Filed On 4/8/05 3:23pm ET · SEC File 0-32585 · Accession Number 1010549-5-247
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
4/08/05 Sunrise RE Development Group Inc 10KSB 12/31/04 5:54 1010549
Document/Exhibit Description Pages Size
1: 10KSB Annual Report -- Small Business 48 227K
2: EX-31.1 Section 302 Certification of Ceo 2± 9K
3: EX-31.2 Section 302 Certification of Cfo 2± 9K
4: EX-32.1 Section 906 Certification of Ceo 1 7K
5: EX-32.2 Section 906 Certification of Cfo 1 6K
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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 fiscal year ended: December 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number: 000-32585
SUNRISE REAL ESTATE DEVELOPMENT GROUP, INC.
-------------------------------------------------------------------------
(Name of Small Business Issuer in its Charter)
Texas 75-2713701
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 1502, No.333,Zhaojiabang Road
Shanghai, PRC 200031
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: + 86-21-6422-0505
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities exchange Act of 1934 during the preceding
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 [ ]
1
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive 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 its most recent fiscal year ended December 31, 2004
were US$7,723,641.
As of March 30, 2005 the aggregate market value of the Common Stock held by
non-affiliates, 6,614,934 shares of Common Stock, was $33,074,670 based on an
average of the bid and ask prices of $5 per share of Common Stock on such date.
The number of shares outstanding of the issuer's Common Stock, $0.01 par value,
as of March 30, 2005 was 21,636,614 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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2
SUNRISE REAL ESTATE DEVELOPMENT GROUP, INC.
FORM 10-KSB
TABLE OF CONTENTS
Page
PART I
Item 1. Business..............................................................4
Item 2. Property.............................................................10
Item 3. Legal Proceedings....................................................10
Item 4. Submission of Matters to a Vote of Security Holders..................10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.............11
Item 6. Management's Discussion and Analysis or Plan of Operation............12
Item 7. Financial Statements.................................................22
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................23
Item 8A. Controls and Procedures..............................................23
Item 8B. Other Information....................................................23
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act....................24
Item 10. Executive Compensation...............................................27
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters......................................28
Item 12. Certain Relationships and Related Transactions.......................30
Item 13. Exhibits and Reports on Form 8-K.....................................30
Item 14. Principal Accounting Fees and Services...............................31
Consolidated Financial Statements
3
Part I
ITEM 1. Description of business
Corporate History
Sunrise Real Estate Development Group, Inc. ("SRRE") was incorporated in the
State of Texas on October 11, 1996. On October 28, 2003, Olympus Investment
Corporation, a Brunei corporation, based in Taipei, Taiwan, purchased all of the
78,400 shares of common stock owned by Yarek Bartosz, and then became the
majority, 51% shareholder of the Company.
Effective December 22, 2003, the name of the Company, Parallax Entertainment,
Inc. was changed to Sunrise Real Estate Development Group, Inc. Also effective
December 22, 2003, the outstanding shares of common stock, 153,262 shares, were
reverse split, one for five, resulting in 30,614 shares being issued and
outstanding, post reverse split. Thereafter, on December 27, 2003, the Company
sold in a private placement to non-US persons 6,600,000 shares of common stock
for $0.025 per share, an aggregate of $165,000. SRRE relied on the Regulation S
exemption from the registration requirements of the Securities Act of 1933 in
connection with this private placement.
On August 31, 2004, SRRE, CY-SRRE and Lin Chi-Jung, an individual and agent for
the beneficial shareholder of CY-SRRE, i.e. Ace Develop, entered into an
exchange agreement that SRRE issue 5,000,000 shares of common stock to the
beneficial shareholder or its designees, in exchange for all outstanding capital
stock of CY-SRRE. The transaction was closed on October 5, 2004. Lin Chi-Jung is
Chairman of the Board of Directors of SRRE, the President of CY-SRRE and the
principal and controlling shareholder of Ace Develop.
Also on August 31, 2004, SRRE, LRY and Lin Chi-Jung, an individual and agent for
beneficial shareholders of LRY, i.e. Ace Develop, Planet Tech and Systems Tech,
entered into an exchange agreement that SRRE issue 10,000,000 shares of common
stock to the beneficial shareholders, or their designees, in exchange for all
outstanding capital stock of LRY. The transaction was closed on October 5, 2004.
Lin Chi-Jung is Chairman of the Board of Directors of SRRE, the President of LRY
and the principal and controlling shareholder of Ace Develop. Regarding the
10,000,000 shares of common stock of SRRE issued in this transaction, 8,500,000
shares were issued to Ace Develop, 750,000 shares were issued to Planet Tech and
750,000 shares were issued to Systems Tech.
Prior to the closing of the aforesaid Exchange Agreements, Sunrise was an
inactive "shell" company. Following the closing, Sunrise, through its two wholly
owned subsidiaries, LRY and CY-SRRE, has engaged in the real estate development
and brokerage businesses in Mainland China.
As a result of the acquisition, the former owners of CY-SRRE and LRY hold a
majority interest in the combined entity. Generally accepted accounting
principles require in certain circumstances that a company whose stockholders
retain the majority voting interest in the combined business to be treated as
the acquirer for financial reporting purposes. Accordingly, the acquisition has
been accounted for as a "reverse acquisition" arrangement whereby CY-SRRE and
LRY are deemed to have purchased SRRE. However, SRRE remains the legal entity
and the Registrant for Securities and Exchange Commission reporting purposes.
The historical financial statements prior to October 5, 2004 are those of
CY-SRRE and LRY and their subsidiaries. All shares and per share data prior to
the acquisition have been restated to reflect the stock issuance as a
recapitalization of CY-SRRE and LRY.
Our ultimate goal is to be fully engaged in the real property development
business. We are now a sales brokerage business with accumulated expertise in
the areas of property sales & marketing. We generated consolidated revenues of
more than $7.7 million from our sales brokerage business in 2004. With
experience and in-depth local market know-how, we are now ready to enter the
property development sector, while at the same time maintaining our steady
growth in the brokerage business.
4
General Business Description
The Company was incorporated on October 11, 1996 in Texas, USA and was formally
known as Parallax Entertainment, Inc. The Company has gone through a series of
transition leading to the completion of a reverse merger on October 5, 2004. The
Company's business is now in the real estate consultation, agency sales, and
property underwriting in the People's Republic of China ("the PRC").
The Company recognizes that in order to differentiate itself from the market,
there is a need to avoid direct competition with the rest of the large-scale
property developers who have abundant funds to acquire land. We aim at crafting
a niche position as the marketing alliance of other developers.
One of the Company's subsidiaries began operations as a real estate marketing
agent in 2001. Within three years of operation, that subsidiary has successfully
marketed 10.7 million square meters of gross floor area of residential and
commercial properties in Mainland China's major and secondary cities.
Company chart
Sunrise operates through a tier of wholly owned subsidiaries with 100% ownership
of capital stock of Sunrise Real Estate Development Group, Inc., a Cayman Island
corporation ("CY-SRRE") and LIN RAY YANG Enterprise, Ltd., a British Virgin
Island company ("LRY"). Neither CY-SRRE nor LRY have operations but respectively
conduct operations in Mainland China through wholly owned subsidiaries based in
Shanghai, the People's Republic of China (the "PRC"). CY-SRRE operates through
its wholly owned subsidiary, Shanghai Xin Ji Yang Real Estate Consultation Co.
Ltd ("SHXJY"). LRY operates through its wholly owned subsidiary, Shanghai Shang
Yang Real Estate Consultation Co. Ltd. ("SHSY"). SHXJY is a property agency
business earning commission revenue from marketing and sales service to
developers. SHSY is a property investment company, investing in and partnering
with developers to whom they provide marketing services. In January 2005, LRY
established a new subsidiary - Suzhou Gao Feng Hui Property Management Co, Ltd
("SZGFH"). This subsidiary is a joint investment between LRY and its partnering
developer, SIP Hi-Dragon Real Estate Development Co., Ltd. The major business of
SZGFH is to render property rental service, buildings management and maintenance
service for office buildings and service apartments. Our corporate
organizational table is as follows:
Figure 1: Company Organization Chart
Sunrise Real Estate
Development Group, Inc.
|
|
------------------------------------------------
| |
| |
Sunrise Real Estate LIN RAY YANG
Development Group, Inc. Enterpise Ltd., BVI
Cayman 100% | 80%
| -------------------------------------------------
100% | | |
Shanghai Xin Ji Yang Real Shanghai Shang Yang Suzhou Gao Feng Hui
Estate Consultation Real Estate Consultation Property Management
Company Limited Company Limited Company Limited
5
Celebrity-turned-entrepreneur, Lin Chi Jung, and the founder of Taiwan's top
property sales agency, Lin Chou Chin, established SHXJY in end of 2001 in
Shanghai jointly. SHXJY combined professional strengths from Taiwan, Mainland
China and Hong Kong to venture into Mainland China's property marketing and
sales brokerage sector.
SHXJY has fifty-two sales teams operating in fifteen provinces in the PRC. As of
December 31, 2004, SHXJY has contracts to market and sell a total property area
exceeding 10.69 million square meters. SHXJY is comprised of three major
divisions: research and development, planning, and sales divisions. It has a
total work force of 450 personnel including 30 Taiwanese expatriates. SHXJY is
one of the largest foreign-based brokerage agencies in Shanghai.
SHSY was incorporated in March 2004 as a property development advisory company
with the goal of becoming established in the land development business in
Mainland China. SHSY identifies, evaluates and negotiates development projects.
SHSY is comprised of professional project planning, property investment
evaluation and project marketing teams.
SHSY's first project is the development of a commercial building within the
Suzhou Industrial Park, called the Sovereign Building. The Sovereign Building is
a joint venture between SHSY and SIP Hi-Dragon Real Estate Development Co.,
Ltd., SHSY will undertake the sale of all units within the project.
SZGFH was incorporated in January 10, 2005 as a property management company. The
registered capital of SZGFH is $300,000; whereby LRY invested 80% into it, and
Hui Long took-up the rest of the 20% stake. The Company anticipates that it
would be able to secure a number of service contracts from the existing unit
owners of Sovereign Building. We are hoping that the rental revenue from this
subsidiary will help our group to have a more diversified revenue base. Our
historical revenue stream has mainly been in the form of commission based
revenue, which sometimes may expose us to developer-related risks, such as
fluctuation in property price, cyclical collection flow and project management
issues. The durable and accumulative rental revenue will provide us a cushion
against the cyclical nature of the real estate industry.
With a relatively short history and smaller capital base, the Company recognizes
that in order to differentiate itself from the market, there is a need to avoid
direct competition with large-scale property developers who have abundant funds
to acquire land. We aim at utilizing our professional experience to carve a
niche and position the Company as the marketing alliance of other developers.
This strategic plan is designed to expand our activities beyond our existing
revenue base, enabling the Company to assume higher investment risk and allow
flexibility in collaborating with partnering developers. The plan is aimed at
improving the capital structure of the Company, diversifying our revenue base,
creating higher values and equity returns.
In the past 3 years, the Company has created a reputation as a leading sales and
marketing agency for new projects. With our accumulated expertise and
experience, we will now slowly take a more aggressive role by participating in
property development. We will select the property developers with outstanding
qualifications as our strategic partners, and continue to build strength in
design, planning, positioning and marketing services.
Business Activities
Since 2002, the Company's main operating subsidiary has engaged in sales and
marketing agency work for newly built property units. The Company has developed
a good network with landowners and earned the trust of developers, allowing us
to explore opportunities in property investment.
As part of this goal, a new operating subsidiary with an experienced management
team has been acquired to focus on developing a new strategic plan for property
investment activities. The new strategic plan is designed to expand Company
activities beyond our existing revenue base, to assume a higher risk of
investment and allow flexibility in structuring collaboration models with
partnering developers.
While the Company has an excellent track record as a leading sales and marketing
agency for new developments, we are slowly becoming a small equity participant
in property development projects.
6
Property Marketing and Sales Agency
Depending on the scope of our engagement and our partners' requirements, the
scope of our services could be a combination of the following models:
Commission Based Services
-------------------------
Commission based services refer to marketing and sales agency services to
perform the following services:
a. Integrated Marketing Planning
b. Advertising Planning & Execution
c. Sales Planning and Execution
In this type of business, the Company signs a marketing and sales agency
agreement with property developers to undertake the marketing and sales
activities of a named project. The scope of service varies according to clients'
needs; it could be a full package of all the above services (a, b and c), a
combination of any 2 of the above services or a single service.
Most of our existing revenue come from commission based services, representing
at least 80% of our annual revenues. We secure those projects via bidding or
direct appointment. Through existing client rapport and selling results, we have
secured a number of projects from previous clients via direct appointment,
especially on subsequent phases of projects that we marketed before. Almost 40%
of our existing projects are such subsequent phases, representing a quarter of
our current year revenues.
Normally before we are retained by a developer, we will evaluate and determined
the acceptable selling value of a project; this value will be proposed to the
developer and the parties will negotiate an Average Selling Value ("ASV") as the
basis of property selling price in our agency agreement.
The actual retail value of the project is generally priced higher than the ASV
depending on the actual market conditions and our confidence level upon project
launching. On average, we are able to sell the property at a 20% markup of ASV.
Our normal commission structure is a combination of:
a) Base Commission of 1.5% on the Acceptable Selling Value
b) Surplus Commission of 20% - 40% of the difference between ASV and actual
sales price.
Our wholly owned subsidiary, Shanghai SHXJY Real Estate Consultation Co, Ltd.
("SHXJY"), engages in this sales and marketing phase of our business.
Property Investment
The Company's ultimate goal is to acquire strategic raw land properties to build
commercial and residential projects.
In the PRC, all land titles are owned by the government, and private companies
are granted the Land Use Rights Certificate ("LURC") of not more than 70 years
depending on the purpose of the development For example, residential property
has a land use right of 70 years, commercial and entertainment land has land use
rights of 50 years.
During tenure of a land use right, the assignee may claim the piece of land as
its property asset, whereby this property is transferable and may be used for
various commercial purposes, i.e., sales and purchase, renting and leasing,
subject to mortgage and guarantee, provided that the principal owner of the
rights would have to pay government usage fees annually.
7
The PRC's regulation framework also requires that a property development company
possess Land Use Right Certificates before registering itself as a Property
Development Company. The Company has not acquired any Land Use Rights and
therefore is not registered as a Property Development Company. However it is our
goal to do so.
Mainland China's Property Sector
|X| The industry's macro environment is slowly opening up and the property
sector is gradually developing to be a more regulated market.
|X| Stable economic growth provides a solid and secure base for investment
returns in the property sector.
Figure 2: GDP Growth of US, Japan, Taiwan, and China for the period of 2000
through 2004
[OBJECT OMITTED]
Figure 3: Per Capita GDP as Multiple of China for US, Japan, Hong Kong,
Singapore, Taiwan, and China.
[OBJECT OMITTED]
Government regulation
---------------------
The Law on the Protection of the Investment from Taiwan Compatriot
8
This regulation ensures that the PRC Government shall in no circumstances
interfere in the economic cooperation between the Mainland China and Taiwan
because of political differences. The PRC Government shall not discriminate and
shall protect the legal benefits of Taiwan compatriots' investment in Mainland
China. This policy allows Taiwan business to safely operate in Mainland China
without government discrimination.
On August 31, 2003, the State Council of the PRC issued Guo Fa (2003) No.18,
State Council's notice regarding the accelerating real estate market in the
direction of continuous and healthy development. There is no doubt that this
policy will become an important contribution to the PRC's economic development.
It explicitly provides for assistance to middle/low income households by means
of subsidies, clearly defining the regulations to control land pricing so as to
enable the majority of households to pay the housing price and fulfill Chinese
citizens' dreams of buying ordinary commodity housing. Such decision will have
positive direct influence on the overall economic growth of the country.
The No.18 policy conforms to the public opinion to satisfy market supply and
demand, it also provides that strong support will be provided to qualified real
estate development companies. The construction cost for economical and suitable
housing will also be reduced through measures such as land transfers, reducing
or waiving administrative and institutional charges as well as tax revenue
preferential policies and so on. Enterprises will all be under fair competition,
eliminating those previous under-the-table compromising transactions.
Regulation No.18
The Policies that benefit real estate developers in the No.18 regulation are as
follows:
o Increase the supply of ordinary commodity housing.
o Control construction of upscale commodity apartment.
o Stimulate the secondary housing market.
o Increase the collection of housing accumulation funds and exert more
efforts in granting loans.
o Strengthen the supervision and management of mortgage and exert more effort
in providing credit support to those qualified real estate development
enterprises projects
Environmental matters
---------------------
None
9
Employees
As of December 31, 2004, we had the following number of employees:
Department Employees
---------- ---------
Administration Dept. 21
Marketing Department Dept. 40
R&D Dept 9
Accounting Dept. 7
Advertising & Communication Planning Dept. 14
Financing Dept. 2
Investor Relations Dept. 2
Suzhou Subsidiary of XJY
Administration Dept. 9
Accounting Dept. 2
Marketing Dept. 71
R&D Department 7
Nanchang Branch of XJY
Administration Dept. 4
Accounting Dept. 2
Marketing Dept.
Advertising & Communication Planning Dept. 1
Beijing Subsidiary of XJY
Administration Dept. 4
Accounting Dept. 1
Marketing Dept. 1
Yangzhou Branch of XJY
Administration Dept. 2
Accounting Dept. 2
Marketing Dept. 32
Total 233
ITEM 2. DESCRIPTION OF PROPERTY
We currently rent our facilities at 7/F & 15/F, No.333, Zhaojiabang Road,
Shanghai, the PRC. In addition, we have regional field support office in various
cities in Mainland China, namely Suzhou, Beijing, Nanjing and Yangzhou.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings of a material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Over the Counter Bulletin Board system under
the symbol "SRRE." The following table sets forth the high and low bid
quotations of our common stock reported by the OTCBB system for the periods
indicated.
Over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commissions, and may not necessarily represent actual
transactions.
(Expressed in USD)
------------------- ---------------------- ----------------------
2004 2003
------------------- ---------------------- ----------------------
High Low High Low
------------------- ---------- ----------- ----------- ----------
First quarter 6.30 5.90 1.85 0.00
------------------- ---------- ----------- ----------- ----------
Second quarter 10.01 3.50 0.55 0.21
------------------- ---------- ----------- ----------- ----------
Third quarter 7.50 7.00 0.50 0.21
------------------- ---------- ----------- ----------- ----------
Fourth quarter 7.50 3.50 6.50 0.25
------------------- ---------- ----------- ----------- ----------
Source: http://yahoo.finance.com
According to the transfer agent's records, at March 1, 2005, approximately
10,471 holders, including beneficial holders, held our common stock. On March
30, 2005, the closing price of our common stock was $5.00.
No cash dividends were paid to common stockholders in 2004 and 2003. Major
reason being we are still a growing company and we would require sufficient
liquidity to fund our aggressive business activities. The Company would consider
paying dividends in the future when cash surplus allowed so.
11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Please read this discussion along with the Consolidated Financial Statements and
Notes found at ITEM 7. "FINANCIAL STATEMENTS."
OVERVIEW
As a result of the completion of merger exercise on October 5 2004, the holding
companies of the 2 businesses i.e., LIN RAY YANG Enterprise Ltd., a British
Virgin Island company ("LRY"), and Sunrise Real Estate Development Group, Inc.,
a Cayman Islands company ("CY-SRRE") became our wholly-owned subsidiaries, and
their respective subsidiaries (SHSY & SHXJY) businesses became our only
business.
Since the former stockholders of LRY and CY-SRRE acquired a majority of our
voting interests in the merger, the transaction was treated as a reverse
acquisition, with LRY and CY-SRRE treated as the acquirer for accounting
purposes. Accordingly, the pre-merger financial statements of LRY and CY-SRRE
are our historical financial statements. Before the completion of the merger
exercise, SRRE had no continuing operations and its historical results would not
be meaningful if combined with the historical results of SHXJY.
As a result of the acquisition, the former owners of CY-SRRE and LRY hold a
majority interest in the combined entity. Generally accepted accounting
principles require in certain circumstances that a company whose stockholders
retain the majority voting interest in the combined business to be treated as
the acquirer for financial reporting purposes. Accordingly, the acquisition has
been accounted for as a "reverse acquisition" arrangement whereby CY-SRRE and
LRY are deemed to have purchased SRRE. However, SRRE remains the legal entity
and the Registrant for Securities and Exchange Commission reporting purposes.
The historical financial statements prior to October 5, 2004 are those of
CY-SRRE and LRY and their subsidiaries. All shares and per share data prior to
the acquisition have been restated to reflect the stock issuance as a
recapitalization of CY-SRRE and LRY.
SRRE and its subsidiaries, namely, CY-SRRE, LRY, SHXJY, SZXJY, BJXJY and SHSY
are collectively referred to as "the Company" hereafter. The principal
activities of the Company are the provision of property brokerage services and
real estate marketing services in Mainland China.
RECENT DEVELOPMENTS
Before 2004, our major business is agency business, whereby our only subsidiary
then, SHXJY was contracted by property developers to market and sell their newly
developed property units; in return we earn a commission fee calculated as a
percentage of the selling price. Our business operation in SHXJY continues to
demonstrate growth in revenue.
In 2004, through another subsidiary, SHSY, we venture into a higher risk
business model whereby our commission was not calculated as a percentage of
selling price anymore; instead, our commission revenue is equivalent to the
price difference between the final selling price and underwriting price. In this
higher risk model named "Underwriting Model", we negotiated with the developer
for an underwriting price as low as possible, with the condition that we
guarantee to acquire all unsold units within certain period. In return, we were
given the flexibility to price the final selling price and earn the price
difference between the final selling price and the underwriting price. The risk
of this kind of arrangement is that, if there is any unsold unit upon the expiry
period, we may have to absorb the unsold units from developers at the
underwriting price and hold them as our stock or investment. As per the terms of
underwriting agreement, there are 2 expiry periods: the first is in the mid of
2005 whereby we committed to sell 60% of the contracted value; the second is by
the end 2005, whereby we committed to the remaining 40% of the contracted value.
12
While we expect revenue to stem from these two subsidiaries businesses, we can
provide no assurance that this will result in any increase in profitability.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-KSB
In addition to historical information, this Form 10-KSB contains forward-looking
statements. Forward-looking statements are expressions of our current beliefs
and expectations, based on information currently available to us; estimates, and
projections about our industry, and certain assumptions made by our management.
These statements are not historical facts. We use words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions to identify our forward-looking statements, which include, among
other things, our anticipated revenue and cost of our agency and investment
business.
Because we are unable to control or predict many of the factors that will
determine our future performance and financial results, including future
economic, competitive, and market conditions, our forward-looking statements are
not guarantees of future performance. They are subject to risks, uncertainties,
and errors in assumptions that could cause our actual results to differ
materially from those reflected in our forward-looking statements. We believe
that the assumptions underlying our forward-looking statements are reasonable.
However, you should not place undue reliance on these forward-looking
statements. They only reflect our view and expectations as of the date of this
Form 10-KSB. We undertake no obligation to publicly update or revise any
forward-looking statement in light of new information, future events, or
otherwise.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation 46R (FIN 46R), a revision to Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46R clarifies some of the
provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R
is effective at the end of the first interim period ending after March 15, 2004.
Entities that have adopted FIN 46 prior to this effective date can continue to
apply the provisions of FIN 46 until the effective date of FIN 46R or elect
early adoption of FIN 46R. The adoption of FIN 46 and FIN 46R did not have a
material impact on our financial statements.
In December 2004, the Financial Accounting Standards Board (FASB) issued a
revision of FASB Statement No. 123, (FASB 123R) Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. FASB 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity, equity instruments or
that may be settled by the issuance of those equity instruments. FASB 123R
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. FASB 123R does not change
the accounting guidance for share-based payment transactions with parties other
than employees provided in FASB 123 as originally issued and EITF Issue No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services. FASB 123R does
not address the accounting for employee share ownership plans, which are subject
to AICPA Statement of Position 93-6, Employers Accounting for Employee Stock
Ownership Plans. We do not believe the adoption of FASB 123R will have a
material impact on our financial statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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. Critical accounting policies for us include revenue
recognition, impairment of goodwill, and accounting for income taxes.
13
Goodwill
--------
SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill be tested
for impairment on an annual basis (December 31 for us) and between annual tests
if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value. These events
or circumstances could include a significant change in the business climate,
legal factors, operating performance indicators, competition, sale or
disposition of a significant portion of the Company. Application of the goodwill
impairment test requires judgment, including the identification of the Company,
assignment of assets and liabilities to Company, assignment of goodwill to the
Company, and determination of the fair value of the Company. The fair value of
Company is estimated using a discounted cash flow methodology. This requires
significant judgments including estimation of future cash flows, which is
dependent on internal forecasts, estimation of the long-term rate of growth for
our business, the useful life over which cash flows will occur, and
determination of our weighted average cost of capital. Changes in these
estimates and assumptions could materially affect the determination of fair
value and/or goodwill impairment for the Company
Income Taxes
------------
SFAS 109, Accounting for Income Taxes, establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entity's financial
statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in our financial statements or
tax returns. Variations in the actual outcome of these future tax consequences
could materially impact our financial position or our results of operations.
Revenue Recognition
-------------------
Agency commission revenue from property broking is recognised when the property
developer and the buyer complete a property sales transactions, which is
normally at the time when the property developer receives from the buyer a
portion of the sales proceeds in accordance with the terms of the relevant
property sales agreement.
Revenue from marketing consultancy services is recognized when services are
provided to clients.
RESULTS OF OPERATIONS
We provide the discussion and analysis of our changes in financial condition and
results of operations with comparison to that of last fiscal year only. There
will be no comparison for last fiscal year vis-a-vis the period before as there
was no pro-forma consolidated financial statement prior to the "reverse
acquisition" exercise.
Revenue
-------
Our net revenues after sales tax are mainly agency commission fee derived from
SHXJY. Net revenue was $7.7 million in 2004 compared to $5.3 million in 2003. In
2004, we were contracted to sell property value worth $283 million, which was a
134% increase from last year contracted value of $121 million. We expect we will
experience the similar if not better revenue growth rate in 2005 for our
commissioned agency business.
In 2004, another operating subsidiary, SHSY is contributing minimal gross
revenue of $122,380 as it is still in the early stage of development; in
February 2004, SHSY has won a project to underwrite an office building in
Suzhou. Property Sales Underwriting is comparatively a higher risk business
model compared to our pure commission based agency business, whereby our
commission was not calculated as a percentage of selling price anymore; instead,
our commission revenue is equivalent to the price difference between the final
selling price and underwriting price. In this relatively high risk model,
14
namely, "Underwriting Model", we negotiated with developer for an underwriting
price as low as possible, with the condition that we guarantee to acquire all
unsold units within certain period. In return, we were given the flexibility to
price the final selling price and earn the price difference between the final
selling price and the underwriting price. The risk of this kind of arrangement
is that, if there is any unsold unit upon the expiry period, we may have to
absorb the unsold property units from developers at the underwriting price and
hold it as our stock or investment.
This underwriting project launched in January 2005 after the property develop
obtained the necessary permit for sale. Since then, we have sold almost a
quarter of the underwritten floor areas as of March 23, 2005; this will generate
potential revenue of $3.8 million. The total revenue to be generated from this
project is $15 million. We expect with the inclusion of this underwriting
income, the composition of our group revenue will change tremendously in 2005,
with both agency commission and underwriting income each representing
approximately half of the revenue.
Cost of Revenue
---------------
Cost of revenue increased to $4.2 million when compared with that of last
corresponding period. The increase is primarily in tandem with the increase in
sales. Besides, there were other elements for the significant increase in cost
of revenue in 2004;
1. Advertising costs: For most of the projects handled by the Company,
advertising costs are borne by corresponding property developers. For
certain projects in 2004, we committed to bear all advertising costs on our
own in exchange for a higher agency commission rate. All advertising costs
incurred in the promotion of the Company's property projects are expensed
as incurred. Total advertising costs for 2004 was $1.3 million while just
$17,000 was incurred in 2003. Due to the cyclical nature of our business,
we have no guarantee to match the advertising costs to the related revenue;
however, we are confident that advertising costs expensed in 2004 will be
recovered when the related revenue is generated in 2005. Advertising costs
are usually incurred according to the timeline specified in project
budgeting. It is budgeted according to a percentage of our expected sales
amount. Due to the nature of property marketing and sales cycle,
advertising costs are usually incurred two to three months prior to the
formal sales launch activities; in some cases, advertising costs and
activities may take place before year-end, while sales launch activities
were take place after year-end. As advertising costs are expended off as
incurred, there is possibility that advertising costs incurred in current
year are not exactly matching with the related revenue earned.
2. Operating Incentives: Operating Incentive is awarded to the management and
operation team for achieving and exceeding certain preset performance
targets for the year, operating incentive of $165,000 was incurred in this
year.
General and Administrative Expenses
-----------------------------------
The Company's general & administrative expenses increased by 229% over 2003. The
increase in general and administrative expenses was mainly due to the following
reasons:
1. Regionalized Management Initiative Program: The increase in management
member and sales personnel resulting from the introduction of Regionalized
Management Initiative Program caused the increase in staff costs during the
year. In addition, the rental and other office expenses arising from the
set-up of SHSY, SZXJY and SHXJY's two branches located in Nanchong and
Yangzhou in 2004 also caused the increase in general and administrative
expenses.
2. Establishment of SHSY: The setting up of SHSY in March 2004 is to undertake
higher risk business arrangement with developer, i.e.; underwriting case
and any other property investment project in the future. The running cost
of this subsidiary is amounted to $487,940 in 2004.
3. Business Development Incentive: This incentive was attributed to the
initial management team members for their valuable contribution to the
Company. It was calculated at 0.2% of the total value of properties sold in
2004. During the year, business development incentive of $565,456 was
declared to the initial management team.
15
In addition to the general and administration expenses associated with the new
subsidiaries and branches, the expenses also included housing allowance of
$138,000 given to the top management who are Taiwanese expatriate. As being a
social committed enterprise, we also made contribution to the community by
donating to local schools and providing education subsidies in rural areas. In
2004, the total contribution for the above was $48,000.
LIQUIDITY AND CAPITAL RESOURCES
Source of Cash:
---------------
|X| Our principal sources of cash are commission revenue from our agency
business. As agency business will remain the core of our operation, it will
continue to be our primary source of cash. On top of that, we are expecting
another source of operating cash from our newly set-up investment division
as well. We believe these sources will continue to meet our cash
requirements, including debt service, operating expenses and promissory
deposits for various property projects. Although we expect these sources of
cash to be sufficient to fund our planned uses of cash, we can make no
assurance that the expected property sales will be completed as planned.
|X| Another major source of cash is from the injection of capital amounting to
$2 million by LIN RAY YANG Enterprise Ltd., a British Virgin Island company
("BVI LRY").
|X| Proceeds from borrowings were also a key source of cash for SRRE. We have
obtained $1 million under a commercial promissory note. The commercial
promissory note bears interest at a rate of 5% per annum. All outstanding
principal and interest are due at maturity as of December 31, 2004. In
January 2005 the line of maturity of the Note was extended for a year to
December 31, 2005. Interest is due on demand and all outstanding principal
are due at maturity.
|X| We have also entered in a mortgage loan agreement with Suzhou Commercial
Bank. This is a 5- year term loan amounting to $1.48 million. The
arrangement of this term loan is mainly to finance the acquisitions of two
floors of an office building under development in Suzhou, the PRC. The term
loan bears 0.4875% monthly interest with a monthly repayment installment of
$28,510. We may face difficulty in paying back the loan if the
property-underwriting project in Suzhou does not provide the cash source as
planned.
|X| We have also profit sharing partners whom committed to share part of our
investment risk in the property underwriting project spearheading by our
subsidiary, SHSY. The total proceeds from these profit sharing partners are
$972,633. Profit distributable to these profit sharing partners will be
allotted to them respectively after deducting all the costs involved in the
project.
Uses of Cash
------------
|X| Most of our cash resources were used to fund the operating expenses and
personnel related expenses, such as salary and commission paid to sales
forces, advertising cost, maintenance of regional offices and etc.
|X| We also committed in placing performance guarantee deposits to certain
property developers in order to secure the relevant projects.
We expect that moving forward we may utilize more available cash sources to fund
for Performance Guarantee in order to secure higher quality projects and to
allow us to negotiate for better agency commission structure.
Potential Cash Pressure for 2005
--------------------------------
|X| Sales Underwriting Agreement
16
Our subsidiary, SHSY has underwritten the sale of Suzhou Hui Long Project
(the building name is called Sovereign Building), a property developed by
an independent developer. Under this underwriting agreement, we negotiated
with developer for an underwriting price, with the condition that we
guarantee to acquire all unsold units within certain period. In return, we
were given the flexibility to price the final selling price and earn the
price difference between the final selling price and the underwriting
price. We are optimistic that we would be able to sell off the committed
units by the date agreed by both parties.
The total sum of the underwriting value is $49 million. We have committed
to sell 60% of the total underwriting value by May 25, 2005. As of March 9,
2005, we have managed to sell off 35% of the committed value since the
launch the sales on January 8, 2005. The management is confident to achieve
the 60% target by May 25, 2005. If we do not meet the 60% target by May 25,
2005, we have to acquire from the independent developer the remaining
unsold units. The requirement to pay the unsold units will partly be funded
by mortgage loans from banks and partly be funded by the proceeds earned
from the sold units.
This report contains certain forward-looking statements and information relating
to us that are based on the beliefs and assumptions made by our management as
well as information currently available to the management. When used in this
document, the words "anticipate", "believe", "estimate", and "expect" and
similar expressions, are intended to identify forward-looking statements. Such
statements reflect our current views with respect to future events and are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated or expected.
RISK FACTORS
SRRE has identified a number of risk factors faced by the Company. These
factors, among others, may cause actual result, events or performance to differ
materially from those expressed in any forward-looking statements made in this
Form 10-KSB or in press releases or other public disclosures. Investors should
be aware of the existence of these factors.
Risk relating to the Group
Risk relating to Property Underwriting Agreement
Shanghai Shangyang Real Estate Consultation Company Limited ("SHSY"), one of our
subsidiaries, has entered into a Property Underwriting Agreement with an
independent property developer to underwrite the Sovereign Building Project, a
commercial building developed by the developer at a fixed underwriting price.
When an unit is sold, the price difference between the ultimate selling price
and the fixed underwriting price will be attributable to SHSY According to the
Property Underwriting Agreement, we have committed to distribute all the units
within a certain period of time. If we fail to sell all the units, we have to
acquire all the unsold units from the developer. Hence, we are bearing a
potential risk of liability, and our future cash flow and liquidity would be
adversely affected.
We may be unable to recognize our income
Generally, we recognize our income after the contracts signed with developers
are fulfilled and confirmations are received from the developers. But, sometimes
we cannot recognize income even we have rendered our services because of the
following reasons:
|X| The developers have not received payments from potential property buyers
who promise to pay the outstanding sum by cash,
|X| The property owners are unable to obtain the mortgage financing from bank,
in the case where property buyer is paying the outstanding sum via mortgage
financing
|X| Even if the property owners obtain the mortgage loan, because the
developers' credit is relatively low, the banks are unwilling to grant the
bridging loan to developer in time,
|X| The developers intend to be in arrears with the sales commission, hence not
granting confirmation to the Company to invoice them according.
Development of new business may stretch our cash flow and strain our operation
efficiency
In end of 2004, We have established a joint venture with SIP Hi-Dragon Real
Estate Development Co., Ltd. - Suzhou Gao Feng Hui Property Management Co., Ltd
to expand our business; our proportion of investment is 80%. The business scope
17
of the new company is to conduct renting service, building management service
and buildings maintenance management service of office buildings, hotel-style
flat, some activities we have little experience of. Such expansion and the need
to integrate operations arising from the expansion may place a significant
strain on our managerial, operational and financial resources, and will further
contribute to an increase need in our financing requirements.
Risk associated with a Guaranteed Return Promotion
In order to sell out the underwritten property of Sovereign Building as
scheduled, we have launched a Promotional Package in end of November 2004. This
promotional package allow buyers and investors to enjoy a 5 or 8 years
guaranteed investment return of 8.5% and 8.8% per annum respectively. The return
is guaranteed by the Suzhou Gao Feng Hui Property Management Co., Ltd ("SZGFH"),
an independent company that we have 80% stake in, whereby SZGFH's principal
activities are the provisions of real estate leasing service and property
management service. However, we may not successfully lease out the targeted
properties at prices higher than that we committed as per the promotional
package. Our failure to do so could adversely affect our financial condition. In
addition, one of our subsidiaries, Shanghai Shang Yang Real Estate Consultation
Co., Ltd., must bear joint liability for the guarantee return agreement that
Suzhou Gao Feng Hui Property Management Co., Ltd enters into with several
property owners. If Gao Feng Hui fails to fulfill the agreement, Shang Yang's
financial condition may be affected adversely.
Our acquisition of new property may involve risks
We acquired two floors of the Sovereign Building this year and financed 50% of
the property acquisition sum via a 5-year term loan with the remainder 50% due
in November 2005. This acquisition involves several risks, including but not
limited to the following:
|X| Acquired property may not perform as well as we expected or ever become
profitable.
|X| Improvements to the properties may ultimately cost significantly more than
we had estimated.
|X| The mentioned loan is a floating rate debt. Accordingly, increases in
interest rates could materially increase our interest expense.
|X| If we are unable to generate sufficient cash flow from operation, when the
remainder 50% of the property acquisition sum is due, our operation would
be adversely affected.
We may be unable to effectively manage our growth
We will need to manage our growth effectively, which may entail devising and
effectively implementing business and integration plans, training and managing
our growing workforce, managing our costs and implementing adequate control and
reporting systems in a timely manner. We may not successfully manage our growth
or in integrating and assimilating any acquired business operations. Our failure
to do so could affect our success in executing our business plan and adversely
affect our revenues, profitability and results of operations.
Dependence on the performance of the property sector in specific geographical
area
The properties we resell and intend to invest are mainly based in Yangtze Delta,
especially in Shanghai. Our future prospects are therefore heavily dependent on
the continued growth of the property sector around Yangtze Delta, and our
business may be affected by any adverse developments in the supply and demand or
housing prices in the property sector around Yangtze Delta. The current level of
property development and investment activity in Yangtze Delta and other markets
is substantial. However, there is no assurance that such property resale and
investment activity in Yangtze Delta or any of the other markets of ours will
continue at this level in the future or that we will be able to benefit from the
future growth of the property market in Yangtze Delta or any of these other
property markets.
Financing considerations
Property sector is a capital-intensive business. Adequate financing is one of
the major factors, which can affect our ability to executive our plan in this
regard. We finance our business mainly from internal funds and bank borrowings,
and currently we are preparing for our listing exercise and raising equity fund.
There is no guarantee that we will always have internal funds available for
future developments or we will not experience difficulties in obtaining
18
financing and renewing credit facilities granted by financial institutions in
the future. And there may be a delay in listing and equity fund raising
activities. Our access to debt or equity financing depends on banks' willingness
to lend and on conditions in the capital markets, and we may not be able to
secure additional sources of financing on commercially acceptable terms, if at
all.
Any rise in interest rate would increase our interest cost
An increase in interest rates will increase the interest expense associated with
our floating-rate debt and the refinancing of any fixed-rate debt originally
financed at a lower rate.
Dependence on qualified personnel
As a small company, our success depends on the service of our executive officers
and other skilled managerial and technical personnel. The loss of the services
of one or more of such employees could have material adverse effect on us. In
addition, as our business continues to grow, we will need to recruit, train and
retain additional qualified employees. If we fail to attract and retain
qualified personnel, our business and prospects would be adversely affected.
Risk relating to partnering developers
We have been recording enormous growth rate this year. Currently, Xin Ji Yang is
our major contributor in term of both revenue and net income. As a service-based
company, Xin Ji Yang depends much on the working relationship and the agency
contracts with its partnering developers. We are exposed to the risk that the
developers may experience financial or other difficulties, which may affect
their ability or will to carry out the development projects and the reselling
contracts, thus delaying or canceling the fulfillment of the agency contracts.
Any of these factors could adversely affect our revenues.
Our controlling shareholders may take actions that are not in public
shareholders' best interests
The Ace Develop Properties Limited directly controls 62% of our outstanding
common stock and Lin Chi-jung, our Chairman, indirectly controls 62% of our
outstanding common stock. Accordingly, under and subject to the Articles of
Incorporation and the Company Law, the Ace Develop Properties Limited and Lin
Chi-Jung, by virtue of their controlling ownership of share interests, will be
able to exercise substantial control over our business by directly or indirectly
voting at either shareholders meetings or the board of directors meetings in
matters of significance to us and our public shareholders, including matters
relating to: |X| Election of directors and supervisors; |X| The amount and
timing of dividends and other distributions; |X| Acquisition of or merger with
another company; and |X| Amendment of the Articles of Incorporation.
Risk relating to the Real Estate Industry in Yangtze Delta and Other Areas of
the PRC
The real estate market in Yangtze Delta and other areas of the PRC
We are subject to real estate market conditions in the PRC generally and Yangtze
Delta in particular. Private ownership of property in the PRC is still at an
early stage of development. Although there is a perception that economic growth
in the PRC and the higher standard of living resulting from such growth will
lead to a greater demand for private properties in the PRC, it is not possible
to predict with certainty that such a correlation exists as many social,
political, economic, legal and other factors may affect the development of the
property market.
The PRC property market, including the Yangtze Delta property market, is
volatile and may experience oversupply and property price fluctuations. The
central and local governments frequently adjust monetary and other economic
policies to prevent and curtail the overheating of the PRC and local economies,
and such economic adjustments may affect the real estate market in Yangtze Delta
and other parts of China. Furthermore, the central and local governments from
time to time make policy adjustments and adopt new regulatory measures in a
direct effort to control the over development of the real estate market in
China, including Yangtze Delta. Such policies may lead to changes in market
conditions, including price instability and imbalance of supply and demand of
residential properties, which may materially adversely affect our business and
financial conditions. Also, there is no assurance that there will not be over
development in the property sector in Yangtze Delta and other parts of China in
the future. Any future over development in the property sector in Yangtze Delta
and other parts of China may result in an oversupply of properties and a fall of
property prices in Yangtze Delta or any of our other markets, which could
adversely affect our business and financial condition.
19
We face Increasing competition which may adversely affect our profitability
In recent years, a large number of property companies have begun undertaking
property sales and investment projects in Yangtze Delta and elsewhere in the
PRC, some of which may have better track record and greater financial and other
resources than we do. The intensity of the competition may adversely affect our
business and financial position. In addition, the real estate market in Yangtze
Delta and elsewhere in the PRC is rapidly changing. If we cannot respond to
changes of the market conditions more swiftly or effectively than our
competitors do, our business and financial position will be adversely affected.
Interest rate and mortgage financing risks
Mortgages are becoming increasingly popular as a means of financing property
purchases in the PRC. An increase in interest rates may significantly increase
the cost of mortgage financing, thus reducing the affordability of mortgages as
a source of financing for residential property purchases. The PRC government has
increased the down payment requirement and imposed certain other conditions
which make mortgage financing unavailable or unattractive to the potential
property purchasers. There is no assurance that the down payment requirement and
other condition will not be further revised upward. If the availability or
attractiveness of mortgage financing is significantly limited, many of our
prospective customers would not be able to purchase the properties and, as a
result, our business and future prospects would be adversely affected.
Risks relating to the PRC
All of our current deal sources are located in China and all of our revenues are
derived from our operations in China. Accordingly, our business, financial
condition, results of operations and prospects are subject, to a significant
extent, to economic, political and legal developments in China.
PRC economic, political policies and social conditions could affect our business
The economy of PRC differs from the economies of most developed countries in a
number ofiirespects, including amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources. The PRC Government has been reforming the PRC economic system from
planned economy to market oriented economy for more than 20 years, and has also
begun reforming the government structure in recent years. These reforms have
resulted in significant economic growth and social progress. Although we believe
these reforms will have a positive effect on our overall and long-term
development, we cannot predict whether any future changes in PRC's political,
economic and social conditions, laws, regulations and policies will have any
adverse effect on our current or future business, results of operations or
financial condition.
Changes in foreign exchange regulations may adversely affect our ability to
remit dividends and our results of operations and financial condition
Substantially all of our revenues and operating expenses are denominated in
Renminbi. Conversion of Renminbi is under strict government regulation in the
PRC. The Renminbi is currently freely convertible under the "current account",
including trade and service related foreign exchange transactions and payment of
dividends, but not under the "capital account", which includes foreign direct
investment and loans. Under the existing foreign exchange regulations in the
PRC, we will be able to pay dividends in foreign currencies without prior
approval from the State Administration for Foreign Exchange by complying with
certain procedural requirements. However, there is no assurance that the above
foreign policies regarding payment of dividends in foreign currencies will
continue in the future.
Fluctuation of the Renminbi could materially affect the value of, and dividends
payable on, the Shares in foreign currency term
The value of the Renminbi is subject to changes in the PRC Government's policies
and depends to a large extent on China's domestic and international economic and
political developments, as well as supply and demand in the local market. Since
1994, the official exchange rate for the conversion of Renminbi to US dollars
has generally been stable. However, we cannot give any assurance that the value
of the Renminbi will continue to remain stable against the US dollar or any
20
other foreign currency. Since our income and profit are denominated in Renminbi,
any devaluation of the Renminbi would adversely affect the value of, and
dividends, if any, payable on, our Shares in foreign currency terms
The PRC Legal System Embodies Uncertainties
The PRC legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have little
precedent value. In 1979, the PRC government began to promulgate a comprehensive
system of laws and regulations governing economic matters in general. The
overall effect of legislation over the past 25 years has significantly enhanced
the protections afforded to various forms of foreign investment in Mainland
China. Our PRC operating subsidiaries, Xing Ji Yang and Shang Yang, both wholly
foreign-owned enterprises (WFOE) are subject to laws and regulations applicable
to foreign investment in mainland China in general and laws and regulations
applicable to WFOE in particular. However, these laws, regulations and legal
requirements are constantly changing, and their interpretation and enforcement
involve uncertainties. These uncertainties could limit the legal protections
available to us and other foreign investors. In addition, we cannot predict the
effect of future developments in the PRC legal system, including the
promulgation of new laws, changes to existing laws or the interpretation or
enforcement thereof, or the pre-emption of local regulations by national laws.
21
ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Reports of Independent Public Accountants..................... F-1
Consolidated Balance Sheets -
December 31, 2004 and 2003 ................................. F-2
Consolidated Statements of Operations -
December 31, 2004 and 2003 ................................. F-3
Consolidated Statements of Stockholders' Equity -
December 31, 2004 and 2003 ................................. F-4
Consolidated Statements of Cash Flows -
December 31, 2004 and 2003 ................................. F-5
Notes to Consolidated Financial Statements.................... F-6 - F-16
22
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
Sunrise Real Estate Development Group, Inc.
We have audited the accompanying consolidated balance sheets of Sunrise Real
Estate Development Group, Inc. as of December 31, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2004 and 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. The 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 includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sunrise Real
Estate Development Group, Inc. as of December 31, 2004 and 2003 and the results
of its consolidated operations and cash flows for the years ended December 31,
2004 and 2003, in conformity with generally accepted accounting principles in
the United States of America.
BDO McCabe Lo & Company
Certified Public Accountants
Hong Kong, March 21, 2005
F-1
· Enlarge/Download Table
Sunrise Real Estate Development Group, Inc.
Consolidated Balance Sheets
(Expressed in US Dollars)
December 31, December 31,
2004 2003
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 969,913 $ 1,279,759
Accounts receivable (Note 3) 2,280,172 348,528
Promissory deposits (Note 4) 2,784,994 36,247
Other receivables and deposits (Note 5) 362,586 102,549
------------ ------------
Total current assets 6,397,665 1,767,083
Plant and equipment - net (Note 6) 596,685 200,241
Deposits for acquisitions of properties (Note 7) 1,480,036 --
Goodwill (Note 8) 183,029 --
------------ ------------
Total assets $ 8,657,415 $ 1,967,324
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loan (Note 9) $ 276,084 $ --
Promissory note payable (Note 10) 1,000,000 --
Accounts payable 193,762 120,632
Venture deposits (Note 11) 972,633 --
Customer deposits -- 22,451
Amount due to director (Note 12) 59,167 --
Other payables and accrued expenses (Note 13) 1,620,980 154,238
Other tax payable (Note 14) 114,747 17,698
Income tax payable (Note 15) 56,575 117,184
Dividends payable -- 543,708
------------ ------------
Total current liabilities 4,293,948 975,911
------------ ------------
Commitments and contingencies (Note 16) -- --
Long-term bank loan (Note 9) 1,203,952 --
Minority interest 3,948 --
Stockholders' equity
Common stock, par value $0.01 per share;
200,000,000 shares authorized; 21,636,614 and
15,000,000 shares issued and outstanding, respectively 216,366 150,000
Additional paid-in capital 2,233,844 200,000
Statutory reserve (Note 17) 175,004 143,163
Retained earnings 530,353 498,250
------------ ------------
Total stockholders' equity 3,155,567 991,413
------------ ------------
Total liabilities and stockholders' equity $ 8,657,415 $ 1,967,324
============ ============
See accompanying notes to financial statements.
F-2
Sunrise Real Estate Development Group, Inc.
Consolidated Statements of Operations
(Expressed in US Dollars)
Years Ended December 31,
2004 2003
------------ ------------
Net revenue $ 7,723,641 $ 5,297,422
Cost of revenue (4,162,762) (2,331,320)
------------ ------------
Gross profit 3,560,879 2,966,102
Operating expenses (1,048,574) (755,313)
General and administrative expenses (2,335,714) (709,988)
------------ ------------
Operating profit 176,591 1,500,801
Interest income 7,887 2,859
Other income, net 54,891 12,393
Finance expenses (23,333) --
------------ ------------
Profit before income tax and minority interest 216,036 1,516,053
Income tax (Note 15) (164,174) (239,138)
------------ ------------
Profit before minority interest 51,862 1,276,915
Minority interest 12,082 --
------------ ------------
Net profit $ 63,944 $ 1,276,915
============ ============
Earnings per share - basic and diluted $ 0.004 $ 0.085
============ ============
Weighted average common shares outstanding
- basic 16,600,060 15,000,000
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See accompanying notes to financial statements.
F-3
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Sunrise Real Estate Development Group, Inc.
Consolidated Statements of Stockholders' Equity
(Expressed in US Dollars)
Common Stock
--------------------------- Retained
Number Additional earnings/ Total
of share paid-in Statutory (accumulated stockholders'
issued Amount capital reserve losses) equity
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002
(Recapitalization of CY-SRRE and
LRY) (Note 1) 15,000,000 $ 150,000 $ 200,000 $ 13,340 $ (105,134) $ 258,206
Net profit for the year -- -- -- -- 1,276,915 1,276,915
Transfer between reserves -- -- -- 129,823 (129,823) --
Dividends 