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As Of Filer Filing For·On·As Docs:Size Issuer Agent 5/29/07 China Housing & Land Dev, Inc. 424B3 1:223K Edgar Tech & Bus… Inc/FA |
Document/Exhibit Description Pages Size 1: 424B3 424(B)(3) Supplemental Prospectus No 1 HTML 326K
| Prospectus Supplement No 1 |
Filed Pursuant to Rule
424(b)(3)
Registration
File No. 333-136847
PROSPECTUS SUPPLEMENT NO.
1
DATED MAY 29, 2007
TO PROSPECTUS DATED SEPTEMBER 14, 2006
CHINA HOUSING & LAND
DEVELOPMENT, INC.
Resale of 928,835 Shares
of Common Stock
This prospectus supplement supplements the prospectus dated September 14, 2006 relating to the offer and resale by the selling stockholders identified in the prospectus of up to 928,835 shares of common stock of China Housing & Land Development, Inc. This prospectus supplement includes:
| • | our Annual Report on Form 10-KSB for the year ended December 31, 2006, which was filed with the Securities and Exchange Commission on April 2, 2007. |
| • | our Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007, which was filed with the Securities and Exchange Commission on May 14, 2007. |
The information contained in the report included in this prospectus supplement is dated as of the period of such report. This prospectus should be read in conjunction with the prospectus dated September 14, 2006, which is to be delivered with this prospectus supplement. This prospectus supplement is qualified by reference to the prospectus except to the extent that the information in this prospectus supplement updates and supersedes the information contained in the prospectus dated September 14, 2006, including any supplements or amendments thereto.
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.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 29, 2007
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the year ended December 31, 2006
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
COMMISSION FILE NO. 000-51429
China Housing & Land Development, Inc.
--------------------------------------
(Name of Small Business Issuer in Its Charter)
Nevada 20-1334845
------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6 Youyi Dong Lu, Han Yuan 4 Lou
Xi'An, Shaanxi Province
China 710054
------------------------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 86-029-82582632
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
Securities Registered Pursuant to Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.001 Per Share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the year ended December 31, 2006 were $54,099,486. The
aggregate market value of the registrant's common stock held by non-affiliates
as of December 31, 2006 was approximately $0.00.
State the number of shares outstanding of each of the issuer's classes of equity
securities, as of the latest practicable date: 20,619,223 shares of Common
Stock, $0.001 par value per share, outstanding as of December 31, 2006.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
================================================================================
PART I
ITEM 1. BUSINESS
THE COMPANY
China Housing & Land Development Inc. ("CHLN," "we," "our" or "us"), 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. ("Tsining"), a
corporation formed under the laws of the People's Republic of China on
Septembber 7 1999, Pursuant to the purchase agreement, CHLN acquired all of the
issued and outstanding capital stock of Tsining in exchange for 16,000,000
(post-split) shares of CHLN's common stock.
Concurrently with the closing of the purchase agreement and as a condition
thereof, CHLN entered into an agreement with Deljit Bains and Davinder Bains,
its executive officers, pursuant to which they each returned 4,000,000
(post-split) shares (8,000,000 shares in total) of CHLN common stock to CHLN for
cancellation. They were not compensated in any way for the cancellation of their
shares of CHLN common stock. Upon completion of the foregoing transactions, CHLN
had an aggregate of 20,000,000 shares of common stock issued and outstanding.
As a result of the merger, Tsining's stockholders own approximately 80% of
the combined company and the directors and executive officers of TSINING became
the directors and executive officers of CHLN. Accordingly, the transaction has
been accounted for as a reverse acquisition of CHLN by TSINING resulting in a
recapitalization of TSINING rather than as a business combination. TSINING is
deemed to be the purchaser and surviving company for accounting purposes.
Accordingly, its assets and liabilities are included in the balance sheet at
their historical book values and the results of operations of TSINING have been
presented for the comparative prior period. The historical cost of the net
liabilities of CHLN that were acquired was $432. Pro forma information is not
presented as the financial statements of CHLN are insignificant. In addition, on
May 5, 2006, CHLN changed it name to China Housing & Land Development, Inc.
(hereafter referred to as the "Company") 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.
2
CHLN, through our wholly owned subsidiary Xi'an Tsining Housing
Development Co., Ltd. is engaged in the construction, development and sale of
residential real estate units in the People's Republic of China (the "PRC" or
"China"). Tsining completed a number of significant real estate development and
construction projects in Xi'an, and ranked No.1 private developer in the
regional Xi'an real estate market, and we intend to continue investing in the
Xi'an market, as well as neighboring areas.
From 1999 through 2006, our sales from property development grew from
approximately $2.4 million in 1999 to approximately $54.10 million in 2006
revenue , and net income has grown to over $9.05 million in 2006 from a loss in
1999.
Our corporate offices are located at 6 East Friendship Road, Han Yuan 4th
Floor, Xi'an, China. Our telephone number at that location is 86-29-8258-2632.
Industry Overview
People's Republic of China
China has experienced rapid economic growth in the last twenty years.
According to China's Department of Commercial Affairs, China's gross domestic
product ("GDP") achieved an annual growth rate of 9.77% from 2004 to 2006.
According to the National Statistics Bureau of China, the GDP of China in 2006
was RMB 20,960.95 billion, up 10.04% over the previous year.
We believe that the primary reasons behind China's strong economic growth
are
(i) a robust domestic consumer demand resulting from rising consumer
confidence and disposable income,
(ii) increasing foreign direct investment after accession into the World
Trade Organization,
(iii) surging investments in real estate and infrastructure, as exhibited
by a boom in the real property market. We believe that a paradigm
shift is taking place in China, characterized by some major economic
and political improvements, such as a de-politicization of Chinese
society, growing private business, an emerging unified national market
and integration into the global value chain.
3
Residential Real Estate
China is in the midst of a rapid urbanization process. There are now over
400 million Chinese living in urban areas. Despite policies to limit population
growth, China's urban population has been increasing and real estate investment
has been thriving. Real estate investment has grown considerably, but not at a
rate we believe is excessive relative to GDP growth. We believe that there is
still strong growth potential in Chinese real estate investments. According to
the National Statistics Bureau of China, real estate investment in China
increased from RMB 15,000 million in 1978 to RMB 1,575,900 million in 2005.
Southnet News reports in China's Youth Newspaper that from the late 1990s to
2006, there was an annual average growth rate of approximately 20% in real
estate investments.
China's real estate market entered a new phase in 1990 with the
promulgation of the Temporary Regulations on the Sale and Transfer of Urban
State-Owned Real Estate which was the first in a series of major housing policy
reforms. Previously all land and housing was owned by the State. Key regulatory
developments have included:
o 1991- Employees allowed to use funds in their Housing Accounts to pay
for deposits on home purchases;
o 1992- All large cities began to sell state owned housing;
o 1998- The policy of state allocation of housing was abolished;
o 1999- The maximum term for mortgages was extended to 30 years and
financing limits were increased from 70% to 80% of the purchase price.
Statistics from the Ministry of Construction show that from 1980 to 2000,
China's real estate industry showed strong growth with newly built housing
reaching an average of 218 square feet per person, a two fold increase from
1970. The PRC government expects the nation to increase aggregate housing area
from the 2005 total of 59 billion square feet to 64.5 billion square feet, or
approximately 70 million individual housing units, by 2015.
According to the PRC National Bureau of Statistics (NBS), in 2004,
investment in Chinese real estate exceeded US$159 billion, accounting for 25
percent of fixed asset investment. The continuing national trends of
urbanization and expanded development are generally expected to lead sustained
growth in the market for at least the next ten years.
Since 1990s, Chinese government reforms in urban and rural housing
policies have promoted the concept of the family residence in allowing
individuals to purchase their own homes, and opportunities for financing such
purchases through banks and other funds have become available to individuals.
Previously, homes were owned by companies for their employees, and there was no
market for real estate at the individual level. A viable and vibrant real estate
market has emerged with these reforms. The effect of the emerging housing
industry on the financial sector was considerable. According to the National
Statistics Bureau of China, in 2004 individuals accounted for 93.3% of the total
sales of commercial buildings.
4
Most of China's housing and land development companies develop projects on
a regional rather than a national basis. There are several reasons for this.
First, land is controlled by local governments and local companies have better
relationships with local governments and easier access to regional information.
Moreover, bank loans are approved by local bank branches; therefore, local real
estate companies are better able to leverage relationships to obtain financing
and/or preferential financing terms. Also, housing specifications tend to vary
on a regional basis based on local tastes, customs, and environmental factors.
The demand for residential housing is characterized by individuals and
families, many of whom are purchasing for the first time. They will normally pay
a 20% deposit on the cost of the property with the remainder covered by a
mortgage. On a local basis, the Xian Bureau of Statistics indicates that, from
2001 to 2004, demand for residential housing in Xian increased from 37.6 million
square feet to 61.1 million square feet. During the same period, the average
price per square foot increased from US$23.23 to US$37.88.
The population of Xian exceeded eight million in 2006. The average living
area in Xian is about 157 square feet per person, significantly less than the
national average. The Xian government expects the local average to reach 269
square feet of living area per person by the year 2020, at which time the
population is expected to be ten million. This will necessitate the construction
of 1.259 billion square feet of housing, an annual increase of 78.7 million
square feet.
As the local economy has developed under Beijing's "Go West" policy,
personal incomes have grown, driving the demand for better housing. The
residential real estate market in Xian is currently expanding in a balanced
fashion. The vacancy rate for new housing is approximately 15%, the lowest in
five years. The Xian residential realty market is projected to show strong and
steady growth over the next three to five years, driven by changes in family
living patterns, the need to alleviate crowded housing and the impact of the
State's regional development plans.
Geographically, our core property business is based in Xi'an, the
industrial heartland of western China. Xi'an is an ancient city, well known for
its terracotta soldiers. Xi'an is also the largest city in western China with a
population of eight million and is an important technological, commercial and
cultural center. Xi'an plays an important strategic role in the Chinese
government's "Going West" policy
5
Commercial Real Estate
Since 2000 commercial property development in China has been growing
rapidly. According to the NBS, 2003 commercial property sales were 304.9 million
square feet, more than double the 150.5 million square feet sold in 2000. The
average selling price was US$42.69 per square foot, 1.67 times higher than the
average residential housing price, representing a price increase of 12% over the
previous year. The latest NBS figures show 2005 commercial property sales valued
US$760 billion, a 13% increase over 2004. The demand for commercial space,
particularly stores and malls, is generally not expected to slow in the near
term.
Business
A. Completed Property Development Projects
We are primarily focused on land acquisition for the development of
residential housing. Over the past several years, the bulk of our sales were
realized from the five projects described below. The completed projects are in
downtown Xian and commanded prices per square foot that were higher than the
regional average. All five projects included secured parking, cable TV, hot
water, heating systems, and access to natural gas.
1) Tsining * Mingyuan: 8 East Youyi Road, Xian. The construction area is
473,627 square feet. Mingyuan is a residential complex consisting of 303
apartments ranging from two to four bedrooms and 950 to 1,800 square feet
in size. Construction commenced in March 1998 and was completed in April
2000. In total, the project generated total sales of US$19.72 million with
an average price of US$41.65 per square foot.
2) Lidu * Mingyuan: 25 East Mutoushi, Xian. Located in the prime commercial
area near the historic Bell Tower. The project covers 1.3 acres, a building
area of 86,114 square feet, and 56 apartments ranging from two to four
bedrooms. The project began in October 2000 and was completed in November
2001. With an average price of US$47.25 per square foot, total sales were
US$4.07 million.
3) Tsining * Hanyuan: 6 East Youyi Road, Xian. Located in the south of Xian,
noted for its schools and universities. The project was started in February
2002 and completed in December 2003. It is comprised of 238 two and three
bedroom apartments ranging from 1,140 to 1,800 square feet and covering a
total construction area of 346,799 square feet. The apartments sold at an
average price of US$40.53 per square foot generating total sales of
US$14.05 million.
4) Tsining * Home IN: 88 North Xingqing Road, Xian. Located near the city
center, the Home IN project consists of 215 two and three bedroom
western-style apartments ranging from 1,120 to 1,920 square feet in size.
Total construction area is 248,385 square feet. The project, completed in
December 2003, generated sales of US$49.64 per square foot for a total of
US$12.33 million in total sales.
5) Tsining * GangWan: 123 Laodong Road, Xian. Less than one mile from the
western hi-tec industrial zone, GangWen spans three acres and is comprised
of eight buildings with a total construction area of 510,812 square feet.
The project began in April 2003 and was completed in December 2004. GangWen
has apartments ranging from one to three bedrooms and 430 to 1,430 square
feet in size. There are 466 apartments. Total sales were US$15.90 million
with an average price of US$31.14 per square foot.
6
B. Projects Currently Under sale
The following are projects under sales which will contain both residential
housing as well as office and retail space available for rent. We have completed
both projects in 2006. The sales of these two projects are mainly contributed
the majority to our 2006's revenue:
1) Tsining 24G: 133 Changle Road, Xian. 24G is an redevelopment of an existing
26 floor building, located in the center of the most matured and developed
commercial belt of the city. This upscale development will include 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: White collar workers, small business owners and traders,
entrepreneurs. Total square footage available for residential use was
239,173,covering 372 one to three bedroom serviced apartments ranging from
387 to 1,936 square feet. In addition to the residential housing, The
commercial area of 24G covers 199,395 square feet, will house electronic
products retailers, clothing stores, convenience stores and restaurants in
its ground-level retail space.. The project started construction in June
2005 and was completed in June 2006. 24G contributed US$13.00 million to
2006 revenue.
2) Tsining Junjing Garden I: 369 North Jinhua Road, Xian. It's the first
German style Residential & Commercial Community in Xi'an, designed by the
world-famous WSP architect design house. Its target Customer is local
middle income families. The project has 15 residential apartment buildings
consisting of 1,230 one to five bedroom apartments, ranging from 505 to
3,787 square feet in size. The Garden will feature secured parking, cable
TV, hot water, heating systems, and access to natural gas. Total square
footage available for residential use was 189,772 Junjing Garden I was also
a commercial venture that will house small businesses serving the needs of
Junjing Garden I residents and surrounding residential communities. Total
commercial space was 289,100 square feet, and we expect to remain 128,273
square feet of commercial space to house a supermarket and other retailers
generating annual rental income. The project was completed in September
2006. Junjing Garden I contributed US$39.67 million to 2006 revenue.
C. Project Development Pipeline
We have purchased two additional parcels of land in Xian in anticipation of
beginning development of the following residential properties. The completion of
such projects is subject to adequate financing, permits, licensing and market
conditions:
7
1) Junjing Garden II: 38 East Hujiamiao, Xian Set on 18 acres of land. It's
the first Canadian style residential community with "green and
energy-saving" characters, and won "National Energy Saving Project". Its
target Customer: local middle income family. Located near Junjing Garden I,
this complex will consist of 1,500 one to five bedroom apartments. The
apartments will offer secured parking, cable TV, hot water, heating
systems, and access to natural gas. Set on 18 acres, total square footage
available for sale is expected to be 2,524,457 ,residential will be
2,407,377 Square Footage and commercial will be 117,080 Square Footage.
Planning is set to begin in second quarter of 2007 and project completion
in 2009.
2) Yijing Garden: 14 Jiangong Road, Xian. Set on 15 acres of land, Yijing
Garden Located at one of the best residential area in the city, surrounded
by universities and park. We had got the certificate for land use in 2004.
Its target Customer: Middle/High income family . Yijing Garden will consist
of 1,500 apartments ranging from two to four bedrooms. Total square footage
will be 2,039,793. Secured parking, cable TV, hot water, heating systems,
and access to natural gas will be included. Construction is set to begin in
October 2008 and be completed December 2010.
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.
Suppliers
The supply of land is controlled by the government. There are generally
three ways in which we acquire land.
o Purchase by auction held by the Land Consolidation and Rehabilitation
Center;
o Purchase by auction held by court under bankruptcy proceedings;
o 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
selects 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.
8
Intellectual Property
We currently have no registered intellectual property.
Research and Development
We have not had any material research and development expenses over the
past two years. Due to the characteristic of the housing and land development
industry, "R&D" consists of marketing research. The funding of all marketing
research is expected to come from operating cash flow.
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:
o "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:
o "License for Construction Area Planning" and "License for Construction
Project Planning", authorized by Xian Bureau of Municipal Design;
o "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.
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.
Time for
Registered Capital Experience Developed Area license to
(million) (years) (square feet) Other 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
9
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. By the end of December, 2005, the company had completed
ten projects, developed 988 acres of land and 21,528,525 square feet of
construction area. 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.
Employees
As of December 31, 2006, we employed a total of 49 employees in the
following capacities: 5 management, 6 administrative, 13 operational, 9 sales, 9
planning and 7 finance. We believe that 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. All employees are eligible for incentive-based compensation.
10
RISK FACTORS
In addition to the other information in this annual report, our business is
subject to numerous risks which should be considered carefully in evaluating our
business and prospects. The following matters, among others, may have a material
adverse effect on our business, financial condition, liquidity, results or
operations or prospects, financial or otherwise. Reference to this cautionary
statement in the context of a forward-looking statement or statements shall be
deemed to be a statement that any one or more of the following factors may cause
actual results to differ materially from those in such forward-looking statement
or statements.
Risk related to our business
----------------------------
Our revenues may vary from quarter to quarter due to when our real estate
projects are completed.
We sell residential real estate units in real estate development projects.
We recognize revenue when a sale is consummated, which only occurs when a
project is completed. As with revenue, we recognize cost of sales when a sale is
consummated, which we recognize only when a project is completed. Our sales are
not verified until the completion of our real estate development projects. Our
revenues are subject to the timing of when our projects are completed.
Additionally, fluctuating or inconsistent demand for our products by our
customers may affect our revenues.
Our home sales and operating revenues could decline due to macro-economic and
other factors outside of its 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 most 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.
11
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.
The terms of any future financing may adversely affect your interest as
stockholders.
If we require additional financing in the future, it may be required to
incur indebtedness or issue equity securities, the terms of which may adversely
affect your interests in us. For example, the issuance of additional
indebtedness may be senior in right of payment to your shares upon our
liquidation. In addition, indebtedness may be under terms that make the
operation of our business more difficult because the lender's consent will be
required before we can take certain actions. Similarly, the terms of any equity
securities we issue may be senior in right of payment of dividends to your
common stock and may contain superior rights and other rights as compared to
your common stock. Further, any such issuance of equity securities may dilute
your interest in us.
We do not anticipate paying dividends on the 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 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. Lu Pingji, our Chairman and Chief
Executive Officer, and Mr. Feng Xiaohong, our Chief Operational 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 related to the People's Republic of China
----------------------------------------------
The People's Republic of China's Economic Policies could affect our Business.
Substantially all of our assets are located in the People's Republic of
China and substantially all of our revenue is derived from our operations in The
People's Republic of China. Accordingly, our results of operations and prospects
are subject, to a significant extent, to the economic, political and legal
developments in the People's Republic of China.
While the People's Republic of 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
the People's Republic 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 the People's Republic 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 the People's Republic of 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 the
People's Republic of 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 the People's Republic of 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.
Although we do import goods into or export goods out of the People's
Republic ofChina, fluctuation of the Renminbi may indirectly affect its
financial condition by affecting the volume of cross- border money flow.
The value of the Renminbi fluctuates and is subject to changes in the
People's Republic of China's political and economic conditions. Since 1994, the
conversion of Renminbi into foreign currencies, including United States dollars,
has been based on rates set by the People's Bank of China which are set based
upon the interbank foreign exchange market rates and current exchange rates of a
basket of currencies on the world financial markets. As of August 22, 2006, the
exchange rate between the Renminbi and the United States dollar was 7.9663
Renminbi to every one United States dollar.
13
We may face obstacles from the communist system in the People's Republic of
China.
Foreign companies conducting operations in the People's Republic of China
face significant political, economic and legal risks. The Communist regime in
the People's Republic of China, including a cumbersome bureaucracy, may hinder
Western investment.
We may have difficulty establishing adequate management, legal and financial
controls in the People's Republic of China.
The People's Republic of 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 the People's
Republic of 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 the People's Republic of
China.
Because the Company's executive officers and directors, including, the
chairman of it's 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 its officers and directors by a
stockholder or group of stockholders in the United States. Also, because the
majority of our assets are located in the People's Republic of 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 Associated with Investing in Our Common Stock
---------------------------------------------------
Certain of our stockholders control a significant amount of our common stock.
Certain of our stockholders who were originally shareholders of Tsining
prior to the closing of the Exchange Agreement own approximately 80% of our
issued and outstanding common stock. Approximately 48% of these shareholders
have entered into a voting trust agreement with Pingji Lu, who has sole
investment and voting power over their shares of our common stock. As a result,
this group has the ability to significantly influence the election of all
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions, such as mergers, consolidations
or the sale of substantially all of our assets. Consequently, this concentration
of ownership may have the effect of delaying or preventing a change of control,
including a merger, consolidation or other business combination involving us, or
discouraging a potential acquirer from making a tender offer or otherwise
attempting to obtain control, even if such a change of control would benefit our
other shareholders.
14
Efforts to comply with recently enacted changes in securities laws and
regulations will increase our costs and require additional management resources,
and we still may fail to comply.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC
adopted rules requiring public companies to include a report of management on
the company's internal controls over financial reporting in their annual reports
on Form 10-K. In addition, the public accounting firm auditing the company's
financial statements must attest to and report on management's assessment of the
effectiveness of the company's internal controls over financial reporting. This
requirement will apply to our annual report on Form 10-KSB in accordance with
SEC's regulation. If we are unable to conclude that we have effective internal
controls over financial reporting or if our independent auditors are unable to
provide us with an unqualified report as to the effectiveness of our internal
controls over financial reporting as of December 31, 2008 and future year ends
as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could
lose confidence in the reliability of our financial statements, which could
result in a decrease in the value of our securities. We have not yet begun a
formal process to evaluate our internal controls over financial reporting. Given
the status of our efforts, coupled with the fact that guidance from regulatory
authorities in the area of internal controls continues to evolve, substantial
uncertainty exists regarding our ability to comply by applicable deadlines.
There has not been significant trading in our common stock.
Our common stock is quoted on the Over-the-Counter Bulletin Board and to
date, there has been a limited trading market for our common stock. There is a
significant risk that our stock price may fluctuate dramatically in the future
in response to any of the following factors, some of which are beyond our
control:
o variations in our quarterly operating results;
o announcements that our revenue or income are below analysts'
expectations;
o general economic slowdowns;
o changes in market valuations of similar companies;
o sales of large blocks of our common stock;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o Fluctuations in stock market prices and volumes, which are
particularly common among highly volatile securities of
internationally-based companies.
We do not anticipate paying dividends in the foreseeable future.
We have never declared or paid any cash dividends or distributions on our
common stock. We currently intend to retain our future earnings to support
operations and to finance expansion and therefore do not anticipate paying any
cash dividends on our common stock in the foreseeable future.
15
ITEM 2. PROPERTIES
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.
Name of project Geographic location Subsistence area(m(2))
--------------- ------------------- ----------------------
Junjingyuan I North Jinhua Road Xi'an City 29,558.10
Tsining 24G East Erhuan of Xi'an City 27,570.91
Yijing Yuan (Land) South Erhuan of Xi'an City 60,666.00
Junjing Yuan II Dongzhan Road of Xi'an City 69,261.68
Other Projects 10,696.49
----------
Total 197,753.18
==========
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 2006, no matters were submitted to a
vote of our security holders.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Over-The-Counter Bulletin Board system
and the National Association of Securities Dealers (NASD) Electronic Bulletin
Board under the symbol "CHLN.OB." The following table sets forth, for the
periods indicated, the high and low sale prices for our common stock as reported
by the National Quotation Bureau, Inc.
Fiscal Year Ended December 31 High Low
----------------------------- ---- ---
2005
----
Third Quarter (September 15, 2005 - September 30 2005) $0.0125 $0.0063
Fourth Quarter (October 2005 - December 2005) $0.0144 $0.0063
2006
----
First Quarter (January 2006 - March 2006) $0.0625 $0.0144
Second Quarter (April 2006 - April 20, 2006) $0.2475 $0.0625
(April 22 - June 2006) $4.25 $0.25
Third Quarter (July 2006 - September 2006) $3.75 $1.70
Fourth Quarter (October 2006 - December 2006) $3.10 $1.55
On March 29, 2007, the closing bid price of our common stock was $3.30.
As of December 31, 2006, there were approximately 530 holders of record of
our common stock.
RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to a Share Purchase Agreement dated April 21, 2006, the Company
issued 2,000,000 shares of common stock to non-U.S. persons (as contemplated by
Rule902 under the Securities Act of 1933). These issuances are exempt from
registration requirements under Regulation S under the Securities Act of 1933,as
amended. The shares issued pursuant to Regulation S were issued in an "offshore
transaction" as defined in, and pursuant to, Rule 902 under the Securities Act
of 1933 on the basis that the purchaser was not offered the shares in the United
States and did not execute or deliver any agreement in the United States.
On June 28, 2006, the Company entered into securities purchase agreements
with accredited investors and completed the sale of $1,075,000 of common stock
of the Company 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 a period of three years at an exercise price of $3.60 per share.
Pursuant to the terms of the Warrant, 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. New York
Global Securities, Inc. acted as the placement agent of the transaction.
17
In connection with the offering, the Company paid a placement fee of 10% of
the proceeds in cash, together with non-accountable expenses in the amount of 3%
of the proceeds, in cash. In addition, the placement agent was issued warrants
to purchases 66,154 shares of common stock on the same terms and conditions as
the investors.
On July 7, 2006, the Company entered into securities purchase agreements
with accredited investors and completed the sale of $124,975 of common stock of
the Company and common stock purchase warrants. The securities sold were an
aggregate of 38,454 shares of Common Stock and 11,536 Warrants. Each Warrant is
exercisable for a period of three years at an exercise price of $3.60 per share.
Pursuant to the terms of the Warrant, 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. New York
Global Securities, Inc. acted as the placement agent of the transaction.
In connection with the offering, the Company paid a placement fee of 10% of
the proceeds in cash, together with non-accountable expenses in the amount of 3%
of the proceeds, in cash. In addition, the placement agent was issued warrants
to purchases 7,691 shares of common stock on the same terms and conditions as
the investors.
On August 21, 2006, we entered into securities purchase agreements with
accredited investors and completed the sale of $812,500 of our common stock and
common stock purchase warrants. The securities sold were an aggregate of 250,000
shares of common stock and 75,000 warrants. Each warrant is exercisable for a
period of three years at an exercise price of $3.60 per share. Pursuant to the
terms of the warrant, 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 our common stock. New York Global Securities, Inc.
acted as the placement agent of the transaction.
In connection with the offering, we paid a placement fee of 10% of the
proceeds in cash, together with non-accountable expenses in the amount of 3% of
the proceeds, in cash. In addition, the placement agent was issued warrants to
purchases 50,000 shares of common stock on the same terms and conditions as the
investors.
All of the above offerings and sales were deemed to be exempt under
Regulation of the Securities Act of 1933, as amended. No advertising or general
solicitation was employed in offering the securities. The offerings and sales
were made to a limited number of persons, all of whom were accredited investors,
business associates of our company or executive officers of our company, and
transfer was restricted by our company in accordance with the requirements of
the Securities Act of 1933.
The company filed a registration statement on Form SB-2 on August 23, 2006
to register the common stock and the common stock purchase warrants issued in
the offerings described above, which became effective on September 14, 2006.
18
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policy
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The accompanying consolidated financial statements include the accounts of China
Housing & Land Development, Inc. and its wholly owned subsidiary, XTHDC. All
inter-company accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America.
Use of estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Foreign Currency Translation
----------------------------
As of December 31, 2006, the accounts of the Company are maintained in their
functional currency the Chinese Yuan Renminbi (RMB). The reporting currency for
the consolidated financial statements is the United States Dollars (USD) in
accordance with Statement of Financial Accounts Standards ("SFAS") No. 52,
"Foreign Currency Translation," with the RMB as the functional currency.
According to SFAS No. 52, all assets and liabilities were translated at the
exchange rate on the balance sheet date, stockholder's equity are translated at
the historical rates and statement of operations and cash flows are translated
at the weighted average exchange rate for the year. The resulting translation
adjustments are reported under other comprehensive income in accordance with
SFAS No. 130, "Reporting Comprehensive Income."
Revenue recognition
-------------------
Real estate sales are reported in accordance with the provisions of Statement of
Financial Accounting Standard No. 66, "Accounting for Sales of Real Estate".
Profit from the sales of development properties, less 5% business tax, is
recognized by the full accrual method when the sale is consummated. A sale is
not considered consummated until (1) the parties are bound by the terms of a
contract, (2) all consideration has been exchanged, (3) any permanent financing
of which the seller is responsible has been arranged, (4) all conditions
precedent to closing have been performed, (5) the seller does not have
substantial continuing involvement with the property, and (6) the usual risks
and rewards of ownership have been transferred to the buyer.
Sales transactions not meeting all the conditions of the full accrual method are
accounted for using the deposit method of accounting. Under the deposit method,
all costs are capitalized as incurred, and payments received from the buyer are
recorded as a deposit liability. Real estate rental income, less 5% business
tax, is recognized on the straight-line basis over the terms of the tenancy
agreements.
19
For Company financed sales, the Company is recognizing sales based on the full
accrual method provided that the buyer's initial and continuing investment is
adequate according to SFAS No. 66. Initial investment is buyer's down-payment
less the loan amount provided by the Company. Interest on these loans are
amortized over the terms of the loans.
Real estate capitalization and cost allocation
----------------------------------------------
Residential properties completed or under construction are 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, interest on indebtedness, real estate taxes, insurance,
construction overhead and indirect project costs. 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 improvement costs include land, land improvements, interest on
indebtedness and real estate taxes. Appropriate costs are allocated to projects
on the basis of acreage, dwelling units and relative sales value. Land held for
development and improvements are stated at cost or estimated net realizable
value, whichever is lower.
Land and land improvements applicable to condominiums, town homes and
single-family homes, are transferred to construction in progress when
construction commences.
Capitalization of interest
--------------------------
Interest incurred during construction is capitalized into construction in
progress. All other interest is expensed as incurred.
FORWARD LOOKING STATEMENTS
Some of the statements contained in this Form 10-KSB 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 10-KSB, 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:
o Our ability to attract and retain management, and to integrate and
maintain technical information and management information systems;
o Our ability to raise capital when needed and on acceptable terms and
conditions;
o The intensity of competition; and
o General economic conditions.
All written and oral forward-looking statements made in connection with
this Form 10-KSB 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.
20
Results of Operations
Year Ended December 31, 2006 Compared To Year Ended December 31, 2005
Revenue
-------
Our revenues for the year ended December 31, 2006 is $54,099,486, an
increase of $21,313,768, or 65.01%, from $32,785,718 for 2005. Sales of
properties is $53,647,174 for the year ended December 31, 2006, an increase of
$21,197,137, or 65.32%, from $32,450,037 for 2005; Other Income(Rental
contribution) is $452,312 for the year ended December 31, 2006, an increase of
$116,631, or 34.74%, from $335,681 for 2005.
For the year ended December 31, 2006, we had revenues of $39,670,186 for
Tsining JunjingYuan, $13,000,694 for Tsining-24G, $1,428,606 for other projects.
For the same periods last year, we had revenues of $10,598,504 for Tsining
JunjingYuan, $16,505,770 for Tsining-Gangwan, $5,681,444 for other projects.
There are serval reasons for the rapid revenue increase. Firstly, we completed
the construction of Junjing Yuan I in September 2006, and Tsining-24G in June
2006. The total completed construction area covered 1,337,600 sq.ft, including
532,981 sq.ft for Tsining-24G and 804,588 sq.ft for Junjing Yuan I, increased
40% from the 957,637 sq.ft completed area in 2005. Secondly,in 2006 the total
sold area reached 1,515,253 sq.ft, mainly consist of Tsining-24G and Junjing
Yuan I., increase 62.1% from the 854,716 sq.ft sold area in 2005, mainly which
consist of Junjing Yuan I and of Tsining-Gangwan. Thridly, Tsining-24G has
better location and more commercial area than other completed projects, the
average sale price increased from $35.91 per sq.ft in 2005 to $38.55 per sq.ft
in 2006, an annual price increase rate of 7.35%.
We recognize revenue on the full accrual methold of accounting when a sale
is consumated in accordance with our revenue recognition policies. As to
December 31, 2006, according to the US GAAP, we had generated $4,240,324 of
sales that did not meet our revenue recognition policies. We have entered into
contracts with these customers regarding these sales and have received
$1,863,008 as deposits against these sales which have been recorded as advances
from customers on the accompanying balance sheet. We expect to reconginze these
sales in the 2007.
Costs and Expenses
------------------
The cost of properties sold consists of cost of land development,
construction and interior design and decoration. The cost of properties sold for
the year ended December 31, 2006 was $36,749,683 mainly due to Junjing Yuan I
and Tsining-24G, as compared to $21,236,598 in fiscal 2005 mainly due to Junjing
Yuan I and Gangwan. The increase in cost of sales is mainly attributed to more
square feet completed in 2006. And also, Tsining-24G is service apartment and
commercial project, with the unit cost of $49.54 per Sq.ft. that was higher than
residential projects.
Our selling, general and administrative expense for the year ended
December 31, 2006 was $3,197,310, a decrease of $435,317, or 11.98%, from
$3,632,627 for 2005. Selling, general and administrative expense reflects our
overhead expenses such as office rent, management and staff salaries, general
insurance, accounting and legal expenses.
21
Interest Expense
----------------
We incurred interest expense for the year ended December 31, 2006 of
$289,083, a decrease of $452,797, or 61%, from $741,880 for 2005. The main
reason for the decrease was that capitalized interest in 2006 increased by
$289,082 as compared to the prior year. The part of capitalized interest was
reclassified from the "Interest Expense" to "Cost of properties sold" account.
For the year ended December 31, 2006, interest incurred by the Company was
$2,264,670 including capitalized interest for the same period of $1,975,588.
Operating Income before Income Tax
----------------------------------
We had operating income before income taxes of $13,562,252 for the year
ended December 31, 2006, an increase of $6,491,211, or 91.80%, from $7,071,041
for 2005. The increase of the operating income before income taxes is mainly
attributed by Tsining-24G projects, which has higher price margin. In addition,
the total sales area of 2006 was higher than that of 2005.
Net Income
----------
Our net income for the year ended December 31, 2006 was $9,050,810, an
increase of $4,313,213, or 91.04%, from $4,737,597 for 2005. The increase in net
income is attributable to increased sales and higher margin from Tsining-24G in
fiscal 2006.
Liquidity and Capital Resources
-------------------------------
Our principal demands for liquidity are for development of new properties
and future property acquisitions and general corporate purposes. As of December
31, 2006, we had total mortgage indebtedness of $23,206,852 with a weighted
average interest rate of 0.725% per month, payable quarterly. Future scheduled
maturities of mortgages payable are as follows: August 7, 2007 -- $5,128,000;
May 25, 2007 -- $2,564,000; July 7, 2007 -- $2,564,000; September 20, 2007 --
$503,826; June 27, 2007 -- $403,830; May 6, 2007 -- $4,107,528; June 6, 2007 --
$2,564,000; Dec 31, 2007 -- $ 6,410,000; various loan at various interest rate
-- $ 1,525,668. The mortgage debt is secured by assets of the Company.
As of December 31, 2006, we had $1,487,904 of cash and cash equivalents on
hand, an increase of $1,457,158 from $30,746 of cash and cash equivalents on
hand as of December 31, 2005.
As of December 31, 2006 accounts payable was $5,324,815 and other payables
was $2,572,838. Our operating activities generated net cash of $6,343,346 during
the twelve months ended Dec 31, 2006. As of December 31, 2006, we had $9,730,650
of properties under construction, a decrease of $31,757,434, compared to
$41,488,084 of properties under construction as of December 31, 2005.
Receivables, deferred charges and other assets were $986,039. Advances to
suppliers decreased $11,930,759, for the twelve months ended Dec 31, 2006.
Accounts payable increased $2,716,495, other payables decreased $266,309, and
accrued expenses increased $1,625,843, while unearned revenues (Advances from
customers) decreased $28,428,381.
We used net cash of $14,680,870 in investing activities during the twelve
months ended December 31, 2006 primarily due to the $13,269,773 for the payment
for fixed assets purchased. During the twelve months ended December 31, 2006
financing activities provided net cash of $8,696,388, as a result of receiving
$14,851,854 of loan proceedes and $7,905,887 of loan re-payments made during the
twelve months ended December 31, 2006 and the net proceeds from issuance of
619,223 shares of our common stock.
22
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 possible cash investments. 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.
The majority of our 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 arrangement
-----------------------------
We do not have any off-balance sheet arrangement.
23
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
China Housing & Land Development Inc.
We have audited the accompanying consolidated balance sheet of China Housing &
Land Development Inc. and subsidiary as of December 31, 2006, and the related
consolidated statements of income and other comprehensive income, shareholders'
equity, and cash flows for the year 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 audit. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The consolidated financial statements
of China Housing & Land Development Inc. and subsidiary as of December 31, 2005
in the accompanying consolidated financial statements were audited by other
auditors whose report dated February 23, 2006 expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an 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
evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of China Housing & Land
Development Inc and subsidiary as of December 31, 2006, and the results of its
operations and its cash flows for each of the years then ended December 31, 2006
in conformity with accounting principles generally accepted in the United States
of America.
/S/ Moore Stephens Wurth Frazer and Torbet, LLP
-----------------------------------------------
Walnut, California
March 26, 2007
F-1
RIDER A
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
Xi'an Tsining Housing Development Co., Ltd.
We have audited the accompanying statements of income, stockholders' equity and
cash flows of Xi'an Tsining Housing Development Co., Ltd. (the "Company"), a
wholly owned subsidiary of China Housing and Land Development, Inc. for the year
ended December 31, 2005. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of the operations and cash flows of Xi'an
Tsining Housing Development Co., Ltd. for the year ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
/S/ Kabani & Company, Inc.
------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California
February 23, 2006
F-2
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2006
ASSETS
Cash $ 379,633
Cash - restricted 1,108,271
Accounts receivable, net of allowance for doubtful
accounts of $79,118 3,070,516
Notes receivable, net 2,127,271
Inventories
Finished projects $ 37,247,436
Construction in progress 9,730,650
------------
Total real estate held for development or sale 46,978,086
Property and equipment, net 17,701,896
Advance to suppliers 493,570
Receivables, deferred charge and other assets 986,039
------------
Total assets $ 72,845,282
============
LIABILITIES
Accounts payable $ 5,324,815
Advances from customers 2,902,426
Accrued expenses 1,738,584
Payable to original shareholders 5,462,798
Income and other taxes payable 11,386,169
Other payables 2,572,838
Loans from employees 1,037,842
Loans payables 23,206,852
------------
Total liabilities 53,632,324
------------
SHAREHOLDERS' EQUITY
Common stock: $.001 par value, authorized 100,000,000 shares 20,619
issued and outstanding 20,619,223
Additional paid in capital 7,192,600
Statutory reserves 2,150,138
Retained earnings 14,414,181
Capital contribution receivable (5,462,798)
Accumulated other comprehensive income 898,218
------------
Total shareholders' equity 19,212,958
------------
Total liabilities and shareholders' equity $ 72,845,282
============
The accompanying notes are an integral part of this statement.
See report of independent registered public accounting firm.
F-3
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
----------- -----------
REVENUE
Sale of properties $53,647,174 $32,450,037
Other income 452,312 335,681
----------- -----------
Total revenue 54,099,486 32,785,718
----------- -----------
COSTS AND EXPENSES
Cost of properties sold 36,749,683 21,236,598
Selling, general and administrative expenses 3,197,310 3,632,627
Other expense 301,158 103,572
Interest expense 289,083 741,880
----------- -----------
Total costs and expense 40,537,234 25,714,677
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 13,562,252 7,071,041
PROVISION FOR INCOME TAXES 4,511,442 2,333,444
----------- -----------
NET INCOME 9,050,810 4,737,597
GAIN ON FOREIGN EXCHANGE 655,435 242,783
----------- -----------
OTHER COMPREHENSIVE INCOME $ 9,706,245 $ 4,980,380
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 20,277,615 20,000,000
=========== ===========
EARNINGS PER SHARE
BASIC AND DILUTED $ 0.45 $ 0.24
=========== ===========
The accompanying notes are an integral part of this statement.
See report of independent registered public accounting firm.
F-4
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 2006 AND 2005
Owner Other
Common Stock Paid in Statutory Retained contribution comprehensive
capital reserves earnings receivable income (loss) Totals
---------------------- ----------- ----------- ------------ ------------ ---------- -------------
BALANCE, December 31, 20,000,000 20,000 5,442,798 $ 523,538 $ 2,252,373 $ - $ - $ 8,238,709
2004
Net Income 4,737,598 4,737,598
Adjustment to
statutory reserve 710,640 (710,640) -
Foreign currency
translation
adjustment 242,783 242,783
---------- ---------- ----------- ----------- ------------- ------------ ---------- -------------
BALANCE, December 31, 20,000,000 $ 20,000 $ 5,442,798 $ 1,234,178 $ 6,279,331 $ - $ 242,783 $ 13,219,090
2005
Common stock issued
for cash at $3.25 619,223 619 1,749,802 1,750,421
Net Income 9,050,810 9,050,810
Adjustment to statutory
reserve 915,960 (915,960) -
Capital contribution
receivable (5,462,798) (5,462,798)
Foreign currency
translation
adjustment 655,435 655,435
---------- ---------- ----------- ----------- ------------- ------------ ---------- -------------
BALANCE, December 31,
2006 20,619,223 $ 20,619 $ 7,192,600 $ 2,150,138 $ 14,414,180 $ (5,462,798) $ 898,218 $ 19,212,958
========== ========== =========== =========== ============= ============ ========== =============
The accompanying notes are an integral part of this statement.
See report of independent registered public accounting firm.
F-5
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,050,810 $ 4,737,597
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Allowance for bad debt 509,435 82,371
Depreciation 354,444 124,404
Gain on disposal of fixed assets and inventory (149,830) --
Loss on investment -- 6,597
(Increase) decrease in assets:
Accounts receivable (431,805) --
Real estate 3,640,231 (2,613,747)
Advance to suppliers 11,930,759 (6,672,673)
Other receivable and deferred charge (1,118,155) (1,248,884)
Increase (decrease) in liabilities:
Accounts payable 2,716,495 (1,737,640)
Advances from customers (28,428,381) 3,913,777
Accrued expense 1,625,843 2,596,303
Other payable (266,309) (123,000)
Income and other taxes payable 6,909,809 (2,242,998)
------------ ------------
Net cash provided by (used in) operating activities 6,343,346 (3,177,893)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash 591,312 1,586,420
Proceed from sale of long term investment -- 492,000
Purchase of buildings, equipment and automobiles (13,269,773) (2,834,214)
Proceed from sale of fixed assets 243,616 --
Notes receivable funded (2,246,025) --
------------ ------------
Net cash used in investing activities (14,680,870) (755,794)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan proceeds 13,835,303 14,760,000
Payments on loans (7,905,887) (10,824,000)
Loans from employees 1,016,551 --
Proceeds from issuance of common stock 1,750,421 --
------------ ------------
Net cash provided by financing activities 8,696,388 3,936,000
------------ ------------
INCREASE IN CASH 358,864 2,313
EFFECTS ON FOREIGN CURRENCY EXCHANGE (9,976) 706
CASH, beginning of year 30,745 27,726
------------ ------------
CASH, end of year $ 379,633 $ 30,745
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest expense $ 2,147,800 $ 170,928
============ ============
Cash paid for income taxes $ -- $ 2,476,096
============ ============
The accompanying notes are an integral part of this statement.
See report of independent registered public accounting firm.
F-6
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Note 1 - Organization and Basis of Presentation
Organization
------------
China Housing & Land Development, Inc (the "Company") is a Navada
corporation, incorporated on July 6, 2004 under the name Pacific Northwest
Productions Inc. On May 6, 2006, the Company changed its name to China Housing
& Land Development Inc. The Company, through its subsidiary Xian Tsining
Housing Development Company Inc. (XTHDC), is engaged in acquisition,
development, management, and sale of commercial and residential real estate
properties located primarily in Xi'an city, the People's Republic of China
(PRC).
XTHDC was established during May 1992 as a state-owned enterprise, whose former
name is Xian New Star Group Real Estate Development Co. Ltd, and was formerly
the logistics department of Lan Zhou Military area of the People's Liberation
Army of China. The Company was reorganized as a limited liability company with
equity capital invested by management personnel in September 1999. The Company
is a Chinese registered limited liability company with a legal structure similar
to a regular corporation and a limited liability company. The Articles of
Association provide for a 54 year term beginning September 7, 1999 with
registered capital of approximately $3,140,000 (RMB26,000,000). On March 28,
2002, the registered capital of Tsining was increased to approximately
$6,050,000 (RMB50,000,000).
On April 21, 2006, XTHDC entered into and closed a share purchase agreement with
Pacific Northwest Productions, Inc. ("Pacific"), a public shell in the United
States of America incorporated in the state of Nevada. Pursuant to the purchase
agreement, Pacific acquired all of the issued and outstanding capital stock of
XTHDC in exchange for 16,000,000 (post-split) shares of Pacific's common stock.
Concurrently with the closing of the purchase agreement and as a condition
thereof, Pacific entered into an agreement with Deljit Bains and Davinder Bains,
its 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 merger, XTHDC's stockholders own approximately 80% of the
combined company and the directors and executive officers of XTHDC became the
directors and executive officers of Pacific. Accordingly, the transaction has
been accounted for as a reverse acquisition of Pacific by XTHDC resulting in a
recapitalization of XTHDC rather than as a business combination. XTHDC is deemed
to be the purchaser and surviving company for accounting purposes. Accordingly,
its assets and liabilities are included in the balance sheet at their historical
book values and the results of operations of XTHDC have been presented for the
comparative prior period.
See report of independent registered public accounting firm
F-7
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
In addition, May 5, 2006, Pacific changed it name to China Housing & Land
Development, Inc. (hereafter referred to as the "Company") 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.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
-----------------------------------------------------
The accompanying consolidated financial statements include the accounts of China
Housing & Land Development, Inc. and its wholly owned subsidiary, XTHDC. All
inter-company accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America.
Use of estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Foreign Currency Translation
----------------------------
As of December 31, 2006, the accounts of the Company are maintained in their
functional currency the Chinese Yuan Renminbi (RMB). The reporting currency for
the consolidated financial statements is the United States Dollars (USD) in
accordance with Statement of Financial Accounts Standards ("SFAS") No. 52,
"Foreign Currency Translation," with the RMB as the functional currency.
According to SFAS No. 52, all assets and liabilities were translated at the
exchange rate on the balance sheet date, stockholder's equity are translated at
the historical rates and statement of operations and cash flows are translated
at the weighted average exchange rate for the year. The resulting translation
adjustments are reported under other comprehensive income in accordance with
SFAS No. 130, "Reporting Comprehensive Income."
Revenue recognition
-------------------
Real estate sales are reported in accordance with the provisions of Statement of
Financial Accounting Standard No. 66, "Accounting for Sales of Real Estate".
Profit from the sales of development properties, less 5% business tax, is
recognized by the full accrual method when the sale is consummated. A sale is
not considered consummated until (1) the parties are bound by the terms of a
contract, (2) all consideration has been exchanged, (3) any permanent financing
of which the seller is responsible has been arranged, (4) all conditions
precedent to closing have been performed, (5) the seller does not have
substantial continuing involvement with the property, and (6) the usual risks
and rewards of ownership have been transferred to the buyer.
Sales transactions not meeting all the conditions of the full accrual method are
accounted for using the deposit method of accounting. Under the deposit method,
all costs are capitalized as incurred, and payments received from the buyer are
recorded as a deposit liability. Real estate rental income, less 5% business
tax, is recognized on the straight-line basis over the terms of the tenancy
agreements.
See report of independent registered public accounting firm
F-8
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
For Company financed sales, the Company is recognizing sales based on the full
accrual method provided that the buyer's initial and continuing investment is
adequate according to SFAS No. 66. Initial investment is buyer's down-payment
less the loan amount provided by the Company. Interest on these loans are
amortized over the terms of the loans.
Real estate capitalization and cost allocation
----------------------------------------------
Residential properties completed or under construction are 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, interest on indebtedness, real estate taxes, insurance,
construction overhead and indirect project costs. 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 improvement costs include land, land improvements, interest on
indebtedness and real estate taxes. Appropriate costs are allocated to projects
on the basis of acreage, dwelling units and relative sales value. Land held for
development and improvements are stated at cost or estimated net realizable
value, whichever is lower.
Land and land improvements applicable to condominiums, town homes and
single-family homes, are transferred to construction in progress when
construction commences.
Capitalization of interest
--------------------------
Interest incurred during construction is capitalized into construction in
progress. All other interest is expensed as incurred.
For the year ended December 31, 2006, interest incurred by the Company was
$2,245,021 and capitalized interest for the same period was $1,975,588.
Concentrations
--------------
The Company sells residential and commercial units to residents and small
business owners. The Company has no major customer that is accounted for more
than 5% of the Company's sales for the year ended December 31, 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 41% for the year ended December
31, 2006.
See report of independent registered public accounting firm
F-9
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Accounts payables to these subcontractors/suppliers amounted to $2,070,834 at
December 31, 2006.
The Company's operations are carried out in the People's Republic of China.
Accordingly, the Company's business, financial condition and results of
operations may be influenced by the political, economic and legal environments
in the People's Republic of China, by the general state of the People's Republic
of China'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 demand deposits in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at December
31, 2006 amounted to $353,762, of which no deposits are covered by insurance.
The Company has not experienced any losses in such accounts and believes it is
not exposed to any risks on its cash in bank accounts.
Restricted cash
---------------
The bank grants mortgage loans to home purchasers and will credit these amounts
to the Company's bank account once title passes. If the houses 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 has obtained the ownership documents to secure the
mortgage loan. Total restricted cash amounted to $1,108,271 as of December 31,
2006.
Accounts receivable-trade
-------------------------
Accounts receivable-trade 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 presented net of an allowance for
doubtful accounts of $3,070,516 at December 31, 2006.
See report of independent registered public accounting firm
F-10
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Notes receivable
----------------
In 2006, the Company began financing sales to certain new home owners. Financing
agreements are signed and the loans are due in 1 to 3 years. The loans are
non-interest bearing, therefore the Company calculated imputed interest totaling
$34,710 and discounted the carrying amount of note receivable. The Company will
start to amortize the interest in the year, 2007. Notes receivable are presented
net of unamortized interest and allowance for doubtful accounts.
Notes receivable $ 2,290,378
Less: unamortized interest (34,710)
Less: allowance for doubtful accounts (128,397)
--------------
Notes receivable, net $ 2,127,271
==============
Other receivables
-----------------
Other receivables consist of various cash advances to unrelated companies and
individuals which the management of the Company have business relationships.
These amounts are not related to operations of the Company, are unsecured,
non-interest bearing and generally are short term in nature. The balances of
other receivables were $1,282,831 as December 31, 2006. Other receivables are
reviewed annually as to whether their carrying value has become impaired. As of
December 31, 2006, the Company has established an allowance for doubtful
accounts of $301,920.
Advances to suppliers
---------------------
Advances to suppliers consist of amounts paid in advance to contractors and
vendors for services and materials that have not been performed or received and
generally relate to the development and construction of residential units in the
PRC. Advances amounted to $493,570 as of December 31, 2006.
Inventories
-----------
Inventories consist of residential and commercial units under construction and
units completed. Inventories are stated at the lower of cost or net realizable
value. If the inventory is determined to be impaired, it will be written down to
its fair market value. Inventory costs include land use right, land development
and home construction costs, engineering costs, insurance costs, wages, real
estate taxes, and interest related to development and construction. All costs
are accumulated by specific projects and allocated to residential and commercial
units within the respective projects. The Company leases the land for the
residential unit sites under land use rights with various terms from the
government of the PRC. The Company evaluates the carrying value for impairment
based on the undiscounted future cash flows of the assets. Write-downs of
inventories deemed to be impaired would be recorded as adjustments to the cost
basis. Impairment charges of $79,665, and $0 were recorded for the years ended
December 31, 2006 and 2005, respectively.
See report of independent registered public accounting firm
F-11
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
No depreciation is provided for construction in progress. Construction overhead
and selling expenses are expensed as incurred.
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 years ended December 31, 2006 and 2005 amounted to $354,444 and
$124,404, respectively. Estimated useful lives of the assets are as follows:
Estimated Useful Life
---------------------
Buildings 30 years
Vehicles 6 years
Electronic equipment 5 years
Office furniture 5 years
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Major additions and betterment to property and equipment are
capitalized.
Long-lived assets
-----------------
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." The Company periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with SFAS 144. SFAS 144 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 market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal. Based on its
review, the Company believes there was no impairments of its long-lived assets
as of December 31, 2006.
Fair value of financial instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable, accrued liabilities and other payables to approximate their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest.
Management believes the interest rate on notes reflect rates currently
available. Thus, the carrying value of loans payable approximates fair value.
See report of independent registered public accounting firm
F-12
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Advances from customers
-----------------------
Advances from customers represent prepayments by customers for home purchases.
The Company records such prepayment as advances from customers when the payments
are received. Advances from customers amounted to $2,902,426 at December 31,
2006.
Accounts payable
----------------
Accounts payable consists of balances due to subcontractors and suppliers for
the purchase of construction services. Accounts payable amounted to $5,324,815
at December 31, 2006.
Other payable
-------------
Other payables consist of various cash advances from unrelated companies and
individuals which management of the Company have business relationships. These
amounts are not related to operations of the Company, are unsecured,
non-interest bearing and generally are short term in nature. Other payables
amounted to $2,572,838 as of December 31, 2006.
Employee compensation
---------------------
The Company has a bonus compensation plan for its executive officers and
employees if certain goals are met. The total amount of bonus compensation
charged to selling, general and administrative expense under this plan was $0
and $81,208 for the years ended December 31, 2006 and 2005, respectively.
Advertising Costs
-----------------
Advertising and sales promotion costs are expensed as incurred. Advertising
expense totaled $565,577 and $533,021 for the years ending December 31, 2006 and
2005 respectively.
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 cost of the project. Any
excess amounts are expensed in the period when they occur. Many of the items
relating to workmanship are completed by the existing labor force utilized to
construct other new houses and are therefore already factored into the labor and
overhead costs of another project. 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, 2006 and 2005, the Company accrued $68,682 and
$66,502 as warranty costs, respectively.
See report of independent registered public accounting firm
F-13
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
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, 2006 and 2005, there were no
significant book to tax differences
Local PRC income tax
--------------------
The Company is governed by the Income Tax Law of the PRC concerning Chinese
registered limited liability company. Under the Income Tax Laws of the PRC,
Chinese enterprises are generally subject to an income tax at an effective rate
of 33% (30% state income taxes plus 3% local income taxes) 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. The provision for income taxes at December
31, 2006 consisted of the following:
2006 2005
------------- ------------
Provision for China income and local tax $ 4,511,442 $ 2,333,444
Deferred taxes -- --
------------- ------------
Total provision for income taxes $ 4,511,442 $ 2,333,444
============= ============
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate at December 31,
2006 2005
--------- ---------
U.S. statutory rates 34.0% 34.0%
Foreign income not recognized in USA (34.0) (34.0)
China income taxes 33.0 33.0
--------- ---------
Totals 33.0% 33.0%
========= =========
Basic and diluted earning per share
-----------------------------------
Earning per share is calculated in accordance with the Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per share". SFAS No.
128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net earning
per share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net earning per share is based upon the weighted average
number of common shares outstanding. Diluted net earning per share is based on
the assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method.
See report of independent registered public accounting firm
F-14
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
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 period.
At December 31, 2006, the Company had outstanding 309,612 warrants. The average
stock price for the twelve months ended December 31, 2006 was less than the
exercise price of the warrants; therefore, the warrants are not factored into
the diluted earning per share calculation as they are anti-dilutive.
Comprehensive income
--------------------
Comprehensive income consists of net income and foreign currency translation
gains and losses affecting shareholders' equity that, under generally accepted
accounting principle, are excluded from net income. Gain on foreign exchange
translation totaled $ 655,435 and $242,783 for 2006 and 2005, respectively.
Statement of Cash Flows
-----------------------
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows," cash flows from the Company's operations is
calculated based upon the local currencies. 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.
Recent Pronouncements
---------------------
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument.
This statement is effective for all financial instruments acquired or issued
after the beginning of the Company's first fiscal year that begins after
September 15, 2006. The Company has not evaluated the impact of this
pronouncement on its financial statements.
See report of independent registered public accounting firm
F-15
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
In March 2006 FASB issued SFAS 156 'Accounting for Servicing of Financial
Assets' this Statement amends FASB Statement No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. This Statement:
1. Requires an entity to recognize a servicing asset or servicing liability
each time it undertakes an obligation to service a financial asset by entering
into a servicing contract.
2. Requires all separately recognized servicing assets and servicing
liabilities to be initially measured at fair value, if practicable.
3. Permits an entity to choose 'Amortization method' or Fair value measurement
method' for each class of separately recognized servicing assets and servicing
liabilities.
4. At its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with recognized
servicing rights, without calling into question the treatment of other
available-for-sale securities under Statement 115, provided that the
available-for-sale securities are identified in some manner as offsetting the
entity's exposure to changes in fair value of servicing assets or servicing
liabilities that a service elects to subsequently measure at fair value.
5. Requires separate presentation of servicing assets and servicing
liabilities subsequently measured at fair value in the statement of financial
position and additional disclosures for all separately recognized servicing
assets and servicing liabilities. An entity should adopt this Statement as of
the beginning of its first fiscal year that begins after September 15, 2006.
Management believes that this statement will not have a significant impact on
its financial statements.
In September 2006, FASB issued SFAS 157 `Fair Value Measurements'. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on its financial statements. In
September 2006, FASB issued SFAS 158 `Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans--an amendment of FASB Statements No. 87,
88, 106, and 132(R)' This Statement improves financial reporting by requiring an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
See report of independent registered public accounting firm
F-16
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
not-for-profit organization. This Statement also improves financial reporting by
requiring an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is
required to recognize the funded status of a defined benefit postretirement plan
and to provide the required disclosures as of the end of the fiscal year ending
after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements. The requirement to measure
plan assets and benefit obligations as of the date of the employer's fiscal
year-end statement of financial position is effective for fiscal years ending
after December 15, 2008. The management is currently evaluating the effect of
this pronouncement on its financial statements.
Note 3 - Supplemental disclosure of cash flow information
Income taxes paid amounted to $0 and $2,476,096 for the years ended December,
2006 and 2005, respectively. Interest paid for the year ended December 31, 2006
and 2005 amounted to $2,147,800 and $170,928, respectively.
Noncash investing transactions included the exchange of certain inventory units
costing $492,757 for certain units in a hotel valued at $703,296. The result of
the exchange is a gain of $210,296 which was included in other income as
disclosed in Note 15.
Noncash financing transactions included the issuance of 16,000,000 shares of
common stock to the original shareholders of XTHDC in consideration of a
promissory note totaling $5,462,797 which was due on December 31, 2007.
Note 4 - Inventories
The following summarizes the components of real estate inventories at December
31, 2006:
Finished projects $ 37,247,436
Construction in progress 9,730,650
-------------
Total real estate held for development or sale $ 46,978,086
=============
Note 5 - Receivables, deferred charges and other assets
Receivables, deferred charges and other assets consist of the following at
December 31, 2006:
See report of independent registered public accounting firm
F-17
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Other receivable $ 1,282,831
Allowance for bad debts (301,920)
Prepaid expenses 5,128
-------------------
Receivables, deferred charges and
other assets $ 986,039
===================
Note 6 - Property and equipment, net
Property and equipment consist of the following at December 31, 2006:
Buildings and improvements $ 18,255,045
Machinery and equipment 117,081
Transportation equipment 55,598
Furniture and fixture 95,519
--------------------
Totals 18,523,243
Accumulated depreciation (821,347)
--------------------
Property and equipment, net $ 17,701,896
====================
Note 7 - Accounts receivable
Accounts receivable consist of the following at December 31, 2006:
Accounts receivable $ 3,149,634
Allowance for doubtful (79,118)
accounts
--------------------
Accounts receivable, net $ 3,070,516
====================
Note 8 - Loans from employees
The Company has borrowed monies 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. At December 31, 2006, loan from
employees amounted to $1,037,842. Total interest expense on these loans amounted
to $80,440 and $117,602 for 2006 and 2005, respectively.
Note 9 - Loans payable
Loans payable represent amounts due to various banks and are due on demand or
normally within one year. These loans generally can be renewed with the banks
when expired. Loans payable at December 31, 2006 consisted of the following:
See report of independent registered public accounting firm
F-18
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Commercial Bank Weilai Branch
due August 7, 2007, annual interest rate
is at 9.945%, secured by the Company's
Xin Xin Gangwan, Xin Xin Tower and
Ming Yuan Projects $ 5,128,000
Shannxi International Trust Investment Co.,
due on demand, annual interest is at
10.80%, secured by 14 units of the
Company's Xin Xin In House and Harbor
projects 2,564,000
Shannxi International Trust Investment Co.,
due September 20, 2007, annual interest
is at 10.80%, secured by six commercial
units of the Company's Jun Jin Yuan project 503,826
Merchant bank Xi'an high and new technology
development zone branch, due June 27, 2007
annual interest is at 19.20%, secured by the
Company's Jun Jin Yuan project 403,830
Construction Bank Zhuque Road Branch,
due May 6, 2007, annual interest is at 6.21%,
secured by the Company's Jun Jin Yuan project 4,107,528
Construction Bank Zhuque Road Branch,
due July 6, 2007, annual interest is at 6.91%,
secured by the Company's Jun Jin Yuan project 2,564,000
Commercial Bank Weilai Branch,
due December 31, 2007, annual interest is at
9.79%, secured by the Company's 24G project 6,410,000
Various loans on demand,
to unrelated parties, at various interest rate 1,525,668
------------
Total $ 23,206,852
============
All loans were borrowed for construction projects. All interest paid was
capitalized and allocated to various construction projects.
Note 10 - Accrued Expenses
Accrued expenses at December 31, 2006 are as follows:
Accrued payroll $ 13,294
Accrued expenses 1,725,290
-------------
Total $ 1,738,584
=============
See report of independent registered public accounting firm
F-19
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Note 11 - Stockholders' Equity
Common stock
------------
On June 28, 2006, the Company entered into securities purchase agreements with
accredited investors and completed the sale 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 a period of three years at an exercise price of $3.60 per share.
Pursuant to the terms of the warrant, 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. New York
Global Securities, Inc. acted as the placement agent of the transaction.
The Company is obligated to file a registration statement registering the resale
of shares of the Company's common stock and those issuable upon exercise of the
warrants. If the registration statement is not filed within 45 days from the
date of investment, or declared effective within 60 days thereafter (135 days if
the registration statement receives a full review by the SEC), or if the
registration is suspended other than as permitted in the registration rights
agreement between the Company and the investors, the Company is obligated to pay
the investors certain fees in the amount of 1% of the aggregate amount invested,
per month, and the obligations may be deemed to be in default.
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.
On July 7, 2006, the Company entered into securities purchase agreements with
accredited investors and completed the sale of $124,975 of the Company's common
stock and common stock purchase warrants. The securities sold were an aggregate
of 38,454 shares of common stock and 11,536 warrants. Each warrant is
exercisable for a period of three years at an exercise price of $3.60 per share.
Pursuant to the terms of the warrant, 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. New York
Global Securities, Inc. acted as the placement agent of the transaction.
See report of independent registered public accounting firm
F-20
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
The Company is obligated to file a registration statement registering the resale
of shares of the Company's Common Stock and those issuable upon exercise of the
Warrants. If the registration statement is not filed within 45 days from the
date of investment, or declared effective within 60 days thereafter (135 days if
the registration statement receives a full review by the SEC), or if the
registration is suspended other than as permitted in the registration rights
agreement between the Company and the investors, the Company is obligated to pay
the investors certain fees in the amount of 1% of the aggregate amount invested,
per month, and the obligations may be deemed to be in default.
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
purchases 7,691 shares of common stock on the same terms and conditions as the
investors.
On August 21, 2006, the Company entered into securities purchase agreements with
accredited investors and completed the sale of $812,500 of the Company's common
stock and common stock purchase warrants. The securities sold were an aggregate
of 250,000 shares of common stock and 75,000 warrants. Each warrant is
exercisable for a period of three years at an exercise price of $3.60 per share.
Pursuant to the terms of the warrant, 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. New York
Global Securities, Inc. acted as the placement agent of the transaction.
The Company is obligated to file a registration statement registering the resale
of shares of the Company's Common Stock and those issuable upon exercise of the
Warrants. If the registration statement is not filed within 45 days from the
date of investment, or declared effective within 60 days thereafter (135 days if
the registration statement receives a full review by the SEC), or if the
registration is suspended other than as permitted in the registration rights
agreement between the Company and the investors, the Company is obligated to pay
the investors certain fees in the amount of 1% of the aggregate amount invested,
per month, and the obligations may be deemed to be in default.
In connection with the offering, the Company paid a placement fee of 10% of the
proceeds in cash, together with non-accountable expenses in the amount of 3% of
the proceeds, in cash. In addition, the placement agent was issued warrants to
purchases 50,000 shares of common stock on the same terms and conditions as the
investors.
See report of independent registered public accounting firm
F-21
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
Warrants
--------
Following is a summary of the warrant activity:
Weighted
Average
Warrants Exercise Aggregate
outstanding Price Intrinsic Value
Outstanding, December 31, 2006 - - -
Granted 309,612 -
Forfeited - -
Exercised - -
------------
Outstanding, December 31, 2006 309,612 $3.60 $ 0
============
Following is a summary of the status of warrants outstanding at December 31,
2006:
Outstanding Warrants Exercisable Warrants
Average
Remaining
Exercise Number Contractual Average Exercise
Price Life Price Number
$3.60 309,612 2.57 $3.60 309,612
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 and statutory public welfare fund
for staff and workers. 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.
The proportion of allocation for statutory public welfare fund and enterprise
expansion fund is decided by the enterprise itself. A wholly-owned Foreign
Invested Enterprise does not have to establish or contribute to an enterprise
expansion fund.
Statutory surplus reserves are to be utilized to offset prior years' losses, or
to increase its share capital. When the statutory surplus reserve fund of 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 the 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. Pursuant to the board of directors' resolution, the Company
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 Company's registered capital.
See report of independent registered public accounting firm
F-22
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
The transfer to this reserve must be made before distributions of any dividends
to shareholders. For the year ended December 31, 2006, the Company appropriated
$915,960 to this surplus reserve.
Note 12 - 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, 2006, the Company made contributions
in the amount of $13,922.
Note 13 - Earnings Per Share
Earnings per share for twelve months December 31, 2006 and 2005 were determined
by dividing net income for the periods by the weighted average number of both
basic and diluted shares of common stock and common stock equivalents
outstanding. There were no common stock equivalents that were dilutive during
the twelve months December 31, 2006; accordingly, basic and diluted earning per
share were the same for all periods presented.
Notes 14 - Other Income
The Company also rents certain portion of its residential and commercial units
to individuals and businesses for a 1 year term renewed annually. Rental income
and other income and expense for the year ended December 31 consisted of the
following:
2006 2005
-------- --------
Interest income $ 30,395 $ 45,545
Other nonoperating income 58,543 139,236
House rental income 213,544 144,678
Gain on disposal of fixed assets and inventory 149,830 --
Gain on disposal of fixed assets -- 6,222
-------- --------
Total $452,312 $335,681
======== ========
Note 15 - Commitments and Contingencies
The Company leases part of its office space under long-term, non-cancelable
operating lease agreements. The leases expire on 12/31/2008.
See report of independent registered public accounting firm
F-23
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
The following is a schedule of future minimum rental payments required under the
operating lease agreements:
Year ending Office
December 31 Lease
-----------
2007 $ 65,783
2008 65,783
-----------
131,566
===========
Rental expense for the 2006 and 2005 amounted to $70,178 and $64,017,
respectively.
Note 17 - Subsequent Events
On March 9, 2007, the Company entered into a Shares Transfer Agreement (the
Agreement) with the shareholders of Xi'an New Land Development Co., Ltd. (New
Land), pursuant to which the Company 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 RMB, 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 RMB,
estimated to be approximately US$610,000, payable within 20 days after the
signing of the Agreement, an additional cash payment of 57 million RMB,
estimated to be approximately US$7.2 million, payable within 30 days after the
Company has received a satisfactory audit report of New Land, and the issuance
of 10% promissory note of the aggregate amount of 208 million RMB, estimated to
be approximately US$26.2 million, with a maturity date of January 30, 2009.
See report of independent registered public accounting firm
F-24
ITEM 8. 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 September 30, 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, 2006 the Company has engaged Moore Stephens Wurth
Frazer and Torbet. LLP, Certified Public Accountant and Consultants ("Moore
Stephens") with address at 1199 South Fairway Drive, Suite 200 Walnut,
California 91789, 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.
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.
Item 8A. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Disclosure controls and procedures
are the controls and other procedures that we designed to ensure that we record,
process, summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the Securities and Exchange
Commission under the Exchange Act. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
report.
24
Disclosure controls and procedures are controls and procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Securities Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
is accumulated and communicated to management, including our principal executive
officer and our principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting.
During the year ended December 31, 2006, there was no change in our
internal control over financial reporting (as such term is defined in Rule
13a-15(f)under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 8B. OTHER INFORMATION.
25
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE
GOVERNANCE COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Executive Officers and Directors
Below are the names and certain information regarding our executive officers and
directors.
Name Age Position
------------- --- --------
Lu Pingji 56 Chairman of the Board and Chief Executive Officer
Xiao Genxiang 44 Chief Administrative Officer and Director
Feng Xiaohong 42 Chief Operating Officer and Director
Wan Yulong 44 Chief Financial Officer
Shi Zhiyong 46 Vice President, Chief Legal Counsel 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
Lu Pingji, Chairman & CEO
Mr. Lu Pingji, 56, has served as the Chairman of the Board of Directors 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 its 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. 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.
Xiao Genxiang, Chief Administrative Officer & Director
Mr. Xiao Genxiang, 44, the Chief Administrative Officer of the Company, joined
the company and became CAO and Board Member in September 1999. In addition, Mr.
Xiao was a director and Executive Vice President of Lanbo Financial Investment
Company Group Limited from October 2003 until its merger with Lanbo Financial
Group, Inc., when Mr. Xiao served as the Executive Vice President, Chief
Operating Officer and a director of Lanbo Financial Group, Inc. until December
2005. Prior to that Mr. Xiao was a director and President of Xian Newstar Real
Estate Development Co., Ltd. from 1999. Mr. Xiao received an M.B.A from Xi'an
Jiaotong University in 2001.
Feng Xiaohong, Chief Operating Officer & Board Member
Mr. Feng Xiaohong, 42, 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. 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.
26
Mr. Wan Yulong, Chief Financial Officer
Mr. Wan Yulong, 44, has been Chief Financial Officer of the Company since
joining in June 2003. In addition, Mr. Wan was the Chief Financial Officer of
Lanbo Financial Investment Company Group Limited from October 2003 until its
merger with Lanbo Financial Group, Inc., when Mr. Wan served as the Chief
Financial Officer of Lanbo Financial Group, Inc. until December 2005. From July
1999 to May 2003, Mr. Wan was CFO of Xi'an Royal Hotel. From September 1996 to
July 1999, Mr. Wan was working for Xi'an Huadi Accountant Office. From January
1993 to September 1995, Mr. Wan was director of finance and vice president of
Xi'an Minerals Development Company. From August 1984 to December 1993, Mr. Wan
was the Financial Director of Northwest Geological Company of National
Architecture-Material Bureau. Mr. Wan is a CPA, and director of the Accountant
Association of Shaanxi Foreign Investment Corporations. Mr. Wan received an
M.B.A from Xi'an Jiaotong University in 2000.
Mr. Shi Zhiyong, Vice President, Chief Legal Counsel and Board Member
Mr. Shi Zhiyong, 46, joined the Company and became Chief Legal Counsel and board
member in March 2004. From December 1985 to February 2004, Mr. Shi was vice
professor of Shaanxi Politico-Legality Management Cadre Institute. Mr. Shi is a
certificated registered attorney.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our executive officers, directors and persons who own
more than 10% of our common stock to file initial reports of ownership on Form 3
and changes in ownership on Forms 4 or 5 with the SEC. Such executive officers,
directors and over 10% stockholders are also required by SEC rules to furnish us
with copies of all such forms they file.
Based solely on our review of the copies of such forms we have received, or
written representations from certain reporting persons, we believe that, during
the year ended December 31, 2005, all executive officers, directors and over 10%
stockholders filed on a timely basis all reports required to be filed by them
under Section 16(a) with respect to our common stock, other than the respective
Form 4 with respect to a December 8 2006 transaction of each of the following
directors and officers: Pingji Lu, Yulong Wan, Genxiang Xiao, Xiaohong Feng, and
Zhiyong Shi related to.
27
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid in respect of our Chief
Executive Officer and those individuals who received compensation in excess of
$100,000 per year (collectively, the "Named Executive Officers") for our last
two completed fiscal years.
SUMMARY COMPENSATION TABLE
--------------------------- ---------- ----------- ----- --------- ------------ ---------- ------------- --------- -------
Name and Principal Year Salary ($) Bonus Stock Option Non-Equity Nonqualified All Other Total
Position ($) Awards Awards Incentive Deferred Other ($)
($) ($) Plan Compen- Compen-
Compen- sation sation
sation Earnings ($)
($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
--------------------------- ---------- ----------- ----- --------- ------------ ---------- ------------- --------- -------
Lu Pingji, Chairman & CEO 2006 $17,136 N/A N/A N/A N/A N/A N/A $17,136
2005 $17,136 N/A N/A N/A N/A N/A N/A $17,136
--------------------------- ---------- ----------- ----- --------- ------------ ---------- ------------- --------- -------
Xiao Genxiang, 2006 $14,051 N/A N/A N/A N/A N/A N/A $14,051
Chief Administrative 2005 $14,051 N/A N/A N/A N/A N/A N/A $14,051
Officer and Director
--------------------------- ---------- ----------- ----- --------- ------------ ---------- ------------- --------- -------
Feng Xiaohong, Chief 2006 $15,596 N/A N/A N/A N/A N/A N/A $15,596
Operating Officer & Board 2005 $15,596 N/A N/A N/A N/A N/A N/A $15,596
Member
--------------------------- ---------- ----------- ----- --------- ------------ ---------- ------------- --------- -------
Wan Yulong, Chief 2006 $7,390 N/A N/A N/A N/A N/A N/A $7,390
Financial Officer 2005 $7,390 N/A N/A N/A N/A N/A N/A $7,390
--------------------------- ---------- ----------- ----- --------- ------------ ---------- ------------- --------- -------
Shi Zhiyong, Vice 2006 $8,914 N/A N/A N/A N/A N/A N/A $8,914
President, Chief Legal 2005 $8,914 N/A N/A N/A N/A N/A N/A $8,914
Counsel and Board Member
--------------------------- ---------- ----------- ----- --------- ------------ ---------- ------------- --------- -------
There has been no common stock authorized for issuance with respect to any
equity compensation plan as of the fiscal year ended December 1, 2006. None of
our executive officers received any stock options in the fiscal year ended
December 31, 2006, nor did they exercise any such options in the same period.
There are no current employment agreements between any individuals and us.
28
Director Compensation
------------------------------- ------------- ----------- --------- ----------------- ---------------- ------------ ---------
Name Fees Earned Stock Option Non-Equity Nonqualified All Other Total
or Paid in Awards Awards Incentive Plan Deferred Compensation ($)
Cash ($) ($) Compensation Compensation ($)
($) ($) Earnings
($)
(a) (b) (c) (d) (e) (f) (g) (h)
------------------------------- ------------- ----------- --------- ----------------- ---------------- ------------ ---------
Lu Pingji, Chairman & CEO N/A N/A N/A N/A N/A N/A N/A
------------------------------- ------------- ----------- --------- ----------------- ---------------- ------------ ---------
Xiao Genxiang, N/A N/A N/A N/A N/A N/A N/A
Chief Administrative Officer
and Director
------------------------------- ------------- ----------- --------- ----------------- ---------------- ------------ ---------
Feng Xiaohong, Chief Operating N/A N/A N/A N/A N/A N/A N/A
Officer & Board Member
------------------------------- ------------- ----------- --------- ----------------- ---------------- ------------ ---------
Shi Zhiyong, Vice President, N/A N/A N/A N/A N/A N/A N/A
Chief Legal Counsel and Board
Member
------------------------------- ------------- ----------- --------- ----------------- ---------------- ------------ ---------
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AN
RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information, as of December 31,
2006, 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.
29
Common Stock Percentage of
Name of Beneficial Owner (1) Beneficially Owned (2) Common Stock (2)
------------------------------- ---------------------- ----------------
Lu Pingji 3,539,500 17.17%
Wang Yulong 32,000 0.16%
Xiao Genxiang 465,000 2.26%
Feng Xiaohong 600,000 2.91%
Shi Zhiyong 120,000 0.58%
--------- ------
All officers and directors as a 4,756,500 23.07%
group (5 persons)
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
Xian 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 [20,619,223] shares of common
stock outstanding as of December 31, 2006 [Update], together with securities
exercisable or convertible into shares of common stock within 60 days of August
23, 2006 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
that are currently exercisable or exercisable within 60 days of August 23, 2006
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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
30
ITEM 13. EXHIBITS AND REPORTS ON FORM 10-K.
Exhibit Description of Exhibit
No.
3.1 Articles of Incorporation (incorporated by reference to the exhibits
to Registrants Form SB-2 filed on October 27, 2004)
3.2 Registrant's By-Laws (incorporated by reference to the exhibits to
Registrants Form SB-2 filed on October 27, 2004)
10.1 Share Purchase Agreement by and among Pacific Northwest Productions
Inc., Xi'an Tsining Housing Development Co., Ltd. and the shareholders
of Xi'an Tsining Housing Development Co., Ltd.(incorporated by
reference to the exhibits to Registrant's Form 8-K filed on April 27,
2006).
10.2 Return to Treasury Agreement between Pacific Northwest Productions
Inc. and Davinder Bains, dated as of April 21, 2006 (incorporated by
reference to the exhibits to Registrant's Form 8-K filed on April 27,
2006).
10.3 Return to Treasury Agreement between Pacific Northwest Productions
Inc. and Deljit Bains, dated as of April 21, 2006 (incorporated by
reference to the exhibits to Registrant's Form 8-K filed on April 27,
2006).
10.4 Form of Placement Agent Agreement (incorporated by reference to the
exhibits to Registrant's Form 8-K filed on July 6, 2006).
10.5 Form of Securities Purchase Agreement (incorporated by reference to
the exhibits to Registrant's Form 8-K filed on July 6, 2006).
10.6 Form of Common Stock Purchase Warrant (incorporated by reference to
the exhibits to Registrant's Form 8-K filed on July 6, 2006).
10.7 Form of Registration Rights Agreement (incorporated by reference to
the exhibits to Registrant's Form 8-K filed on July 6, 2006).
10.8 Form of the Shares Transfer Agreement between China Housing & Land
Development Inc. and certain shareholders of Xi'an New Land
Development Co., Ltd., dated as of March 9, 2007 (incorporated by
reference to the exhibits to Registrant's Form 8-K filed on March 12,
2007).
16.1 Letter from Kabani & Company, Inc. to the Securities and Exchange
Commission, dated January 17, 2007 (incorporated by reference to the
exhibits to Registrant's Form 8-K filed on December 29, 2006).
21.1 List of subsidiaries.*
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act.*
31.2 Certification of Principal Financial and Accounting Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act.*
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act.*
32.2 Certification of Chief Accounting Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act.*
* Filed herewith
31
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
During fiscal 2005 and the first quarter of fiscal 2006 our principal
independent auditor was Dale Matheson Carr-Hilton LaBonte. Dale Matheson
Carr-Hilton LaBonte performed the audits for the two year period ended December
31, 2005. which reports for the two years ended December 31, 2005 and 2004.
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 also reviewed the Registrant'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 September 30, 2005.
The audit of our annual financial statement for this 10-KSB for the period
ended December 31, 2006, respectively, were performed by our current principal
independent auditor Moore Stephens Wurth Frazer and Torbet, LLP. The following
are the services provided and the amount billed:
(a) Audit Fees
The aggregate fees billed for professional services rendered by our
principal accountants for the audit of our annual financial statements for the
fiscal year ended December 31, 2006 was $100,000 and for the fiscal year ended
December 31, 2005 were $5000. The reviews for the financial statements included
in our quarterly reports on Form 10-QSB during the fiscal years ended December
31, 2006 and December 31, 2005 were $27,500 and $2,800, respectively, per year.
(b) Audit-Related Fees
We incurred no fees for the fiscal years ended December 31, 2006 and 2005
for assurance and related services by our principal accountant that were
reasonably related to the performance of the audit or review of our financial
statements, and not reported under Audit Fees above.
(c) Tax Fees
The aggregate fees billed for professional services rendered by our
principal accountant for tax compliance, tax advice, preparation and filing of
tax returns and tax planning for the fiscal years ended December 31, 2005 and
2004 were $ NIL.
(d) All Other Fees
There were no fees billed in either of the last fiscal years for products
and services provided by the principal accountant, other than theservices
reported above.
We do not have an audit committee currently serving and as a result our
board of directors performs the duties of an audit committee
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHINA HOUSING AND LAND DEVELOPMENT, INC.
April 2, 2007 By: /s/ Lu Pingji
-------------
Name: Lu Pingji
Title: Chief Executive Officer
April 2, 2007 By: /s/ Wan Yulong
--------------
Name:Wan Yulong
Title: Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this Form 10-KSB has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------------------------- -------------------------- ---------------
/s/ Lu Pingji Chairman of the Board and
--------------------------- Chief Executive Officer April 2, 2007
Lu Pingji
/s/ Xiao Genxiang Chief Administrative Officer
--------------------------- and Director April 2, 2007
Xiao Genxiang
/s/ Feng Xiaohong Chief Operating Officer and
--------------------------- Director April 2, 2007
Feng Xiaohong
Vice President,
/s/ Shi Zhiyong Chief Legal Counsel and
--------------------------- Director April 2, 2007
Shi Zhiyong
/s/ Wan Yulong Chief Financial Officer April 2, 2007
---------------------------
Wan Yulong
33
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2007
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________________ to _______________
000-51429
(Commission file number)
CHINA HOUSING & LAND DEVELOPMENT, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 20-1334845
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6 Youyi Dong Lu, Han Yuan 4 Lou
Xi'An, Shaanxi Province
China 710054
(Address of principal executive offices)
86-029-82582632
(Issuer's telephone number)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes |_| No |X|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of May 11, 2007 -29,941,070 shares
of common stock
Transitional Small Business Disclosure Format (check one): Yes |_| No |X|
CHINA HOUSING & LAND DEVELOPMENT, INC.
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2007 (unaudited) and
December 31, 2006 2
Consolidated Statements of Income and Other Comprehensive Income for
the three month periods ended March 31, 2007 and 2006 (unaudited) 3
Consolidated Statements of Cash Flows for the three month periods
ended March 31, 2007 and 2006 (unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis or Plan of Operations 22
Item 3. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 25
Item 6. Exhibits 25
SIGNATURES 26
EX-31.1 (Certifications required under Section 302 of the Sarbanes-Oxley Act
of 2002)
EX-31.2 (Certifications required under Section 302 of the Sarbanes-Oxley Act
of 2002)
EX-32.1 (Certifications required under Section 906 of the Sarbanes-Oxley Act
of 2002)
EX-32.2 (Certifications required under Section 906 of the Sarbanes-Oxley Act
of 2002)
PART I. FINANCIAL INFORMATION
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2007 AND DECEMBER 31, 2006
March 31, December 31,
2007 2006
------------ ------------
(Unaudited)
------------
ASSETS
Cash $ 257,187 $ 379,633
Cash - restricted 1,222,618 1,108,271
Accounts receivable, net of allowance for doubtful
accounts of $79,920 and 79,118, respectively 2,618,833 3,070,516
Notes receivable, net 2,128,304 2,127,271
Real estate
Finished projects 31,788,383 37,247,436
Construction in progress 10,549,075 9,730,650
------------ ------------
Total real estate held for development or sale 42,337,458 46,978,086
------------ ------------
Property and equipment, net 17,708,994 17,701,896
Advance to suppliers 5,247,003 493,570
Receivables, deferred charges and other assets 1,140,707 986,039
------------ ------------
Total assets $ 72,661,104 $ 72,845,282
============ ============
LIABILITIES
Accounts payable $ 5,550,820 $ 5,324,815
Advances from customers 2,015,250 2,902,426
Accrued expenses 1,481,171 1,738,584
Payable to original shareholders 5,462,798 5,462,798
Income and other taxes payable 11,835,787 11,386,169
Other payables 1,857,590 2,572,838
Loans from employees 1,441,142 1,037,842
Loans payable 22,626,329 23,206,852
------------ ------------
Total liabilities 52,270,887 53,632,324
============ ============
SHAREHOLDERS' EQUITY
Common stock: $.001 par value, authorized 100,000,000 shares
issued and outstanding 20,679,223 and 20,619,223, respectively 20,679 20,619
Additional paid in capital 7,323,940 7,192,600
Statutory reserves 2,234,124 2,150,138
Retained earnings 15,122,697 14,414,181
Capital contribution receivable (5,462,798) (5,462,798)
Accumulated other comprehensive income 1,151,575 898,218
------------ ------------
Total shareholders' equity 20,390,217 19,212,958
------------ ------------
Total liabilities and shareholders' equity $ 72,661,104 $ 72,845,282
============ ============
2
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
2007 2006
(Unaudited) (Unaudited)
----------- -----------
REVENUE
Sale of properties $ 8,045,576 $16,978,251
Other income 150,621 18,572
----------- -----------
Total revenue 8,196,197 16,996,823
----------- -----------
COSTS AND EXPENSES
Cost of properties sold 6,251,458 11,507,106
Selling, general and administrative expenses 498,079 623,240
Other expense 32,619 72,414
Interest expense 207,876 21,783
----------- -----------
Total costs and expense 6,990,032 12,224,543
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,206,165 4,772,280
PROVISION FOR INCOME TAXES 413,663 1,553,878
----------- -----------
NET INCOME 792,502 3,218,402
GAIN ON FOREIGN EXCHANGE 253,357 98,750
----------- -----------
OTHER COMPREHENSIVE INCOME $ 1,045,859 $ 3,317,152
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 20,669,223 20,277,615
=========== ===========
EARNINGS PER SHARE
BASIC AND DILUTED $ 0.04 $ 0.16
=========== ===========
3
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006
2007 2006
------------ ------------
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 792,502 $ 3,218,402
Adjustments to reconcile net income to cash
provided by (used in) operating activities:
Allowance for bad debt 512,654 635,722
Depreciation 169,861 31,554
Gain on disposal of fixed assets and inventory 472 --
Amortization of stock issued for investor relations fees
(Increase) decrease in assets: 32,850 --
Accounts receivable 401,374 51,930
Real estate 5,097,643 (5,883,384)
Advance to suppliers (4,691,540) 6,026,822
Other receivable and deferred charges (388,692) (391,140)
Increase (decrease) in liabilities:
Accounts payable 170,026 2,232,169
Advances from customers (913,140) (14,032,170)
Accrued expense (274,003) 48,133
Other payable (734,292) 79,857
Income and other taxes payable 332,894 2,307,021
------------ ------------
Net cash provided by (used in) operating activities 508,609 (5,675,084)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash (102,718) 570,789
Purchase of buildings, equipment and automobiles (1,891) (319,744)
Notes receivable funded (108,838) --
------------ ------------
Net cash used in (provided by) investing activities (213,447) 251,045
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan proceeds 645,050 5,741,650
Payments on loans (1,457,813) --
Loans from employees 391,290 --
------------ ------------
Net cash (used in) provided by financing activities (421,473) 5,741,650
------------ ------------
(DECREASE) INCREASE IN CASH (126,311) 317,611
EFFECTS ON FOREIGN CURRENCY EXCHANGE 3,865 1,530
CASH, beginning of period 379,633 30,746
------------ ------------
CASH, end of period $ 257,187 $ 349,887
============ ============
4
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Note 1 - Organization and basis of presentation
Organization
------------
China Housing & Land Development, Inc (the "Company") is a Nevada corporation,
incorporated on July 6, 2004 under the name Pacific Northwest Productions Inc.
On May 6, 2006, the Company changed its name to China Housing & Land Development
Inc. The Company, through its subsidiary Xian Tsining Housing Development
Company Inc. (XTHDC), is engaged in acquisition, development, management, and
sale of commercial and residential real estate properties located primarily in
Xi'an city, the People's Republic of China (PRC).
XTHDC was established during May 1992 as a state-owned enterprise, whose former
name is Xian New Star Group Real Estate Development Co. Ltd, and was formerly
the logistics department of Lan Zhou Military area of the People's Liberation
Army of China. The Company was reorganized as a limited liability company with
equity capital invested by management personnel in September 1999. The Company
is a Chinese registered limited liability company with a legal structure similar
to a regular corporation and a limited liability company. The Articles of
Association provide for a 54 year term beginning September 7, 1999 with
registered capital of approximately $3,140,000 (RMB26,000,000). On March 28,
2002, the registered capital of Tsining was increased to approximately
$6,050,000 (RMB50,000,000).
On April 21, 2006, XTHDC entered into and closed a share purchase agreement with
Pacific Northwest Productions, Inc. ("Pacific"), a public shell in the United
States of America incorporated in the state of Nevada. Pursuant to the purchase
agreement, Pacific acquired all of the issued and outstanding capital stock of
XTHDC in exchange for 16,000,000 (post-split) shares of Pacific's common stock.
Concurrently with the closing of the purchase agreement and as a condition
thereof, Pacific entered into an agreement with Deljit Bains and Davinder Bains,
its 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 merger, XTHDC's stockholders own approximately 80% of the
combined company and the directors and executive officers of XTHDC became the
directors and executive officers of Pacific. Accordingly, the transaction has
been accounted for as a reverse acquisition of Pacific by XTHDC resulting in a
recapitalization of XTHDC. XTHDC is deemed to be the purchaser and surviving
company for accounting purposes. Accordingly, its assets and liabilities are
included in the balance sheet at their historical book values and the results of
operations of XTHDC have been presented for the comparative prior period.
In addition, on May 5, 2006, Pacific changed its name to China Housing & Land
Development, Inc. (hereafter referred to as the "Company") 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.
5
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Note 2 - Acquisition
On March 9, 2007, the Company entered into a Shares Transfer Agreement (the
Agreement) to acquire 32 million shares of Xi'an New Land Development Co., Ltd.
(New Land), representing 100% equity ownership of New Land. The total purchase
price for the acquisition is 270 million RMB, approximately $34 million, which
is subject to change. The total purchase price includes 1) an initial cash
payment of 5 million RMB, approximately $610,000, payable within 20 days after
the signing of the Agreement, 2) an additional cash payment of 57 million RMB,
approximately $7.2 million, payable within 30 days after the Company receives a
satisfactory audit report of New Land, and 3) a promissory note of the aggregate
amount of 208 million RMB, approximately $26.2 million, bearing 10% interest
with a maturity date of January 30, 2009.
As of March 31, 2007, the transaction had not closed; as such, the financial
data of New Land is not included in the accompanying financial statements.
Note 3 - Summary of significant accounting policies
Principles of consolidation and basis of presentation
-----------------------------------------------------
The accompanying consolidated financial statements include the accounts of China
Housing & Land Development, Inc. and its wholly owned subsidiary, XTHDC. All
material inter-company accounts and transactions have been eliminated in
consolidation. The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America.
Use of estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
Foreign currency translation
----------------------------
As of March 31, 2007, the accounts of the Company are maintained in their
functional currency the Chinese Yuan Renminbi (RMB). The reporting currency for
the consolidated financial statements is the United States Dollars (USD). In
accordance with Statement of Financial Accounts Standards ("SFAS") No. 52,
"Foreign Currency Translation," all assets and liabilities were translated at
the exchange rate on the balance sheet date, stockholder's equity are translated
at the historical rates and statement of operations are translated at the
weighted average exchange rate for the period. Cash flows are also translated at
the weighted average exchange rate for the year; therefore, amounts reported on
the statement of cash flows will not necessarily agree with changes in the
corresponding balances on the balance sheet.
6
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
The resulting translation adjustments are reported under other comprehensive
income in accordance with SFAS No. 130, "Reporting Comprehensive Income."
Revenue recognition
-------------------
Real estate sales are reported in accordance with the provisions of Statement of
Financial Accounting Standard No. 66, "Accounting for Sales of Real Estate".
Profit from the sales of development properties, less 5% business tax, is
recognized by the full accrual method when the sale is consummated. A sale is
not considered consummated until (1) the parties are bound by the terms of a
contract, (2) all consideration has been exchanged, (3) any permanent financing
of which the seller is responsible has been arranged, (4) all conditions
precedent to closing have been performed, (5) the seller does not have
substantial continuing involvement with the property, and (6) the usual risks
and rewards of ownership have been transferred to the buyer. Sales transactions
not meeting all the conditions of the full accrual method are accounted for
using the deposit method of accounting. Under the deposit method, all costs are
capitalized as incurred, and payments received from the buyer are recorded as a
deposit liability. Real estate rental income, less 5% business tax, is
recognized on the straight-line basis over the terms of the tenancy agreements.
For Company financed sales, the Company is recognizing sales based on the full
accrual method provided that the buyer's initial and continuing investment is
adequate according to SFAS No. 66. 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 terms of the loans.
Real estate capitalization and cost allocation
----------------------------------------------
Residential properties completed or under construction are 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, interest on indebtedness, real estate taxes, insurance,
construction overhead and indirect project costs. 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 improvement costs include land, land improvements, interest on
indebtedness and real estate taxes. Appropriate costs are allocated to projects
on the basis of acreage, dwelling units and relative sales value. Land held for
development and improvements are stated at cost or estimated net realizable
value, whichever is lower.
Land and land improvements applicable to condominiums, town homes and
single-family homes, are transferred to construction in progress when
construction commences.
Capitalization of interest
--------------------------
Interest incurred during construction is capitalized into construction in
progress. All other interest is expensed as incurred.
7
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
For the three months ended March 31, 2007, interest incurred by the Company was
$531,103 and capitalized interest for the same period was $323,227. For the
three months ended March 31, 2006, interest incurred by the Company was $706,649
and capitalized interest for the same period was $684,866.
Concentrations
--------------
The Company sells residential and commercial units to residents and small
business owners. The Company had one major customer that accounted for
approximately 47% of the Company's sales for the three months ended March 31,
2007 and accounts receivable for this customer at March 31, 2007 amounted to
$1,199,408. There was no major customer that accounted for over 5% of the
Company's sales for the three months ended March 31, 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 16% and 41% of the Company's
purchases for the three months ended March 31, 2007 and 2006, respectively.
Accounts payables to these subcontractors/suppliers amounted to $1,260,133 and
$2,574,122 at March 31, 2007 and 2006, respectively.
The Company's operations are carried out in the People's Republic of China.
Accordingly, the Company's business, financial condition and results of
operations may be influenced by the political, economic and legal environments
in the People's Republic of China, by the general state of the People's Republic
of China'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 demand deposits in accounts maintained with
state-owned banks within the PRC. Total cash in state-owned banks at March 31,
2007 and December 31, 2006 amounted to $233,483 and $353,762, respectively, of
which no deposits are covered by insurance. The Company has not experienced any
losses in such accounts and believes it is not exposed to any risks on its cash
in bank accounts.
Restricted cash
---------------
The bank grants mortgage loans to home purchasers and will credit these amounts
to the Company's bank account once title passes. If the houses 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 $1,222,618 and $1,108,271 as of
March 31, 2007 and December 31, 2006, respectively.
8
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Accounts receivable-trade
-------------------------
Accounts receivable-trade 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 presented net of an allowance for
doubtful accounts of $2,618,833 and $3,070,516 at March 31, 2007 and December
31, 2006, respectively.
Notes receivable
----------------
The Company finances sales to certain new home owners. Financing agreements are
signed and the loans are due in 1 to 3 years. The loans are non-interest
bearing, therefore the Company has calculated imputed interest and discounted
the carrying amount of notes receivable. Notes receivable are presented net of
unamortized interest and allowance for doubtful accounts.
March 31, 2007 December 31,
(Unaudited) 2006
----------- -----------
Notes receivable $ 2,290,142 $ 2,290,378
Less: unamortized interest (32,139) (34,710)
Less: allowance for doubtful accounts (129,699) (128,397)
----------- -----------
Notes receivable, net $ 2,128,304 $ 2,127,271
=========== ===========
Other receivables
-----------------
Other receivables consist of various cash advances to unrelated companies and
individuals which the management of the Company have business relationships.
These amounts are not related to operations of the Company, are unsecured,
non-interest bearing and generally are short term in nature. The balances of
other receivables were $1,291,299 and $1,282,831 as of March 31, 2007 and
December 31, 2006, respectively. Other receivables are reviewed annually as to
whether their carrying value has become impaired. The Company has established an
allowance for doubtful accounts of $304,981 and $301,920 as of March 31, 2007
and December 31, 2006, respectively
Advances to suppliers
---------------------
Advances to suppliers consist of amounts paid in advance to contractors and
vendors for services and materials that have not been performed or received and
generally relate to the development and construction of residential units in the
PRC. Advances amounted to $5,247,003 and $493,570 as of March 31, 2007 and
December 31, 2006, respectively.
9
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Real estate inventory (Inventory or Inventories)
------------------------------------------------
Real estate inventories represent real estate held for development or sale and
consist of residential and commercial units under construction and units
completed. Inventories are stated at the lower of cost or net realizable value.
If the inventory is determined to be impaired, it will be written down to its
fair market value. Inventory costs include land use right, land development and
home construction costs, engineering costs, insurance costs, wages, real estate
taxes, and interest related to development and construction. All costs are
accumulated by specific projects and allocated to residential and commercial
units within the respective projects. The Company leases the land for the
residential unit sites under land use rights with various terms from the
government of the PRC. The Company evaluates the carrying value for impairment
based on the undiscounted future cash flows of the assets. Write-downs of
inventory deemed to be impaired would be recorded as adjustments to the cost
basis. No Impairment loss was incurred or recorded for the three months ended
March 31, 2007 and 2006.
No depreciation is provided for construction in progress. Construction overhead
and selling expenses are expensed as incurred.
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 three months ended March 31, 2007 and 2006 amounted to $169,861
and $31,554, respectively. Estimated useful lives of the assets are as follows:
Estimated Useful Life
---------------------
Buildings 30 years
Vehicles 6 years
Electronic equipment 5 years
Office furniture 5 years
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Major additions and betterment to property and equipment are
capitalized.
Long-lived assets
-----------------
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations for a Disposal of a Segment of a
Business." The Company periodically evaluates the carrying value of long-lived
assets to be held and used in accordance with SFAS 144. SFAS 144 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 market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner, except
that fair market values are reduced for the cost of disposal. Based on its
review, the Company believes there were no impairment of its long-lived assets
as of March 31, 2007.
10
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Fair value of financial instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties. The Company considers the
carrying amount of cash, accounts receivable, other receivables, accounts
payable, accrued liabilities and other payables to approximate their fair values
because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest.
Management believes the interest rate on notes reflect rates currently
available. Thus, the carrying value of loans payable approximates fair value.
Advances from customers
-----------------------
Advances from customers represent prepayments by customers for home purchases.
The Company records these prepayments as advances from customers when the
payments are received. Advances from customers amounted to $2,015,250 and
$2,902,426 at March 31, 2007 and December 31, 2006, respectively.
Accounts payable
----------------
Accounts payable consists of balances due to subcontractors and suppliers.
Accounts payable amounted to $5,550,820 and $5,324,815 at March 31, 2007 and
December 31, 2006, respectively.
Other payables
--------------
Other payables consist of various cash advances from unrelated companies and
individuals which management of the Company have business relationships. These
amounts are not related to operations of the Company, are unsecured,
non-interest bearing and generally are short term in nature. Other payables
amounted to $1,857,590 and $2,572,838 as of March 31, 2007 and December 31,
2006, repectively.
Advertising costs
-----------------
Advertising and sales promotion costs are expensed as incurred. Advertising
expense totaled $62,891 and $163,033 for the three months ended March 31, 2007
and 2006 respectively.
11
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
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 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 cost of the project. Any
excess amounts are expensed in the period when they occur. Many of the items
relating to workmanship are completed by the existing labor force utilized to
construct other new houses and are therefore already factored into the labor and
overhead costs of another project. 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 March 31, 2007 and December 31,2006, the Company has accrued
$68,682 as 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 March 31, 2007 and 2006, there was no significant
book to tax differences.
The Company adopted FASB Interpretation 48, "Accounting for Uncertainty in
Income Taxes" ("FIN 48"), as of January 1, 2007. A tax position is recognized as
a benefit only if it is "more likely than not" that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized on examination. For tax positions not meeting the
"more likely than not" test, no tax benefit is recorded. The adoption had no
affect on the Company's financial statements.
12
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Local PRC income tax
--------------------
The Company is governed by the Income Tax Law of the PRC concerning Chinese
registered limited liability companies. Under the Income Tax Laws of the PRC,
Chinese enterprises are generally subject to an income tax at an effective rate
of 33% (30% state income taxes plus 3% local income taxes) 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. The provision for income taxes at March 31
consisted of the following:
2007 2006
(Unaudited) (Unaudited)
---------- ----------
Provision for China income and local tax $ 413,663 $1,553,878
Deferred taxes -- --
---------- ----------
Total provision for income taxes $ 413,663 $1,553,878
========== ==========
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate at March 31,
2007 2006
------ ------
U.S. statutory rates 34.0% 34.0%
Foreign income not recognized in USA (34.0) (34.0)
China income taxes 33.0 33.0
------ ------
Totals 33.0% 33.0%
====== ======
Beginning January 1, 2008, the new Enterprise Income Tax ("EIT") law will
replace the existing laws for Domestic Enterprises ("DES") and Foreign Invested
Enterprises ("FIEs"). The new standard EIT rate of 25% will replace the 33% rate
currently applicable to both DES and FIEs. The two years tax exemption, three
years 50% tax reduction tax holiday for production-oriented FIEs will be
eliminated. The Company is currently evaluating the effect of the new EIT law
will have on its financial position.
Sales and additional taxes
--------------------------
In June 2006, the Emerging Issues Task Force (EITF) reached a consensus on EITF
No. 06-3, How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (EITF No. 06-3). EITF
No. 06-3 permits that such taxes may be presented on either a gross basis or a
net basis as long as that presentation is used consistently. The adoption of
EITF No. 06-3 on January 1, 2007 did not impact our consolidated financial
statements. We present the taxes within the scope of EITF No. 06-3 on a net
basis.
All sales recognized are subject to sales and additional taxes of 5.61% and are
payable to local government. This amount is included in cost of properties sold.
Sales and additional taxes incurred for the three months ended March 31, 2007
and 2006 were $451,357 and $952,480, respectively.
Basic and diluted earning per share
-----------------------------------
Earning per share is calculated in accordance with the Statement of Financial
Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per share". SFAS No.
128 superseded Accounting Principles Board Opinion No.15 (APB 15). Net earning
per share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net earning per share is based upon the weighted average
number of common shares outstanding. Diluted net earning per share is based on
the assumption that all dilutive convertible shares and stock options were
converted or exercised. Dilution is computed by applying the treasury stock
method.
13
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
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 period.
At March 31, 2007, the Company had 309,612 outstanding warrants. The average
stock price for the three months ended March 31, 2007 was less than the exercise
price of the warrants; therefore, the warrants are not factored into the diluted
earning per share calculation as they are anti-dilutive.
Stock-based compensation
------------------------
The Company records stock-based compensation pursuant to Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payments,"
("FAS123R"), which established standards for the accounting for transactions in
which an entity exchange 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 will be recognized over the period of services rendered.
Comprehensive income
--------------------
Comprehensive income consists of net income and foreign currency translation
gains and losses affecting shareholders' equity that, under generally accepted
accounting principles, are excluded from net income. Gain on foreign exchange
translation totaled $253,357 and $98,750 for the three months ended March 31,
2007 and 2006, respectively.
Statement of cash flows
-----------------------
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows," cash flows from the Company's operations is
calculated based upon the local currencies. 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.
Recent pronouncements
---------------------
In September 2006, FASB issued SFAS 157 `Fair Value Measurements'. This
Statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles (GAAP), and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements. However, for some entities, the application of this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on its financial statements.
14
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
In February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 159, The Fair Value
Option for Financial Assets and Financials Liabilities -- Including an Amendment
of FASB Statement No. 115. This standard 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 also
establishes certain additional presentation and disclosure requirements. The
standard is effective as of the beginning of the fiscal year that begins after
November 15, 2007. The Company is currently evaluating the provisions of SFAS
No. 159 to determine the potential impact, if any, the adoption will have on the
Company's financial statements.
Note 4 - Supplemental disclosure of cash flow information
Income taxes paid amounted to $0 and $0 for the three months ended March 31,
2007 and 2006, respectively. Interest paid for the three months ended March 31,
2007 and 2006 amounted to $531,103 and $706,649, respectively.
Noncash financing transactions included 60,000 shares of common stock issued to
an investor relations company in consideration of a one year consulting service
valued at $131,400.
Note 5 - Real estate inventories
The following summarizes the components of real estate inventories as of March
31, 2007 and December 31, 2006:
March 31, 2007 December 31,
(Unaudited) 2006
------------- -------------
Finished projects $ 31,788,383 $ 37,247,436
Construction in progress 10,549,075 9,730,650
------------- -------------
Total real estate held for development or sale $ 42,337,458 $ 46,978,086
============= =============
Note 6 - Receivables, deferred charges and other assets
Receivables, deferred charges and other assets consist of the following as of
March 31, 2007 and December 31, 2006:
March 31, 2007 December 31,
(Unaudited) 2006
------------ -----------
Other receivable $ 1,291,299 $ 1,282,831
Allowance for doubtful Accounts (304,981) (301,920)
Prepaid expenses 154,389 5,128
------------ -----------
Receivables, deferred charges and other assets $ 1,140,707 $ 986,039
============ ===========
15
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Note 7 - Property and equipment, net
Property and equipment consist of the following as of March 31, 2007 and
December 31, 2006:
March 31, 2007 December 31,
(Unaudited) 2006
------------ ------------
Buildings and improvements $ 18,440,651 $ 18,255,045
Machinery and equipment 119,693 117,081
Transportation equipment 50,171 55,598
Furniture and fixture 96,469 95,519
------------ ------------
Totals 18,706,984 18,523,243
Accumulated depreciation (997,990) (821,347)
------------ ------------
Property and equipment, net $ 17,708,994 $ 17,701,896
============ ============
Note 8 - Accounts receivable
Accounts receivable consist of the following as of March 31, 2007 and December
31, 2006:
March 31, 2007 December 31,
(Unaudited) 2006
----------- -----------
Accounts receivable $ 2,698,253 $ 3,149,634
Allowance for doubtful accounts (79,920) (79,118)
----------- -----------
Accounts receivable, net $ 2,618,333 $ 3,070,516
=========== ===========
Note 9 - Loans from employees
The Company has borrowed monies from certain employees to fund the Company's
construction projects. The loans bear interest ranging from 7% to 12% and the
principal matures within one to three years. Loans from employees amounted to
$1,441,142 and $1,037,842 as of March 31, 2007 and December 31, 2006,
respectively.
16
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Note 10 - Loans payable
Loans payable represent amounts due to various banks and are due on demand or
normally within one year. These loans generally can be renewed with the banks
when expired. Loans payable consisted of the following as of March 31, 2007 and
December 31, 2006:
March 31, 2007 December 31,
(Unaudited) 2006
-------------- -------------
Commercial Bank Weilai Branch due August 7, 2007, annual
interest rate is at 9.945%, secured by the Company's Xin Xin
Gangwan, Xin Xin Tower and Ming Yuan Projects $ 5,180,000 $ 5,128,000
Shannxi International Trust Investment Co., due on demand,
annual interest is at 10.80%,secured by 14 units of the
Company's Xin Xin In House and Harbor projects 2,201,502 2,564,000
Shannxi International Trust Investment Co., due September
20, 2007, annual interest is at 10.80%, secured by six
commercial units of the Company's Jun Jin Yuan project 508,935 503,826
Merchant bank Xi'an high and new technology development zone
branch, due June 27, 2007annual interest is at 19.20%,
secured by the Company's Jun Jin Yuan project 407,925 403,830
Construction Bank Zhuque Road Branch,due May 6, 2007, annual
interest is at 6.21%,secured by the Company's Jun Jin Yuan
project 3,501,684 4,107,528
Construction Bank Zhuque Road Branch,due July 6, 2007,
annual interest is at 6.91%,secured by the Company's Jun Jin
Yuan project 2,680,653 2,564,000
Commercial Bank Weilai Branch,due December 31, 2007, annual
interest is at 9.79%, secured by the Company's 24G project 6,345,506 6,410,000
Various loans on demand,to unrelated parties, at various interest rate 1,800,124 1,525,668
-------------- -------------
Total $ 22,626,329 $ 23,206,852
============== =============
All loans were borrowed for construction projects. Interest paid was capitalized
during the periods of construction and allocated to various construction
projects. When the projects are completed, interest incurred from these loans is
expensed.
Note 11 - Shareholders' equity
Common stock
------------
On June 28, 2006, the Company entered into securities purchase agreements with
accredited investors and completed the sale 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 a period of three years at an exercise price of $3.60 per share.
Pursuant to the terms of the warrant, 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. New York
Global Securities, Inc. acted as the placement agent of the transaction. See
note 15 for the effect of anti-dilution provisions which was triggered as a
result of the May 7, 2007 equity offering.
17
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
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.
On July 7, 2006, the Company entered into securities purchase agreements with
accredited investors and completed the sale of $124,975 of the Company's common
stock and common stock purchase warrants. The securities sold were an aggregate
of 38,454 shares of common stock and 11,536 warrants. Each warrant is
exercisable for a period of three years at an exercise price of $3.60 per share.
Pursuant to the terms of the warrant, 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. New York
Global Securities, Inc. acted as the placement agent of the transaction. See
note 15 for the effect of anti-dilution provisions which was triggered as a
result of the May 7, 2007 equity offering.
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
purchases 7,691 shares of common stock on the same terms and conditions as the
investors.
On August 21, 2006, the Company entered into securities purchase agreements with
accredited investors and completed the sale of $812,500 of the Company's common
stock and common stock purchase warrants. The securities sold were an aggregate
of 250,000 shares of common stock and 75,000 warrants. Each warrant is
exercisable for a period of three years at an exercise price of $3.60 per share.
Pursuant to the terms of the warrant, 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. New York
Global Securities, Inc. acted as the placement agent of the transaction. See
note 15 for the effect of anti-dilution provisions which was triggered as a
result of the May 7, 2007 equity offering.
The Company has 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.
In connection with the offering, the Company paid a placement fee of 10% of the
proceeds in cash, together with non-accountable 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.
18
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
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.
Warrants
--------
Following is a summary of the warrant activity:
Warrants Weighted Average Aggregate
outstanding Exercise Price Intrinsic Value
----------- ---------------- ---------------
Outstanding, December 31, 2006 - $ - $ -
Granted 309,612 3.60 -
Forfeited - - -
Exercised - - -
-------- --------- ------------
Outstanding, March 31, 2007 309,612 $ 3.60 $ -
======== ========= ============
Following is a summary of the status of warrants outstanding at March 31, 2007:
Outstanding Warrants Exercisable Warrants
--------------------- -------------------------------
Exercise Number Average Remaining Average Price Number
Price Contractual Life
-------- --------- ----------------- -------------- ---------
$ 3.60 309,612 2.31 $ 3.60 309,612
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 the statutory surplus reserve fund of 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 the 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.
19
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Pursuant to the board of directors' resolution, the Company 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 Company's registered capital.
The transfer to this reserve must be made before distributions of any dividends
to shareholders. For the three months ended March 31, 2007 and 2006, the Company
appropriated $83,986 and $321,840, respectively to this surplus reserve.
Note 12 - 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. The amount contributed to the fund is based on a certain % on the base
salaries set forth by the provincial and city government. For the months ended
March 31, 2007 and 2006, the Company made contributions in the amount of $6,218.
and $17,079, respectively.
Note 13 - Earnings per share
Earnings per share for three months ended March 31, 2007 and 2006 were
determined by dividing net income for the periods by the weighted average number
of both basic and diluted shares of common stock and common stock equivalents
outstanding. There were no common stock equivalents that were dilutive during
the three months ended March 31, 2007 and 2006; accordingly, basic and diluted
earning per share were the same for all periods presented.
Note 14 - Commitments and contingencies
The Company leases part of its office space under long-term, non-cancelable
operating lease agreements. The leases expire on 12/31/2008.
The following is a schedule of future minimum rental payments required under the
operating lease agreements:
Year ending Office
March 31 Lease
------------------------------------------------------------------
2007 $ 67,585
2008 67,585
---------
135,170
=========
Rental expense for the three months ended March 31, 2007 and 2006 amounted to
$16,896 and $18,988, respectively.
20
CHINA HOUSING & LAND DEVELOPMENT INC. AND SUBSIDARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
(UNAUDITED)
Note 15 - Subsequent events
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 ("Common Stock") and common stock purchase warrants
(the "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 transaction. 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. After completion of the May 7, 2007 agreement, and according to
Section 4.8, Anti-Dilute of the Share Purchase Agreements dated June 28, 2006,
July 7, 2006 and August 21, 2006, the Company is required to issue and register
126,138 shares common stock and 27,418 warrants; additionally, the Company is
required to reduce the exercise price of the warrant from $3.60 to $3.31.
21
ITEM 2. Management's Discussion and Analysis
FORWARD LOOKING STATEMENTS
Some of the statements contained in this Form 10-QSB 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 10-QSB, 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:
o Our ability to attract and retain management, and to integrate and
maintain technical information and management information systems;
o Our ability to raise capital when needed and on acceptable terms and
conditions;
o The intensity of competition; and
o General economic conditions.
All written and oral forward-looking statements made in connection with this
Form 10-QSB 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.
Three Months Ended March 31, 2007 as Compared To Three Months Ended March 31, 2006
Revenue
-------
We generated revenues of $8,196,197 for the three months ended March 31, 2007, a
decrease of $8,800,626 or 52% compared to $16,996,823 for the three months ended
March 31, 2006. The reason for decrease is that on January 2006, 7 buildings
covered 706,792 sq.ft in Junjing Yuan I were completed, and all pre-sale of
these area before the completion were recognized into revenue in the first
quarter of 2006, which were $14.6 million. These recognized pre sales were
contributed the most part of the revenues for the first quarter of 2006.
Revenue Contribution by Project:
(All numbers in USD millions)
March 31, 2007 December 31, 2006
Tsining-24G $ 7.1
Tsining Junjing Yuan $ 0.5 $ 16.7
Tsining GangWan $ 0.1
Other $ 0.5 $ 0.2
============== ===============
Total $ 8.2 $ 17.0
============== ===============
For the three-month period ended March 31, 2007, we had revenues of $541,817 for
Tsining JunJing I, $7,128,387 for Tsining-24G, and $525,993 for other projects.
During the three month period ended March 31, 2007, we sold $3,775,070 of
residential and commercial units of Tsining 24G to one customer, Hang Zhou Ye
Feng Company, which was the largest customer in the first quarter of 2007. The
revenue from Hang Zhou Ye Feng Company represents almost 46% of total revenues
for the three months ended March 31, 2007.
22
Costs and Expenses
------------------
Our costs and expenses for the three months ended March 31, 2007 as compared to
the three months ended March 31, 2006 were in line with the decreased revenue
from the sale of properties.
The cost of properties sold for the three months ended March 31, 2007 was
$6,251,458, a decrease of $5,255,648 or 46% compared to $11,507,106 for the
three months ended March 31, 2006. This is in line with the 52% decrease in
revenues generated by the Company from the sale of properties during the same
two periods.
Other expenses for the three months ended March 31, 2007 was $32,619, a decrease
of $39,795 or 55% compared to $72,414 for the three months ended March 31, 2006.
Our selling, general and administrative expenses for the three months ended
March 31, 2007 was $498,097, a decrease of $125,143 or 20% compared to $623,240
for the three months ended March 31, 2006. Selling, general and administrative
expenses reflects our overhead expenses such as office rent, management and
staff salaries, general insurance, accounting and legal expenses. We staff our
sales department at fixed levels. As one project approaches the end of the sales
cycle, the sales staff is shifted to the next project.
Interest Expense
----------------
We incurred interest expense for the three months ended March 31, 2007 of
$207,876, an increase of $186,093 or 854% compared to $21,783 for the three
months ended March 31, 2006. Capitalized interest for the three months ended
March 31, 2007 was $323,227 compared to $684,866 for the three months ended
March 31, 2006 . Interest expense increased in the first quarter of 2007
compared to 2006 since most projects are completed in 2007 and interest incurred
was expensed rather than capitalized.
Operating Income before Income Tax
----------------------------------
We had operating income before income tax of $1,206,165 for the three months
ended March 31, 2007; a decrease of $3,566,115, compared to $4,772,280 for the
three months ended March 31, 2006.
We had one major customer, Hang Zhou Ye Feng Company, which accounted for almost
46% of total revenues for the three months ended March 31, 2007, which we sold
the properties to Hang Zhou Ye Feng Company at a discount sales price. And, for
the three months ended March 31, 2007, we sold some parking lots, which the
profit margin is lower than residential and commercial properties.
Net Income
----------
Our net income for the three months ended March 31, 2007 was $792,502, a
decrease of $2,425,900 compared to $3,218,402 for the three months ended March
31, 2006, which is a direct result of the decrease of revenues earned from the
sale of properties.
23
Liquidity and Capital Resources
-------------------------------
Our principal demands for liquidity are for development of new properties and
future property acquisitions and general corporate purposes. As of March 31,
2007, we had total mortgage indebtedness of $22,626,329 with a weighted average
interest rate of 0.725% per month, payable quarterly. Future scheduled
maturities of mortgages payable are as follows: May 6, 2007-- $3,501,684; June
27, 2007 -- $407,925; July 6, 2007 -- $2,680,653; August 7, 2007 -- $5,180,000;
September 20, 2007 -- $508,935; December 31, 2007 -- $6,345,506. The mortgage
debt is secured by assets of the Company.
As of March 31, 2007, we had $257,187 of cash and cash equivalents on hand, a
decrease of $122,446 compared to $379,633 of cash and cash equivalents on hand
as of March 31, 2006.
As of March 31, 2007 accounts payable was $5,550,820 and other payables was
$1,857,590. We increased properties under construction by $818,425. Receivables,
deferred charges and other assets increased $154,668. Advances to suppliers
increased by $4,753,433 during the three months ended March 31, 2007, most of it
was the advance payment on Land related expenses for the JunJing II project.
Accounts payable increased $226,005, other payables decreased $715,248, and
accrued expenses decreased $257,413, while advance from customers decreased
$887,176.
Our operating activities provided cash of $508,609 during the three months ended
March 31, 2007. We used cash of $213,447 in investing activities during the
three months ended March 31, 2007 primarily $108,838 for the Notes receivable
funded. During the three months ended March 31, 2007. Cash used in financing
activities was $421,473, the result of $1,457,813 payments on loans and $645,050
of loan proceeds made during the three months ended March 31, 2007 and $391,290
of loan from employees.
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
possible cash investments. 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 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. Xi'an New Land Development Co.,
LTD ("New Land") is now in cooperation with BaQiao District Government of Xi'an
City in developing BaQiao Science & Technology Industrial Park, a provincial
development zone in Shaan'xi Province. Now, this acquisition is in process, in
the future, China Housing will take the first steps in the primary land market,
and also have the right to develop and sell 487 acres of property which 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.
Subsequent Events
-----------------
On May 7, 2007, we entered into securities purchase agreements with accredited
investors, and on May 9, 2007, we 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 transaction. 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. After
completion of the May 7, 2007 agreement, and according to Section 4.8,
Anti-Dilute of the Share Purchase Agreements dated June 28, 2006, July 7, 2006
and August 21, 2006, the Company is required to issue and register 126,138
shares common stock and 27,418 warrants; additionally, the Company is required
to reduce the exercise price of the warrant from $3.60 to $3.31.
Item 3. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer conducted an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report.
There were no significant changes in internal control over financial reporting
(as defined in Rule 13a-15(e) under the Exchange Act) that occurred during the
first quarter of 2007 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits
(a) Exhibits
Exhibit Number Description of Exhibit
--------------------------------------------------------------------------------
31.1 Certification of Principal Executive Officer pursuant to
Rule 13a-14 and Rule 15d-14(a), promulgated under the
Securities and Exchange Act of 1934, as amended
31.2 Certification of Principal Financial Officer pursuant to
Rule 13a-14 and Rule 15d 14(a), promulgated under the
Securities and Exchange Act of 1934, as amended
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002(Chief Executive Officer)
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002(Chief Financial Officer)
25
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
China Housing & Land Development, Inc.
May 14, 2007 By: /s/ LU PINGJI
-------------
Lu Pingji
Chief Executive Officer (Principal
Executive Officer)
May 14, 2007 By: /s/ WAN YULONG
-------------
Wan Yulong
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
| This ‘424B3’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 12/20/09 | ||||
| 1/30/09 | ||||
| 12/31/08 | 10-K, 10-K/A, 5 | |||
| 12/15/08 | ||||
| 1/1/08 | ||||
| 12/31/07 | 10-K, 10-K/A | |||
| 11/15/07 | ||||
| 9/20/07 | ||||
| 8/7/07 | PRE 14C | |||
| 7/7/07 | ||||
| 7/6/07 | ||||
| 6/27/07 | ||||
| 6/16/07 | ||||
| 6/15/07 | ||||
| 6/6/07 | ||||
| Filed on: | 5/29/07 | |||
| 5/25/07 | ||||
| 5/14/07 | 10QSB | |||
| 5/11/07 | ||||
| 5/9/07 | 8-K | |||
| 5/7/07 | ||||
| 5/6/07 | ||||
| 4/2/07 | 10KSB | |||
| 3/31/07 | 10QSB, 10QSB/A | |||
| 3/29/07 | ||||
| 3/26/07 | ||||
| 3/12/07 | 8-K | |||
| 3/9/07 | 8-K | |||
| 1/17/07 | ||||
| 1/15/07 | ||||
| 1/12/07 | ||||
| 1/1/07 | ||||
| 12/31/06 | 10KSB | |||
| 12/29/06 | 4, 8-K | |||
| 12/20/06 | ||||
| 12/15/06 | ||||
| 12/1/06 | ||||
| 9/20/06 | ||||
| 9/15/06 | ||||
| 9/14/06 | ||||
| 8/23/06 | SB-2 | |||
| 8/22/06 | ||||
| 8/21/06 | 8-K | |||
| 7/7/06 | 8-K | |||
| 7/6/06 | 8-K | |||
| 6/30/06 | 10QSB | |||
| 6/28/06 | 8-K, 8-K/A | |||
| 5/6/06 | ||||
| 5/5/06 | ||||
| 4/27/06 | 8-K | |||
| 4/21/06 | 3, 8-K, 8-K/A | |||
| 4/20/06 | ||||
| 3/31/06 | 10QSB, 10QSB/A | |||
| 2/23/06 | ||||
| 12/31/05 | 10KSB | |||
| 9/30/05 | 10QSB | |||
| 9/15/05 | ||||
| 6/30/05 | 10QSB | |||
| 12/31/04 | ||||
| 10/27/04 | SB-2 | |||
| 7/6/04 | ||||
| 12/31/03 | ||||
| 3/28/02 | ||||
| 1/1/02 | ||||
| 9/7/99 | ||||
| List all Filings | ||||