and, unless otherwise
determined by the Board or the committee, the right to receive all dividends and
other distributions paid or made with respect to the restricted
stock.
Generally,
unless the Board or committee determines otherwise, upon a participant’s
termination of employment for any reason other than death, disability or
retirement, restricted stock that has not vested is immediately forfeited to
us.
The
Board or committee may at any time, and from time to time, modify or amend the
plan, except that unless approved by the shareholders: (i) the maximum number of
shares of restricted stock which may be issued under the Plan may not be
increased (except in the event of a stock split or other adjustment described
above); or (ii) the requirements as to eligibility for participation in the Plan
may not be modified.
40
SECTION
162(m) PROVISIONS
Awards to
any participant whom the committee determines to be a “covered employee” under
Section 162(m) of the Code may be subject to restrictions, including the
establishment of performance goals, as necessary for the award to meet the
requirements for performance-based compensation under Section 162(m). The
committee shall establish performance goals in the case of an award of
restricted stock intended to qualify for the performance-based compensation
exception of Section 162(m) of the Code within the time period and in accordance
with the requirements prescribed by Section 162(m) of the Code and the
regulations promulgated thereunder.
TRANSFERABILITY
Awards
under the Plan generally are not transferable other than by will or by the laws
of descent and distribution, and, during the lifetime of the participant, only
the participant or his or her duly appointed guardian or personal representative
may sell the shares.
GRANTS
OF RESTRICTED STOCK AWARDS
When we
issued restricted shares , we followed the below formula:
Q
= S ÷ C A × C × J
The
application of the above formula intends to determine how much incentive common
stock shares each eligible executive officer should be issued, if any, in any
given year based on the coefficient representing this performance target
vis-à-vis the total pool of eligible executive officers.
Q stands
for the amount of restricted shares that one should enjoy in current
year;
S means
the total planned issuing amount of restricted shares by the Company in current
year;
CA refers
to the Sum of Individual Allotment Coefficient among the qualified incentive
candidates in current year;
C is
Individual Allotment Coefficient for incentive candidates;
J means
the percentage of individual performance assessment scores in current
year.
The
compensation Committee did not review the performance goal, formula for
calculation, discretionary individually performance assessment scores until June6, 2008. Places after the decimal point in the calculated result should be
eliminated. The total number of restricted stock shares issued in 2008 (“S”) is
750,000, the Sum of Individual Allotment Coefficient among the qualified
incentive candidates in 2007 (“CA”) is 16.8, and the percentages of individual
performance assessment scores in 2007 (“J”) are the following:
Pingji
Lu
105
%
Xiaohong
Feng
107
%
Genxiang
Xiao
92.5
%
Jing
Lu
100
%
Lei
Feng
96
%
Yulong
Wan
100
%
Fang
Nie
100
%
Jun
Yang
100
%
We use
Mr. Pingji Lu’s bonus shares received under this Plan to illustrate how the
formula works. Mr. Lu received 60,000 shares of restricted stock awards in July
2008.
60,000 =
(750,000- 510,000)/16. 8 x 4 x 105%
Q =
60,000;
S
=
750,000-510,000
“Bonus Shares” deducts “Bonus Shares of the Common Stock Mortgaged for
Make-Good Provision Payment of the Share Purchase Agreement;"
(1)
CA =
16.8;
C = 4%
(2);
J = 105%.
(3)
41
(1)
According to Section 4.19 Make-Good Obligation of the Share Purchase Agreement
in connection with the private placement on May 9, 2007 (the “Share Purchase
Agreement”), in the event that the after-tax net income of the Company during
fiscal year 2007 is less than US$16,300,000.00, as reported in the Company’s
audited financial statements for fiscal year 2007, the Company shall pay the
purchasers 510,000 management-held shares, held in Make-Good Escrow as set
forth in Section 4.20 of the Share Purchase Agreement to be distributed to the
purchasers pro rata in accordance with their respective investment amounts. In
the event that the after-tax net income of the Company during fiscal year 2008
is less than US$35,800,000.00, as reported in the Company’s audited
financial statements for fiscal year 2008, the Company shall pay the purchasers
either (i) 510,000 management-held Shares, if the after-tax net income of
the Company during fiscal year 2007 was equal to or greater than
US$16,300,000.00, to be distributed pro rata in accordance with each purchaser’s
respective investment amounts, or (ii) 510,000 newly issued shares of common
stock by the Company, if the after-tax net income of the Company during fiscal
year 2007 was less than US$16,300,000.00, as reported in the Company’s audited
financial statements for fiscal year 2007, and the 510,000 management-held
shares have already been distributed to the purchasers in accordance with this
Section 4.19, to be distributed pro rata in accordance with each purchaser’s
respective investment amount. The costs associated with the make-good guarantee
shall not be included as a cost towards the determination of the after-tax net
income for each year.
Considering
the risks and sacrifice the management has taken to give their personal shares
to the purchasers to get the financing the Company needed, the Compensation
Committee has reviewed and approved the proposal of rewarding the same amount of
shares to the executive officers for those they gave to the investors, only if
the Company reached the after-tax net income targets according to the make-good
obligation of Section 4.19 of the Share Purchase Agreement.
According
to the Company’s 2007 and 2008 audited annual report, the after-tax net income
of the Company during fiscal year 2007 and 2008 was $16.7 million and $9.6
million, respectively. Thus, The Company met the general performance goal for
fiscal year 2007 under the make-good obligation of the Share Purchase
Agreement in connection with the private placement on May 9, 2007 and did not
meet the general performance goal for fiscal year 2008.
For
fiscal year 2007, as the Company met the general performance goal, no
management-held shares (shares mortgaged for the make-good provision payment)
were distributed to private placement purchasers. And according to Compensation
Committee’s resolution, 510,000 newly issued shares were awarded to executive
officers as bonus shares.
For
fiscal year 2008, the Company failed to meet the general performance goal.
Therefore, 510,000 management-held shares (shares mortgaged for the make-good
provision payment) will be distributed to private placement purchasers and no
newly issued shares from the Company will be awarded to executive officers. As
of July 17, 2009, the Company has completed the distribution of 510,000
management-held shares to private placement purchasers.
The
following table sets forth the number of shares mortgaged for the make-good
provision payment, which is the same number of “Bonus Shares of the Common Stock
Mortgaged for Make-Good Provision Payment” the executive officers
received.
Management
mortgage shares:
Name
Title
Mortgaged
Shares
Mr.Pingji
Lu
Chairman
351,435
Mr.
Xiaohong Feng
CEO
61,162
Mr.
Genxiang Xiao
Former
CAO
47,758
Ms.
Jing Lu
COO
& Board Secretary
49,645
Total
510,000
(2)
The portion of performance-based compensation in our total compensation varies
based on different job titles and contribution to the Company. In the formula
which we followed when deciding the amount of restricted shares for each person
(i.e. Q = S ÷ C A × C × J), Individual Allotment Coefficients are set forth as
the following:
1)
Chairman/CEO:
4
2)
Managing
Director, General Manager in subsidiary companies:
3
3)
Assistant
CFO, Board Secretary, General Manager in Secondary subsidiary companies:
2
4)
Manager
of Investment and Development Department:
1
5)
Key
Technicians: 0.3
The
Individual Allotment Coefficients are determined by the Company’s HR department
based on such factors as the importance of the position, the responsibilities
and risks each tile involves, on a scale from 0.3 (the lowest) to 4 (the
highest). HR then submitted the proposal of the Individual Allotment Coefficient
to the Compensation Committee and got the approval.
42
(3)
Our percentages of individual performance assessment scores are decided by the
HR and set forth in the Guidelines. The percentage of each performance target is
determined by the relative importance of the target. For example, for the most
important target of the Company, the Sales, it has a percentage of 15% of total
score. For the next important target of the Company, the Net Asset Return, it
has a percentage of 13%. Shareholder Returns, Capital Returns each takes up 10%
of the total score and Gross Margin has a percentage of 2%. The above five items
take up 50% of the whole performance assessment scores. The rest of the scores
are allocated to relatively minor items such as customer satisfaction, operation
objectives, self-training and development. Based on the percentages of the
performance score as set forth in the Guideline, Mr. Lu’s percentage
is 105%, which is determined by the HR in accordance with the performance
target agreement signed with Mr. Lu and after reviewing the actual number of
targets accomplished. According to the performance target agreement which was
entered into in compliance with the Guidelines, the accomplishment of certain
important targets will have added percentage. For example, 5 percent can be
added to the original 15% if the net profit of the Company exceeded certain
amount.
We are
not disclosing specific performance targets other than those already disclosed
since they are all project-related and the disclosure of which will cause
substantial competitive harm to the Company. Unlike producers of commodity
products and related manufacturing operations, our target components are related
to unique new land acquisition opportunities and particular land parcels’
development which are extremely sensitive and proprietary in real estate
markets. They relate to confidential land or property acquisition opportunities.
Such disclosures would provide our competitors with confidential business
information to take advantage of such disclosed information to compete against
or harm our operations to the irreparable detriment to our business and the
interest of our shareholders.
If the
Company were forced to disclose more detailed various components of the
performance targets, it would compel the company to provide through such
disclosure detailed confidential information on specific real estate development
projects which are set each year by the management, human resources department
and the compensation committee of the Company. Such targets are inspirational in
nature and relate to the expected sustainable costs of acquisitions (bottom-line
negotiation positions), planned sale price per unit and the targeted land
acquisition locations and expected value and profit to be realized on those
specific parcels, some of which have been acquired but under negotiation with
various parties for sale, co-development or otherwise, others are confidential
land acquisition or development targets unknown to our competitors or others.
For example, if we were to disclose the locations and expected land acquisition
strategies prematurely, our competitors would be given open opportunities to
either interfere in the negotiations, usurp the development opportunities
or simply damage our position by forcing up the acquisition costs for us. Large
real estate development projects are extremely market sensitive as to the timing
and the location, disclosure of such information would give our business secrets
away and allow our competitors to take actions to undercut our business
operation or even create situations in which we would be either crowded out the
market or cornered in our strategy to the detriment of our and our shareholders’
interests.
In
addition, if the Company were forced to provide detailed target components, the
Company would be in essence providing very detailed market guidance without any
reasonable support that it would be met as such targets are by nature
inspirational for the executives.
The
general performance target provided for 2007 relating to the restrictive stock
grant may be disclosed at the sole discretion of the Company when it no longer
indicates or contains confidential information. The Company does not
intend to prematurely disclose such data as a matter of policy to avoid giving
guidance and incur the obligation to constantly update on progress or failure of
specific bidding positions or development status on sensitive
projects.
Such
specific targets are difficult to achieve and depend on many factors that may or
may not within the control of the management, such as market conditions,
competitors’ positions and moves in the market as well as funding availability
and costs.
43
The table
below sets forth the number of restricted stock shares our executive officers
and directors have received in 2008 under our 2007 Stock Incentive Plan. The
dollar value is based on the stock price of $3.99 per share, the closing price
of the common stock at July 2, 2008.
Shares
received in 2008 under the 2007 Stock Incentive Plan
Name and Position
Maximum
Dollar Value
($)
Maximum
Number of
Units
Lu
Pingji
1,641,626
411,435
shares
Chairman
Feng
Xiaohong
427,006
107,019
shares
Chief
Executive Officer and Director
Xiao
Genxiang
348,730
87,401
shares
Former
Chief Administrative Officer and Director
Lu
Jing
312,082
78,216
shares
Chief
Operating Officer and Board Secretary
All
executive officers as a group
2,729,444
684,071
shares
Non-Executive
Director Group
N/A
0
shares
Non-Executive
Officer Employee Group
N/A
144,145
shares
The table
below sets forth information concerning all the performance-based compensation
made to our executive officers in 2008 for their 2007 performance.
Name
Title
Performance
Score
Bonus
Shares of the
Common
Stock
Mortgaged
for
Make-Good
Provision
Payment
of the Stock
Purchase
Agreement
Bonus
Shares of the
Common
Stock for
Performance
Total
Number of
Bonus
Shares
Pingji
Lu
Chairman
105
%
351,435
60,000
411,435
Xiaohong
Feng
CEO
107
%
61,162
45,857
107,019
Gengxiang
Xiao
CAO
92.5
%
47,758
39,643
87,401
Jing
Lu
COO
& Board Secretary
100
%
49,645
28,571
78,216
Lei
Feng
Former
Assistant CFO
96
%
0
27,429
27,429
Yulong
Wan
Former
CFO
100
%
0
18,500
18,500
Fang
Nie
Finance
Supervisor
100
%
0
15,000
15,000
Jun
Yang
Finance
Supervisor
100
%
0
5,000
5,000
44
The table
below sets forth our outstanding equity awards at December 1,2009.
Currently,
we have agreed to issue a total of 72,222 shares of the Company’s common stock
to our former Chief Financial Officer, William Xin, of which 33,333 shares, as
part of his 2008 compensation, have been issued and have vested, 22,222 shares,
as part of his 2009 compensation from January 1, 2009 to September 1, 2009,
have vested and will be issued and 16,667 shares, as a part of Mr. Xin’s
severance package, will vest on December 31, 2009. The market value
of the shares is based on our common stock price at June 2, 2009, the date on
which Mr. Xin and the Company entered into the Settlement Agreement. Other than
the shares we issued to Mr. Xin, which are a part of his compensation and
severance packages, we have not issued any compensation shares subject to
vesting.
45
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We
do not have any member of our compensation committee who is, or was an officer
or employee, or had any relationship with the Company requiring disclosure under
Item 404 of Rule S-K. We also do not have any executive officer who served as a
member of the compensation committee of another entity or a director of another
entity, whose executive officers served on our compensation committee or served
as a director of our board.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information, as of December 2, 2009, with
respect to the beneficial ownership of the outstanding common stock by (i) any
holder of more than five (5%) percent; (ii) each of the Company’s executive
officers and directors; and (iii) the Company’s directors and executive officers
as a group. Except as otherwise indicated, each of the stockholders listed below
has sole voting and investment power over the shares beneficially
owned.
Name (1)
Title
Amount and
nature of
beneficial
ownership
Percentage of
Class (2)
Mr.
Pingji Lu
Chairman
15,830,791
(3)
49.65
%
Mr.
Xiaohong Feng
Director
& CEO
645,856
2.03
%
Mr.
Genxiang Xiao
Former
Director & Former CAO
504,642
1.58
%
Mr.
Cangsang Huang
CFO
0
0
%
Ms.
Jing Lu
COO
& Board Secretary
528,570
1.66
%
Mr.
Michael Marks
Independent
Director
5,000
0.02
%
Ms.
Carolina Woo
Independent
Director
7,500
0.02
%
Mr.
Suiyin Gao
Independent
Director
5,000
0.02
%
Mr.
Albert McLelland
Independent
Director
0
0
%
Total
17,527,359
54.97
%
(1)
Except as otherwise indicated, the address of each beneficial owner is c/o Xi’an
Tsining Housing Development CO., Ltd., 6 Youyi Dong Lu, Han Yuan 4 Lou,
Xi’an, Shaanxi Province, China 710054.
(2)
Applicable percentage ownership is based on 31,884,969 shares of common stock
outstanding as of December 2, 2009, together with securities
exercisable or convertible into shares of common stock within 60 days of
December 2, 2009 for each stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities. Shares
of common stock underlying convertible securities that are currently exercisable
or exercisable within 60 days of December 2, 2009 are deemed to be beneficially
owned by the person holding such securities for the purpose of computing the
percentage of ownership of such person, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other
person.
(3) The amount of shares listed
includes 12,231,292 shares held by employees of the Company. All voting power
for such shares has been transferred to Mr. Pingji Lu by the employees who hold
such shares.
46
Management’s
Discussion and Analysis
FORWARD
LOOKING STATEMENTS
Some of
the statements contained in this Form S-1 that are not historical facts are
“forward-looking statements” which can be identified by the use of terminology
such as “estimates,”“projects,”“plans,”“believes,”“expects,”“anticipates,”“intends,” or the negative or other variations, or by discussions of strategy
that involve risks and uncertainties. We urge you to be cautious of the
forward-looking statements, that such statements, which are contained in this
Form S-1, reflect our current beliefs with respect to future events and involve
known and unknown risks, uncertainties and other factors affecting our
operations, market growth, services, products and licenses. No assurances can be
given regarding the achievement of future results, as actual results may differ
materially as a result of the risks we face, and actual events may differ from
the assumptions underlying the statements that have been made regarding
anticipated events. Factors that may cause actual results, our performance or
achievements, or industry results, to differ materially from those contemplated
by such forward-looking statements include without limitation:
·
Our
ability to attract and retain management, and to integrate and maintain
technical information and management information
systems;
·
Our
ability to raise capital when needed and on acceptable terms and
conditions;
·
The
intensity of competition; and
·
General
economic conditions.
All
written and oral forward-looking statements made in connection with this Form
S-1 that are attributable to us or persons acting on our behalf are expressly
qualified in their entirety by these cautionary statements. Given the
uncertainties that surround such statements, you are cautioned not to place
undue reliance on such forward-looking statements.
Critical
Accounting Policies and Estimates
We
prepare our consolidated financial statements in accordance with U.S. GAAP,
which requires us to make judgments, estimates and assumptions that affect (i)
the reported amounts of our assets and liabilities, (ii) the disclosure of our
contingent assets and liabilities at the end of each reporting period and (iii)
the reported amounts of revenues and expenses during each reporting
period. We continually evaluate these estimates based on our own experience,
knowledge and assessment of current business and other conditions, our
expectations regarding the future based on available information and reasonable
assumptions, which together form our basis for making judgments about matters
that are inherently uncertain. Since the use of estimates is an integral
component of the financial reporting process, our actual results could differ
from those estimates. Some of our accounting policies require a higher degree of
judgment than others in their application.
When
reading our financial statements, you should consider (i) our selection of
critical accounting policies, (ii) the judgment and other uncertainties
affecting the application of such policies and (iii) the sensitivity of reported
results to changes in conditions and assumptions. We believe the following
accounting policies involve the most significant judgments and estimates used in
the preparation of our financial statements.
Restatement
of Financial Statements
On
October 21, 2009, the management of China Housing & Land Development, Inc.
(the "Company"), in consultation with its independent accounting firm,
determined that the Company will restate its financial statements for the year
ended December 31, 2008 as reported on Form 10-K filed March 25, 2009, as
amended. The Company will also restate the financial statements contained in
Form 10-Q filed May 7, 2009 for the period ended March 31, 2009 and Form 10-Q
filed August 12, 2009 for the period ended June 30, 2009.
Pursuant
to an the registration rights agreement entered into in connection with the
Company’s issuance of its 5.0% Senior Secured Convertible Debt (the “Convertible
Debt”), the Company is required to pay the investors of the Convertible Debt
certain late registration payments (“Late Payments”) if the Company failed to
file a registration statement within 60 days after the closing date of the
transaction or if such registration statement failed to become effective by 90
calendar days, or 120 days if the registration statement is subject to a full
review by the U.S. Securities and Exchange Commission. The Company commenced
negotiations with the investors of the 5.0% Senior Secured Convertible Debt to
waive the Late Payments in December 2008 for a waiver for the Late Payments, as
the Company and the investors believed that the registration would become
effective within a short period of time. However, as the registration has not
become effective as of September 2009, the investors of the 5.0% Senior Secured
Convertible Debt has thereafter decided to claim the Late Payments. As a result,
the Company has restated its financial statements for the year ended
December 31, 2008 as reported on Form 10-K and its financial statements
contained in Form 10-Q for the period ended March 31, 2009 and Form 10-Q for the
period ended June 30, 2009 to accrue the corresponding expenses. After the
restatement, the Company presented the late Payments as security registration
expenses.
47
Warrants
and derivative liability
As of
September 30, 2009, the Company has approximately $4.7 million of warrants
liability and $3.8 million of fair value of embedded derivatives on the
balance sheet, representing approximately 4.0% and 3.2% of the total
liabilities, respectively.
We
utilize the Cox-Rubinstein-Ross (“CRR”) Binomial Lattice Model to estimate the
fair values of warrants liability and embedded derivatives. The CRR model
depends on the following assumptions: the Company’s common stock price
underlying the warrants; strike price; conversion price; expected life;
expected volatility; risk free interest rate; and dividend rate. We used the CRR
Binomial Lattice Model for the past 3 years and we do not expect any
significant changes to assumptions except for the common share price and the
expected volatility.
We
estimate the fair value of warrants liability and embedded derivatives every
quarter and recognize the change of fair value as gain or loss on our
current quarter consolidated statement of income. The fair values of warrants
liability and embedded derivatives have changed during the past few years
according to the valuation models and the fair values are positively related to
the market share price movement and the volatility.
During
the three months ended September 30, 2009, our common stock price experienced
large fluctuations with the price decreasing from $5.58 on July 1, 2009 to
$3.85 on September 30, 2009. The decrease in stock price caused a decrease in
fair value for warrants liability and embedded derivatives. As a result, we
recognized approximately $3.04 million as a change in fair value of warrants and
$2.70 million as a change in fair value of embedded derivatives, which are
all non-cash gains.
The
following table summarizes the fair value of warrant liability and embedded
derivative as at various periods.
The
following tables summarize all the warrants and conversion option outstanding
and the assumptions used for their valuations as of December 31, 2008 and
September 30, 2009.
Investor Warrants:
9/30/2009
12/31/2008
Strike
price
6.07
6.07
Market
price
3.85
1.29
Valuation
date
9/30/2009
6/30/2009
Expiry
date
2/28/2013
2/28/2013
Volatility
105.00
%
90
%
Risk
free rate
1.63
%
1.33
%
Option
value
2.30810
0.45822
#
of warrants
1,437,467
1,437,467
Value
3,317,830
658,682
Investor Warrants: 5-7-2007
9/30/2008
12/31/2008
Strike
price
4.50
4.50
Market
price
3.85
1.29
Valuation
date
9/30/2008
6/30/2009
Expiry
date
5/9/2012
5/9/2009
Volatility
105.00
%
90
%
Risk
free rate
1.24
%
1.09
%
Option
value
0.55267
0.16402
#
of warrants
2,539,416
2,731,382
Value
1,403,464
448,011
*Warrants
issued
through
private
placement
12/31/2008
12/31/2008
12/31/2008
12/31/2008
12/31/2008
12/31/2008
Strike
price
3.31
3.31
3.31
3.31
3.31
3.31
Market
price
1.29
1.29
1.29
1.29
1.29
1.29
Valuation
date
12/31/2008
12/31/2008
12/31/2008
12/31/2008
12/31/2008
12/31/2009
Expiry
date
6/28/2009
7/7/2009
8/21/2009
6/28/2009
7/7/2009
8/21/2009
Volatility
90.00
%
90.00
%
90.00
%
90.00
%
90.00
%
90.00
%
Risk
free rate
0.27
%
0.27
%
0.30
%
0.27
%
0.27
%
0.30
%
Option
value
0.03720
0.04086
0.06394
0.03720
0.04086
0.06394
#
of warrants
99,231
11,536
75,000
8,770
1,020
17,574
Value
3,692
471
4,796
326
42
1,124
*During
the third quarter of 2009, 81,921 warrants have been exercised, and the rest of
18,594 warrants have expired unexercised. As of September 30, 2009, there were
no warrants issued through private placement outstanding.
Conversion Option Valuation:
9/30/2009
12/31/2008
Strike
price
5.57
5.57
Market
price
3.85
1.29
Valuation
date
9/30/2008
6/30/2008
Expiry
date
2/28/2013
2/28/2013
Volatility
105.00
%
90
%
Risk
free rate
1.59
%
1.31
%
Option
value
2.33796
0.4706
Host
Value - principal
9,000,000
9,000,000
Host
Value - interest
0
0
Shares
issuable on conversion
1,615,799
1,615,799
Host
Value - principal
3,777,670
760,398
Host
Value - interest
0
0
Option
value - total
3,777,670
760,398
Derivative
value
3,777,670
760,398
Real
estate held for development or sale, intangible asset and deposits on land use
rights
As of
December 3, 2009, our market capitalization is approximately
$144.1 million.
We
evaluate the recoverability of our real estate developments taking into account
several factors including, but not limited to, our plans for future operations,
prevailing market prices for similar properties and projected cash
flows.
We review
real estate projects, whenever events or changes in circumstances indicate that
the carrying amount of an asset may no longer be recoverable. When these events
occur, we measure impairment by comparing the carrying value to the estimated
undiscounted future cash flows expected as a result from the use of the assets
and their eventual disposition. If the total of the expected undiscounted cash
flow is less than the carrying amount of the assets, we would recognize an
impairment loss based on the fair value of the assets.
Our
significant judgments and estimates related to impairment include our
determination if an event has occurred to warrant an impairment test. If a test
is required, other significant judgments and estimates will include our
expectations of future cash flows and the calculation of the fair value of the
impaired assets.
When real
estate costs are determined to be impaired, they are written down to their
estimated net realizable value. The Company evaluates the carrying value for
impairment based on the undiscounted future cash flows of the assets.
Write-downs of real estate costs deemed impaired would be recorded as
adjustments to the cost basis. There has been no impairment on the real estate
inventories and no impairment loss has been recorded for the three and nine
months ended September 30, 2009 and 2008.
The
Company’s intangible asset is related to the exclusive rights to develop 487
acres land in the Baqiao area that the Company acquired during 2007. We assessed
the fair value of this intangible asset based on the current-period operating
cash flow and a projection of future cash flows. It is the Company’s
understanding that the cooperation agreement with Baqiao District Government
will be extended after June 2011. Based on the prevailing market condition in
Xi’an city we concluded that there is no impairment.
According
to the agreement with Baqiao District Government, at the beginning of each year,
the Company will prepare the annual work plan and have it approved by Baqiao
District Government. The annual work plan will include the detailed projects
that will be started during that year and the Baqiao District Government is
responsible for the land clearance. Due to the delay of land
clearance progress, certain scheduled projects have been postponed. The
Baqiao District Government acknowledged the delay and informed us of their
intention to extend the agreement. Currently, we still have 348 acres land
undeveloped and $41.6 million in intangible assets. If at any time, the
Baqiao District Government indicates that they will not extend the agreement, we
will assess the impairment of the intangible asset and write off the intangible
asset from our balance sheet.
The
Company evaluates its intangible assets for impairment whenever events or
changes in circumstances indicate the carrying value may not be recoverable.
Based on the estimated future cash flows, the Company records a write-down for
impairments, if appropriate. For the three and nine months ended September 30,2009 and 2008, the Company has recorded $0 of impairment on this intangible
asset.
The
Company amortized the intangible asset based on the percentage of the profit
margin realized over the total expected profit margin to be realized from the
487 acre land in the Baqiao project. During fiscal 2007, the Company sold 18.5
acres of land and the related profit margin realized on that sale represented
2.4% of the total estimated profit margin on the whole 487 acre project, as a
result, the Company amortized $1,157,758 (2.4%) of the total intangible asset
during fiscal 2007. This method is intended to match the pattern of amortization
with the income-generating capacity of the intangible asset. For the year ended
December 31, 2008, the Company has recorded $0 of amortization on this
intangible asset. Amortization
expense for the three months ended September 30, 2009 and 2008 amounted to $0.
Amortization expense for the nine months ended September 30, 2009 and 2008
amounted to $4,360,003 and $0, respectively. The amortization expense was
capitalized and included in the real estate construction in
progress.
Management
re-evaluated the expected profit margin from the 487 acres of land as at
September 30, 2009 and recalculated the intangible amortization related to the
2008 land sales based on the new estimate. As a result, management found the
difference resulting from the change of estimate was not material. Therefore no
adjustment was made in the three and nine months ended September 30, 2009 due to
the change of accounting estimate of total profit margin on the 487 acres of
land.
49
Deposits
on land use rights
30-Sep-09
31-Dec-08
31-Dec-07
Deposits
on land use rights
28,432,993
47,333,287
29,694,103
The
Company conducts regular reviews of the deposits on land use right. After review
and assessment, the Company concluded that there was no significant decrease in
the market price and therefore no impairment write-down was required. According
to E House (China) Real Estate Research Institute the average residential sale
price in Xi’an city was stable in the fiscal quarter ended September 30, 2009.
The average sale price increased to 4,962 RMB per square meter (approximately
US$ 726 per square meter) from 4,642 RMB in the second quarter 2009,
representing about 7% year-on-year growth.
Material
trends and uncertainties that may impact our continuing operations
Changes
in national and regional economic conditions, as well as local economic
conditions where we conduct our operations and where prospective purchasers of
our homes live, may result in more caution on the part of homebuyers and
consequently fewer home purchases. According to the data from Xi’an Bureau of
Statistics, Xi’an city’s real estate transaction volume (in terms of sq. meter
signed) decreased about 30% in 2008 compared to 2007. As currently all our
projects are in Xi’an city, the downturn of the real estate market in Xi’an
caused the decline of our operating revenues in 2008. Since 2009, we see the
market sentiment has improved and the transaction volume has increased compared
to same period of 2008. During the third quarter of 2009, our revenue increased
approximately 204% over same period 2008.
Virtually
all purchasers of our homes finance their acquisitions through lenders providing
mortgage financing. A substantial increase in mortgage interest rates or
unavailability of mortgage financing would adversely affect the ability of
prospective homebuyers to obtain the financing they would need in order to
purchase our homes, as well as adversely affect the ability of prospective
move-up homebuyers to sell their current homes. For example, if mortgage
financing became less available, demand for our homes could decline. A reduction
in demand could also have an adverse effect on the pricing of our homes because
we (and our competitors) may reduce prices in an effort to better compete for
home buyers. A reduction in pricing could result in a decline in revenues and in
our margins. We do not expect any substantial change of current mortgage policy
and the prevailing mortgage rate in the near future.
The real
estate development industry is capital intensive, and development requires
significant up-front expenditures to acquire land and begin development.
Accordingly, we incur substantial indebtedness to finance our homebuilding and
land development activities. Although we believe that internally generated funds
and current borrowing capacity will be sufficient to fund our capital and other
expenditures (including land acquisition, development and construction
activities), the amounts available from such sources may not be adequate to meet
our needs. If such sources are not sufficient, we would seek additional capital
in the form of debt or equity financing from a variety of potential sources,
including bank financing and/or securities offerings. The availability of
borrowed funds, to be utilized for land acquisition, development and
construction, may be greatly reduced, and the lending community may require
increased amounts of equity to be invested in a project by borrowers in
connection with new loans. Failure to obtain sufficient capital to fund its
planned capital and other expenditures could have a material adverse effect on
our business.
In
addition, regulatory requirements could cause us to incur significant
liabilities and operating expenses and could restrict our business activities.
We are subject to statutes and rules regulating, among other things, certain
developmental matters, building and site design, and matters concerning the
protection of health and the environment. Our operating expenses may be
increased by governmental regulations such as building permit allocation
ordinances and impact and other fees and taxes, which may be imposed to defray
the cost of providing certain governmental services and improvements. Any
delay or refusal from government agencies to grant us necessary licenses,
permits and approvals could have an adverse effect on our
operations.
As of
September 30, 2009, we had $19,089,130 of cash and cash equivalents, compared to
$37,425,340 as of December 31, 2008, a decrease of $18,336,210. However, cash
and cash equivalents had an increase of $8,955,530 since June 30,2009.
The
Company believes that the combination of present capital resources, internally
generated funds, and unused financing sources are more than adequate to meet
cash requirements for the year 2009. We intend to meet our liquidity
requirements, including capital expenditures related to the purchase of land for
the development of our future projects, through cash flow provided by operations
and additional funds raised by future financings. Upon acquiring land for future
development, we intend to raise funds to develop our projects by obtaining
mortgage financing mainly from local banking institutions with which we have
done business in the past. We believe that our relationships with these banks
are in good standing and that our real estate will secure the loans needed. We
believe that adequate cash flow will be available to fund our
operations.
Our
revenues are mainly derived from the sale of residential and commercial units
and buildings, infrastructure work we perform for the local government and land
development projects in the Baqiao area.
In the
third quarter of 2009, most of our revenues came from Tsining JunJing II phases
one and two. JunJing II phase one consists of 13 residential buildings and 3
auxiliary buildings, including one kindergarten, with a gross floor area of
about 136,012 square meters. This project began to be delivered to customers at
the end of October, 2009. JunJing II phase two consists of 12 buildings, mainly
middle and high rises, and began to accept pre-sale contracts in the second
quarter 2009.
Effective
January 1, 2008, the Company adopted the percentage of completion method of
accounting for revenue recognition for all building construction projects in
progress, including the Tsining JunJing II. The full accrual method was
used before that date for all of our residential, commercial and infrastructure
projects. Infrastructure projects continue to be accounted for using the full
accrual method of accounting.
The
revenues from the sale of properties in the three months ended September 30,2009 increased 204% to $22,728,282 from $7,475,692 in the same period of 2008.
The increase was primarily due to the increased revenue from Tsining JunJing II
Phase One and Phase Two.
Our
project in process is the Baqiao project where we have the exclusive right to
develop 487 acres. In 2007, we acquired the development rights and recognized
$24,405,717 in revenue as a result of an approximately 18 acre land sale to an
unrelated developer. Near the end of 2008, we initiated a joint venture with
Prax Capital to co-develop 79 acres within the Baqiao project. Prax Capital
invested $29.3 million in cash into the joint venture. After setting aside
approximately 42 acres for the newly planned Golden Bay project, approximately
348 acres remain available for development in the Baqiao project.
Tsining
JunJing II Phase One was our major revenue generating construction project in
the three months ended September 30, 2009, contributing 12,130,788 in
revenues. By September 30, 2009, we pre-sold approximately 1,077 units in the
project, totaling approximately 111,463 square meters, which accounts for
approximately 91% and 82% of the total units available and total GFA
respectively.
JunJing
II Phase One consists of 13 middle-rise and high-rise residential buildings and
3 auxiliary buildings, including a kindergarten, with a gross floor area of
approximately 136,012 square meters. Estimated total revenues for Phase One are
approximately $95.6 million. The Company completed most of the construction
of Phase One in the third quarter of 2009.
Tsining
JunJing II Phase Two
Tsining
JunJing II Phase Two consists of 12 middle and high-rise buildings with total
expected revenues of approximately $94.1 million. We officially started
pre-sales in the second quarter of 2009 and were able to secure $19.1 million in
sales contracts for 202 units of which we recognized approximately
$8.8 million in the third quarter. As of September 30, we have pre-sold 22%
of total units available and 21% of total GFA.
53
Please
note that the method of percentage of completion was utilized to recognize
revenue from Jan. 1, 2008. Only revenue recognition of Tsining JunJing II is
under this method. The percentages of completion of the construction for each
building as at September 30, 2009 are shown below:
Tsining JunJing II Phase one Buildings
Percentage of Completion
1#
97.11
%
2#
98.99
%
3#
98.81
%
4#
97.73
%
5#
99.03
%
6#
91.33
%
7#
99.48
%
8#
99.61
%
9#
89.96
%
14#
96.82
%
15#
99.91
%
20#
97.25
%
21#
96.86
%
Tsining JunJing II Phase two Buildings
Percentage of Completion
10#
46.78
%
11#
52.79
%
12#
46.96
%
13#
62.90
%
18#
47.50
%
24#
40.64
%
The above
are all the buildings under pre-sale in JunJing II Phase One and Phase
Two.
Revenues
from projects completed
The
revenue from completed projects totaled $1,792,053 in the three months
ended September 30, 2009, compared to $224,221 during same period of
2008. The overall real estate market in China is stronger than last year.
A large portion of revenue came from the sales of commercial units in
the Tsining 24G project, which have higher average selling price and
contributing approximately $1.6 million in revenues.
Other
income
Other
income includes property management fees, rental income, revenues from the
disposal of fixed assets as well as government’s allowance for the equivalent
cost of interest on the Company’s investments required to support infrastructure
construction, continued river management and suburban planning for the entire
Baqiao high-technology industrial park. We recognized $1,065,363 in other income
for the three months ended September 30, 2009 compared with $70,070 in the same
period of 2008. The 1,420% increase is mainly due to the acquisition of Xinxing
Property Management, which contributed approximately $643,861 property and
hotel management revenues to our consolidated revenues, and the increased
rental income from existing commercial units.
Cost
of properties and land
The cost
of properties and land in the three months ended September 30, 2009 increased
169.7 percent to $16,374,170 compared with $6,071,599 in the same period of
2008. The increase was primarily a result of the increased sales volume in
our JunJing II Phase One and Phase Two projects.
54
Gross
profit and profit margin
Gross
profit for the three months ended September 30, 2009 was
$7,419,475, representing an increase of 403 percent from $1,474,163 in the
same period of 2008. The gross profit margin for the three months ended
September 30, 2009 was 31.2 percent compared with 19.5 percent in the same
period of 2008. The relatively low gross margin in the third quarter of
2008 is primarily due to the fact that residential units sold in that
quarter were subject to a marketing campaign that utilized favorable prices to
attract market interest and encourage future sales. This year we concentrated
more on the research and development and we are able to deliver real estate with
better quality and increased average sales price. Meanwhile the performance of
sales is much better with the improvement in market conditions. Our gross margin
increased due to all these factors.
Selling,
general and administrative expenses
Selling,
general and administrative expenses (SG&A) for the three months ended
September 30, 2009 increased 56.9 percent to $ 2,501,688 from $ 1,594,514
in the same period of 2008. The increase in SG&A is associated with the
increased sales. This quarter’s SG&A mainly include marketing expenses
associated with Tsining JunJing II Phase One and Phase Two as well as
administrative and marketing expenses related to the Puhua project. SG&A
accounted to 10.5% of total revenue in the third quarter of 2009 compared
to 21.13% for the same period in 2008.
Stock-based
compensation
We
incurred stock-based compensation expenses amounting to $87,777 in the three
months ended September 30, 2009, which was for the common stock issued for
service provided by the Company’s former CFO. We recorded $3,000,000 in the same
period of 2008 for 750,000 shares of common stock granted to members of
management for their 2007 services. The number of shares granted to each
individual is calculated in accordance with the Company’s Detail Implementation
Rule for Restricted Stock Incentive Plan of 2007-2008. The compensation was
based on the stock price on the grant date of July 2, 2008, which
was the day the awards were formally approved by the Board of
Directors.
Other
expenses
Other
expenses consist mainly of late delivery settlements and maintenance
costs. Other expenses in the three months ended September 30, 2009
increased 366.8 percent to $284,044 compared with $60,848 in the same period of
2008. Combined with the delivery and sales from the JunJing project, the
expenses increased slightly.
Operating
profit and operating profit margin
Operating
profit is defined as gross profit minus selling, general and administrative
expenses, stock-based compensation, security registration expenses and
other expenses. Operating profit in the three months ended September30, 2009 was $3,966,191 compared with $3,181,199 operating loss in the same
period of 2008, primarily due to the higher revenues generated by Tsining
JunJing II Phase One and Phase Two and insignificant stock-based compensation.
As a result, the operating profit margin was 16.67 percent for the third quarter
of 2009 compared with negative 42.2 percent for the same period of
2008.
Interest
expense
Interest
expense in the three months ended September 30, 2009 decreased 35 percent to
$417,809 from $638,228 in the same period of 2008. This is primarily due to the
capitalization of interest in the construction in progress and repayment of the
$7.3million bank loan. In 2008, the Company signed a RMB 1 billion (about $147
million) construction credit line agreement with China Construction Bank. During
2008, we drew down approximately $22 million of the credit line. During the
three months ended September 30, 2009, the company drew down another $13 million
of the credit line and repaid $7.3 million. The loan from China Construction
Bank has an interest rate that floats at 110 percent of the People’s Bank of
China reference rate.
Change
in fair value of embedded derivative
The
embedded derivative is related to the Company’s $20 million Convertible Debt
offering completed in January 2008. The change in the fair value of embedded
derivatives was a periodic adjustment to the estimated cost to the Company,
which was provided by the Cox-Ross-Rubinstein Binomial Lattice valuation
model (CRR model).
55
The CRR
model depends on the following assumptions: the Company’s common stock price
underlying the warrants; strike price; conversion price; expected life; expected
volatility; risk free interest rate; and dividend rate. During the third quarter
of 2009, our common stock price experienced large fluctuations with the price
decreasing from $5.76 on June 30, 2009 to $3.85 on September 30, 2009. The
decrease in stock price and expected volatility caused a decrease in
fair value for warrants and the change of fair value was booked as a reverse of
non-cash expense.
The
company recorded $(2,695,306) in the change in fair value of embedded
derivatives in the three months ended September 30, 2009 compared with
$(2,101,825) in the same period of 2008.
Change
in fair value of warrants
In 2006,
2007 and 2008, the Company issued warrants in conjunction with the issuance of
common shares or Convertible Debt. The warrants permit the investors to buy
additional common shares at the prices specified in the warrant
agreements.
An
investor typically only exercises a warrant to buy common shares when the stock
price is higher than the warrant exercise price. In the three months ended
September 30, 2009, 273,887 warrants were exercised. The investor pays the
exercise price and the Company covers the difference between the warrant
exercise price and the share price at the time of conversion.
In
addition, the Company was required to estimate the fair value of its remaining
warrants outstanding and adjust the value as appropriate, and it chose to use
the Cox-Ross-Rubinstein Binomial Lattice valuation model to estimate their fair
value.
The
change in fair value of warrants was $(3,042,752) in the three months ended
September 30, 2009, compared to $(2,939,563) during the same period of 2008,
which consisted of the periodic adjustment to the estimated cost to the company
to provide the common shares, assuming that all of the warrants will be
exercised sometime in the future. The basis for estimating the cost to provide
the common shares was provided by the valuation model. The CRR model depends on
the following assumptions: the Company’s common stock price underlying the
warrants; strike price; expected life; expected volatility; risk free interest
rate; and dividend rate. During the third quarter of 2009, our common stock
price experienced large fluctuations with the price decreasing from $5.76 on
June 30, 2009 to $3.85 on September 30, 2009. The decrease in stock price
and expected volatility caused a decrease in fair value for warrants and
the change of fair value was booked as a reverse of non-cash
expense.
Security
registration expenses
Pursuant
to the agreement with the investors of the 5% Senior Secured Convertible Debt,
the Company was required to pay the investors certain late registration payments
(“Late Payments”) if the company failed to file a Registration Statement within
60 days after the closing date of the 5% Senior Secured Convertible Debt. The
Company commenced negotiations with the investors of the 5% Senior Secured
Convertible Debt to waive the Late Payments in December 2008, as both parties
believed that the registration statement would become effective within a short
period of time. However, as the registration statement has not become effective
as of September 2009, the investors of the 5% Senior Secured Convertible Debt
have decided to claim the Late Payments. The Company has accrued for the
Late Payments of $579,775 in the third quarter. On September 28, 2009, the
Company reached a First Amendment (the “Amendment”) with the Investors to settle
the Late Payments, in the amount of $2,400,000, by the issuance of 614,290
common stock shares. The 614,290 common stock was determined by dividing
$2,400,000, the total Late Payments up to September 28, 2009, by 95% of the
historical volume weighted average price (“VWAP”) of the common stock shares, as
determined by using Bloomberg function VWAP, for the immediate preceding 30 days
period. In accordance with the Amendment, the Investors will waive any further
Late Payments against the Company under the Registration Rights Agreement. We do
not expect any similar claim in the future.
The
security registration expenses were $579,775 for the three months ended
September 30, 2009, compared with $0 in the same period of 2008.
Recovery
of income taxes
The
Company recognized an income tax benefit of $3,652,886 in the three months ended
September 30, 2009, compared with $388,308 in the same period of 2008. In
the third quarter, the Company reached an income tax settlement with local tax
bureau. Based on the settlement, Hao Tai, a subsidiary of the Company, received
a tax credit of $4.86 million. The Company estimated the tax provision for other
subsidiaries based on a 25% statutory rate.
56
Non-controlling
Interest
We
recorded a $86,121 loss attributable to non-controlling shareholder of Puhua and
Success Hill, which was related to the formation of Puhua in the third
quarter of 2008. We did not have any loss attributable to non-controlling
shareholder in the same period of 2008 before Puhua’s formation.
Net
income attributable to China Housing & Land Development,
Inc.
Net
income attributable to China Housing & Land Development, Inc.
for the three months ended September 30, 2009
increased 778.6 percent to $12,714,128 compared to $1,447,072 in
the same period of 2008.
We
believe that the net income attributable to China Housing & Land
Development, Inc. increase was a result of multiple factors. The overall
real estate market condition in Xi’an has improved since the beginning of 2009
and through the third quarter, which is also demonstrated in the pre-sales
results of our current projects under construction, i.e. JunJing II Phase
one and Phase two. In the third quarter, we were able to recognize approximately
$21 million as revenue from JunJing II project and were able to secure
approximately $21.95 million new contracts. As of September 30, 2009, we have
pre-sold 111,463 sq. meters out of 136,012 sq. meters total GFA of Junjing
II Phase one, approximately 82% on the GFA basis and 91% on the unit
basis.
With the
introduction of JunJing II Phase two, we are also expecting the gross
margin will be improved slightly in the future, which is primarily because of
its better quality and higher average price in JunJing II Phase two. The average
price for Phase two has reached $726/square meter, $17 higher than Phase
one.
The
periodic revaluation of derivatives and warrants also contributed approximately
$5.7 million during the quarter mainly due to the decrease of our common stock
price. The large fluctuation in our common stock price in recent months has
resulted in an approximately $13.1 million revaluation non-cash charge in the
second quarter of 2009.
The
settlement of tax with the local tax bureau during the third quarter also
contributed approximately $4.86 million, which is considered to be a one-time
gain.
EPS
attributable to China Housing & Land Development, Inc.
Basic EPS attributable
to China Housing & Land Development, Inc. was
$0.41 in the three months ended September 30, 2009, compared to $0.05 in
the same period of 2008. Diluted EPS attributable to China Housing & Land
Development, Inc. was $0.24 in the three months ended September 30, 2009,
compared to $0.04 in the same period of 2008. The number of shares
outstanding doesn’t change significantly from year to year. Earnings available
to distribute increased greatly from $1.45 million in third quarter of 2008
to $12.71 million in the third quarter of this year. The EPS and diluted
EPS attributable to China Housing & Land Development, Inc.
reflected the Company’s improved performance during the third quarter
of this year.
Common shares used to
calculate basic and diluted EPS attributable to China Housing & Land
Development, Inc.
The
weighted average shares outstanding used to calculate basic earnings per
share attributable to China Housing & Land Development, Inc. was
31,134,137 shares in the three months ended September 30, 2009 and
30,877,453 shares in the same period of 2008. The weighted average shares
outstanding used to calculate the diluted EPS attributable to China
Housing & Land Development, Inc. was 32,972,253 shares in the
three months ended September 30, 2009 and 30,882,483 shares in the same period
of 2008.
Foreign
exchange
The
company operates in China and the functional currency is Chinese Renminbi (RMB)
but the reporting currency is U.S. dollar, based on the exchange rate of the two
currencies. The fluctuation of exchange rates during the three months ended
September 30, 2009 and the same period of 2008, when translating the operating
results and financial positions at different exchange rates, created the
accrued gain (loss) on foreign exchange. The gain on foreign exchange in the
three months ended September 30, 2009 was $69,244, compared with $911,996 in the
same period of 2008.
Total
revenues for the nine months ended September 30, 2009 increased
135.9 percent to $60,240,247 from $25,536,889 for the nine months
ended September 30, 2008.
The
revenues from the sale of properties in the nine months ended September 30, 2009
increased 126.8 percent to $56,835,091 from $25,054,867 in the same period of
2008. The increase was primarily due to the increased revenue from Tsining
JunJing II Phase One and Phase Two
As a
result of the utilization of the full accrual method of accounting for
infrastructure projects, we have not recognized revenues from the infrastructure
project in the Baqiao area. We expect to recognize the revenues associated with
the construction of the river dam in the third quarter 2009 when the
project is delivered to the local government.
** The
figure is unavailable due to return of units during this
period.
59
Revenues
from projects under construction
Tsining
JunJing II Phase One
Tsining
JunJing II Phase One was our major revenue generating construction project in
the nine months ended September 30, 2009, contributing $42,457,017 in revenues.
By September 30, 2009, we had pre-sold approximately 1,077 units in the project,
totaling approximately 111,463 square meters.
Tsining
JunJing II Phase Two
Tsining
JunJing II Phase Two consists of 12 middle-rise and high-rise buildings with
total expected revenues of approximately $94.1 million. We officially started
the pre-sales in the second quarter of 2009 and were able to secure $19.1
million in sales contracts for 224 units of which we recognized
approximately $9.8 million in the first nine months of 2009.
Revenues
from projects completed
Revenues
in the nine months ended September 30, 2009 for completed projects decreased
8.49% percent to $4,613,537 compared with $5,041,431 in the same period of 2008.
The decrease in revenues for the nine months ended September 30, 2009 was
primarily due to reduced sales of JunJing I project, as most units of the
project were sold out.
Other
income
Other
income includes property management fees, rental income, revenues from
the disposal of fixed assets as well as government’s allowance for the
equivalent cost of interest on the Company’s investments required to support
infrastructure construction, continued river management, and suburban planning
for the entire Baqiao high-technology industrial park. We recognized
$3,405,156 in other income for the nine months ended September 30,2009 compared with $482 022 in the same period of 2008. The 606% increase is
mainly due to the acquisition of Xinxing Property Management during the first
quarter of 2009, which contributed approximately $1,787,705 property and
hotel management revenues to our consolidated revenues.
60
Cost
of properties and land
The cost
of properties and land in the nine months ended September 30, 2009 increased
109.6 percent to $41,266,855 compared with $19,691,432 in the same period of
2008. The increase was primarily a result of the increased sales volume in our
JunJing II Phase One and Phase Two projects.
Gross
profit and profit margin
Gross
profit for the nine months ended September 30, 2009 was
$18,973,392, representing an increase of 224.6 percent from $5,845,457
in the same period of 2008. The gross profit margin for the nine months
ended September 30, 2009 was 31.5 percent compared with 22.9 percent in the
same period of 2008. The increase in the gross profit margin was mainly due
to our different product mix and our marketing strategy. The
residential units we sold during the nine months ended September 30, 2009
generally had higher profit margins than the units sold in the same period of
2008. In addition, due to the fact that we had a marketing campaign for our
JunJing II project from the second quarter of 2008 and used favorable prices to
attract market interest and encourage future sales. This year we concentrated
more on the research and development and we are able to deliver real estate with
better quality and increased average sales price. Meanwhile the performance of
sales is much better with the improvement in market conditions. Our gross margin
increased because of all these factors.
Selling,
general and administrative expenses
SG&A for
the nine months ended September 30, 2009 increased 40.6 percent to
$5,853,458 from $4,161,865 in the same period of 2008. The increase in
SG&A is due to the increased sales, for example, the
marketing expenses associated with Tsining JunJing II Phase One and Phase Two
projects and the administrative expenses and marketing expenses related to the
Puhua project. However the ratio of SG&A to total revenues for the nine
months decreased from 16.3% in 2008 to 9.72% in 2009, because the Company is
improving the management and become more and more efficient in
operation.
Stock-based
compensation
We
incurred stock-based compensation expenses amounting to $87,777 in the nine
months ended September 30, 2009, common stock issued for service provided by the
Company’s former CFO: this amount is compared to $3,000,000 in stock- based
compensation expenses in the same period of 2008 for 750,000 shares of common
stock granted to members of management for their 2007 services. The number of
shares granted to each individual was calculated in accordance with the
Company’s Detail Implementation Rule for Restricted Stock Incentive Plan of
2007-2008. The compensation was based on the stock price on the grant
date of July 2, 2008, which is the day the awards were formally
approved by the Board of Directors.
Other
expenses
Other
expenses consist mainly of late delivery settlements and maintenance
costs.
Other
expenses in the nine months ended September 30, 2009 increased 517.7 percent to
$474,167 compared with $76,758 in the same period of 2008. The Company incurred
a larger amount of expenses regarding the delivery and sales of
JunJing project.
Operating
profit and operating profit margin
Operating
profit in the nine months ended September 30, 2009 was $10,771,473 compared with
$1,393,166 operating loss in the same period of 2008 , primarily due to the
higher revenue generated by Tsining JunJing II Phase One and Phase Two. As a
result, the operating profit margin was 17.88 percent for the nine months ended
September 30, 2009 compared with negative 5.5 percent for the same period
of 2008.
61
Interest
expense
Interest
expense in the nine months ended September 30, 2009 decreased 31 percent to
$1,202,786 from $1,736,344 in the same period of 2008. This change
was primarily due to the capitalization of interest in construction in
process and repayment of a 18.4 million bank loan. In mid-2008, the Company
signed a RMB 1 billion (about $147 million) construction credit line agreement
with China Construction Bank. During 2008, we drew down approximately $22
million of the credit line. The company repaid $18.4 million during
the nine months ended September 30, 2009. The loan from China Construction
Bank has an interest rate that floats at 110 percent of the People’s Bank of
China reference rate.
Change
in fair value of embedded derivative
The
Company recorded $3,017,272 expense in the change in fair value
of embedded derivatives in the nine months ended September 30, 2009 compared
with $2,556,313 reverse of expense in the same period of 2008.
Change
in fair value of warrants
In 2006,
2007 and 2008 the Company issued warrants in conjunction with the issuance of
common shares or Convertible Debt. The warrants permit the shareholders to buy
additional common shares at the prices specified in the warrant
agreements.
During the
nine months ended September 30, 2009, 370,810 warrants were exercised. A
shareholder typically only exercises a warrant to buy common shares when the
stock price is higher than the warrant exercise price. The shareholder pays the
exercise price and the Company covers the difference between the warrant
exercise price and the share price at the time of conversion.
In
addition, the Company was required to estimate the fair value of its remaining
warrants outstanding and adjust the value as appropriate, and it chose to use
the Cox-Ross-Rubinstein Binomial Lattice valuation model to estimate their fair
value.
The
change in fair value of warrants was $4,012,736 in the nine months ended
September 30, 2009, compared to $(3,895,615) during the same period of 2008,
which consisted of the periodic adjustment to the estimated cost to the company
to provide the common shares, assuming that all the of the warrants will be
exercised sometime in the future. The basis for estimating the cost to provide
the common shares was provided by the valuation model. The CRR model depends on
the following assumptions: the Company’s common stock price underlying the
warrants; strike price; expected life; expected volatility; risk free interest
rate; and dividend rate. During the first nine months of 2009, our common stock
price experienced large fluctuations with the price increasing from $1.29 on
December 31, 2008 to $3.85 on September 30, 2009. The increase in
stock price and expected volatility caused an increase in fair value
for warrants and the change of fair value was booked as a non-cash
expense.
Security
registration expenses
Pursuant
to the agreement with the investors of the 5% Senior Secured Convertible Debt,
the Company was required to pay the investors certain late registration payments
(“Late Payments”) if the company failed to file a Registration Statement within
60 days after the closing date of the 5% Senior Secured Convertible Debt. The
Company commenced negotiations with the investors of the 5% Senior Secured
Convertible Debt to waive the Late Payments in December 2008, as both parties
believed that the registration statement would become effective within a short
period of time. However, as the registration statement has not become effective
as of September 2009, the investors of the 5% Senior Secured Convertible Debt
have decided to claim the Late Payments. The Company has accrued for the
Late Payments of $579,775 in the third quarter. On September 28, 2009, the
Company reached a First Amendment (the “Amendment”) with the Investors to settle
the Late Payments, in the amount of $2,400,000, by the issuance of 614,290
common stock shares. The 614,290 common stock was determined by dividing
$2,400,000, the total Late Payments up to September 28, 2009, by 95% of the
historical volume weighted average price (“VWAP”) of the common stock shares, as
determined by using Bloomberg function VWAP, for the immediate preceding 30 days
period. In accordance with the Amendment, the Investors will waive any further
Late Payments against the Company under the Registration Rights Agreement. We do
not expect any similar claim in the future.
The
security registration expenses were $1,786,517 for nine months ended September30, 2009, compared with $0 in the same period of 2008.
Recovery
of income taxes
The
company booked a recovery for income tax provision of $1,591,331 compared
with $0 in the same period of 2008. The Company calculates income tax
provision based on the 25% statutory rate for each of the subsidiaries. The
recovery was caused by the tax settlement between Hao Tai and the local tax
bureau. Due to the settlement the Company recovered around $4.86 million in
the third quarter.
62
Non-controlling
Interest
We
recorded a $279,155 loss attributable to non-controlling shareholder of Puhua
and Success Hill in the nine months ended September 30, 2009, which
was related to the formation of Puhua in 2008. We did not have any loss
attributable to non-controlling shareholder in the same period of 2008 before
Puhua’s formation.
Net
income attributable to China Housing & Land Development,
Inc.
Net
income attributable
to China Housing & Land Development, Inc. in the nine
months ended September 30, 2009 increased 33.8 percent to
$3,519,860 from $2,630,636 in the same period of 2008.
We
believe the net income attributable
to China Housing & Land Development, Inc. increase was
primarily due to the significantly improved sales. The overall real estate
market condition in Xi’an has improved since the beginning of 2009 and through
the third quarter, which is also demonstrated in the pre-sales results of our
current projects under construction, i.e. JunJing II Phase one and Phase
two. In the third quarter, we were able to recognize approximately $21 million
as revenue and were able to secure approximately $21.95 million in new
contracts. As of September 30, 2009, we have pre-sold 111,463 sq. meters
out of 136,012 sq. meters total GFA of Junjing II Phase one,
approximately 82% on the GFA basis and 91% on the unit basis.
With the
introduction of JunJing II Phase two, we also expect the gross margin
to improve slightly in the future, primarily because of the generally better
quality and higher average price of JunJing II Phase two.
The average price for Phase two has reached $732/square meter, $91 higher than
Phase one.
Basic and diluted EPS
attributable to China Housing & Land Development,
Inc.
Basic EPS
attributable to China Housing & Land Development, Inc. was $0.11 in
the nine months ended September 30, 2009, compared to $0.09 in the same
period of 2008. Diluted EPS attributable to China Housing & Land
Development, Inc. was $0.11 in the nine months ended September 30,2009, compared to $0.07 in the same period of 2008. The number of shares
outstanding doesn’t change significantly from year to year. But earnings
available to distribute increased greatly from $2.63 million in third quarter of
2008 to $3.52 million this year. The improved EPS and diluted EPS
attributable to China Housing & Land Development, Inc. mainly
demonstrated the good performance of the Company during the first nine
months of this year.
Common shares used to
calculate basic and diluted EPS attributable to China Housing & Land
Development, Inc.
The
weighted average shares outstanding used to calculate basic EPS
attributable to China Housing & Land Development, Inc. was
30,987,760 shares in the nine months ended September 30, 2009 and
30,389,712 shares in the same period of 2008. The weighted average shares
outstanding used to calculate the diluted EPS attributable to China
Housing & Land Development, Inc. was 30,996,953 shares in the nine
months ended September 30, 2009 and 30,436,461 shares in the same period of
2008.
Foreign
exchange
The
company operates in China and the functional currency is Chinese Renminbi (RMB)
but the reporting currency is U.S. dollar, based on the exchange rates of the
two currencies. The fluctuation of exchange rate during the nine months ended
September 30, 2009 and the same period of 2008, when translating the operating
results and financial positions at different exchange rates, created the accrued
gain (loss) on foreign exchange. The loss on foreign exchange in the nine
months ended September 30, 2009 was $242,176, compared with a gain of $6,176,248
in the same period of 2008.
Cash
flow discussion
There is
net cash outflow of $18,341,447 during the nine months ended September 30,2009 compared with $11,259,992 cash inflow during the same period of
2008.
63
The major
cash outflow is from operating activities. The outflow was $10,808,209 in the
nine months ended September 30, 2009 and $14,884,371 in the same period of
2008. In the nine month of this year, cash is used for the development of
Tsining JunJing II Phase One, Phase Two and Puhua Project.
A cash
inflow $447,990 appeared at investing activities segment in the nine months
ended September 30, 2009, compared with the cash outflow of $617,060 for the
same period of 2008. The increase was primarily due to a change in restricted
cash, which brought $110,130 cash inflow to the Company instead of $755,376
outflow last year. Also, the cash from acquired business contributed $0.5
million cash for the nine months ended September 30, 2009.
There was
a cash outflow of $7,981,228 for financing activities in the nine months
ended September 30, 2009 compared with $26,761,423 of inflow in 2008. The
difference is primarily attributable to the fact that the Company issued the $20
million Convertible Debt and warrants in the first quarter of 2008. Meanwhile
the Company also repaid $18.4 million bank loan creating a significant cash
outflow.
Debt
leverage
Total
debt consists of Payables for acquisition of businesses, Loans from employees,
Loans payable and Convertible Debt.
Net debt
outstanding (total debt less cash) as of September 30, 2009 was $32,857,725
compared with $20,955,952 on December 31, 2008. Cash decreased to $19.1 million
at September 30, 2009 from $37.4 million on December 31, 2008 is a major reason.
The company's net debt as a percentage of total capital (net debt plus
shareholders' equity) was 21 percent on September 30, 2009 and 16 percent on
December 31, 2008, which increased slightly due to the cash balance
decrease.
Liquidity
and capital resources
Our
principal liquidity demands are based on the development of new properties,
property acquisitions, and general corporate purposes.
As of
September 30, 2009, we had $19,089,130 of cash and cash equivalents, a
decrease of $18,336,210, compared with $37,425,340 of cash and cash equivalents
as of December 31, 2008 and an increase of $8,955,530 as of June 30, 2009. Our
cash flow from operating activities used over $10.8 million during the nine
months ended September 30, 2009 compared with an outflow of $15.1 million
in the Second quarter ended June 30, 2009. Along with progress in
projects, we started seeing positive cash flow from operations and we can use
this internal generated cash flow to fund our projects in the
pipeline.
The
Company leases part of its office and hotel space under various operating lease
agreements. The future minimum rental payments required under the operating
lease agreements are summarized below. The Company entered into a
contract with Xi’an Baqiao local government for a rubber dam construction
project. The Company is committed to expend approximately $1 million on this
project. As of September 30, 2009, the Company had one land use right
with an unpaid balance of approximately $2.6 million. The balance is not due
until the vendor removes the existing building on the land and changes the
zoning status of the land use right certificate.
Payment due by period
Commitments and Contingencies
Total
Less than
1 year
1-3 years
3-5 years
Over 5 years
Rental
lease
$
336,859
$
86,292
$
52,806
$
52,806
$
144,955
Rubber
dam construction
1,025,461
1,025,461
-
-
-
Land
use right
2,592,951
-
2,592,951
-
-
Total
$
3,997,854
$
1,149,405
$
2,664 ,207
$
52,775
$
151,467
Financial
obligations
As of
September 30, 2009, we had total bank loans of $29,591,867 with a weighted
average interest rate of 9.08 percent.
Mortgage
debt (total bank loans) is secured by the assets of the
company.
64
Loans
payable
Loans
payable represent amounts due to various banks and are due on demand or normally
due within one or two years. These loans generally can be renewed with the banks
when the loans mature.
Most of
the obligations of the Company are tied to specific projects. The terms of the
loans typically are 1 to 3 years. Loan extensions are determined by mutual
agreement when the current term expires and both parties will consider the
remaining time needed to complete the project. Most of these loans are payable
when the project has been completed and the residents or businesses take
possession.
On June28, 2008, the Company signed a strategic partnership Memorandum of Understanding
(“MOU”) with China Construction Bank Xi’an Branch that established a RMB 1
billion credit line for real estate development of the Company and its
subsidiaries. Under the MOU, the Company and its subsidiaries are required to
set up a basic deposit account with China Construction Bank, to maintain a
current ratio of not less than 90% and to maintain liabilities to assets ratio
of not greater than 65%. On August 28, 2008, the Company entered a first loan
agreement with China Construction Bank Xi’an Branch to draw down the first RMB
150 million loans, which will mature on August 27, 2011. $21,986,075 (RMB
150 million) was received by the Company on December 31, 2008. During the nine
months ended September 30, 2009, the Company paid down the loan to $7,617,708
(RMB 52 million). On August 30, 2009, the Company entered a second loan
agreement with China Construction Bank Xi’an Branch to draw down another RMB 85
million loan, which will mature on September 8, 2012. $12,452,023 (RMB 85
million) was received by the Company by September 30, 2009.
As of
December 31, 2008 and September 30, 2009, our current ratios were approximately
255.1% and 221.8%, respectively, and our liabilities to assets ratios were
approximately 49.3% and 49.1%, respectively. The Company will be able to draw
down approximately another $107.3 million before we reach the maximum
liabilities to assets ratio of 65%.
The
following table summarizes the amounts and types of the Company's obligations
and provides the estimated period of maturity for the financial obligations by
class as of September 30, 2009:
Due
August 29, 2010, annual interest rate is 10.21%, guaranteed by Tsining and
secured by the Company's Tsining building and part of Jun Jing Yuan II
project
5,127,304
5,130,084
Xi'an
Rural Credit union Zao Yuan Rd. Branch
Due
July 3, 2010, annual interest rate is 8.83%, secured by the Company's Jun
Jing Yuan I, Yuan I, Han Yuan and Xin Xing Tower projects
2,929,888
3,371,198
China
Construction Bank, Xi'an Branch
Due
August 27, 2011, floating interest rate based on 110% of People’s Bank of
China annual interest rate, secured by the Company's Jun Jing
II project
7,617,708
21,986,076
China
Construction Bank, Xi'an Branch
Due
September 8, 2012, floating interest rate based on 110% of People’s Bank
of China annual interest rate, secured by the Company's Jun Jing II
project
12,452,023
-
Total:
29,591,867
35,617,442
The
currently indicated annual interest requirement on these loans totals about $2.7
million. The loan from China Construction Bank has an interest rate that floats
at 110 percent of the People’s Bank of China reference rate.
Liquidity
expectation
The
company believes that the combination of present capital resources, internally
generated funds, and unused financing sources are more than adequate to meet
cash requirements for the year 2009.
We intend
to meet our liquidity requirements, including capital expenditures related to
the purchase of land for the development of our future projects, through cash
flow provided by operations and additional funds raised by future financings.
Upon acquiring land for future developments, we intend to raise funds to develop
our projects by obtaining mortgage financing mainly from local banking
institutions with which we have done business in the past. We believe that our
relationships with these banks are in good standing and that our real estate
will secure the loans needed. We believe that adequate cash flow will be
available to fund our operations.
As part
of our funding plan, on March 9, 2007, we entered into a Share Transfer
Agreement with the shareholders of New Land, under which we have acquired
32,000,000 shares of the New Land, constituting 100 percent equity ownership of
New Land.
New Land
is now in cooperation with the Baqiao District Government of Xi'an City to
develop the Baqiao Science & Technology Industrial Park, a provincial
development zone in Shaanxi Province. With this acquisition, the company gained
the right to develop and sell 487 acres of property that has been targeted for
new residential developments.
The
majority of the company's revenues and expenses were denominated primarily in
renminbi (RMB), the currency of the People's Republic of China. There is no
assurance that exchange rates between the RMB and the U.S. dollar will remain
stable. The company does not engage in currency hedging. Inflation has not
had a material impact on the company's business.
66
Comparison
of years 2008 and 2007
Revenues
Our
revenues from sales of properties are mainly derived from the sale of
residential and commercial units and buildings, infrastructure work we perform
for the local government, and land development projects in the Baqiao
area.
In 2008,
most of our revenues came from Tsining JunJing II phase one, which consists of
13 residential buildings and 3 auxiliary buildings, including one kindergarten,
with a gross floor area of about 136,012 square meters. This project is
currently under construction and collecting funds under pre-sales
agreements.
Effective
January 1, 2008, the company adopted the percentage of completion method of
accounting for revenue recognition for all building construction projects in
progress, which currently includes project Tsining JunJing II. The full accrual
method was used before that date for all our residential, commercial, and
infrastructure projects. Infrastructure projects continue to be accounted for
using the full accrual method of accounting.
Revenues
by project:
2008
2007
2006
US$
Project
Under Construction
Tsining
JunJing II Phase one
$
23,776,789
$
-
$
-
Projects
Completed
Tsining
JunJing I
264,066
8,964,784
39,670,186
Tsining-24G
27,243
25,198,129
13,000,694
Tsining
Gangwan
58,427
2,368,602
318,338
Tsining
Hanyuan
13,894
3,100
161,274
Tsining
Home In
121,076
323,751
-
Tsining
Mingyuan
44,567
247,298
352,199
Lidu
Mingyuan
-
303,124
144,483
Infrastructure
Project
Baqiao
infrastructure construction
-
10,790,610
-
Project
In Process
Baqiao
-
24,405,717
-
Revenues
from the sales of properties
$
24,306,062
$
73,579,325
$
53,647,174
The
revenues from the sale of properties in the 2008 decreased 67.0% to $24,306,062
from $73,579,325 in 2007. The decrease was primarily due to the absence of a
land sale in 2007, and the completion of several projects in 2007. Revenues in
2007 increased 37.2% from 2006.
The
revenue from our project under construction and completed projects totaled
$24,306,062 in 2008 compared with $38,382,998 in 2007. The 36.7% decrease was
due mainly to the absence of 2007 revenues from Tsining-24G and JunJing I
because both projects had come to completion and most of the revenues for those
two projects were recognized at one moment using the full accrual method of
accounting, partly offset in 2008 by revenues we recognized from Tsining JunJing
II phase one using the percentage of completion method of accounting and by the
2008 sales of some units in completed projects.
Our
infrastructure project in the Baqiao area generated $1,433,837 in revenues and
was booked under other revenue in 2008, which consisted of the government’s
allowance for the equivalent cost of interest on the company’s investments
required to support the infrastructure construction, plus continued river
management and suburban planning for the entire Baqiao high-technology
industrial park. In 2007 we acquired the Baqiao infrastructure project and
constructed and delivered a river dam to the local government during the year,
for which we recognized $10,790,610 in revenues in 2007. In 2008, we were
awarded another dam project on the same river but have not recognized revenues
from it under full accrual method of accounting because the project is still in
progress. We expect to finish the river dam in second quarter 2009 and recognize
the revenues when the project is delivered to the local government.
Our
project in process is the Baqiao project where we have the exclusive right to
develop 487 acres. We acquired the development rights in 2007 and recognized
$24,405,717 in revenue in 2007 as a result of a land 18.4 acre land sale to an
unrelated developer, we established a joint venture with Prax Capital Real
Estate Holdings Limited (Prax Capital) to co-develop 79 acres within the Baqiao
project. Prax Capital invested $29.3 million cash in the joint venture. Under
Generally Accepted Accounting Principles, we did not recognize any revenue from
the creation of this development project in 2008. About 390 acres remain
available for development in the Baqiao project.
** The
figure is unavailable due to return of units during this
period.
68
Revenues
from projects under construction
Please
note that the method of percentage of completion has being utilized to recognize
revenue from Jan. 1, 2008. Therefore, only revenue recognition of Tsining
JunJing II is under this method. The percentages of completion of the
construction for each building as at December 31, 2008 are shown
below:
Tsining JunJing II Phase one
Buildings
Percentage of Completion
1#
65.77
%
2#
72.23
%
3#
72.29
%
4#
68.13
%
5#
93.67
%
6#
69.78
%
7#
84.69
%
8#
66.66
%
9#
67.86
%
14#
70.04
%
15#
71.46
%
20#
62.23
%
21#
61.29
%
26#
79.84
%
27#
46.19
%
28#
48.31
%
Tsining JunJing II Phase two
Buildings
Percentage of Completion
10#
32.83
%
11#
32.32
%
12#
31.28
%
13#
32.32
%
16#
32.90
%
17#
32.19
%
18#
30.76
%
19#
33.77
%
22#
32.30
%
23#
31.47
%
24#
32.07
%
25#
31.24
%
Tsining
JunJing II Phase one
Tsining
JunJing II Phase one was our major revenue generating construction project in
2008, contributing $23,776,789 in revenues. We began construction in 2007
however; as a result of utilizing the percentage of completion method of
accounting, we did not begin to realize revenues from our pre-sales until we met
certain construction milestones in the second quarter of 2008. By the end of
2008, we had pre-sold about 564 units in the project.
JunJing
II phase one consists of 13 middle-rise and high-rise residential buildings and
3 auxiliary buildings, including a kindergarten, with a gross floor area of
about 136,012 square meters. Estimated total revenues from phase one are about
$101.6 million. The company expects to complete the construction of phase one in
the third quarter of 2009.
Tsining
JunJing II Phase two
Phase two
of JunJing II consists of 12 middle-rise and high-rise buildings and is expected
to start construction during the second quarter of 2009 and should begin
contributing revenue from third quarter of 2009 or the first quarter of 2010.
The total revenues from phase two are expected to be about $94.1
million.
Revenues
from projects completed
Tsining
JunJing I
Project
Tsining JunJing I’s revenues for the year 2008 decreased 97.1 percent to
$264,066 from $8,964,783 in 2007 because the project was completed and most
units were delivered in 2006 and the sale of additional residential and retail
units occurred in 2007. The revenues in 2008 came from the sales of a few
remaining retail units and parking spaces.
Tsining
JunJing I revenues in 2007 declined 77.4 percent to $8,964,783 from
$39,670,186 in 2006 due to the fact that the project was completed and most
units were delivered in 2006. The 2007 revenues came from the sale of additional
residential and commercial units in the project.
Tsining-24G
Project
Tsining-24G’s revenues for the year 2008 decreased 99.9 percent to $27,243
compared with $25,198,128 for the year 2007, due to the completion of the
residential, hotel, and retail project in the second quarter 2007, when most of
the revenues were recognized using the full accrual method of accounting. The
sale of the hotel portion of the building and most retail spaces in Tsining-24G
were recognized in second quarter 2007 revenues. The revenues in 2008 resulted
from the sales of a few remaining retail and parking spaces.
69
Project
Tsining-24G revenues in 2007 grew 93.9 percent to $25,198,128 compared with
$13,000,694 in 2006. The increase was due to the block sale of the hotel portion
of one building in 2007.
Other
Projects
Revenues
in 2008 for other projects decreased 92.7 percent to $237,964 compared with
$3,245,875 in 2007. All remaining units from the company’s projects completed
that are not listed above are included in other projects. The decrease in
revenues in 2008 was primarily due to the absence of the sales of
a residential-commercial building, which was rented out before the sales
and several residential units in the company's previously completed projects in
2007.
Revenues
in 2007 for other projects were $3,245,875, up 231.6 percent compared with
$976,294 in 2006. The increase in 2007 was primarily due to the sale of an
occupied residential-commercial building and the sale of several units in the
company’s older projects.
Other
income
Other
income includes rental income, revenues from disposal of fixed assets as well as
government’s allowance for the equivalent cost of interest on the company’s
investments required to support infrastructure construction, plus continued
river management and suburban planning for the entire Baqiao high-technology
industrial park. We recognized $2,159,784 as other income in 2008
compared with $333,525 in 2007. Also in 2008, we generated a minor amount of
revenue from leasing commercial units, parking spaces, and ancillary
facilities in our completed projects. Other income in 2007 decreased 26.3
percent to $333,525 from $452,312 in 2006 primarily due to the absence in 2007
of a property clean-up project performed in 2006.
Cost
of properties and land
2008 – The cost of
properties and land in 2008 decreased 50.3 percent to $21,473,426 compared with
$43,221,757 in 2007. The decrease was primarily as a result of the lower number
of projects sold. In 2008, we had one project recognize a portion of pre-sales
using the percentage of completion method of accounting, compared with sales of
two projects in 2007 using the full accrual method of accounting.
Revenues
and the cost of revenues from Project Tsining JunJing II phase one began to
be recognized in the second quarter 2008 and are being recognized using the
percentage of completion method of accounting. The revenues and cost of revenues
for Tsining-24G, most of which was sold in the first quarter 2007, were
recognized using the full accrual method of accounting.
2007 – The cost of sales
in 2007 increased 17.6 percent to $43,221,757 compared with $36,749,683 in 2006.
The primary sources of the higher cost were the Baqiao infrastructure
construction and land development projects that were new in 2007.
Gross
profit and profit margin
2008 – Gross profit for
2008 was $4,992,420, down 83.7 percent from $30,691,093 in 2007. The gross
profit margin for 2008 was 18.9 percent compared with 41.5 percent in 2007. The
decrease in the gross profit was due to the smaller number of projects on sale
in 2008 and the sales of residential units in 2008 had lower profit margins
than the premium-priced retail and residential units sold in 2007 and the sale
of land in 2007 had a better margin. Most buildings sold in 2008 were in the
Tsining JunJing II residential project, which included the first units in
the project that were negotiated in 2007 at attractive prices to stimulate the
market interest and encourage future sales.
2007 – Gross profit for
2007 was $30,691,093, up 76.9 percent from $17,349,803 in 2006. The gross
profit margin for 2007 was 41.5 percent compared with 32.1 percent in 2006. The
increases in gross profit and gross profit margin were primarily due to the
Baqiao land development and infrastructure construction projects in 2007
that were not part of the company in 2006.
70
Selling,
general, and administrative expenses
2008 – Selling, general,
and administrative expenses for 2008 increased 191.1 percent to $8,497,562 from
$2,919,360 in 2007. The increase in selling, general, and administrative
expenses was due primarily to the following reasons:
1. Higher
advertising, marketing, and selling expenses totaled $2,146,520 in 2008 compared
with $781,998 in 2007. Advertising and sales promotion costs are expensed as
incurred. The higher advertising, marketing, and selling expenses resulted from
the Company’s aggressive marketing campaign during 2008 for Tsining JunJing II
phase one project, which included advertising and fully furnished showrooms
where potential buyers could see possible layouts and decorative effects. These
showrooms have attracted hundreds of potential buyers and continue to create
buyer interest and result in additional pre-sales purchase
agreements.
2. During
the fourth quarter of 2008, we completed the formation of the Puhua with Prax
Capital. Start-up costs totaling $637,522 were expensed in 2008. We had no
similar start-up costs in 2007.
3.
An increase in allowance for bad debts. The Company provides an
allowance for doubtful accounts equal to the estimated uncollectible amounts.
The Company's estimated uncollectible amounts are based on historical collection
experience and a review of the current status of trade accounts receivable. We
booked an allowance for doubtful accounts of $1,429,070 in 2008 compared with
$94,514 in 2007.
In 2008,
we estimated the allowance based on each account and we discussed all accounts
over 6 months and any amounts over 1 year because it is conservative given the
economic down-turn and circumstances at that time. A big portion of the
allowance is due to a customer refusing to pay and the dispute is in the legal
process. We have classified this as uncollectable. There was an allowance of
$94,514 in 2007.
4.
Higher professional expenses that resulted from the Company’s upgrade to NASDAQ
where its common shares began trading in May 2008. The Company believes its
listing on NASDAQ will provide more liquidity and transparency for shareholders
and additional financing flexibility for the company. Audit, legal, and other
professional costs totaled $1,405,178 in 2008 compared with $392,251 in
2007.
5.
Higher stamp tax and land use tax paid in 2008 due to changes in local
regulations that caused us to recognize $429,593 for those taxes in 2008
compared with $6,964 in 2007.
6.
Debt issuance costs are capitalized as deferred financing cost and amortized on
a straight line basis over the term of the debt. The amortization of debt
issuance costs for 2008 was $148,606 and no such costs were incurred in
2007.
7. Higher
administrative expenses occurred in 2008. Due to the
increase of management’s salary and bonus of $ 899,157 and the $
744,647 increase on employee salary of subsidiaries. And also $241,403
property management fee was higher charged in 2008 than $104,160 in
2007.
2007 – Selling, general,
and administrative expenses for 2007 decreased 8.7 percent to $2,919,360 from
$3,197,310 in 2006. The decrease in selling, general, and administrative
expenses was due primarily to the benefits from the Enterprise Resources
Planning system adopted by the Company in 2007 to control expenses.
Stock-based
compensation
2008 – The Company
recorded a $3 million noncash expense for restricted common shares during the
third quarter of 2008, which was related the Company’s incentive program for
performance achieved in 2007. The Company also recorded a $78,600 noncash
expense as we issued shares to certain directors and officer as part of their
2008 salary.
2007 and 2006– The Company did not
incur any stock-based compensation cost in 2007 or 2006.
Other
expenses
Other
expenses mainly consist of the losses (gains) related to the cleanup of fixed
assets, donations to charitable organizations, late delivery settlements, and
maintenance costs.
2008 – Other expenses in
2008 increased 414.8 percent to $295,595 compared with $57,416 in 2007. The
other expenses in 2008 include $146,412 (RMB 1,000,000) in donations to
earthquake relief funds in China.
2007 – Other expenses in
2007 decreased 80.9 percent to $57,416 compared with $301,158 in 2006. The 2007
decline was primarily due to the 2007 absence of the expenses in 2006 associated
with the normal added fixtures and finishing in the Tsining JunJing I and
Tsining-24G projects desired by the customers to reach final
satisfaction.
Operating
profit and operating profit margin
Operating
profit is defined as gross profit minus selling, general, and administrative
expenses, stock-based compensation, and other expenses.
2008 – Operating
loss in 2008 was $(6,879,337) compared with income of $27,714,317
in 2007, down 124.8 percent, primarily due to lower gross profit on the
residential portion of Tsining JunJing II, the absence of high operating profit
from the Tsining-24G commercial spaces sold in the first quarter of 2007
and the higher profit from the land sale in 2007, and higher selling,
general, and administrative expenses in the 2008 that included higher
professional expenses associated with the listing on the NASDAQ stock market and
the non-cash stock-based incentive compensation in 2008. As a result, the
operating profit margin was (26.0)% for the 2008 compared with 37.5% for
2007.
2007 – Operating profit
in 2007 increased 100.1 percent to $27,714,317 from $13,851,335 in 2006, due
primarily to higher revenues in 2007 from the Baqiao infrastructure construction
and from land development sales at attractive profit margins. The profit margin
increased to 37.5 percent in 2007, compared with 25.6 percent in 2006, primarily
due to the attractive pricing and low costs associated with the two Baqiao
projects listed above.
71
Interest
expense
2008 – Interest expense
in 2008 decreased 18.5 percent to $1,346,183 from $1,652,349 in 2007. The
decrease was primarily due to the capitalization of interest directly related to
the construction. We capitalized $4.7 million in year ended December 31, 2008
compare to $3.5 million during the same period of 2007. In mid-2008, the company
signed a RMB 1 billion (about $147 million) construction credit line agreement
with China Construction Bank. During 2008, we drew down about $22 million
in the credit line. The loan from China Construction Bank has an interest
rate that floats at 110 percent of the People’s Bank of China reference
rate.
2007 – Interest expense
in 2007 increased 471.6 percent to $1,652,349 from $289,083 in 2006. The
increase in 2007 was due primarily to the financing associated with the purchase
of the company that owned the exclusive right to develop the Baqiao project and
to perform the related infrastructure construction.
Change
in fair value of embedded derivatives
We are
using the CRR Binomial Lattice Model to estimate the fair values of warrants
liability and embedded derivatives. The CRR model depends on the following
assumptions: the price of the Company’s common stock underlying the warrants;
the strike price; the conversion price; expected life; expected volatility;
risk free interest rate; and dividend rate. We have used the CRR Binomial
Lattice Model in the past 3 years and do not expect any significant changes to
assumptions expect common share price and the volatility.
The fair
values of warrants liability and embedded derivatives have changed during the
past few years according to the valuation models and the fair values are
positively related to the market share price movement and the volatility. During
the fiscal year 2008, the Company’s common stock price decreased, which also
caused the decrease of the fair values. We estimated the fair values of warrants
liability and embedded derivatives every quarter and recognized the change of
fair values as gain or lose in our current quarter’s income statement. During
the fiscal year 2008, we recognized approximately $4.93 million as change in
fair value of warrants and $3.17 million as change in fair value of embedded
derivatives.
Investor Warrants:
1/28/2008
12/31/2008
Strike
price
6.07
6.07
Market
price
4.25
1.29
Valuation
date
1/28/2008
12/31/2008
Expiry
date
2/28/2013
2/28/2013
Volatility
75.00
%
90.00
%
Risk
free rate
2.80
%
1.33
%
Option
value
2.37894
0.45822
#
of warrants
1,437,467
1,437,467
Value
3,419,653
658,682
72
Investor Warrants: 5-7-2007
12/31/2007
12/31/2008
Strike
price
4.50
4.50
Market
price
5.01
1.29
Valuation
date
12/31/2007
12/31/2008
Expiry
date
5/9/2012
5/9/2012
Volatility
75.00
%
90
%
Risk
free rate
3.35
%
1.09
%
Option
value
0.76285
0.16402
#
of warrants
2,733,252
2,731,382
Value
2,085,073
448,011
Warrants issued through private placement
12/31/2007
12/31/2007
12/31/2007
12/31/2007
12/31/2007
12/31/2007
Strike
price
3.31
3.31
3.31
3.31
3.31
3.31
Market
price
5.01
5.01
5.01
5.01
5.01
5.01
Valuation
date
12/31/2008
12/31/2008
12/31/2008
12/31/2008
12/31/2008
12/31/2009
Expiry
date
6/28/2009
7/7/2009
8/21/2009
6/28/2009
7/7/2009
8/21/2009
Volatility
75.00
%
75.00
%
75.00
%
75.00
%
75.00
%
75.00
%
Risk
free rate
3.20
%
3.20
%
3.20
%
3.20
%
3.20
%
3.20
%
Option
value
2.53781
2.54870
2.60163
2.53781
2.54870
2.60163
#
of warrants
99,231
11,536
75,000
8,770
1,020
17,574
Value
251,829
29,402
195,122
22,257
2,600
45,721
73
Warrants issued through private placement
12/31/2008
12/31/2008
12/31/2008
12/31/2008
12/31/2008
12/31/2008
Strike
price
3.31
3.31
3.31
3.31
3.31
3.31
Market
price
1.29
1.29
1.29
1.29
1.29
1.29
Valuation
date
12/31/2008
12/31/2008
12/31/2008
12/31/2008
12/31/2008
12/31/2009
Expiry
date
6/28/2009
7/7/2009
8/21/2009
6/28/2009
7/7/2009
8/21/2009
Volatility
90.00
%
90.00
%
90.00
%
90.00
%
90.00
%
90.00
%
Risk
free rate
0.27
%
0.27
%
0.30
%
0.27
%
0.27
%
0.30
%
Option
value
0.03720
0.04086
0.06394
0.03720
0.04086
0.06394
#
of warrants
99,231
11,536
75,000
8,770
1,020
17,574
Value
3,692
471
4,796
326
42
1,124
Conversion
Option Valuation:
1/28/2008
12/31/2008
Strike
price
5.57
5.57
Market
price
4.25
1.29
Valuation
date
1/28/2008
1/28/2008
Expiry
date
2/28/2013
2/28/2013
Volatility
75.00
%
90.00
%
Risk
free rate
2.80
%
1.31
%
Option
value
2.43041
0.47060
Host
Value - principal
9,000,000
9,000,000
Host
Value - interest (1)
0
0
Shares
issuable on conversion
1,615,799
1,615,799
Host
Value - principal
3,927,375
760,398
Host
Value - interest (1)
0
0
Option
value - total
3,927,375
760,398
Derivative
value
3,927,375
760,398
74
In 2006,
2007, and 2008 the company issued warrants in conjunction with the issuance of
common shares or Convertible Debt. The warrants permit the shareholders to buy
additional common shares at the prices specified in the warrant
agreements.
In 2008,
shareholders exercised a total of 1,870 warrants to buy a total of 1,870 common
shares. A shareholder typically only exercises a warrant to buy common shares
when the stock price is higher than the warrant exercise price, the shareholder
pays the exercise price and the company covers the difference between the
warrant exercise price and the share price at the time of
conversion.
The
company was required to estimate the fair value of its remaining warrants
outstanding and adjust the value as needed, and it chose to use the
Cox-Ross-Rubinstein Binomial Lattice valuation model to estimate their fair
value.
The
change in fair value of warrants of $(4,932,961) in 2008 consisted of the
periodic adjustment to the estimated cost to the company to provide the common
shares, assuming that all the warrants will be exercised sometime in the future.
The basis for estimating the cost to provide those common shares was provided by
the valuation model.
Security
registration expenses
Pursuant
to the agreement with the investors of the 5% Senior Secured Convertible
Debt (Note 14), the Company was required to pay the investors certain late
registration payments (“Late Payments”) if the company failed to file a
Registration Statement within 60 days after the closing date of the 5% Senior
Secured Convertible Debt. The Company commenced negotiations with the investors
of the 5% Senior Secured Convertible Debt to waive the Late Payments in December
2008, as both parties believed that the registration statement would become
effective within a short period of time. However, as the registration statement
has not become effective as of September 2009, the investors of the 5% Senior
Secured Convertible Debt have decided to claim the Late Payments. The
Company has decided to present the Late Payments as security registration
expenses.
The
accrued security registration expenses were $613,483 for the year ended December31, 2008. The Company had no such expenses in the same period of
2007.
Provision
for income taxes
During
the fourth quarter of 2008, the local tax authority conducted a tax examination
and reached a tax settlement with us regarding our income tax liability; we
realized a gain of $12,712,153, which is included in the provision for income
taxes. Local tax authority examined the Company’s tax records and issued an
income tax settlement report. As a result, the company adjusted its provision
for income taxes to $(10,490,833) compared with the $8,743,556 provision
recorded in 2007.
The
effective tax rate was 34.4 percent for 2007 and 33.3 for 2006. The slightly
higher effective rate is due primarily to one of the company’s operations whose
required structure entails owning two subsidiaries that create costs that cannot
be used to reduce the company’s tax obligation.
Noncontrolling
interest
We
recorded $(159,564) noncontrolling interest
attributable to the minority shareholder of Puhua and Success Hill, which is
relate to the formation of Puhua in the fourth quarter of 2008. We did not have
any noncontrolling
interest in 2007.
Net
income attributable to China Housing & Land Development,
Inc.
2008 –
Net income attributable to China Housing & Land Development,
Inc. in 2008 decreased 46.4 percent to $8,942,370 from $16,686,116
in 2007.
As
explained above, the decrease in net income attributable to China Housing
& Land Development, Inc. was due primarily to the absence of a land
sale, fewer projects in the sales cycle, lower gross profit, higher
selling, general, and administrative expenses, the restricted common stock
issued in 2008 as incentive compensation for the year 2007, and accretion on
Convertible Debt, partly offset by the change in the fair value of warrants and
embedded derivatives and the tax settlement in fourth quarter of
2008.
2007 –
Net income attributable to China Housing & Land Development, Inc. for
the year 2007 increased 84.4 percent to $16,686,116 from $9,050,810 for the year
2006. The increase was primarily due to the 2007 revenue from the land sale and
infrastructure project related to the Baqiao project, partly offset by the
absence of the 2006 sales of the Tsining JunJing I and Tsining-24G projects, the
2007 change in the fair value of the warrants, and the higher interest expense
associated with borrowings to acquire the Baqiao project in
2007.
75
Basic and diluted EPS
attributable to China Housing & Land Development,
Inc.
2008 –
Basic EPS attributable to China Housing & Land Development,
Inc. were $0.29 in 2008, down 53.2 percent from $0.62 in 2007.
Diluted EPS attributable to China Housing & Land Development,
Inc. were $0.28 in 2008, down 54.8 percent from $0.62 in 2007. The
increases in the weighted average shares outstanding in 2008 compared with 2007
were due to the restricted common shares issued in the third quarter 2008 as
incentive compensation for the year 2007 performance.
2007 –
Basic and diluted EPS attributable to China Housing & Land
Development, Inc. were $0.62 in 2007, up 37.8 percent from $0.45 in
2006. The basic and diluted EPS attributable to China Housing &
Land Development, Inc. were both $0.62 in 2007 because the warrants
were anti-dilutive. Likewise, the basic and diluted EPS attributable
to China Housing & Land Development, Inc. were both $0.45 in
2006 for the same reason.
Common
shares used to calculate basic and diluted EPS attributable to China Housing
& Land Development, Inc.
2008 —
The weighted average shares outstanding used to calculate the basic EPS
attributable to China Housing & Land Development, Inc. were
30,516,411 shares in 2008 and 26,871,388 shares in 2007. The weighted average
shares outstanding used to calculate the diluted EPS attributable
to Cina Housing & Land Development, Inc. were 30,527,203
shares in 2008 and 26,871,388 shares in 2007. The increase was primarily due to
the incentive shares we issued to certain managements for their 2007
performance.
2007 —
Basic and diluted EPS attributable to China Housing & Land
Development, Inc. were based on weighted average shares
outstanding of 26,817,388 for 2007 and 20,277,615 for 2006. The 32.3 percent
increase in the weighted average shares outstanding was due to the common shares
with warrants issued in 2007, as well as the common stock with warrants that
were issued in 2006.
Gain
on foreign exchange
The
company operates in China and accounts in the Chinese renminbi but reports its
financial results in U.S. dollars, based on the exchange rates of the two
currencies. During 2006, 2007, and 2008, the renminbi appreciated in value
against the U.S. dollar, which, when translating the operating results and
financial positions at different exchange rates, created the accrued gain on
foreign exchange.
Cash
flow discussion
2008 – The increase in
cash for the year 2008 was $34,346,145 compared with $2,007,132 in
2007.
Cash flow
from operating activities in 2008 decreased 436.9 percent to $(29,076,621)
from $8,611,383 in 2007, primarily due to the operating cash outflow associated
with the development of Tsining JunJing II phase one.
The use
of cash in investing activities in 2008 was $(510,713), which was 98.0 percent
less than 2007, primarily due to the increase of the restricted cash and the
absence of the subsidiary acquisition. We acquired 100 percent equity of
New Land in March 2007.
Cash flow
from financing activities in 2008 provided $63,933,479, up 247.2 percent from
2007, primarily due to $29,268,913 net proceeds from the creation of the joint
venture with Prax Capita, the $19,230,370 proceeds from the Convertible
Debt offering in January 2008 and funds from construction loans with
banks that totaled $46,054,762, partly offset by payments on loans totaling
$25,905,804.
In
mid-2008, the company signed a RMB 1 billion (about $147 million) construction
credit line agreement with China Construction Bank to support the company’s
development projects. The company has been granted a total RMB 150 million
(approximately $22 million) loan for the JunJing II phase one project and
expects another RMB 150 million (approximately $22 million) loan once the
JunJing II phase two project begins.
2007 – The increase in
cash for the year 2007 was $2,007,132 compared with $358,864 in
2006.
Cash flow
from operating activities in 2007 increased 35.75 percent to $8,611,383 from
2006, this was primarily due to higher net income from the sale of real estate
and profit from the sale of a land use right.
Cash flow
from investing activities in 2007 consumed $25,020,248, up 70.4 percent from
2006, primarily due to higher expenditures to acquire a company that held the
right to develop the Baqiao project, and the absence of the 2006 purchases of
buildings, equipment, and automobiles.
Cash flow
from financing activities in 2007 provided $18,415,997, up 111.8 percent from
$8,696,388 in 2006, primarily due to the issuance of common stock and warrants,
which was partly offset by payments on loans.
76
Debt
leverage
Total
debt consists of the sum of the balance sheet lines titled Payable to
New Land’s previous shareholders, Loans from employees, Loans payable and
Convertible Debt.
Net debt
outstanding (total debt less cash) as of December 31, 2008 was $20,955,952
compared with $25,469,759 on December 31, 2007. The company's net debt as a
percent of total capital (net debt plus shareholders' equity) was 15.6 percent
on December 31, 2008 and 27.8 percent on December 31, 2007. The decrease in net
debt as a percent of total capital was primarily due to the increase of cash. In
the fourth quarter of 2008, we completed the formation of a joint venture and
received $29.3 million in cash from Prax Capital for their share of the
participation.
The
Company has loans payable to previous shareholders of New Land totaling to
$8,429,889 at December 31, 2008. $5,606,449 of the total relates to the
acquisition of New Land and New Land’s original shareholders have agreed to
extend the loan to December 31, 2009. We had requested this extension
in order to utilize the funds for our operations.
2007 – Total debt
outstanding at year end 2007 was $27,922,125 compared with $29,707,492 at
yearend 2006. Net debt outstanding (total debt less cash) at yearend 2007 was
$25,469,759 compared with $28,219,588 at year end 2006. The Company’s net debt
as a percent of total capital (net debt plus shareholders’ equity) was 27.79
percent at yearend 2007 and 59.49 percent at yearend 2006. The reduction in net
debt leverage was primarily due to the issuance of common stock and warrants and
the net reduction in loans.
Liquidity
and capital resources
Our
principal demands for liquidity are for the development of new properties,
property acquisitions, and general corporate purposes. As of
December 31, 2008, we had $38,230,352 of cash and cash equivalents, an increase
of $35,777,986 compared with $2,452,366 of cash and cash equivalents as of
December 31, 2007.
Financial
obligations
As of
December 31, 2008, we had total bank loans of $35,617,442 with a weighted
average interest rate of 10.65 percent. Future scheduled maturities of loans
payable were as follows:
Due Date
Outstanding Amount
2009-9-14
$
3,371,198
2009-12-25
$
5,130,084
2010-8-29
$
5,130,084
2011-8-27
$
21,986,076
Mortgage
debt (total bank loans) is secured by the assets of the company.
Loans payable
Loans
payable represent amounts due to various banks and are due on demand or normally
due within one year. These loans generally can be renewed with the banks when
the loans mature.
77
Most of
the obligations of the company are tied to specific projects. The terms of the
loans typically are 1 to 3 years. Loan extensions are determined by mutual
agreement when the current term expires and both parties will consider the
remaining time needed to complete the project. Most of these loans are payable
when the project has been completed and the residents or businesses take
possession.
The
currently indicated annual interest requirement on these loans totals about $3.8
million. The loan from China Construction Bank has an interest rate that floats
at 110 percent of the People’s Bank of China reference rate.
The
following table summarizes the amounts and types of the company's obligations
and provides the estimated period of maturity for the financial obligations by
class as of December 31, 2008:
Obligations Due by Period
1 year
1-3 years
3-5 years
(Millions
of dollars)
Current
liabilities:
Accounts
payable
$
10.53
Income
taxes payable
$
7.53
Other
payables
$
5.18
Advances
(deposits) from customers
$
9.26
Accrued
expenses
$
3.54
Accrued
security registration expenses
$
0.61
Long-term
liabilities:
Warranties
liabilities
$
1.12
Deferred
tax
$
11.50
Fair
value of embedded derivatives
$
0.76
Convertible
Debt
$
13.62
Long-term
debt:
Loans
payable
$
8.50
$
27.13
Payable
for acquisition of businesses
$
8.43
Loans
from employees
$
1.52
Liquidity
expectation
The
company believes that the combination of present capital resources, internally
generated funds, and unused financing sources are more than adequate to meet
cash requirements for the year 2009.
We intend
to meet our liquidity requirements, including capital expenditures related to
the purchase of land for the development of our future projects, through cash
flow provided by operations and additional funds raised by future financings.
Upon acquiring land for future development, we intend to raise funds to develop
our projects by obtaining mortgage financing from local banking institutions
with which we have done business in the past. We believe that our relationships
with these banks are in good standing and that our real estate will secure the
loans needed. We believe that adequate cash flow will be available to fund our
operations.
As part
of our funding plan, on March 9, 2007, we entered into a Shares Transfer
Agreement with the shareholders of New Land, pursuant to which we have acquired
32,000,000 shares of the New Land, constituting 100 percent equity ownership of
New Land.
78
New Land
is now in cooperation with the Baqiao District Government of Xi'an City in
developing the Baqiao Science & Technology Industrial Park, a provincial
development zone in Shaanxi Province. This acquisition has been completed, and
the Company has the right to develop and sell 487 acres of property that has
been targeted for new residential developments.
The
majority of the company's revenues and expenses were denominated primarily in
renminbi (RMB), the currency of the People's Republic of China. There is no
assurance that exchange rates between the RMB and the U.S. dollar will remain
stable. The company does not engage in currency hedging. Inflation has not had a
material impact on the company's business.
Off-Balance
Sheet Arrangements
Neither
us, nor any of our subsidiaries has any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on their financial
condition or results of operations.
Other
events
On
January 28, 2008, the company raised $20 million through the issuance of senior
secured Convertible Debt to institutional investors. As part of the private
placement, the company issued five-year senior secured Convertible Debt with an
aggregate principal amount of $20 million that pays cash interest of 5 percent
per annum. $9 million of the notes are convertible into common stock and carry
an initial conversion price of $5.57 per share, which can be increased if
certain stock price thresholds are met. Additionally, forced conversion can also
occur at the Company’s discretion if certain stock price thresholds are met. The
notes are secured by certain real estate assets and additionally through a
pledge of common shares owned by Mr. Pingji Lu, the Company’s Chairman.
Additionally, investors in the private placement were granted 1,437,467
five-year warrants with a strike price of $6.07 per common share, which are
callable if certain stock price thresholds are met. Approximately 215,620 of the
warrants are available as a management incentive if certain milestones are
met.
On July7, 2008, the company signed a strategic partnership agreement with the China
Construction Bank Shaanxi Branch that establishes a RMB 1 billion
(approximately US$147 million) construction credit line to support
the construction work of China Housing and its subsidiaries. The new strategic
partnership is the first and only one of its kind for both China Housing &
Land Development and China Construction Bank Shaanxi Branch. The agreement also
establishes China Housing as a VIP client for the bank.
On
October 13, 2008, the company announced that it recently began constructing its
third dam on the Ba River, adjacent to the company's 487-acre Baqiao housing
project. The dam is expected to be completed in the second quarter of 2009. The
company expects to record $3.7 million in revenue and about $0.6 million in
net income when the dam is finished. The company already has secured an
infrastructure construction loan of about RMB 35 million (about $ 5.13 million)
with the Xi'an Commercial Bank to finance this project. The dam will create a
large lake about three meters deep on the Ba River that will increase the
attractiveness and value of the Company's Baqiao housing project.
In early
November 2008, China Housing and Prax Capital China Real Estate Fund I, Inc.,
entered into a joint agreement to develop 79 acres within China Housing’s Baqiao
project. The joint venture was formed in late December 2008, subject to certain
conditions and approvals, which were met. Prax Capital Real Estate Holdings
Limited invested US$29.3 million cash in the joint venture, the joint venture
acquired the land use rights early in the first quarter 2009 and the joint
venture is proceeding with the project.
79
OTHER
EXPENSES OF ISSUANCE AND DISTRIBUTION
Other
than the $622.74 in registration fees and approximately $60,000 in legal and
accounting fees, which are subject to changes, the Company does not anticipate
any other expenses.
DESCRIPTION
OF PROPERTY
Our
principal executive offices are located at 6 Youyi Dong Lu, Han Yuan 4 Lou,
Xi’An, Shaanxi Province, China 710054. This office consists of approximately
2,608.06 square meters which we own.
Our
properties are located in Xian, Shaanxi province in China. We own Tsining
Building, and the Tsining Hanyuan House property with 116,232 square feet of
floor area together with related fixtures and equipment.
We
believe that our properties are adequate for our current and immediately
foreseeable operating needs. We do not have any policies regarding investments
in real estate, securities or other forms of property.
PENNY
STOCK
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules
require:
•
that
a broker or dealer approve a person's account for transactions in penny
stocks; and
•
the
broker or dealer receives from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker
or dealer must
•
obtain
financial information and investment experience objectives of the person;
and
•
make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
80
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:
•
sets
forth the basis on which the broker or dealer made the suitability
determination; and
•
that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
LEGAL
PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings,
which arise in the ordinary course of business. However, litigation is subject
to inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm business. We are currently not aware of
any such legal proceedings or claims that will have, individually or in the
aggregate, a material adverse affect on business, financial condition or
operating results.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has borrowed money from certain employees to fund the Company's
construction projects. The loans bear interest ranging between 7% to 12% and the
principal matures within one to three years. As of December 31, 2008, loans from
employees amounted to $1,517,039 . As of September 30, 2009, loans from
employees amounted to $2,198,196. The following table sets forth the largest
aggregate amount of principal outstanding during fiscal 2008 and for the nine
months ended September 30, 2009, and amounts of principal repaid and interest
incurred during fiscal 2008 and for the nine months ended September 30,2009.
Highest
aggregate amount of principal during the period
20,679,627
3,031,092
16,700,000
2,446,456
Principal
repaid during the period
(10,329,627
)
(1,514,053
)
(1,715,000
)
(251,238
)
10,350,000
1,517,039
14,985,000
2,195,218
Interest
incurred during the period
1,780,700
256,278
1,062,005
155,478
The
Company does not allow borrowing by the employees from the Company. There are no
buying/selling transactions between the employees and the Company. The employee
loans were made at a time when the Company needed working capital to expand
operation and the employees helped the Company by giving their loans. The loans
were made at or below the then current market rate. Although we have the overall
policy of not allowing related party transaction unless the Company benefits, we
have no written policies and procedures for the review, approval, ratification
of any related party transaction. All our directors and officers understand that
they should not engage in any related party transactions and we have announced
the rule to the employees of the Company a few times at different employee
meetings. The Company will work with the audit committee to set up such written
policies and procedures for the review, approval, ratification of any
related party transaction.
81
The
following table sets forth all loans the Company and New Land, its subsidiary,
have made with their employees during the period for which this report is
provided.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our
directors and executive officers are indemnified as provided by the Nevada
Revised Statutes and our Bylaws. These provisions state that our directors may
cause us to indemnify a director or former director against all costs, charges
and expenses, including an amount paid to settle an action or satisfy a
judgment, actually and reasonably incurred by him as a result of him acting as a
director. The indemnification of costs can include an amount paid to settle an
action or satisfy a judgment. Such indemnification is at the discretion of our
board of directors and is subject to the Securities and Exchange Commission’s
policy regarding indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling us 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 Act and is, therefore, unenforceable.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Effective
on December 29, 2006, Kabani & Company, Inc, (“Kabani”) was dismissed as the
independent accountant engaged to audit the financial statements of the
Company.
Kabani
reported on the Company’s operating subsidiary Xi’an Tsining Housing Development
Co., Ltd.‘s financial statements for the years ended December 31, 2005 and 2004.
Kabani’s opinion did not contain an adverse opinion or a disclaimer of opinion,
and was not qualified as to uncertainty, audit scope, or accounting principles.
Kabani also reviewed the Company’s financial statements for the three months
ended March 31, 2006, the three and six months ended June 30, 2006 and June 30,2005, and for the three and nine months ended September 20, 2006 and September30, 2005.
During
the Company’s most recent full fiscal years ended December 31, 2005 and 2004,
there were no disagreements with Kabani on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Kabani, would have
caused them to make reference to the subject matter of such disagreements in
connection with their reports; and there were no reportable events, as listed in
Item 304(a)(1)(v) of Regulation S-K.
Effective
on December 29, 2006the Company has engaged Moore Stephens Wurth Frazer and
Torbet. LLP, Certified Public Accountant and Consultants (“Moore Stephens”) with
address at 135 South State College Boulevard, Suite 300, Brea, California92821, as the new principal accountant to audit its financial statements.
The decision to engage Moore Stephens was approved by the Company’s Board of
Directors.
83
During
the fiscal years ended December 31, 2005, 2004 and 2003 and from December 31,2005 through the engagement of Moore Stephens as the Company’s independent
accountant, neither the Company nor anyone on its behalf has consulted Moore
Stephens with respect to any accounting or auditing issues involving the
Company. In particular, there was no discussion with Moore Stephens regarding
the application of accounting principles to a specified transaction, the type of
audit opinion that might be rendered on the Company’s financial
statements.
Effective
as of December 10, 2007, Moore Stephens resigned as independent certified public
accounting firm for the Company and was replaced by MSCM LLP, effective as of
December 13, 2007.
During
the Company's year ended December 31, 2006, there were no disagreements with
Moore Stephens on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements, if
not resolved to the satisfaction of Moore Stephens would have caused them to
make reference to the subject matter of such disagreements in
connection with their report and there were no reportable events, as listed
in Item 304(a)(1)(v) of Regulation S-K.
Moore
Stephens has not issued any report on the 2006 financial statements which
contained an adverse opinion or a disclaimer of opinion, or was qualified or
modified as to uncertainty, audit scope, or accounting principles. The decision
to change accountants was recommended and approved by the Audit Committee of the
Board of Directors of the Company.
During the years ended December 31, 2006 and 2005 and through the date of this
current report, the Company did not consult with MSCM LLP on (i) the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that may be rendered on the Company’s
financial statements, and MSCM LLP did not provide either a written report or
oral advice to the Company that MSCM LLP concluded was an important factor
considered by the Company in reaching a decision as to any accounting, auditing,
or financial reporting issue; or (ii) the subject of any disagreement, as
defined in Item 304 (a)(1)(iv) of Regulation S-K and the related instructions,
or a reportable event within the meaning set forth in Item 304(a)(1)(v) of
Regulation S-K.
TRANSFER
AGENT
Our
transfer agent is Securities Transfer Corporation. Its address is 2591 Dallas
Parkway, Suite 102, Frisco, Texas75034.
ADDITIONAL
INFORMATION
We
have filed with the SEC a registration statement on Form S-1 to register the
securities offered by this prospectus. For future information about us and the
securities offered under this prospectus, you may refer to the registration
statement and to the exhibits filed as a part of the registration
statement.
We file annual, quarterly and current reports, and other information with the
SEC. Our filings are available to the public at the SEC’s website
at http://www.sec.gov . You also may read and copy any
document we file at the SEC’s Public Reference Room, 100 F Street, N.E.,
Washington, D.C. 20549. Further information on the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330.
Interim
Condensed Consolidated Statements of Income and Other Comprehensive Income
for the Three and nine Months Ended September 30, 2009 and 2008
(Unaudited)
F-27
Interim
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2009 and 2008 (Unaudited)
Notes
To Interim Condensed Consolidated Financial Statements
F-30
F-1
Report
of Independent Registered Public Accounting Firm
To the
Shareholders and Board of Directors of China Housing & Land Development,
Inc.
We have
audited the accompanying consolidated balance sheets of China Housing & Land
Development, Inc., and subsidiaries (the “Company”) as at December 31, 2008 and
2007 and the related consolidated statements of income and comprehensive income,
shareholders’ equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We are not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
As
discussed in Note 3 to the consolidated financial statements, effective
January 1, 2008, the Company changed its method of revenue
recognition.
In our
opinion, these consolidated financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 2008 and 2007
and the results of its operations and its cash flows for the years then ended in
accordance with accounting principles generally accepted in the United States of
America.
As
discussed in Note 2 to the consolidated financial statements, the Company
has restated its financial statements for the year ended December 31, 2008
to reflect the accrual of security registration expenses.
As
discussed in Note 3 to the consolidated financial statements, such statements
have been adjusted for the retrospective application of FASB Statement
No. 160, Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51, which was adopted by the Company on
January 1, 2009.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
China
Housing & Land Development Inc.
We have
audited the accompanying consolidated statements of income and other
comprehensive income, shareholders’ equity and cash flows of China Housing &
Land Development Inc. and subsidiaries (the “Company”) for the year ended
December 31, 2006. These statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these statements
based on our audit.
We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
was not required to have, nor were we engaged to perform, and audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the company’s internal
control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by management, as well
as evaluation the overall financial statement presentation. We believe that
our audit provide a reasonable basis for our opinion.
In our
opinion, the consolidated statements of income and comprehensive income,
shareholders’ equity and cash flows referred to above presents fairly, in all
material respects, the results of the operations and its cash flows of China
Housing & Land Development Inc for the year ended December 31, 2006, in
conformity with accounting principles generally accepted in the United States of
America.
Accounts
receivable, net of allowance for doubtful
accounts
of $1,278,156 and $94,514, respectively
813,122
12,107,882
Other
receivables, prepaid expenses and other assets
446,497
567,308
Notes
receivable, net
811,695
947,918
Real
estate held for development or sale
60,650,011
40,986,931
Property
and equipment, net
12,391,501
5,707,012
Assets
held for sale
14,308,691
12,910,428
Advance
to suppliers
704,275
2,071,549
Deposits
on land use rights
47,333,287
29,694,103
Intangible
assets, net
46,043,660
48,205,697
Deferred
financing costs
622,118
55,451
Total
assets
222,355,209
155,706,645
LIABILITIES
Accounts
payable
$
10,525,158
$
9,311,995
Advances
from customers
9,264,385
5,258,351
Accrued
expenses
3,539,842
1,903,451
Accrued
security registration expenses
613,483
-
Payable
to New Land’s previous shareholders
8,429,889
11,413,229
Income
and other taxes payable
7,532,730
22,711,981
Other
payables
5,183,251
3,881,137
Loans
from employees
1,517,039
2,388,862
Loans
payable
35,617,442
14,120,034
Deferred
tax liability
11,510,915
15,907,880
Warrants
liability
1,117,143
2,631,991
Fair
value of embedded derivatives
760,398
-
Convertible
Debt
13,621,934
-
Total
liabilities
109,233,609
89,528,911
SHAREHOLDERS'
EQUITY
Common
stock: $.001 par value, authorized 100,000,000 shares ; issued and
outstanding 30,893,757 and 30,141,887 shares at December 31, 2008 and
2007, respectively
30,894
30,142
Additional
paid in capital
31,390,750
28,381,534
Statutory
reserves
3,541,226
2,885,279
Retained
earnings
38,651,579
30,365,156
Accumulated
other comprehensive income
10,397,801
4,515,623
Total
China Housing & Land Development, Inc. shareholders’
equity
84,012,250
66,177,734
Noncontrolling
interest
29,109,350
-
Total
shareholders’ equity
113,121,600
66,177,734
Total
liabilities and shareholders' equity
$
222,355,209
$
155,706,645
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
CHINA
HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
Note
1 — Organization and Basis of Presentation
China
Housing & Land Development, Inc., (the Company) is a Nevada corporation,
incorporated on July 6, 2004 under the name Pacific Northwest Productions Inc.,
(Pacific). On May 5, 2006, the Company changed its name to China Housing &
Land Development, Inc. The Company, through its subsidiaries, is engaged in
acquisition, development, management, and sale of commercial and residential
real estate properties located primarily in Xi'an, Shaanxi Province,
People’s Republic of China (PRC or China).
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Xi'an Tsining Housing Development
Company Inc. (Tsining ), Xi'an New Land Development Co. (New Land), Xi'an Hao
Tai Housing Development Company Inc. (Hao Tai), Manstate Assets Management
Limited (Manstate), Puhua (Xi’an) Real Estate Development Co., Ltd
(75% interest) (Puhua), Success Hill Investments Limited (60% interest)
(Success Hill) (collectively, the Subsidiaries). All inter-company accounts
and transactions have been eliminated on consolidation. The accompanying
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
(GAAP).
Tsining
was established during May 1992 as a state-owned enterprise, whose former name
is Xi’an New Star Group Real Estate Development Co. Ltd, and was reorganized as
a limited liability company with equity capital invested by management personnel
in September 1999 with registered capital of approximately $3,140,000 (RMB
26,000,000). On March 28, 2002, the registered capital of Tsining was increased
to approximately $6,050,000 (RMB 50,000,000). On May 21, 2007, the registered
capital of Tsining was further increased to $17,000,000 (RMB
132,838,270).
On April21, 2006, Tsining entered into and closed a share purchase agreement with
Pacific, incorporated in the state of Nevada in the United States of America.
Pursuant to the purchase agreement, Pacific acquired all of the issued and
outstanding capital stock of Tsining in exchange for 16,000,000 (post-split)
shares of Pacific’s common stock.
Concurrent
with the closing of the purchase agreement and as a condition thereof, Pacific
entered into an agreement with Deljit Bains and Davinder Bains, its then
executive officers, pursuant to which they each returned 4,000,000 (post-split)
shares (8,000,000 shares in total) of Pacific common stock to Pacific for
cancellation. They were not compensated in any way for the cancellation of their
shares of Pacific common stock. Upon completion of the foregoing transactions,
Pacific had an aggregate of 20,000,000 shares of common stock issued and
outstanding.
As a
result of the transaction, Tsining’s stockholders owned approximately 80% of the
combined company and the directors and executive officers of Tsining became the
directors and executive officers of Pacific. Accordingly, the transaction has
been accounted for as a reverse acquisition of Pacific by Tsining resulting in a
recapitalization of Tsining. Tsining was deemed to be the purchaser and
surviving company for accounting purposes.
On May 5,2006, Pacific changed its name to China Housing & Land Development, Inc. and
the stockholders approved a stock dividend of seven shares for each share held,
which has been accounted for as an eight to one forward stock split. All shares
and per share data have been restated retrospectively.
New Land
was originally incorporated in September 2003 in Xi’an City in Shaanxi province,
China. In 2006, New Land entered into an agreement with the Baqiao District
Government of Xi’an City to develop Baqiao Science &
Technology Industrial Park (“Baqiao Park”), a provincial development
zone in Shaanxi Province, to establish a joint venture for New Land to
develop and purchase approximately 487 acres in Baqiao Park. The agreement
covers the period from July 2006 to June 2011. New Land is responsible for
the installation and maintenance of all basic infrastructure, including water,
electricity, and gas supply, along with telecommunication and sewer systems. In
return, New Land has been given the exclusive right to obtain 487 acres of
land use rights (“Baqiao Project”).
On June19, 2007, New Land established Xi’an Hao Tai Housing Development Company
Inc. (“Hao Tai”) for the purpose of obtaining, developing, and trading land use
rights in China. Hao Tai is 100% owned by New Land and received its formal
business license from the government in July 2007.
On
November 10, 2008, the Company entered into a framework agreement with Prax
Capital China Real Estate Fund I, Ltd., (“Prax Capital”) to develop 79 acres
within the Company’s Baqiao Project site. Pursuant to the Agreement, as of
December 31, 2008, Prax Capital Real Estate Holdings Limited has invested
US$29,270,000 into Success Hill for an ultimate 25% interest in Puhua
with various distribution rights. Prax Capital’s interest is recorded as
noncontrolling interest in the consolidated financial statements. The Company
holds the remaining 75% interest in Puhua directly and indirectly through
Manstate and Success Hill.
F-7
Note
2—Restatement of Security Registration Expenses
Pursuant
to the agreement with the investors of the 5% Senior Secured Convertible
Debt (Note 14), the Company was required to pay the investors certain late
registration payments (“Late Payments”) if the Company failed to file a
Registration Statement within 60 days after the closing date of the 5% Senior
Secured Convertible Debt. The Company commenced negotiations with the investors
of the 5% Senior Secured Convertible Debt to waive the Late Payments in December
2008, as both parties believed that the registration statement would become
effective within a short period of time. However, as the registration
statement has not become effective as of September 2009, the investors of the 5%
Senior Secured Convertible Debt have decided to claim the Late Payments. Because
the Company failed to accrue the Late Payments, the Company restated the 2008
year end, 2009 quarter one and 2009 quarter two consolidated financial
statements to accrue the corresponding expenses.
The
restatement had the following impact on the Company’s previously reported
results of operations for the year ended December 31, 2008:
Accrued
security registration expenses as previously reported
$
-
Adjustment
to accrue security registration expenses
613,483
Accrued
security registration expenses as restated
$
613,483
Prior to
the restatement, the Company did not accrue the Late Payments. After the
restatement, the Company presented the Late Payments as security registration
expenses.
Note
3 — Summary of Significant Accounting Policies
Principles
of Consolidation and Basis of Presentation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries, Tsining, New Land, Hao Tai and
Manstate, its 75% interest in Puhua and 60% interest in Success
Hill. All inter-company accounts and transactions have been eliminated on
consolidation. The accompanying consolidated financial statements have been
prepared in conformity with GAAP.
Use of
Estimates
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Reporting
Currency and Foreign Currency Translation
As of
December 31, 2008, the accounts of the Company and its Subsidiaries are
maintained in their functional currency, the Chinese Yuan Renminbi ("RMB"). The
consolidated financial statements of the Company have been translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards (“SFAS”)
No.52, “Foreign Currency Translation”. According to SFAS No. 52, all assets and
liabilities of the Subsidiaries are translated at the exchange rate on the
balance sheet date, shareholders' equity is translated at the historical rates
and the statements of income and cash flows are translated at the weighted
average exchange rate for the year. The resulting translation adjustments are
reported under comprehensive income in accordance with SFAS No. 130, "Reporting
Comprehensive Income."
Effective
January 1, 2008, the Company changed its revenue recognition policy for sales of
development properties to the percentage of completion method. Previously, the
full accrual method was used. The percentage of completion method is based on
estimated costs incurred. The change is preferable as it accurately reflects the
business activity of the Company and matches revenues with the costs incurred in
the pursuit of such revenue. SFAS No. 154, "Accounting Changes and Error
Corrections," requires that a change in accounting policy be reflected through
retrospective application of the new accounting policy to all prior periods,
unless it is impracticable to do so. The Company has determined that
retrospective application to periods prior to January 1, 2008 is not practical
as the necessary information needed to restate prior periods is not available.
Therefore, the Company began to apply the percentage completion method on a
prospective basis beginning January 1, 2008.
F-8
Real
estate sales are reported in accordance with the provisions of SFAS No. 66,
"Accounting for Sales of Real Estate". Profit from the sales of real estate
properties, is recognized by the percentage of completion method on the sale of
individual units when all the following criteria are met:
a.
Construction
is beyond a preliminary stage.
b.
The
buyer is committed to the extent of being unable to require a refund
except for non-delivery of the unit or
interest.
c.
Sufficient
units have already been sold to assure that the entire property will not
revert to rental property.
d.
Sales
prices are collectible.
e.
Aggregate
sales proceeds and costs can be reasonably
estimated.
If any of
the above criteria is not met, proceeds shall be accounted for as deposits until
the criteria are met.
Under the
percentage of completion method, revenues from condominium units sold and
related costs are recognized over the course of the construction period, based
on the completion progress of a project. In relation to any project, revenue is
determined by calculating the ratio of incurred costs, including land use rights
costs and construction costs, to total estimated costs and applying that
ratio to the contracted sales amounts. Cost of sales is recognized
by determining the ratio of contracted sales during the period to total
estimated sales value, and applying that ratio to the incurred costs.
Current period amounts are calculated based on the difference between the
life-to-date project totals and the previously recognized amounts.
Significant
judgments and estimates related to applying the percentage of completion method
include the Company’s estimates of the time necessary to complete the project,
the total expected revenue and the total expected costs. Fluctuations in sale
prices and variances in costs from budgets could change the percentages of
completion and affect the amount of revenue and costs recognized. Changes
in total estimated project costs or losses, if any, are recognized in the
period in which they are determined. Revenue recognized to date in excess of
amounts received from customers is included in account receivable. As of
December 31, 2008, the related account receivable balance was $299,745 ( 2007
and 2006 – $Nil). Amounts received from customers in excess of revenue
recognized to date are classified as current liabilities under advances from
customers. As of December 31, 2008 and 2007, the related advances from
customers were $9,264,385 and $5,258,351, respectively.
For
Company’s financed sales, the Company recognizes sales based on the full accrual
method provided that the buyer's initial and continuing investment is adequate
according to SFAS No. 66, “Accounting For Sales of Real Estate”. The initial
investment is the buyer's down-payment less the loan amount provided by the
Company. Interest on these loans is amortized over the term of the
loans.
For land
sales, the Company recognizes revenue when title of the land development right
is transferred and collectability is assured.
Real
estate rental income is recognized on the straight-line basis over the
terms of the tenancy agreements.
For the
reimbursement on infrastructure costs, the Company recognizes income, which is
at a value agreed to by the Company and the government of the PRC, when they
enter into a binding agreement.
Real
Estate Capitalization and Cost Allocation
Real
estate held for development or sale consists of residential and commercial units
under construction and units completed. Construction in progress includes costs
associated with development and construction of the Baqiao project, the JunJing
II project and prepayment paid on the Tang Du project.
The
Company leases land for the residential and commercial unit sites under land use
rights from the government of the PRC.
Real
estate held for development or sale is stated at cost or estimated net
realizable value, whichever is lower. Costs include land and land improvements,
direct construction costs and development costs, including predevelopment costs,
engineering costs, interest on indebtedness, real estate taxes, wages,
insurance, construction overhead and indirect project costs. All costs are
accumulated by specific projects and allocated to residential and commercial
units within the respective projects. Selling and advertising costs are
expensed as incurred. Total estimated costs of multi-unit developments are
allocated to individual units based upon specific identification
methods.
Land and
land improvement costs include cost of land use rights, land improvements, and
real estate taxes. Appropriate costs are allocated to projects on the basis of
acreage, dwelling units and relative sales value.
F-9
Land and
land improvements applicable to apartments and retail space are transferred to
construction in progress when construction commences.
When real
estate costs are determined to be impaired, they are written down to their
estimated net realizable value. The Company evaluates the carrying value for
impairment based on the undiscounted future cash flows of the assets.
Write-downs of real estate costs deemed impaired would be recorded as
adjustments to the cost basis. No impairment loss was incurred or recorded for
the year ended December 31, 2008 (December 31, 2007 - $Nil and 2006 -
$79,665).
No
depreciation is provided for construction in progress.
Capitalization
of Interest
In
accordance with SFAS No.34, “Capitalization of Interest Cost”, interest incurred
during and directly related to construction is capitalized to construction in
progress. All other interest is expensed as incurred.
For the
year ended December 31, 2008, interest incurred by the Company was
$4,659,778 (December 31, 2007 - $3,454,862 and 2006 - $2,245,021) and
capitalized interest for the same period was $3,313,595 (December 31, 2007
- $1,904,096 and 2006-$1,975,588).
Concentration
of Risks
The
Company sells residential and commercial units to residents and small business
owners and the Company sells land to other real estate developers. There was no
major customer that accounted for more than 5% of the sales for the year ended
December 31, 2008. One customer accounted for approximately 44% of accounts
receivable as at December 31, 2008. The Company had four major customers
that accounted for approximately 62% of the Company’s sales for the year ended
December 31, 2007. One of these customers accounted for 84% of
accounts receivable as at December 31, 2007. The Company has no major
customer that accounts for more than 5% of revenue for the year ended December31, 2006.
The
Company is dependent on third-party sub-contractors, manufacturers, and
distributors for all of construction services and supply of construction
materials. Construction services or products purchased from the Company's five
largest subcontractors/suppliers accounted for 30% of total services and
supplies for the year ended December 31, 2008 (December 31, 2007 - 56%
and December 31, 2006 – 41%).
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced by the
political, economic and legal environments in the PRC and by the general state
of the PRC’s economy. The Company's business may be influenced by changes in
governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
Cash and
Concentration of Risk
Cash
includes cash on hand and restricted cash in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at December31, 2008 amounted to $38,230,352 (December 31, 2007 - $2,452,366) of which
no deposits are covered by insurance. The Company has not experienced any losses
in such accounts.
Restricted
Cash
The bank
grants mortgage loans to home purchasers and will transfer these amounts to the
Company's bank account once title passes. If the homes are not completed and the
new home owners have no ownership documents to secure the loan, the bank will
deduct 10% of the home owner's loan from the Company's bank account and transfer
that amount to a designated bank account classified on the balance sheet as
restricted cash. Interest earned on the restricted cash is credited to the
Company's normal bank account. The bank will release the restricted cash after
home purchasers have obtained the ownership documents to secure the mortgage
loan. Total restricted cash amounted to $805,012 as of December 31, 2008
(December 31, 2007 - $101,351).
Accounts
Receivable
Accounts
receivable consists of balances due from customers for the sale of residential
and commercial units in the PRC. The Company provides an allowance for doubtful
accounts equal to the estimated uncollectible amounts. The Company's estimated
uncollectible amounts are based on historical collection experience and a review
of the current status of trade accounts receivable. It is reasonably possible
that the Company's estimate of the allowance for doubtful accounts will
change. Accounts receivable are $813,122 at December 31, 2008 (December 31,2007-$12,107,882). And the accounts receivable are presented net of an allowance
for doubtful accounts of $1,278,156 at December 31, 2008 (December 31, 2007
- $94,514).
F-10
Other
Receivables
Other
receivables consist of various cash advances to unrelated companies and
individuals. These amounts are not related to operations of the Company, are
unsecured, non-interest bearing and generally short term in nature. The balance
of other receivables after deduction of an allowance for doubtful accounts, was
$446,497 as of December 31, 2008 (December 31, 2007 - $567,308). Other
receivables are reviewed annually as to whether their carrying value has become
impaired. As of December 31, 2008, the Company has established an allowance for
doubtful accounts of $473,058 (December 31, 2007 - $190,372).
Notes
Receivable
The
Company finances sales to certain new homeowners with terms of one to three
years. These loans are non-interest bearing, therefore the Company has
discounted the carrying amount of notes receivable at the market mortgage rate
at 5.4% (2007 – 6.35%). Notes receivable are presented net of allowance for
doubtful accounts.
2008
2007
Notes
receivable
$
859,682
$
1,036,75
Less:
unamortized interest
(47,988
)
(88,857
)
Notes
receivable, net
$
811,695
$
947,918
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Depreciation
expense for the year ended December 31, 2008, 2007 and 2006 amounted to
$454,728, $423,932 and $354,444 respectively. Depreciation expense was included
in the selling, general and administrative expenses and other income. Estimated
useful lives of the assets are as follows:
Estimated Useful
Life
Head
office buildings and improvements
30
years
Income
producing properties
21
- 30 years
Vehicles
6
years
Electronic
equipment
5
years
Office
furniture
5years
Computer
software
3
years
Maintenance
and repairs are charged directly to expenses as incurred. Major additions and
betterment to property and equipment are capitalized and depreciated over the
remaining useful life of the assets.
Asset
Held for Sale
The
Company intends to sell one of its fixed assets which consist of 13,609 square
meters of retail units with net book value of $14,308,691 as of December31, 2008 (December 31, 2007 - $12,910,428) and the Company ceases depreciation
of the asset.
Long-lived
Assets
The
Company periodically evaluates the carrying value of long-lived assets to be
held and used in accordance with SFAS No. 144, “Accounting For Impairment on
Disposal of Long-Lived Assets” which requires impairment losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
value of the long-lived assets. Loss on long-lived assets to be disposed of is
determined in a similar manner, except that fair values are reduced for the cost
of disposal. Based on its review, the Company believes there were no impairments
of its long-lived assets as of December 31, 2008 and 2007.
F-11
Advances
to Suppliers
Advances
to suppliers consist of amounts paid in advance to contractors and vendors for
services and materials. Advances amounted to $704,275 as of December 31,2008 (December 31, 2007 - $2,071,549).
Deposits
on Land Use Rights
The
deposits on land use rights consist of deposits held by the PRC government to
purchase land use rights in Baqiao and other projects under planning. The
deposits on land use rights will be included in the real estate held for
development or sale when the Company purchases the land use rights. Deposits
amounted to $47,333,287 as of December 31, 2008 (December 31, 2007 -
$29,694,103).
Intangible
Assets
Intangible
assets relate to the development right for the 487 acres of land in
Baqiao Park obtained from the acquisition of New Land in fiscal
2007. The intangible assets have a definite life. In accordance with SFAS No.
142, “Goodwill and Other Intangible Assets”, the intangible assets are
subject to amortization over their useful life. The method of amortization
selected reflects the pattern in which the economic benefits of the intangible
assets are realized. The amortization of the intangible assets is based on
the percentage of profit margin realized over the total expected profit margin
to be realized from the 487 acres of land in the Baqiao project. The
Company reviews its business plan for its 487 acres of land in Baqiao Park
periodically and updates its assumptions based on the prevailing market prices
and the management’s judgments on the profit margins. This method is
intended to match the pattern of amortization with the income-generating
capacity of the assets.
As of
December 31, 2008, the amount recorded for its intangible assets were
$46,043,660 (December 31, 2007 - $48,205,697). The Company evaluates its
intangible assets for impairment whenever events or changes in circumstances
indicate the carrying value may not be recoverable. Based on estimated future
cash flows, the Company records a write-down for impairments, if
appropriate. For the year ended December 31, 2008, the Company has
recorded $0 (2007 - $1,157,758) of amortization on the intangible
asset.
Deferred
financing costs
Debt
issuance costs are capitalized as deferred financing costs and amortized on a
straight line basis over the term of the debt. The amortization expense for the
year ended December 31, 2008 was $148,606 (2007 and 2006 -$0). This
amortization expense was included in the general administrative
expense.
Fair
Value of Financial Instruments
Effective
January 1, 2008, the Company adopted SFAS No. 157, "Fair Value Measurements,"
(as impacted by FSP No. 157-1 and 157-2), which provides a framework for
measuring fair value under GAAP. As defined in SFAS No. 157, fair value is the
price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date (exit
price). The Company utilizes market data or assumptions that the Company
believes market participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the inputs to the
valuation technique. These inputs can be readily observable, market corroborated
or generally unobservable.
The
Company primarily applies the income approach for recurring fair value
measurements and endeavors to utilize the best available information.
Accordingly, the Company utilizes valuation techniques that maximize the use of
observable inputs and minimize the use of unobservable inputs. The Company
is able to classify fair value balances based on the observability of those
inputs.
The fair
value of warrants liabilities and embedded conversion option liabilities are
determined using the Cox-Ross-Rubinstein (“CRR”) Binomial Lattice Model, which
requires the input of highly subjective assumptions. These assumptions include
the risk-free rate of interest, expected dividend yield, expected volatility,
and the expected life of the award. The risk-free rate of interest is based on
the U.S. Treasury rates appropriate for the expected term of the award. Expected
dividend yield is projected at 0%, as the Company has not paid any dividends on
our common stock since our inception and we do not anticipate paying dividends
on our common stock in the foreseeable future. Expected volatility is based on
our historical volatility and the historical volatilities of the common stock of
comparable publicly traded companies.
SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (Level 1
measurement) and the lowest priority to unobservable inputs (Level 3
measurement). The three levels of the fair value hierarchy defined by SFAS No.
157 are as follows:
Level 1
Quoted
prices are available in active markets for identical assets
or liabilities as of the reporting date. Active markets are those
in which transactions for the asset or liability occur in
sufficient frequency and volume to provide pricing information on an
ongoing basis. Level 1 primarily consists of financial instruments
such as exchange-traded derivatives, listed equities and U.S.
government treasury
securities.
Level 2
Pricing
inputs are other than quoted prices in active markets included in
Level 1, which are either directly or indirectly observable as of the
reporting date. Level 2 includes those financial instruments that are
valued using models or other valuation methodologies. These
models are primarily industry-standard models that consider
various assumptions, including quoted forward prices for commodities,
time value, volatility factors, and current market and contractual
prices for the underlying instruments, as well as other relevant
economic measures. Substantially all of these assumptions are
observable in the marketplace throughout the full term of the
instrument, can be derived from observable data or are supported by
observable levels at which transactions are executed in the
marketplace. Instruments in this category include non-exchange-traded
derivatives such as over the counter forwards, options and repurchase
agreements.
Level 3
Pricing
inputs include significant inputs that are generally less observable
from objective sources. These inputs may be used with internally
developed methodologies that result in management's best estimate of
fair value from the perspective of a market participant. Level 3
instruments include those that may be more structured or otherwise
tailored to customers' needs. At each balance sheet date, the
Company performs an analysis of all instruments subject to SFAS No.
157 and includes in Level 3 all of those whose fair value is based on
significant unobservable inputs.
F-12
Assets
and liabilities measured at fair value on a recurring basis include the
following as of December 31, 2008:
Fair Value
Measurements
Using
Assets/Liabilities
Level
1
Level
2
Level3
At
Fair
Value
Warrants
liabilities
-
$
1,117,143
-
$
1,117,143
Derivative
liabilities
-
760,398
-
760,398
Total
-
$
1,877,541
-
$
1,877,541
Accounts
Payable
Accounts
payable consists of balances due to subcontractors and suppliers for the
purchase of construction services and the Baqiao government for land use rights.
Accounts payable amounted to $10,525,158 at December 31, 2008 (December 31,2007 - $9,311,995).
Advances
from Customers
Advances
from customers represent prepayments by customers for home purchases. The
Company records such prepayments as advances from customers when the payments
are received. The balance is reduced by the percentage of revenue recognized.
Advances from customers amounted to $9,264,385 at December 31, 2008
(December 31, 2007 - $5,258,351).
Other
Payables
Other
Payables consist of balances for non-construction costs with unrelated companies
and individuals. These amounts are unsecured, non-interest bearing and short
term in nature. Other payables amounted to $5,183,251 as of December 31,2008 (December 31, 2007 - $3,881,137) of which, $731,087 is
payable for JV set up (2007 -$Nil).
Advertising
Costs
Advertising
and sales promotion costs are expensed as incurred. Advertising expense for the
year totaled $1,261,495 (2007 - $781,998 and 2006 - $565,577)
Warranty
Costs
Generally,
the Company provides all of its customers with a limited (half a year to 5
years) warranty period for defective workmanship. The Company accrues the
estimated warranty costs into the cost of its homes as a liability after each
project is closed based on the Company's historical experience, which normally
is less than 0.2% of total costs of the project. Any excess amounts are expensed
in the period when they occur. Any significant material defects are generally
under warranty with the Company's suppliers. Currently, the Company retains 5%
of the total construction contract from the construction contractors for a
period of one year after the completion of the construction. Such retention
amounts will be used to pay for any repair expense incurred due to defects
in the construction. The Company has not historically incurred any significant
litigation requiring additional specific reserves for its product offerings. As
of December 31, 2008 and 2007, the Company did not accrue for warranty
costs.
Income
Taxes
The
Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. At December 31, 2008 and 2007 the significant
accounting to tax difference was related to the intangible assets which have no
tax value.
F-13
The
Company adopted the provisions of FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109",
("FIN 48"), on January 1, 2007. The Company did not have any material
unrecognized tax benefits and there was no effect on its financial
condition or results of operations as a result of implementing FIN 48.
During fiscal 2008, the Company settled a prior year income tax
liability with the PRC local tax authority resulting in a gain of
$12,712,153 included in the provision for income taxes. The local tax authority
examined the Company’s tax records and issued an income tax settlement report.
Management believes there is only a remote possibility that the local
tax authority or higher tax authority will reassess the tax
settlement.
The
Company files income tax returns in the PRC jurisdictions. The Company does not
believe there will be any material changes in its unrecognized tax positions
over the next 12 months.
The
Company's policy is to recognize interest and penalties accrued on any
unrecognized tax liability as a component of general and administrative
expense. As of the date of adoption of FIN 48, the Company did not have any
accrued interest or penalties associated with any unrecognized tax rate
differences from the federal statutory rate primarily due to non-deductible
expenses, temporary differences and preferential tax treatment.
No assessments of income taxes for the years ended December 31, 2008, 2007
and 2006 have been received by the Company, except for the income tax
settlement report issued by local tax authority as previously
described.
PRC and
Local Income Tax
The
subsidiaries of the Company are governed by the Income Tax Laws of the PRC
concerning Chinese registered limited liability companies. Under the Income Tax
Laws of the PRC, Chinese enterprises are generally subject to income tax at a
statutory rate of 25% on income reported in the statutory financial statements
after appropriate tax adjustments, unless the enterprise is located in a
specially designated region for which more favorable effective tax rates are
applicable. New Land and Hao Tai are entitled to a refund of 6% of taxes
otherwise payable if they meet certain annual earning criteria.
The
provision for income taxes for the year ended December 31, 2008, 2007 and 2006
consisted of the following:
2008
2007
2006
(Recovery)
provision for China income and local tax
$
(10,490,833
)
$
9,125,616
$
4,511,442
Provision
of deferred taxes
-
(382,060
)
-
Total
(recovery) provision for income taxes
$
(10,490,833
)
$
8,743,556
$
4,511,442
2008
2007
2006
(Loss)
income before provision for income taxes
$
(1,708,027
)
$
25,429,672
$
13,562,252
U.S.
statutory rate of 34%
(580,729
)
8,646,088
4,611,166
Foreign
loss (income) not recognized in USA
2,092,057
(9,766,843
)
(4,611,166
)
Non-taxable
income and non-deductible expense
(2,215,948
)
819,055
-
Foreign
(loss) income tax rate of 25% (2007 and 2006 -33%)
As of
December 31, 2008, the Company has PRC subsidiaries that are in the start up
stage and have a net operating loss carry forward of approximately
$2,356,757, which will begin to expire in 2013. The Company also has a U.S.
net operating loss carry forward of approximately $2,768,525 from the
holding company, which will begin to expire in 2026. A
valuation allowance for the full amount was recognized.
Basic and
Diluted Earnings Per Share
Earnings
per share is calculated in accordance with the SFAS No. 128, "Earnings per
share". Basic net earnings per share are based upon the weighted average number
of common shares outstanding. Diluted net earnings per share are based on the
assumption that all dilutive convertible shares, stock options and warrants were
converted or exercised. Dilution is computed by applying the treasury stock
method.
Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the year.
Share
based compensation
The
Company records stock-based compensation pursuant to Statement of Financial
Accounting Standard No. 123 (revised 2004), “Share-Based Payments,”
(“FAS123R”), which established standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. This
statement requires companies to measure the cost of services received in
exchange for an award of equity instruments based on the grant-date fair value
of the award. The cost is recognized over the period of services
rendered.
Comprehensive
Income
Comprehensive
income consists of net income attributable to China Housing & Land
Development, Inc. and foreign currency translation gains and losses
affecting shareholders' equity that, under GAAP, are excluded from net income.
The gain on foreign exchange translations totaled $5,882,178, $3,617,405
and $655,435 for the year ended December 31, 2008, 2007 and 2006,
respectively.
F-15
Statement
of Cash Flows
In
accordance with SFAS No. 95, "Statement of Cash Flows," cash flows from the
Company's operations are calculated based upon the local currencies
translated at the weighted average exchange rate for the year. As a result,
amounts related to assets and liabilities reported on the statement of cash
flows will not necessarily agree with changes in the corresponding balances on
the balance sheet.
Accounting
Principles Recently Adopted
SFAS No.
159, "The Fair Value Option for Financial Assets and Financials Liabilities —
Including an Amendment of FASB Statement No.115" issued by FASB in February
2007, permits measurement of certain financial assets and financial liabilities
at fair value. If the fair value option is elected, the unrealized gains and
losses are reported in earnings at each reporting date. Generally, the fair
value option may be elected on an instrument by instrument basis, as long
as it is applied to the instrument in its entirety. The fair value option
election is irrevocable, unless a new election date occurs. SFAS No. 159
requires prospective application and certain additional presentation and
disclosure requirements. The adoption on January 1, 2008 of this statement did
not have a material impact on the Company's consolidated financial
statements.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” to improve the relevance, comparability, and
transparency of financial information provided to investors by requiring all
entities to report noncontrolling (minority) interests in subsidiaries in the
same way as required in the consolidated financial statements. Moreover, SFAS
No. 160 eliminates the diversity that currently exists in accounting for
transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. SFAS No. 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. Our noncontrolling interest on the
financial statements represents the noncontrolling stockholder's proportionate
share of equity and net income or net loss of the Company's consolidated
subsidiaries Puhua and Success Hill. On January 1, 2009, the Company adopted
SFAS No.160 on a retrospective basis. The adoption of SFAS No.160 did not have a
significant effect on our consolidated financial position, results of operations
or cash flows. The adoption of SFAS No. 160 required retrospective application
of the presentation and disclosure requirements of the Standard to all periods
presented. The consolidated statement of operations for the years ended December31, 2008 and 2007 was retrospectively recast to include net income (loss)
attributable to both the controlling and noncontrolling interests. As of
December 31, 2008 and 2007, $29,109,350 and $0 were reclassified from
minority interest to a separate component of total equity titled Noncontrolling
interests, respectively. Notes 15 and 20 have been updated to reflect
the revised presentation.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations" which revised SFAS No. 141, "Business Combinations". SFAS No.
141(R) establishes principles and requirements for how an acquirer recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interest in the acquirer and the
goodwill acquired. SFAS No. 141(R) also establishes disclosure requirements
which will enable users to evaluate the nature and financial effects of the
business combination. This standard is effective for fiscal years beginning
after December 15, 2008. As the provisions of SFAS No. 141(R) are applied
prospectively, the impact of this standard cannot be determined until the
transactions occur.
In March
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS No. 161"). SFAS No. 161 amends and expands the
disclosure requirements of FASB Statement 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") to require qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit risk-related contingent features in
derivative agreements. The Statement is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008.
Early application is encouraged. The Company is currently evaluating the impact
of the adoption of SFAS No. 161.
In April
2008, the FASB issued FSP SFAS 142-3, "Determination of the Useful Life of
Intangible Assets" ("FSP 142-3"). This guidance is intended to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), and the period of
expected cash flows used to measure the fair value of the asset under SFAS 141R
when the underlying arrangement includes renewal or extension of terms that
would require substantial costs or result in a material modification to the
asset upon renewal or extension. Companies estimating the useful life of a
recognized intangible asset must now consider their historical experience in
renewing or extending similar arrangements or, in the absence of historical
experience, must consider assumptions that market participants would use about
renewal or extension as adjusted for SFAS 142's entity-specific factors. FSP
142-3 is effective for financial statements issued for fiscal years and interim
periods beginning January 1, 2009. The Company is currently evaluating the
potential impact of the adoption of FSP 142-3.
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. SFAS No. 162 became effective on
November 15, 2008. The Company is currently evaluating the potential impact of
the adoption of SFAS No. 162.
In May
2008, the FASB issued FASB FSP APB 14-1, "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)". FSP APB 14-1 requires the issuer of certain Convertible Debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer's
non-Convertible Debt borrowing rate. Such separate accounting also requires
accretion of the resulting discount on the liability component of the debt to
result in interest expense equal to an issuer`s nonConvertible Debt borrowing
rate. In addition, the FSP provides for certain changes related to the
measurement and accounting related to derecognition, modification or exchange.
FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on
a retroactive basis. The adoption of FASB FSP APB 14-1 is not expected to have a
significant impact on the Company’s consolidated financial
statements.
In
September 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities." FSP EITF 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings allocation in
computing income per share under the two-class method pursuant to SFAS No. 128,
"Earnings per Share." This guidance establishes that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. FSP EITF 03-6-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008. Furthermore, all prior
period earnings per share data presented shall be adjusted retrospectively to
conform to the provisions of FSP EITF 03-6-1. The Company is currently
evaluating the potential impact of the adoption of FSP EITF
03-6-1.
F-16
Note
4 — Acquisition
On March9, 2007, the Company entered into a Share Transfer Agreement (the “Agreement”)
to acquire RMB 32 million of registered and paid-in capital of New Land,
representing 100% equity ownership of New Land. The acquisition was
effective on May 31, 2007. The total purchase price for the acquisition was RMB
270 million, (approximately $35.2 million). The total purchase price
included 1) an initial cash payment of RMB 5 million, (approximately $0.6
million), payable within 20 days after the signing of the Agreement, 2) an
additional cash payment of RMB 57 million, approximately $7.4 million, within 30
days of the receipt of the due diligence report and 3) a promissory note of
the aggregate amount of RMB 208 million, (approximately $27.2 million), bearing
10% interest with a maturity of January 30, 2009. As of December 31, 2008, the
remaining balance of the above note payable under the Agreement amounted to
$5,606,449 (2007 - $8,717,684) (see note 10) and New Land’s original
shareholders have agreed to extend the loan to December 31, 2009.
The
Company accounted for the business combination using the purchase method of
accounting pursuant to SFAS No. 141, “Business Combinations”. The purchase price
was allocated to the identifiable assets and liabilities assumed based on their
estimated fair values.
Purchase
Price
$
35,286,737
Value
assigned to assets and liabilities:
Assets:
Cash
$
50,390
Other
receivables
20,318
Equipment
102,577
Work
in progress
6,448,748
Prepayment
224,597
Intangible
assets
47,107,396
Liabilities:
Accounts
payable
(963,233
)
Other
payables
(2,100,310
)
Accrued
expenses
(58,304
)
Deferred
tax
(15,545,441
)
Total
net assets
$
35,286,637
The
operations of New Land, starting from June 1, 2007, are included in
the Company’s consolidated financial statements.
F-17
Note
5 — Supplemental Disclosure of Cash Flow Information
Income
taxes paid amounted to $225,964, $384,615 and $0 for the year ended December 31,2008, 2007 and 2006, respectively. Interest paid for the year ended December 31,2008, 2007 and 2006 amounted to $3,724,070, $1,975,917 and $2,147,800
respectively.
Note
6 – Real Estate
The
following summarizes the components of real estate inventories as at
December 31, 2008 and 2007:
Note
11 – Loans payable to New Land’s previous
shareholders
The
Company has loans payable to previous shareholders of New Land totaling to
$8,429,889 at December 31, 2008 (December 31, 2007 - $11,413,229). $5,606,449
(2007 - $8,717,684) of the total relates to the acquisition of New Land (see
note 3) and is due in December 2009. The remaining balance pertains to
additional loans made by these shareholders and is due in December 2009. The
loans bear interest at 10% per annum.
Note
12 — Loans from Employees
The
Company has borrowed monies from certain employees to fund the Company's
construction projects. These loans bear interest at rates ranging between 7% and
12% and all principal amounts matures in 2009. At December 31, 2008, loans
from employees amounted to $1,517,039 (December 31, 2007 -
$2,388,862).
Note
13 — Loans Payable
Loans
payable represent amounts due to various banks and are due on demand or within
three years. These loans generally can be renewed with the banks when they
mature. Loans payable at December 31, 2008 and December 31, 2007 consisted of
the following:
2008
2007
Commercial
Bank Weilai Branch
Due
August 29, 2008, annual interest rate is at 11.34 percent, secured by the
Company's Xin Xing Gangwan, Xin Xing Tower and Ming Yuan
projects
$
-
$
5,209,333
Commercial
Bank Weilai Branch
Due
December 25, 2009, annual interest is at 9.47 percent, secured by the
Company's 24G projects
5,130,084
5,483,508
Commercial
Bank Weilai Branch
Due
August 29, 2010, annual interest is at 10.21 percent, guaranteed by
Tsining and secured by the Company's Xin Xing Tower and part of
the JunJing II project
5,130,084
-
Xi'an
Rural Credit union Zao Yuan Rd. Branch
Due
September 14, 2009, annual interest is at 9.527 percent, secured by the
Company's Jun Jing Yuan I, Han Yuan and Xin Xing Tower
projects
3,371,198
3,427,193
China
Construction Bank, Xi'an Branch
Due
August 27, 2011, annual interest is at floating interest rate based
on 110% of People’s Bank of China rate, secured by the Company's Jun Jing
Yuan II project
21,986,076
-
Total
$
35,617,442
$
14,120,034
All loans
were borrowed for construction projects. All interest paid was capitalized and
allocated to JunJing II project.
On June28, 2008, the Company signed a strategic partnership Memorandum of Understanding
(“MOU”) with China Construction Bank Xi’an Branch that established a RMB 1
billion (approximately US$147 million) credit line for real estate development
by the Company and its subsidiaries. Under the MOU, the company and its
subsidiaries are required to set up a basic deposit account with China
Construction Bank, to maintain a current ratio of not less than 90% and to
maintain a liabilities to assets ratio of not greater than 65%. On August 28,2008, the Company entered a loan agreement with China Construction Bank Xi’an
Branch to draw down the first RMB 150 million loan, which will mature
on August 27, 2011. $21,986,075 (RMB 150 million) was received by the
Company on December 31, 2008. As of December 31, 2008, our current ratios were
approximately 136.3%, and our liabilities to assets ratios were
approximately 49.1%. The Company will be able to draw down approximately another
$101 million before we reach the maximum liabilities to assets ratio of
65%. If we are unable to meet all above covenants, we may not be able to draw
down new loans from China Construction Bank and this will cause the delay of our
projects under construction.
F-19
Note
14 - Convertible Debt
On
January 28, 2008, the Company issued Senior Secured Convertible Debt due in 2013
(the "Convertible Debt") and warrants to subscribe for common shares for an
aggregate purchase price of US$20 million. The Convertible Debt bears interest
at 5% per annum (computed based on the actual days elapsed in a period of 360
days) of the RMB notional principle amount, payable quarterly in arrears in U.S.
Dollars on the first business day of each calendar quarter and on the maturity
date. In addition, 1,437,467 five-year warrants were granted with a strike price
of $6.07 per common share, which are callable if certain stock price thresholds
are met. Approximately 215,620 warrants are also available as a management
incentive if certain milestones are met. If the aggregate principal amount of
the Convertible Debt is reduced to US$10 million or less as a result of
repayment by the Company pursuant to the Convertible Debt as a result of any
optional conversion by the Investors or mandatory conversion by the Company of
the Convertible Debt, then each Investor agrees to surrender to the Company
warrants for an aggregate number of shares of common stock equal to such
Investors’ pro rata share of 107,810 shares. If the aggregate principal amount
of the Convertible Debt is reduced to $Nilas a result of repayment by the
Company pursuant to the Convertible Debt as a result of any optional conversion
by the Investors or mandatory conversion by the Company of the Convertible Debt,
then each Investor agrees to surrender to the Company warrants in addition to
the 107,810 warrants surrendered pursuant to the $10 million reduction
noted above for an aggregate number of shares of common stock equal to such
Investor’s pro rata share of 107,810 shares. The Company may hold in treasury
and reissue to the officers and directors of the Company any warrants
surrendered by the Investors. As of October 28, 2009, the Company did
not repay any principle of Convertible Debt and the Investors did not
deliver any optional conversion request to the Company.
The
Investors have the right to convert up to 45% ($9 million) of the
principal amount of the Convertible Debt into common shares at an initial
conversion price of $5.57, subject to an upward adjustment. The Company, at
its discretion, may redeem the remaining $11 million of Convertible Debt at
100% of the principle amount, plus any accrued and unpaid interest. The
warrants associated with the Convertible Debt grant the Investors the right
to acquire shares of common stock at $6.07 per share, subject to customary
anti-dilution adjustments. The warrants may be exercised to purchase common
stock at any time up to and including February 28, 2013.
The
Convertible Debt is secured by a first priority, perfected security
interest in certain shares of common stock of Lu Pingji, the
Chairman of the Company. The Convertible Debt is subject to events of
default customary for convertible securities and for a secured
financing.
Both the
warrant and embedded conversion option associated with the Convertible Debt meet
the definition of a derivative instrument according to FASB No. 133, ”Accounting
for Derivative Instruments and Hedging Activities”. Because the
warrant and the Convertible Debt are denominated in U.S. dollars but the
company’s functional currency is the Chinese Renminbi, the exemption from
derivative instrument accounting provided by FASB No. 133, paragraph 11(a)(1) is
not available and therefore the warrant and embedded conversion option are
recorded as a derivative instrument liability and periodically marked-to-market.
The fair value of the warrants and embedded conversion option on inception were
determined to be $3,419,653 and $3,927,375, respectively, using the
Cox-Ross-Rubinstein Binomial Lattice Model (the “CRR Model”) with the following
assumptions: expected life 4.32 years, expected volatility - 75%, risk free
interest rate - 2.46% and dividend rate - 0%. The fair value of the warrants and
embedded conversion option at December 31, 2008 were determined to be of
$658,682 and $760,398, respectively, using the CRR Model with the following
assumption: expected life 4.08 - 4.16 years, expected volatility - 90%, risk
free interest rate - 1.31%-1.33% and dividend rate - 0%. For the year ended
December 31, 2008, the Company recorded a change in fair value for the warrants
and embedded derivatives of $(2,760,971) and $(3,166,977), respectively in the
consolidated statement of income and comprehensive income.
After
allocating the gross proceeds to the fair value of the warrants and
the embedded derivative instrument, the remaining proceeds were allocated
as the initial carrying value of the Convertible Debt. The initial carrying
value of the Convertible Debt is accreted to its stated amount on maturity
using the effective interest method. The effective interest rate was
determined to be 15.42%. The carrying value of Convertible Debt at December 31,2008 was $13,621,934. Related interest expense and accretion expense for
the year ended December 31, 2008 were $964,897 and $968,962,
respectively.
In
connection with this transaction, the Company and the Investors entered into a
registration rights agreement (the “Registration Rights Agreement”). Pursuant to
the terms and conditions of the Registration Rights Agreement, the Company
agreed to register within 60 calendar days after closing shares of common stock
issuable to the Investors for resale on a Form S-3 Registration Statement to be
effective no later than the 180th day after the closing date of the transaction.
If the Form S-3 is not available at that time, then the Company will file a
Registration Statement on such form as is then available to effect a
registration of the registrable securities, subject to the consent of the
Investors, which consent will not be unreasonably withheld. The Company shall
register an amount of common stock for resale that equals at least 125% of the
sum of shares issuable upon conversion of the Convertible Debt and the exercise
of the warrants. The registration rights granted under the Registration Rights
Agreement are subject to customary exceptions and qualifications and compliance
with certain registration procedures. The Company is subject to the late
registration penalty payment (the “Late Payments”) equal to the
product of (i) the Investor’s outstanding principal amount and (ii) the
quotient obtained by dividing 12% by 360.
The
Company commenced negotiations with the Investors in December 2008 for a waiver
for the Late Payments, as the Company and the Investors believed that the
registration would become effective within a short period of time. However, as
the registration has not become effective as of September 2009, the Company has
accrued for the Late Payments (see Note 2). On September 28, 2009, the Company
reached a First Amendment (the “Amendment”) with the Investors to settle the
Late Payments, in the amount of $2,400,000, by the issuance of 614,290 common
stock. The 614,290 common stock was determined by dividing $2,400,000, the total
Late Payments up to September 28, 2009, by 95% of the historical volume weighted
average price (“VWAP”) of the common stock, as determined by using Bloomberg
function VWAP, for the immediate preceding 30 days period. In accordance with
the Amendment, the Investors waived any further Late Payments against the
Company under the Registration Rights Agreement.
On
November 5, 2008, the Company and Prax Capital entered into a conditional joint
venture agreement to develop 79 acres within China Housing’s Baqiao project
located in Xi’an. Prax Capital invested US$ 29.3 million for a 25% interest in
Puhua with various distribution rights. Prax Capital’s shares are redeemable at
the option of holder, provided that Prax gives advance notice, and with the
Company’s approval. Prax Capital has the first right of distribution and there
is a maximum amount that Prax Capital can receive. At this time, the Company
believes that it is not probable that Prax Capital will exercise their
redemption option.
On
November 5, 2008, New Land entered into a Deed of Guarantee (the “Guarantee”),
in favor of Prax Capital and Success Hill (Success Hill and together with Prax
Capital, the “Beneficiaries”) whereby the Company guarantees the performance of
certain obligations of New Land and Manstate pursuant to the terms and
conditions of various agreements entered into by and between Prax Capital,
Success Hill and New Land, among others, in connection with a Framework
Agreement entered into on November 5, 2008, (“Framework Agreement”) by
and between New Land, the Company and Prax Capital. Prax Capital and
New Land, through the Framework Agreement and the other related agreements,
intend to jointly participate in bidding for land use rights with respect
to a parcel of land and shall cause that land to be developed, operated and
sold.
F-20
The
Guarantee is a continuing Guarantee and shall remain effective until a
termination event occurs as contemplated by the Guarantee. If the Company fails
to timely and fully perform its obligations under the Guarantee then the
Beneficiaries shall be afforded the appropriate remedy as contemplated by the
Guarantee, including, but not limited to, the claim for damages and the
reimbursement of expenses. Any amounts payable under the Guarantee by the
Company shall include an interest accrued at the rate of 10% per annum from
the due date of such payment.
As of
December 31, 2008, the Company owned a 75% interest in Puhua. Given the
Company’s controlling ownership interest, the accounts of Puhua have been
consolidated with the accounts of the Company, and a noncontrolling interest has
been recorded for the noncontrolling investors’ interests in the net assets and
operations of Puhua in accordance with the noncontrolling investor’s
investments.
Noncontrolling
interest
Noncontrolling
interest, December 31. 2007 and 2006
$
0
Initial
investment by noncontrolling interest
29,268,914
Noncontrolling
interests’ share of loss for the year
In
accrued expense, there is a $293,148 (RMB 2 million) finder fee payable to
an unrelated party that assisted the Company in the formation of
Puhua.
Note
17 — Shareholders' Equity
Common
stock
From time
to time, the Company has sold common stock and warrants, as described
below. All warrants are denominated in U.S.
dollars. Because the Company’s functional currency is the Chinese
Renminbi, the warrants are accounted for as derivative instrument liabilities at
fair value and marked-to-market each period.
(1)
On
June 28, 2006, the Company entered into securities purchase agreements
with accredited investors and completed the issue of $1,075,000 of the
Company’s common stock and common stock purchase warrants. The securities
sold were an aggregate of 330,769 shares of common stock and 99,231
warrants. Each warrant is exercisable for three years with an initial
exercise price of $3.60 per share. The exercise price was amended to
$3.31 per share during 2007 with additional 8,770 warrants were
issued.
Pursuant
to the terms of the warrants, each investor has contractually agreed to restrict
its ability to exercise the warrants to an amount which would not exceed the
difference between the number of shares of common stock beneficially owned by
the holder or issuable upon exercise of the warrant held by such holder and 9.9%
of the outstanding shares of common stock of the Company.
In
connection with the offering, the Company paid a placement fee of 10% of the
proceeds in cash, together with other expenses in the amount of 3% of the
proceeds, in cash. In addition, the placement agent was issued warrants to
purchase 66,154 shares of common stock on the same terms and conditions as the
investors. The fair value of these warrants was determined to be $118,340
on the date they were issued, and were exercised during 2007.
The fair
value of each warrants at December 31, 2008 was determined to be $0.04 (2007
-$2.52) using the CRR Binomial Lattice Model with the following assumptions:
expected life – 0.47 years (2007 – 1.47 years); expected volatility – 90% (2007
- 75%), risk free interest rate – 0.27% (2007 – 3.20%) and dividend rate – 0%
(2007 – 0%).
(2)
Pursuant
to securities purchase agreements with accredited investors dated July 7,2006, the Company received $124,975 and issued 38,454 shares of common
stock and 11,536 warrants. Each warrant is exercisable for three years at
an initial exercise price of $3.60 per share. The exercise price was
amended to $3.31 per share during 2007 with 1,020 warrants were
issued.
In
connection with the offering, the Company paid a placement fee of 10% of the
proceeds in cash, together with other expenses in the amount of 3% of the
proceeds, in cash. In addition, the placement agent was issued warrants to
purchase 7,691 shares of common stock on the same terms and conditions as the
investors. The fair value of these warrants was determined to be $13,727 on the
date they were issued, and were exercised during 2007.
F-21
The fair
value of each warrant at December 31, 2008 was determined to be $0.04 (2007
-$2.53) using the CRR Binomial Lattice Model with the following assumptions:
expected life – 0.49 years (2007 – 1.49 years); expected volatility – 90% (2007
- 75%), risk free interest rate – 0.27% (2007 – 3.20%) and dividend rate – 0%
(2007 – 0%).
(3)
Pursuant
to securities purchase agreements with accredited investors dated August21, 2006, the Company received $812,500 and issued 198,845 shares of
common stock and 75,000 warrants. Each warrant is exercisable for three
years at $3.60 per share. The exercise price was amended to $3.31 per
share during 2007 with 17,574 warrants were
issued.
In
connection with the offering, the Company paid a placement fee of 10% of the
proceeds in cash, together with other expenses in the amount of 3% of the
proceeds, in cash. In addition, the placement agent was issued warrants to
purchase 50,000 shares of common stock on the same terms and conditions as
the investors. The fair value of these warrants was determined to be $94,646 on
the date they were issued, and were exercised during 2007.
The fair
value of each warrant at December 31, 2008 was determined to be $0.06 (2007
-$2.59) using the CRR Binomial Lattice Model with the following assumptions:
expected life – 0.62 years (2007 – 1.62 years); expected volatility – 90% (2007
- 75%), risk free interest rate – 0.30% (2007 – 3.20%) and dividend rate – 0%
(2007 – 0%).
The
Company filed the registration statement registering the resale of shares of the
Company’s common stock and those issuable upon exercise of the warrants on
August 21, 2006 and the registration statement was effective on September 14,2006.
(4)
On
January 15, 2007, the Company issued 60,000 shares of common stock to an
investor relations company in consideration for one year of consulting
service through December 31, 2007. The 60,000 shares of common stock have
been recorded at $2.19 per share or $131,400 based on the trading price of
the shares at January 12, 2007. This amount was included in prepaid
expenses and is being amortized over the service
period.
(5)
Pursuant
to securities purchase agreements with accredited investors dated May 7,2007, the Company received $25,006,978 and issued 9,261,847 shares of
common stock and 2,778,554 warrants. Each warrant is exercisable for five
years at $4.50 per share. In connection with the offering, the Company
paid a 7% placement fee and $173,689 in legal
fees.
The
warrants contain a provision permitting the holder to demand payment based on a
Black Scholes valuation in the event of a “Fundamental Transaction” by which:
(1) the Company effects any merger or consolidation of the Company with or into
another Person, (2) the Company effects any sale of all or substantially all of
its assets in one or a series of transactions, (3) any tender offer or exchange
offer (whether by the Company or another Person) is completed pursuant to which
holders of Common Stock are permitted to tender or exchange their shares for
other securities, cash or property, or (4) the Company effects reclassification
of the Common Stock or any compulsory share exchange pursuant to which the
Common Stock is effectively converted into or exchanged for other securities,
cash or property.
The
warrants also provide that if the VWAP of the Common Stock price on any day for
any continuous period of 20 days equals or exceeds 200% of the exercise price,
the Company can send a call notice in respect of the Warrants to the Holder
requiring the mandatory exercise by the Holder of the Warrants. The Holders
then have 60 calendar days to exercise the Warrants. If the Holders fail to
exercise the Warrants within 60 calendar days, the Warrants are cancelled and
forfeited.
45,302
warrants having an exercise price of $4.50 were exercised in July 2007 on a cash
basis, resulting in the issuance of 45,302 shares of common stock.
1,870
warrants having an exercise price of $4.50 were exercised in February 2008 on a
cash basis, resulting in the issuance of 1,870 shares of common stock with
proceeds of $8,415.
The
Company uses the CRR Binomial Lattice Model, which is similar to the Black
Scholes model, to determine the fair value of the warrants because that model
can reflect the Company’s ability to require conversion or forfeiture of the
warrants if the market price exceeds 200% of the exercise price, as discussed
above. The fair value of each warrant at December 31, 2008 was determined to be
$0.16 (2007 -$0.76) using the CRR Binomial Lattice Model with the following
assumptions: expected life – 3.34 years (2007 – 4.34 years); expected
volatility – 90% (2007 - 75%), risk free interest rate – 1.09% (2007 – 3.35%)
and dividend rate – 0% (2007 – 0%). The aggregate fair value of the
warrants using the CRR Binomial Lattice Model at December 31, 2008 was
$448,011. The value of the warrants using the Black-Scholes model at
December 31, 2008 was approximately $443,466. The differences are not
material.
(6)
According
to Section 4.8, Anti-Dilute of the Share Purchase Agreements dated June28, 2006, July 7, 2006 and August 21, 2006, the Company issued 126,138
shares of common stock and 27,364 warrants during 2007; additionally, the
Company reduced the exercise price of all related warrants from $3.60 to
$3.31.
123,845
warrants having an exercise price of $3.31 were exercised in July 2007 on
non-cash, basis resulting in the issuance of 29,377 shares of common
stock.
The fair
value of each additional warrant at December 31, 2008 was determined to be in
the range from $0.04 to $0.06 (2007 – $2.54 to $2.60) using the CRR Binomial
Lattice Model with the following assumptions: expected life ranges from 0.47 to
0.62 years (2007 – 1.47 to 1.62); expected volatility – 90% (2007 – 75%),
risk fee interest rate ranges from 0.27% to 0.3% and dividend rate – 0%
(2007 – 0%).
The
Company recorded all warrants as derivative liabilities at their fair value on
the date of grant and then marked them to $458,461(2007 - $2,631,991) at
December 31, 2008. The change in fair value of related warrants for
the year ended December 31, 2008 was $2,171,990 (2007 -$632,296 and 2006
-$Nil).
Including
the fair value of warrants associated with convertible debenture (see note 14),
the total warrant liability as at December 31, 2008 was $1,117,143 (2007 -
$2,631,991). The total change in fair value of warrants for the year
ended December 31, 2008 was $4,932,961 (2007 - $632,296 and 2006-
$Nil).
F-22
The
Company filed the registration statement registering the resale of shares of the
Company’s common stock on June 22, 2007 and the registration statement was
effective on July 5, 2007.
On July2, 2008, the Company granted 750,000 shares of common stock that vested
immediately to members of management. The number of shares granted to each
individual is calculated in accordance with the Company’s Detail Implementation
Rule for Restricted Stock Incentive Plan of 2007-2008. The Company recognized a
$3,000,000 stock based compensation expense for the year ended December 31,2008 (2007 and 2006 – Nil), based on the stock price on the grant date, which is
the day the awards were formally approved by the Board of
Directors.
In July
2007, the Board of Directors and the Compensation Committee approved the
Restricted Stock Incentive Plan of 2007-2008 (the 2007 Plan). The Plan covers
fiscal year 2007 and 2008 and if the restricted shares were not fully utilized,
the Plan will continue to fiscal year 2009. The total number of shares of
restricted stock that may be granted under the 2007 Plan is 1,000,000
shares.
The 2007
Plan was proposed by the Board of Directors in July 2007. The majority
shareholders also approved the 2007 Plan in July 2007. However, the Board
of Directors and the majority shareholders only approved the maximum aggregate
number of shares that may be issued under the 2007 Plan. The detailed
incentive plan for fiscal year 2007 which specified a performance goal of
$16.3 million net profit without stock-based compensation, the calculation
formula, the discretionary individual’s performance assessment scores in
current year and the 750,000 restricted shares to be issued for 2007 performance
were not reviewed by the Compensation Committee until June 6, 2008, and not
approved by the Board of Directors until July 2, 2008. Therefore, the award was
not authorized until July 2nd, 2008 which is considered as the date of
grant.
In
addition, all employees under the Plan were notified of the general framework of
the 2007 Plan but were not aware of the detailed calculation formula and
the performance goal for fiscal year 2007 until July 2, 2008. Therefore, July 2,2008 is the grant date.
As at
December 31, 2008, the Company accrued as a liability $78,600 stock based
compensation expense for 54,583 shares of common stocks to be granted by the
Company to various directors and executive in 2009.
Following
is a summary of the status of warrants outstanding at December 31,2008:
Outstanding Warrants
Exercise
Price
Number
Average Remaining
Contractual Life
$
3.31
213,131
0.53
years
$
4.50
2,731,382
3.34
years
$
6.07
1,437,467
4.16
years
Note
18 — Statutory Reserves
In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprises' income, after the payment of the PRC income taxes, shall
be allocated to the statutory surplus reserves. The proportion of allocation for
reserve funds is no less than 10 percent of the profit after tax until the
accumulated amount of allocation for statutory surplus reserve funds reaches 50
percent of the registered capital. Statutory reserves represent restricted
retained earnings.
Statutory
surplus reserves are to be utilized to offset prior years' losses, or to
increase its share capital. When a limited liability company converts its
surplus reserves to capital in accordance with a shareholders' resolution, the
Company will either distribute new shares in proportion to the number of shares
held by each shareholder, or increase the par value of each share. Except for
the reduction of losses incurred, any other usage should not result in this
reserve balance falling below 25% of the registered capital. Total registered
capital of all the PRC subsidiaries at December 31, 2008 is approximately $81.8
million (December 31, 2007 - $23.6 million).
Pursuant
to the board of directors' resolution, Tsining transferred 10% of its net
income, as determined in accordance with the PRC accounting rules and
regulations, to a statutory surplus reserve fund until such reserve balance
reaches 50% of the PRC subsidiaries’ registered capital.
The
transfer to this reserve must be made before distributions of any dividends to
shareholders. For the year ended December 31, 2008, the Company appropriated
$665,947 (December 31, 2007 - $735,141 and 2006 - $915,960) to this surplus
reserve.
Note
19 — Employee Welfare Plan
Regulations
in the PRC require the Company to contribute to a defined contribution
retirement plan for all permanent employees. The Company established a
retirement pension insurance, unemployment insurance, health insurance and house
accumulation fund for the employees during the term they are employed. For
the year ended December 31, 2008, 2007 and 2006, the Company made
contributions in the amount of $71,705, $51,781 and $13,922,
respectively.
F-23
Note
20— Earnings Per Share attributable to China Housing & Land Development,
Inc.
Earnings
per share attributable to China Housing & Land Development, Inc. for
years ended December 31, 2008, 2007 and 2006 were determined by dividing net
income attributable to China Housing & Land Development, Inc. for the years
by the weighted average number of both basic and diluted shares of common stock
and common stock equivalents outstanding.
2008
2007
2006
Numerator
Income
attributable to China Housing & Land Development,
Inc. - basic
$
8,942,370
$
16,686,115
$
9,050,810
Effect
of dilutive securities
Warrants
(536,480
)
-
-
Income
attributable to China Housing & Land Development, Inc. -
diluted
$
8,405,890
$
16,686,115
$
9,050,810
Denominator
Weighted
average shares outstanding - basic
30,516,411
26,871,388
20,277,615
Effect
of dilutive securities
Warrants
10,792
-
-
Weighted
average shares outstanding - diluted
30,527,203
26,871,388
20,277,615
Earnings
per share
Basic
earnings per share
$
0.29
$
0.62
$
0.45
Diluted
earnings per share
$
0.28
$
0.62
$
0.45
Certain
outstanding warrants have an anti-dilutive effect on the earnings per share
attributable to China Housing & Land Development, Inc. and are
therefore excluded from the determination of diluted earnings per share
attributable to China Housing & Land Development, Inc.
calculation.
Exercise
Price
Number
$
4.50
2,731,382
$
6.07
1,437,467
Notes
21 — Other Income
The
Company rents certain portions of its residential and commercial units to
individuals and businesses for 1 year terms, renewed annually.
Rental
income and other income and expenses for the year ended December 31 consisted of
the following:
2008
2007
2006
Other
interest income
$
1,433,837
$
42,380
$
30,395
Other
non-operating income
339,568
89,439
58,543
Rental
income, net
369,798
153,359
213,544
Gain
on disposal of fixed assets and inventory
16,581
48,347
149,830
Total
$
2,159,784
$
333,525
$
452,312
Note
22 — Segmented Information
The
Company has one operating segment, being the real-estate sales and development.
All revenue is from customers in the PRC and all of the Company’s assets are
located in the PRC.
Note
23 — Commitments and Contingencies
The
Company leases part of its office space under non-cancelable operating lease
agreements. The leases expired on December 31, 2008 and the Company is in the
process of renewing the lease. The future minimum rental payments required
under the operating lease agreements are $118,095. The leases are expected to be
renewed on annual basis.
The
Company entered into a contract with Xi’an Baqiao local government for a rubber
dam construction project. The Company is committed to spend approximately
$1,026,017 for this project.
As of
December 31, 2008, the Company was committed to one land use right with an
unpaid balance of approximately $2.6 million. The balance is not due until the
vendor removes the existing building on the land and changes the zoning status
on the land use right certificate.
On
December 12, 2008, the Company entered into a contract to acquire a land use
right for total consideration of $37.5 million. Approximately, $7.3 million was
paid and is included in Deposits on land use rights.
F-24
Note
24 — Subsequent event
On
January 21, 2009, the Company completed the acquisition of Xi’an Xinxing
Property Management Co., Ltd. (“Xinxing Property”). Xinxing Property was
privately owned and provides property management services to most of the
Company’s past residential and commercial projects. Xinxing
Property’s current service area totals 1.67 million square meters in 43
facilities that include residential, commercial, and school buildings and parks.
Total consideration for the acquisition is RMB 12 million (approximately
$1.76 million).
Xinxing
Property provided the property management services to the Company during the
year ended December 31, 2008 totaled $144,384 (2007 - $35,793 and 2006 -
$69,234) and Xinxing Property leased the offices from the Company for $303,988
during the same year (2007 - $85,219 and 2006 – $45,308) . The Company
has a receivable balance of $1,901 (2007- $1,778) and a payable balance of
$1,207,047 (2007 -$1,128,928) with Xinxing property as of December 31,2008.
F-25
CHINA
HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES
The
accompanying notes are an integral part of these interim condensed consolidated
financial statements.
F-29
CHINA
HOUSING & LAND DEVELOPMENT, INC. AND SUBSIDIARIES
Notes
To Interim Condensed Consolidated Financial Statements
(Unaudited)
Note
1 – Organization and Basis of Presentation
China
Housing & Land Development, Inc. (the “Company”) is a Nevada corporation,
incorporated on July 6, 2004 under the name Pacific Northwest Productions Inc.
(“Pacific”). On May 6, 2006, the Company changed its name to China Housing &
Land Development, Inc.
The
accompanying unaudited interim condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries,
Xi'an Tsining Housing Development Company Inc. ("Tsining"), Xi'an New Land
Development Co. ("New Land"), Xi'an Hao Tai Housing Development Company Inc.
("Hao Tai"), Manstate Assets Management Limited (“Manstate”), Xi’an
Xinxing Property Management Co., Ltd. (“Xinxing Property”) (see Note 2), Puhua
(Xi’an) Real Estate Development Co., Ltd (75% interest) (“Puhua”) and
Success Hill Investments Limited (60% interest) (“Success Hill”) (collectively,
the "Subsidiaries"). All inter-company accounts and transactions have been
eliminated on consolidation. The accompanying unaudited interim condensed
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
(“GAAP”).
In the
opinion of management, the unaudited interim condensed consolidated financial
statements reflect all adjustments necessary for a fair statement of the
Company's consolidated financial position as at September 30, 2009 and results
of operations and cash flows for the periods ended September 30, 2009 and 2008.
These adjustments consist of normal recurring items. The results of operations
for any interim period are not necessarily indicative of results for the full
year.
The
unaudited interim condensed consolidated financial statements are based on
accounting principles that are consistent in all material respects with those
applied in the Company’s Annual Report on Form 10-K for the year ended December31, 2008 (“2008 Annual Report”); except as disclosed below. They do not include
certain footnote disclosures and financial information normally included in
annual consolidated financial statements prepared in accordance with GAAP and,
therefore, should be read in conjunction with the audited consolidated financial
statements and notes included in the Company's 2008 Annual Report.
Accounting
Principles Recently Adopted
In July
2009, the FASB issued SFAS No. 168, “ FASB Accounting Standards
Codification ” (“SFAS 168”), as the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (GAAP). The
Codification is effective for interim and annual periods ending after September15, 2009. All existing accounting standards are superseded as described in SFAS
168. All other accounting literature not included in the Codification is
non-authoritative. Therefore, beginning with the 10Q filing for September 30,2009, all references made by the Company to GAAP in the consolidated financial
statements will be the new codification numbering system. The
Codification does not change or alter existing GAAP and therefore, does not have
any impact on the Company’s condensed consolidated financial
statements.
In
December 2007, the FASB issued new accounting guidance “Business
Combinations” which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, any non-controlling interest in the acquirer
and the goodwill acquired. It also establishes disclosure requirements which
will enable users to evaluate the nature and financial effects of the business
combination. The adoption on January 1, 2009 of this standard did not have a
material impact on the Company’s condensed consolidated financial
statements.
In
December 2007, the FASB issued new accounting guidance, “Non-controlling
Interests in Consolidated Financial Statements”. This guidance establishes
accounting and reporting standards for ownership interests in subsidiaries held
by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the non-controlling interest, changes in a
parent's ownership interest and the valuation of retained non-controlling equity
investments when a subsidiary is deconsolidated. It also establishes
reporting requirements that provide sufficient disclosures that clearly identify
and distinguish between the interests of the parent and the interests of the
non-controlling owners. The adoption on January 1, 2009 of this standard
resulted in changes to our presentation for non-controlling interests and did
not have a material impact on the Company’s results of operations and financial
condition.
F-30
In March
2008, the FASB issued new accounting guidance, “Disclosures about Derivative
Instruments and Hedging Activities”. It requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit risk-related contingent features in derivative
agreements. The adoption on January 1, 2009 of this standard did not have a
material impact on the Company’s condensed consolidated financial position or
results of operations and the required disclosures have been included in Notes
12 and 14.
In April
2008, the FASB issued new accounting guidance, “Determination of the Useful Life
of Intangible Assets.” This guidance is intended to improve the consistency
between the useful life of a recognized intangible asset under the previous
guidance for Goodwill and Other Intangible Assets and the period of expected
cash flows used to measure the fair value of the asset when the underlying
arrangement includes renewal or extension of terms that would require
substantial costs or result in a material modification to the asset upon
renewal or extension. Companies estimating the useful life of a recognized
intangible asset must now consider their historical experience in renewing or
extending similar arrangements or, in the absence of historical experience, must
consider assumptions that market participants would use about renewal or
extension as adjusted for some entity-specific factors. The adoption on January1, 2009 of this standard did not have a material impact on the Company’s
condensed consolidated financial statements.
In May
2008, the FASB issued new accounting guidance, “Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)”. This guidance requires the issuer of certain Convertible Debt
instruments that may be settled in cash (or other assets) on conversion to
separately account for the liability (debt) and equity (conversion option)
components of the instrument in a manner that reflects the issuer's
non-Convertible Debt borrowing rate. Such separate accounting also requires
accretion of the resulting discount on the liability component of the debt to
result in interest expense equal to an issuer`s non-Convertible Debt borrowing
rate. In addition, the guidance provides for certain changes related to the
measurement and accounting related to derecognition, modification or exchange.
The adoption on January 1, 2009 of this standard did not have a material impact
on the Company’s condensed consolidated financial statements.
In
September 2008, the FASB issued new accounting guidance “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities”. It addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and, therefore, need
to be included in the earnings allocation in computing income per share under
the two-class method. This guidance establishes that unvested share-based
payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be
included in the computation of earnings per share pursuant to the two-class
method. The adoption on January 1, 2009 of this standard did not have a material
impact on the Company’s condensed consolidated financial
statements.
F-31
In April
2009, the FASB issued new accounting guidance “Recognition and Presentation of
Other-Than-Temporary Impairments”, which provides operational guidance for
determining other-than-temporary impairments (“OTTI”) for debt securities. It’s
effective for interim and annual periods ending after June 15, 2009. The
adoption on April 1, 2009 of this standard did not have a material impact on the
Company’s condensed consolidated financial statements.
In
April 2009, the FASB issued new accounting guidance, “Interim Disclosure
about Fair Value of Financial Instruments”. It requires interim disclosures
regarding the fair values of financial instruments that are within the scope
of “Disclosures about the Fair Value of Financial Instruments.”
Additionally, it require disclosure of the methods and significant assumptions
used to estimate the fair value of financial instruments on an interim basis as
well as changes of the methods and significant assumptions from prior periods.
It does not change the accounting treatment for these financial instruments. The
adoption on April 1, 2009 of these standards did not have a material impact on
the Company’s condensed consolidated financial statements.
In
April 2009, the FASB issued new accounting guidance, “Determining Fair
Value When Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly” It
provides guidance on how to determine the fair value of assets and liabilities
when the volume and level of activity for the asset/liability has significantly
decreased. It also provides guidance on identifying circumstances that indicate
a transaction is not orderly. In addition, It requires disclosure in interim and
annual periods of the inputs and valuation techniques used to measure fair value
and a discussion of changes in valuation techniques. Since the volume and level
of activity for the asset or liability of the Company have not decreased and
there are no identifying transactions that are not orderly, the adoption on
April 1, 2009 of this standard did not have a material impact on the Company’s
condensed consolidated financial statements.
In May
2009, the FASB issued new accounting guidance, “Subsequent Events,” which
establishes general standards for the accounting for and the disclosures of
events that occur after the balance sheet date but before the financial
statements are issued or are available to be issued. The pronouncement requires
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date, whether that date represents the date the
financial statements were issued or were available to be issued. We adopted this
pronouncement effective June 30, 2009, and the adoption of this new
standard did not have a material effect on our consolidated financial position,
results of operations or cash flows.
On
January 1, 2009, the Company acquired Xinxing Property (See Note 2). Xinxing
Property provides property management services. The revenues of the property
management services are recognized when the services are provided.
Depreciation
of Xinxing Property’s income producing property’s improvements is computed using
the straight-line method over the estimated useful lives of 10
years.
Reclassification
Certain
reclassifications have been made to the prior year’s financial statements to
conform to the 2009 presentation. The effects of the reclassifications were not
material to the Company’s condensed consolidated financial
statements.
Note
2 – Acquisition
On
January 20, 2009, the Company signed an equity purchase agreement with the
shareholders of Xinxing Property and acquired 100% ownership of Xinxing Property
for a purchase price of RMB 12 million (approximately $1.76
million). Xinxing Property provides property management services to
residential and commercial projects. The acquisition strengthens the Company’s
ability to improve the value to customers during the after-sale phase of the
real estate development business. The synergies and benefits gained are
reflected in the value of goodwill recorded.
According
to the purchase agreement, the operational control of Xinxing Property passed to
the Company effective January 1, 2009, and, accordingly, the results of Xinxing
Property’s operations have been included in the Company’s condensed consolidated
statement of income and other comprehensive income from that date. This
acquisition is not considered material to the Company, and therefore, pro-forma
information for the comparative period has not been presented.
The total
purchase price included (1) an initial cash payment of RMB 2.0 million
(approximately $0.3 million) payable upon signing of the purchase
agreement, (2) a cash payment of RMB 3.6 million (approximately $0.5
million) payable on March 30, 2009, (3) an additional cash payment of RMB 3.6
million (approximately $0.5 million) payable on June 30, 2009 and (4)
a final cash payment of RMB 2.8 million (approximately $0.4 million)
payable on September 30, 2009. If the Company does not make payments
after 45 days of signing the agreement, a 1% penalty per month will be
calculated based on the payable amount. If the payment is delayed for more than
3 months, the original shareholders of Xinxing Property have the right to cancel
the transaction. As of September 30, 2009, the remaining balance under
the agreement amounted to $410,184 (see note 9).
The
acquisition was accounted for using the purchase method. The purchase price was
allocated to the identifiable assets and liabilities assumed based on their
estimated fair values.
F-33
Purchase
Price
$
1,758,886
Value
assigned to assets and liabilities:
Assets:
Cash
519,309
Accounts
receivable
81,769
Other
Receivable/Prepaid expenses and other assets
In
connection with the Xinxing Property acquisition, the statutory
reserve increased by $154,812.
Note
3 – Supplemental Disclosure of Cash Flow Information
Income
taxes paid for both the three and nine months ended September 30, 2009 amounted
to $42,135 (2008 - $225,964). Interest paid for the three months ended September30, 2009 and 2008 amounted to $849,279 and $2,032,689, respectively. Interest
paid for the nine months ended September 30, 2009 and 2008 amounted to
$2,223,011 and $2,858,168, respectively.
Depreciation
expense for the three months ended September 30, 2009 and 2008 amounted to
$156,762 and $50,258, respectively. Depreciation expense for the
nine months ended September 30, 2009 and 2008 amounted to $471,788 and
$233,915, respectively. The depreciation expense was included in the
selling, general and administrative expenses.
Amortization
expense for the three months ended September 30, 2009 and 2008 amounted to
$0. Amortization expense for the nine months ended September 30, 2009 and 2008
amounted to $4,360,003 and $0, respectively. The amortization expense was
capitalized in the real estate construction in progress.
Payable
to original shareholders of Xinxing Property
(ii)
410,184
-
Total
$
6,342,865
$
8,429,889
(i)
The
payable to the original shareholders of New Land bears 10% interest
with an original maturity of January 30, 2009. New Land’s original
shareholders have agreed to extend the loan to December 31,2009.
(ii)
On
January 20, 2009, the Company completed the acquisition of Xinxing
Property (See Note 2). The total purchase price for the acquisition was
RMB 12 million, (approximately $1.76 million). The total purchase
price included 1) an initial cash payment of RMB 2.0
million,(approximately $0.3 million), payable upon signing of the purchase
agreement, 2) an additional cash payment of RMB 3.6 million
(approximately $0.5 million), on March 30, 2009, 3) an additional cash
payment of RMB 3.6 million (approximately $0.5 million), on June 30,2009, and 4) a final cash payment of RMB
2.8 million (approximately $0.4 million), on September 30,2009. If the Company does not make payments after 45 days of signing
the agreement, a 1% penalty per month will be calculated based on the
payable amount. If the payment is delayed for more than 3 months, the
original shareholders of Xinxing Property have the right to cancel the
deal. As of September 30, 2009, the remaining balance payable to original
shareholders under the agreement amounted to
$410,184.
F-36
Note
10 – Loans Payable
Loans
payable represent amounts due to various banks. These loans generally can be
renewed with the banks when they expire. Loans payable as
of September 30, 2009 and December 31, 2008 consisted of
the following:
Due
August 29, 2010, annual interest rate is 10.21%, guaranteed by Tsining and
secured by the Company's Tsining building and part of Jun Jing Yuan II
project
5,127,304
5,130,084
Xi'an
Rural Credit union Zao Yuan Rd. Branch
Due
July 3, 2010, annual interest rate is 8.83%, secured by the Company's Jun
Jing Yuan I, Yuan I, Han Yuan and Xin Xing Tower projects
2,929,888
3,371,198
China
Construction Bank, Xi'an Branch
Due
August 27, 2011, floating interest rate based on 110% of People’s Bank of
China annual interest rate, secured by the Company's Jun Jing
II project
7,617,708
21,986,076
China
Construction Bank, Xi'an Branch
Due
September 8, 2012, floating interest rate based on 110% of People’s
Bank of China annual interest rate, secured by the Company's Jun Jing II
project
12,452,023
-
Total
$
29,591,867
$
35,617,442
All loans
are used to finance construction projects. All interest paid
was capitalized and allocated to various construction
projects.
On June28, 2008, the Company signed a strategic partnership Memorandum of Understanding
(“MOU”) with China Construction Bank Xi’an Branch that established a RMB 1
billion (approximately US$147 million) credit line for real estate development
by the Company and its subsidiaries. Under the MOU, the company and its
subsidiaries are required to set up a basic deposit account with China
Construction Bank, to maintain a current ratio of not less than 90% and to
maintain liabilities to assets ratio of not greater than 65%. On August 28,2008, the Company entered a first loan agreement with China Construction Bank
Xi’an Branch to draw down the first RMB 150 million loans, which will mature
on August 27, 2011. $21,986,075 (RMB 150 million) was received by the
Company on December 31, 2008. During the nine months ended September 30, 2009,
the Company paid down the loan to $7,617,708 (RMB 52 million). On August 30,2009, the Company entered a second loan agreement with China Construction Bank
Xi’an Branch to draw down another RMB 85 million loan, which will mature on
September 8, 2012. $12,452,023 (RMB 85 million) was received by the Company by
the end of September 30, 2009. As of September 30, 2009, our current ratio was
approximately 221.8%, and our liabilities to assets ratio was
approximately 49.1%. The Company will be able to draw down approximately another
$107.3 million before we reach the maximum liabilities to assets ratio of
65%.
F-37
Note
11 – Fair Value of Financial Instruments
The
following table summarizes the financial assets and liabilities measured at fair
value on a recurring basis as of the measurement date, September 30, 2009, and
the basis for that measurement, by level within the fair value
hierarchy:
Fair
Value Measurements Using
Assets/Liabilities
Level 1
Level 2
Level3
At Fair Value
Warrants
liabilities
-
$
4,721,294
-
$
4,721,294
Derivative
liabilities
-
$
3,777,670
-
$
3,777,670
Total
-
$
8,498,964
-
$
8,498,964
Note
12 – Convertible Debt
On
January 28, 2008, the Company issued Senior Secured Convertible Debt due in 2013
(the "Convertible Debt") and warrants to subscribe for common shares for an
aggregate purchase price of US$20 million. The Convertible Debt bears interest
at 5% per annum (computed based on the actual days elapsed in a period of 360
days) of the RMB notional principle amount, payable quarterly in arrears in U.S.
Dollars on the first business day of each calendar quarter and on the maturity
date. In addition, 1,437,467 five-year warrants were granted with a strike price
of $6.07 per common share, which are callable if certain stock price thresholds
are met. Approximately 215,620 warrants are also available as a management
incentive if certain milestones are met. If the aggregate principal amount of
the Convertible Debt is reduced to US$10 million or less as a result of
repayment by the Company pursuant to the Convertible Debt as a result of any
optional conversion by the Investors or mandatory conversion by the Company of
the Convertible Debt, then each Investor agrees to surrender to the Company
warrants for an aggregate number of shares of common stock equal to such
Investors’ pro rata share of 107,810 shares. If the aggregate principal amount
of the Convertible Debt is reduced to $0 as a result of repayment by the Company
pursuant to the Convertible Debt as a result of any optional conversion by the
Investors or mandatory conversion by the Company of the Convertible Debt, then
each Investor agrees to surrender to the Company warrants in addition to the
107,810 warrants surrendered pursuant to the $10 million reduction noted above
for an aggregate number of shares of common stock equal to such Investor’s pro
rata share of 107,810 shares. The Company may hold in treasury and reissue to
the officers and directors of the Company any warrants surrendered by the
Investors. As of September 30, 2009, the Company did not repay any principle of
Convertible Debt and the Investors did not deliver any optional conversion
request to the Company.
The
Investors have the right to convert up to 45% ($9 million) of the
principal amount of the Convertible Debt into common shares at an initial
conversion price of $5.57, subject to an upward adjustment. The Company, at
its discretion, may redeem the remaining $11 million of Convertible Debt at
100% of the principle amount, plus any accrued and unpaid interest. The
warrants associated with the Convertible Debt grant the Investors the right
to acquire shares of common stock at $6.07 per share, subject to customary
anti-dilution adjustments. The warrants may be exercised to purchase common
stock at any time up to and including February 28, 2013.
The
Convertible Debt is secured by a first priority, perfected security
interest in certain shares of common stock of Lu Pingji, the
Chairman of the Company. The Convertible Debt is subject to events of
default customary for convertible securities and for a secured
financing.
Both the
warrants and the embedded derivative associated with Convertible Debt meet the
definition of a derivative instrument according to accounting guidance,
“Accounting for Derivative Instruments and Hedging Activities”. Because the
warrant and the Convertible Debt are denominated in U.S. dollars but the
company’s functional currency is the Chinese Renminbi, the exemption from
derivative instrument accounting provided by the accounting guidance is not
available and therefore the warrant and embedded conversion option are recorded
as derivative instrument liabilities and periodically marked-to-market. The fair
value of the warrants and the embedded derivative on inception were determined
to be $3,419,653 and $3,927,375, respectively, using the Cox-Rubinstein-Ross
Binomial Lattice Model (the “CRR Model”) with the following assumption: expected
life 4.32 years, expected volatility - 75%, risk free interest rate - 2.46% and
dividend rate - 0%. The fair value of the warrants and embedded derivative at
September 30, 2009 were determined to be of $4,721,195 (December 31, 2008 -
$3,419,653) and $3,777,671 (December 31, 2008 – $3,927,375), respectively, using
the CRR Model with the following assumption: expected life 3.33 - 3.42 years,
expected volatility -105%, risk free interest rate - 1.59 - 1.63% and dividend
rate - 0%. For the three months ended September 30, 2009 and 2008, the Company
recorded a change in fair value for warrants and embedded derivatives of
$(662,080) (2008 - $(1,827,824)) and $(2,695,306) (2008 - $(2,101,825)),
respectively, in the interim condensed consolidated statements of income and
comprehensive income. For the nine months ended September 30, 2009 and 2008, the
Company recorded a change in fair value for warrants and embedded derivatives of
$3,604,052 (2008 - $(2,236,811)) and $3,017,273 (December 31, 2008 -
$(2,556,313)), respectively, in the interim condensed consolidated statements of
income and comprehensive income.
F-38
After
allocating the gross proceeds to the fair value of the warrants and
the embedded derivative instrument, the remaining proceeds were allocated
as the initial carrying value of the Convertible Debt. The initial carrying
value of the Convertible Debt is accreted to its stated amount on maturity
using the effective interest method. The effective interest rate was
determined to be 15.42%. The carrying value of Convertible Debt at
September 30, 2009 was $14,511,239 (December 31, 2008 - $13,621,934).
Related interest expense and accretion expense for the three months ended
September 30, 2009 were $269,221 (2008 - $259,707) and $311,319 (2008 -
$266,541), respectively. Related interest expense and accretion expense for
the nine months ended September 30, 2009 were $798,894 (2008 -
$695,402) and $889,305 (2008 - $691,782), respectively.
In
connection with this transaction, the Company and the Investors entered into a
registration rights agreement (the “Registration Rights Agreement”). Pursuant to
the terms and conditions of the Registration Rights Agreement, the Company
agreed to register within 60 calendar days after closing shares of common stock
issuable to the Investors for resale on a Form S-3 Registration Statement
to be effective no later than the 180th day after the closing date of the
transaction. If the Form S-3 is not available at that time, then the Company
will file a Registration Statement on such form as is then available to effect a
registration of the registrable securities, subject to the consent of the
Investors, which consent will not be unreasonably withheld. The Company shall
register an amount of common stock for resale that equals at least 125% of the
sum of shares issuable upon conversion of the Convertible Debt and the exercise
of the warrants. The registration rights granted under the Registration Rights
Agreement are subject to customary exceptions and qualifications and compliance
with certain registration procedures. The Company is subject to the late
registration penalty payment equal to the product of (i) the Investor’s
outstanding principal amount and (ii) the quotient obtained by dividing 12% by
360 (the “Late Payments”).
The
Company commenced negotiations with the Investors in December 2008 for a waiver
for the Late Payments, as the Company and the Investors believed that the
registration would become effective within a short period of time. However, as
the registration has not become effective as of September 2009, the Company has
accrued for the Late Payments as security registration expenses. For the three
months ended September 30, 2009, the Company has recorded security registration
expenses of $579,775 (2008 - $0). For the nine months ended September 30, 2009,
the Company has recorded security registration expenses of $1,786,517 (2008 -
$0). On September 28, 2009, the Company reached a First Amendment (the
“Amendment”) with the Investors to settle the Late Payments, in the amount of
$2,400,000, by the issuance of 614,290 common stock. The 614,290 common stock
was determined by dividing $2,400,000, the total Late Payments up to September28, 2009, by 95% of the historical volume weighted average price (“VWAP”) of the
common stock, as determined by using Bloomberg function VWAP, for the immediate
preceding 30 days period. In accordance with the Amendment, the Investors will
waive any further Late Payments against the Company under the Registration
Rights Agreement.
As at
September 30, 2009, the 614,290 common stock to settle the Late Payments has not
been issued. Therefore, the amount has been recorded as common stock
subscribed.
On
November 5, 2008, the Company and Prax Capital entered into a conditional joint
venture agreement to develop 79 acres within China Housing’s Baqiao project
located in Xi’an. Prax Capital invested US$ 29.3 million for a 25% interest in
Puhua with various distribution rights. Prax Capital’s shares are redeemable at
the option of holder, provided that Prax gives advance notice, and with the
Company’s approval. Prax Capital has the first right of distribution and there
is a maximum amount that Prax Capital can receive. At this time, the Company
believes that it is not probable that Prax Capital will exercise their
redemption option.
On
November 5, 2008, New Land entered into a Deed of Guarantee (the “Guarantee”),
in favor of Prax Capital and Success Hill (Success Hill and together with Prax
Capital, the “Beneficiaries”) whereby the Company guarantees the performance of
certain obligations of New Land and Manstate pursuant to the terms and
conditions of various agreements entered into by and between Prax Capital,
Success Hill and New Land, among others, in connection with a Framework
Agreement entered into on November 5, 2008, (“Framework Agreement”) by and
between New Land, the Company and Prax Capital. Prax Capital and New Land,
through the Framework Agreement and the other related agreements, intend to
jointly participate in bidding for land use rights with respect to a parcel
of land and shall cause that land to be developed, operated and
sold.
F-39
The
Guarantee is a continuing Guarantee and shall remain effective until a
termination event occurs as contemplated by the Guarantee. If the Company fails
to timely and fully perform its obligations under the Guarantee then the
Beneficiaries shall be afforded the appropriate remedy as contemplated by the
Guarantee, including, but not limited to, the claim for damages and the
reimbursement of expenses. Any amounts payable under the Guarantee by the
Company shall include an interest accrued at the rate of 10% per annum from
the due date of such payment.
During
the first nine months of 2009, the Company owned a 75% interest in Puhua (Xi’an)
Real Estate Development Co., Ltd. (“Puhua”), a real estate development company.
Given the Company’s controlling ownership interest, the accounts of Puhua have
been consolidated with the accounts of the Company, and a non-controlling
interest has been recorded for the non-controlling investors’ interests in the
net assets and operations of Puhua in accordance with the non-controlling
investor’s investments.
Pursuant
to accounting guidance, "Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settle in, a Company's Own Stock," the warrants issued
contain a provision permitting the holder to demand payment based on a
Black-Scholes valuation in certain circumstances. Therefore, the Company
recorded the warrants issued through private placements in 2006 and 2007 as a
liability at their fair value on the date of grant and then marked them to
$1,403,464 at September 30, 2009 (December 31, 2008 - $458,461) using the
CRR Binomial Lattice Model with the following assumptions: expected life of 2.61
years; expected volatility - 105%, risk fee interest rate of 1.24% and dividend
rate - 0%. The change in fair value of warrants for the three months ended
September 30, 2009 was $(662,080) (2008 - $(1,111,740)). The change in fair
value of warrants for the nine months ended September 30, 2009 was
$1,353,688 (2008 - $(1,658,804)).
As of
December 31, 2008, the Company accrued as a liability $78,600 of stock based
compensation expense for 54,583 shares of common stock granted by the Company to
various directors and executive in 2009. All these common stocks were
issued during the three months ended June 30, 2009.
On June28, 2009, $320,815 cash was received for 96,923 warrants exercised. The Company
recorded $189,005, the fair value of the warrants exercised, as additional
paid in capital. The Company also issued 96,923 common stocks for the 96,923
warrants exercised in July 2009.
During
the three months ended September 30, 2009, $863,847 cash was received for
191,966 warrants exercised. The Company recorded $120,938, the fair value of the
warrants exercised, as additional paid in capital. The Company also issued
191,966 common stocks for the 191,966 warrants exercised.
During
the three months ended September 30, 2009, an aggregate of 81,921 warrants were
exercised on a cashless basis. The Company recorded $98,742, the fair value of
the cashless warrants exercised, as additional paid in capital. In connection
with these transactions, the Company issued an aggregated of 33,450 common
stocks.
On
September 28, 2009, the accrued security registration expenses of $2,400,000
were settled with the Company’s common stocks (see Note 12), and the settled
security registration expenses were recorded as common stock
subscribed.
On
September 1, 2009, the Company granted 22,222 unissued common stocks to its
former CFO. The Company recorded $87,777, the fair value of the 22,222 shares
granted, as stock based compensation.
As the
change in fair value of embedded derivatives and change in fair value of
warrants for the three months ended September 30, 2009 is not taxable, there was
no income tax provision for the change in fair value of embedded derivatives and
warrants.
During
the three months ended September 30, 2009, the Company’s subsidiary, Hao Tai,
reached an income tax settlement with local tax bureau. As a result of the
settlement, the Company recorded $4,856,377 recovery of income
taxes.
Note 16 – Earnings per Share
attributable to China Housing & Land Development, Inc.
Earnings
per share attributable to China Housing & Land Development, Inc. for
the nine months ended September 30, 2009 and 2008 were
determined by dividing the net income attributable to China Housing & Land
Development, Inc. for the years by the weighted average number of both basic and
diluted shares of common stock and common stock equivalents
outstanding.
Income
attributable to China Housing & Land Development,
Inc. - basic
$
12,714,128
$
1,447,072
$
3,519,860
$
2,630,636
Effect
of dilutive securities:
Diluted
warrants
(2,380,672
)
(256,091
)
-
(482,642
)
Diluted
Convertible Debt
(2,555,212
)
-
-
-
Income
attributable to China Housing & Land Development, Inc. -
diluted
$
7,778,244
$
1,220,981
$
3,519,860
$
2,147,994
Denominator
Weighted
average shares outstanding - basic
31,134,137
30,877,453
30,987,760
30,389,712
Effect
of dilutive securities:
Common
stock subscribed
27,278
-
9,193
-
Diluted
warrants
195,039
5,030
-
46,748
Diluted
Convertible Debt
1,615,799
-
-
-
Weighted
average shares outstanding - diluted
32,972,253
30,882,483
30,996,953
30,436,461
Earnings
per share
Basic
$
0.41
$
0.05
$
0.11
$
0.09
Diluted
$
0.24
$
0.04
$
0.11
$
0.07
For the
nine months ended September 30, 2009, 3,976,883 outstanding warrants issued in
2007 and 2008 and 1,615,799 shares conversion option for the Convertible Debt
issued in 2008 (see Note 12) were not included in the calculation because
they would have an anti-diluted effect.
F-41
Note
17 – Commitments and Contingencies
The
Company leases part of its office and hotel space under various operating lease
agreements. The future minimum rental payments required under the
operating lease agreements are summarized below.
Payment due by period
Commitments
and Contingencies
Total
Less than
1 year
1-3 years
3-5 years
Over 5 years
Rental
lease
$
336,859
$
86,292
$
52,806
$
52,806
$
144,955
Rubber
dam construction
1,025,461
1,025,461
Land
use right
2,59 2,951
2,5 92,951
Total
$
3,997,854
$
1,149,405
$
2,644,207
$
52,775
$
151,46 7
The
Company entered into a contract with Xi’an Baqiao local government for a rubber
dam construction project. The Company is committed to expend approximately
$1,025,461 on this project.
As of
September 30, 2009, the Company had one land use right with an unpaid balance of
approximately $2.6 million. The balance is not due until the vendor removes the
existing building on the land and changes the zoning status of the land use
right certificate.
Note
18 – Subsequent Events
The
Company evaluated subsequent events through November 9, 2009, the date the
interim condensed consolidated financial statements were available to be
issued.
Pursuant
to the Amendment dated September 28, 2009, the Company issued 614,290 common
stock shares to settle $2,400,000 accrued security registration expenses
(see Note 12) on October 21, 2009.
On July15, 2009, the company entered a letter of Intent to acquire an 11 acre tract of
land in the center of Xi’an, China. The Company intends to develop a large
mid-upper income residential and commercial development project on this site,
with gross floor area of 200,000 square meters. The total consideration for the
land acquisition will be in the range of $18 to $22 million and is subject to
finance this project through a combination of internal company funds, revenue
derived from sales of existing projects and bank loans from China Construction
Bank, which enjoys a long-term cooperative relationship with the company. As of
November 10, 2009, the acquisition is still at the planning and preparation
stage. The Company expects to reach an official agreement with the current land
owner by December 31, 2009.
F-42
Dates Referenced Herein and Documents Incorporated by Reference
