Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
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2: EX-1.1 Underwriting Agreement HTML 147K
3: EX-4.1 Instrument Defining the Rights of Security Holders HTML 5K
4: EX-4.8A Instrument Defining the Rights of Security Holders HTML 8K
5: EX-5.1 Opinion re: Legality HTML 21K
6: EX-10.16B Material Contract HTML 6K
7: EX-23.1 Consent of Experts or Counsel HTML 8K
‘S-1/A’ — Pre-Effective Amendment to Registration Statement (General Form)
Approximate
Date of Proposed Sale to the Public: From
time
to time after the effective date of this Registration Statement
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. ž
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement the same
offering. o
CALCULATION
OF REGISTRATION FEE
Proposed
Proposed
Maximum
Maximum
Amount
of
Title
of Each Class of
Amount
To Be
Offering
Price
Aggregate
Registration
Securities
To Be Registered
Registered
(1)
Per
Share
Offering
Price
Fee
Common
Stock, $.001 par value per share
690,000
(2)
4.00
(2)
$
2,760,000
(2)
$
190.03
Common
Stock, $.001 par value per share
3,733,550
(3)
$
3.50
(4)
$
13,067,425
(4)
$
1,398.21
Common
Stock, $.001 par value per share
232,088
(5)
$
3.50
(4)
$
812,308
(4)
$
86.92
Total
Registration Fee
$
1,675.17
(6)
(1)
In
accordance with Rule 416(a), the Registrant is also registering hereunder
an indeterminate number of additional shares of common stock that
shall be
issuable pursuant to Rule 416 to prevent dilution resulting from
stock
splits, stock dividends or similar
transactions.
(2)
The
registration fee for securities to be offered by the Registrant under
an
initial public offering prospectus (“IPO Prospectus”) is based on an
estimate of the offering price and such estimate is solely for the
purpose
of calculating the registration fee pursuant to Rule 457(o). Includes
90,000 shares for which the underwriters have the option to purchase
to
cover over-allotments, if any.
(3)
In
addition to the IPO Prospectus, this Registration Statement also
covers
the resale under a separate share resale prospectus (the “Resale
Prospectus”) by selling stockholders of the Registrant of up to 3,733,550
shares of Common Stock.
(4)
Estimated
solely for the purpose of calculating the registration fee pursuant
to
Rule 457.
(5)
Represents
shares of the Registrant’s common stock being registered for resale that
may be acquired upon the exercise of warrants issued to a selling
stockholder named under the Resale
Prospectus.
(6)
Amount
previously paid.
The
Registrant amends this registration statement on such date or dates as may
be
necessary to delay its effective date until the registrant shall file a further
amendment which specifically states that this registration statement shall
hereafter become effective in accordance with Section 8(a) of the Securities
Act
of 1933, or until the registration statement shall become effective on such
date
as the Commission, acting pursuant to Section 8(a), may
determine.
EXPLANATORY
NOTE
This
Registration Statement contains two prospectuses, as set forth
below.
·
IPO
Prospectus.
A
prospectus to be used for the initial public offering by the Registrant
of
up to 600,000 shares of the Registrant's common stock (in addition
to
90,000 shares that may be sold upon exercise of the underwriters'
over-allotment option) (the "IPO Prospectus") through the underwriters
named on the cover page of the IPO
Prospectus.
·
Resale
Prospectus.
A
prospectus to be used for the resale by selling stockholders of up
to
3,965,638 shares of the Registrant’s common stock (the “Resale
Prospectus”), including 232,088 shares that may be acquired upon the
exercise of warrants.
The
Resale Prospectus is substantively identical to the IPO Prospectus, except
for
the following principal points:
·
they
contain different outside and inside front covers;
·
they
contain different Offering sections in the Prospectus Summary section
beginning on page 5;
·
they
contain different Use of Proceeds sections on page 24;
·
the
Dilution section is deleted from the Resale Prospectus on page
26;
·
a
Selling Stockholder section is included in the Resale Prospectus
beginning
on page 67A;
·
references
in the IPO Prospectus to the Resale Prospectus will be deleted from
the
Resale Prospectus;
·
the
Underwriting section from the IPO Prospectus on page 71 is deleted
from the Resale Prospectus and a Plan of Distribution is inserted
in its
place;
·
the
Legal Matters section in the Resale Prospectus on page 73 deletes the
reference to counsel for the underwriters; and
·
the
outside back cover of the IPO Prospectus is deleted from the Resale
Prospectus.
The
Registrant has included in this Registration Statement, after the financial
statements, a set of alternate pages to reflect the foregoing differences of
the
Resale Prospectus as compared to the IPO Prospectus.
Notwithstanding
the Resale Prospectus, certain of the selling stockholders named in the Resale
Prospectus holding an aggregate of 2,320,875 shares of common stock that were
purchased in a private placement that closed on August 31, 2006 have agreed
that
they will not sell any of such securities until our common stock begins to
be
listed or quoted on the New York Stock Exchange, American Stock Exchange, NASDAQ
Global Market, NASDAQ Capital Market or the OTC Bulletin Board, after which
their shares will automatically be released from the lock up every 30 days
on a
pro rata over a nine month period beginning on the date that is 30 days after
listing or quotation of the shares.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission becomes effective. This prospectus is not an offer
to
sell these securities and we are not soliciting offers to buy these securities
in any state where the offer or sale is not
permitted.
Our
shares of common stock are not currently listed or quoted for trading on any
national securities exchange or national quotation system. We are applying
for
the listing of our common stock on the American Stock Exchange. We propose
to
obtain the trading symbol “RCH.” We expect that the public offering price of our
common stock will be between $3.00 and $4.00 per share.
The
purchase of the securities involves ahigh
degree of risk. See section entitled “Risk Factors” beginning on page
8.
Per
Share
Total
Public
offering price
$
$
Underwriting
discounts and commissions
$
$
Proceeds,
before expenses, to China Architectural Engineering, Inc.
$
$
The
underwriters have a 60-day option to purchase up to 90,000 additional shares
of
common stock from us solely to cover over-allotments, if any.
The
underwriters expect to deliver the shares of common stock to purchasers on
or
about __________, 2007.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any representation to
the
contrary is a criminal offense.
WestPark
Capital, Inc.
The
Date
of This Prospectus Is: ____________________, 2007
Above:
Shanghai Railway Station, one of the Company’s projects.
Above:
Hangzhou Grand Theater, one of the Company’s projects.
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have not,
and
the underwriters have not, authorized any other person to provide you with
different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate
as
of the date on the front cover, but the information may have changed since
that
date.
PROSPECTUS
SUMMARY
Because
this is only a summary, it does not contain all of the information that may
be
important to you. You should carefully read the more detailed information
contained in this prospectus, including our financial statements and related
notes. Our business involves significant risks. You should carefully consider
the information under the heading "Risk Factors" beginning on page 8.
China
Architectural Engineering, Inc.
We
specialize in the design, engineering and installation of high-end specialty
curtain wall systems, including glass curtain walls, stone curtain walls, metal
curtain walls, roofing systems, and related products, for public works projects
and commercial real estate. Our curtain wall products are highly engineered
specialty wall systems consisting primarily of a series of glass panels set
in
metal frames, stone panels, or metal panels, as well as roofing systems and
related products. A curtain wall is fixed to the commercial building by
mechanical connection, either in a primarily inoperable mode or adjustable
with
special settings with spring or press systems. Glass panels are connected to
the
metal support system by metal clamps and fixing bolts. The support system of
fixing bolts could be a steel, aluminum and or glass structure, with glass
flank
or spidery tension rod or cable.
We
have
designed and installed nearly one hundred projects throughout China, including
the National Grand Theater, Exhibition Conservatory of Beijing Botanical Garden,
The COSCO Tower at Changlian Avenue Beijing, and the Wumen Exhibition Hall
in
Beijing’s Forbidden City, and a number of commercial structures in Southeast
Asia. We believe that we compete on the strength of our reputation, track
record, strong relationships with government clients and our ability to give
expression to the vision of leading architects. By focusing on innovation while
outsourcing commoditized manufacturing work, we believe we are able to add
artistic and technological value to projects at cost-effective price
points.
We
believe that our business has opportunities for growth through the following
growth strategies:
·
Emphasize
Innovative Services. We focus our design, engineering, and installation
expertise on distinct product segments requiring complex, unique
or
innovative design and installation
techniques.
·
Provide
Full Service Solutions. We meet the demand for fully integrated curtain
wall contractors that can avoid the coordination difficulties inherent
in
the use of multiple curtain wall subcontractors and implement rapid
and
multiple design changes in a coordinated and timely manner, preventing
project delays and reducing costs to the customer.
·
Leverage
our Brand and Reputation. We believe that the strength of our brand
is
increasing in China and internationally as we build on our large
range of
projects and our offering of comparative cost advantages and supply-chain
management for some of the most complex curtain wall systems in the
world.
·
Geographic
Expansion in China. Our objective is to achieve and maintain a leading
position in the geographic regions and project segments that we serve
by
providing timely, high-quality services to our customers.
·
International
Expansion. We intend to continue our efforts to perform work in other
foreign countries and have launched initiatives to expand sales outside
of
our traditional China-based markets, including Hong Kong and Macau.
Corporate
Information
We
were
incorporated in the State of Delaware on March 16, 2004. We were originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation.
1
On
October 17, 2006, we closed a share exchange transaction, described below,
pursuant to which we (i) became the 100% parent of Full Art International,
Ltd.,
a Hong Kong Company (“Full Art”), which has four subsidiaries, including its
wholly-owned subsidiary Zhuhai King Glass Engineering Co., Ltd. (“Zhuhai”), a
company formed under the laws of the People’s Republic of China (“PRC” or
“China”), (ii) assumed the operations of Full Art and its subsidiaries and (iii)
changed our name from SRKP 1, Inc. to China Architectural Engineering,
Inc.
Our
corporate offices are located at 105 Baishi Road, Jiuzhou West Avenue, Zhuhai,
519070, People’s Republic of China.
Recent
Events
October
2006 Share Exchange
On
August21, 2006, we entered into a share exchange agreement with KGE Group, Limited,
a
Hong Kong corporation and the sole shareholder of Full Art. Pursuant to the
share exchange agreement, as amended on October 17, 2006 (the “Exchange
Agreement”), we agreed to issue shares of our common stock in exchange for all
of the issued and outstanding securities of Full Art (the “Share Exchange”). The
Share Exchange closed on October 17, 2006.
Upon
the
closing of the Share Exchange, we issued an aggregate of 45,304,125 shares
of
our common stock to the sole shareholder of Full Art and its designees in
exchange for all of the issued and outstanding securities of Full Art. Also
at
the closing of the Share Exchange, we issued 100,000 shares of our common stock
and five-year warrants to purchase 232,088 shares of our common stock at a
per
share exercise price of $1.60 for investor relations services (the “IR
Securities”). In addition, immediately prior to the closing of the Share
Exchange and the Private Placement, as described below, we and certain of our
shareholders agreed to cancel an aggregate of 3,125,000 shares of common stock
such that there were 2,275,000 shares of common stock outstanding immediately
prior to the Share Exchange and Private Placement. We issued no fractional
shares in connection with the Share Exchange.
Immediately
after the closing of the Share Exchange and Private Placement, we had 50,000,000
outstanding shares of common stock and outstanding warrants to purchase 232,088
shares of our common stock. Upon the closing of the Share Exchange, the sole
shareholder of Full Art and its designees owned approximately 90.6% of our
issued and outstanding common stock, the pre-existing shareholders of the
Company owned 4.7% and investors in the Private Placement (described below)
(that closed concurrently with the Share Exchange) owned 4.6% of our outstanding
common stock.
We
agreed
to register the following securities held by our shareholders in the
registration statement that we filed to register the shares issued in the
Private Placement:
·
the
IR Securities, which consist of 100,000 shares of common stock and
232,088
shares of common stock underlying warrants;
and
·
1,312,675
shares of common stock held by our shareholders who were shareholders
immediately prior to the Share Exchange.
In
addition, we agreed to register shares of common stock in a subsequent
registration statement that we agreed to file by May 23, 2007, which is six
months and ten days after the date on which we first filed the registration
statement to register the shares issued in the Private Placement, to register
the following securities:
·
962,325
shares held affiliates of WestPark Capital, Inc. (“WestPark”) who were
shareholders immediately prior to the Share Exchange, and
·
2,000,000
shares of common stock that were issued at the closing of the Share
Exchange to FirstAlliance Financial Group, Inc. (“FirstAlliance”) as a
designee of Full Art’s sole shareholder.
With
respect to the registration statement that we will file to cover the 962,325
shares of common stock held by the WestPark affiliates and the 2,000,000 shares
that were issued to FirstAlliance, we agreed to use our reasonable best efforts
to cause the registration statement to become effective within 120 days after
the required filing date or the actual filing date, whichever is earlier, or
150
days after the required filing date or the actual filing date, whichever is
earlier, if the registration statement is subject to a full review by the SEC.
In addition, we agreed to use our reasonable best efforts to maintain the
registration statement effective for a period of 24 months at our expense.
We
originally agreed to a penalty provision pursuant to which we would issue
additional shares of our common stock if we failed to timely file and maintain
the registration statement, but we subsequently entered into an agreement with
the WestPark affiliates and FirstAlliance pursuant to which they waived the
penalty provision. There is also no penalty associated with the registration
of
the IR Securities. We have verbally agreed with the WestPark affiliates and
FirstAlliance to register their shares after the effective date of this
registration statement.
2
Immediately
after the closing of the Share Exchange, we changed our corporate name from
“SRKP 1, Inc.” to “China Architectural Engineering, Inc.” The shares of our
common stock are not currently listed or quoted for trading on any national
securities exchange or national quotation system. We are applying for the
listing of our common stock on the American Stock Exchange.
The
transactions contemplated by the Exchange Agreement, as amended, were intended
to be a “tax-free” incorporation pursuant to the provisions of Section 351 of
the Internal Revenue Code of 1986, as amended.
October
2006 Private Placement
On
October 17, 2006, concurrently with the close of the Share Exchange, we received
gross proceeds of $3,713,400 in a private placement transaction (the “Private
Placement”). Pursuant to subscription agreements entered into with the
investors, we sold an aggregate of 2,320,875 shares of common stock at $1.60
per
share. We were required to file a registration statement no later than 30 days
after the closing of the Share Exchange, which we met, and we must use our
reasonable best efforts to cause the registration statement to become effective
within one hundred and 150 days after the closing or 180 days after the closing
if the registration statement is subject to a full review by the SEC. We are
also required to use our reasonable best efforts to maintain the registration
statement effective for a period of 24 months at our expense. We originally
agreed that if we fail to register the shares, we would be obligated to pay
to
the investors a cash payment equal to 0.0333% of the purchase price of their
respective shares for each business day of the failure. There was no maximum
potential consideration to be transferred in respect to the potential penalty.
Subsequently, we entered into an agreement with a sufficient number of investors
necessary to bind all investor pursuant to which the penalty provision was
waived.
The
investors in the Private Placement also entered into a lock up agreement
pursuant to which they agreed not to sell their shares until our common stock
begins to be listed or quoted on the New York Stock Exchange, American Stock
Exchange, NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board,
after which their shares will automatically be released from the lock up every
30 days on a pro rata over a nine month period beginning on the date that is
30
days after listing or quotation of the shares. After commissions and expenses,
we received net proceeds of approximately $3,267,792 in the Private Placement.
WestPark Capital, Inc. acted as placement agent in connection with the Private
Placement. For its services as placement agent, WestPark received an aggregate
fee of approximately $445,608, which consisted of a commission equal to 9.0%
of
the gross proceeds from the financing and a non-accountable fee of 3% of the
gross proceeds. Some of the controlling shareholders and control persons of
WestPark were also, prior to the completion of the Share Exchange, controlling
shareholders and control persons of our company, including Richard Rappaport,
who is the Chief Executive Officer of WestPark and was the President and a
significant shareholder of our company prior to the Share Exchange, and Anthony
C. Pintsopoulos, who is the Chief Financial Officer of WestPark and an officer
and director our company prior to the Share Exchange. Each of Messrs. Rappaport
and Pintsopoulos resigned from all of their executive and director positions
with us upon the closing of the Share Exchange.
April
2007 Issuance of Bonds and Bond Warrants
On
April12, 2007, we completed a financing transaction with ABN AMRO Bank N.V. (the
“Subscriber”) issuing (i) $10,000,000 Variable Rate Convertible Bonds due in
2012 (the “Bonds”) and (ii) 800,000 warrants to purchase an aggregate of 800,000
shares of our common stock, subject to adjustments for stock splits or
reorganizations as set forth in the warrant, that expire in 2010 (the “Bond
Warrants”).
3
The
Bonds
were subscribed at a price equal to 97% of their principal amount, which is
the
issue price of 100% less a 3% commission to the Subscriber. The Bonds were
issued pursuant to, and are subject to the terms and conditions of, a trust
deed
dated April 12, 2007 between us and The Bank of New York, London Branch, as
amended on August 29, 2007 (the “Trust Deed”). The Bonds are also subject to a
paying and conversion agency agreement dated April 12, 2007 between us, The
Bank
of New York, and The Bank of New York, London Branch. The
terms
and conditions of the Bonds, as set forth in the Trust Deed include, among
other
thing, the following terms:
·
Interest
Rate. The
Bonds bear cash interest from April 12, 2007 at the rate of 6% per
annum
for the first year after April 12, 2007 and 3% per annum thereafter,
of
the principal amount of the Bonds.
·
Conversion.
Each Bond is convertible at the option of the holder at any time
on and
after a date that is 365 days after the date that our
securities commence trading on the American Stock Exchange
(“AMEX’) through March 28, 2012, into shares of our common stock at an
initial conversion price equal to the price per share at which shares
are
sold in our proposed initial public offering of common stock on AMEX
with
minimum gross proceeds of $2,000,000. If no initial public offering
occurs
prior to conversion, the conversion price per share will be $2.00,
subject
to adjustment in accordance with the terms and conditions of the
Bonds.
The conversion price is subject to adjustment in certain events,
including
our issuance of additional shares of common stock or rights to purchase
common stock at a per share or per share exercise or conversion price,
respectively, at less than the applicable per share conversion price
of
the Bonds. If for the period of 20 consecutive trading days immediately
prior to April 12, 2009 or February 18, 2012, the conversion price
for the
Bonds is higher than the average closing price for the shares, then
the
conversion price will be reset to such average closing price; provided
that, the conversion price will not be reset lower than 70% of the
then
existing conversion price. In addition, the Trust Deed provides that
the
conversion price of the Bonds cannot be adjusted to lower than $0.25
per
share of common stock (as adjusted for stock splits, stock dividends,
spin-offs, rights offerings, recapitalizations and similar
events).
·
Mandatory
Redemptions.
If
on or before April 12, 2008, either (i) our common stock (including
the
shares of common stock issuable upon conversion of the Bonds and
exercise
of the Bond Warrants) are not listed on AMEX or (ii) the Bonds, Bond
Warrants, and shares underlying the Bonds and Bond Warrants are not
registered with the Securities and Exchange Commission (the “SEC”), then
holders of the Bonds can require us to redeem the Bonds at 106.09%
of the
principal amount. In addition, at any time after April 12, 2010,
holders
of the Bonds can require us to redeem the Bonds at 126.51% of the
principal amount. We are required to redeem any outstanding Bonds
at
150.87% of its principal amount on April 4,2012.
On
April12, 2007, we entered into a warrant instrument with the Subscriber pursuant
to
which the Subscriber purchased the Bond Warrants from us (the “Warrant
Instrument”). The Bond Warrants, which are represented by a global certificate,
are also subject to a warrant agency agreement by and among us, The Bank
of New
York and The Bank of New York, London Branch dated April 12, 2007 (the “Warrant
Agency Agreement”). Pursuant to the terms and conditions of the Warrant
Instrument and the Warrant Agency Agreement, the Bond Warrants become
exercisable on October 12, 2008 and terminate on April 12, 2010. The Bond
Warrants are exercisable at a per share exercise price of $0.01. We have
agreed
to list the shares of common stock underlying the Bond Warrants on AMEX,
or any
alternative stock exchange by April 12, 2008.
On
April12, 2007 we also entered into a registration rights agreement with the
Subscriber pursuant to which we agreed to include the Bonds, the Bond Warrants,
and the shares of common stock underlying the Bonds and Bond Warrants in
a
pre-effective amendment to the registration statement of which this prospectus
is a part. Subsequently, we verbally agreed with the Subscriber not to include
its securities in this registration statement and to register them in a separate
registration statement to be filed promptly after the effective date of this
registration statement.
4
The
Offering
Common
stock offered we are offering
600,000
shares (1)
Common
stock outstanding after the offering
50,600,000
shares (2)
Offering
Price
$3.00
to $4.00 per share (estimated)
Use
of proceeds
We
intend to use the net proceeds of this offering for general corporate
purposes. See "Use of Proceeds" on page 24 for
more information on the use of proceeds.
Risk
factors
Investing
in these securities involves a high degree of risk. As an investor
you
should be able to bear a complete loss of your investment. You should
carefully consider the information set forth in the “Risk Factors” section
beginning on page 8.
(1)
Excludes
up to 90,000 shares that may be sold upon the underwriters’ over-allotment
option. We are also concurrently registering for resale under a separate
prospectus up to 3,965,638 shares of our common stock held by the
selling
stockholders named under a prospectus, including 232,088 shares that
may
be acquired upon the exercise of warrants. None of these securities
are
being offered by us and we will not receive any proceeds from the
sale of
these shares. For additional information, see above under “Prospectus
Summary - Recent Events.”
(2)
Based
on 50,000,000 shares
of common stock issued and outstanding as of August 15, 2007. The
number of shares of our common stock outstanding excludes 232,088
shares
of our common stock issuable upon exercise of outstanding warrants,
4,761,905 shares of our common stock issuable upon the conversion
of the
Bonds, and 800,000 shares of our common stock issuable upon the exercise
of the Bond Warrants.
5
SUMMARY
FINANCIAL DATA
The
following summary financial information contains consolidated statement of
operations data for the six months ended June 30, 2007 and 2006 (unaudited)
and
each of the years in the five-year period ended December 31, 2006 and the
consolidated balance sheet data as of June 30, 2007 and 2006 (unaudited) and
year-end for each of the years in the five-year period ended December 31, 2006.
The consolidated statement of operations data and balance sheet data were
derived from the audited consolidated financial statements, except for data
for
the periods ended and as of June 30, 2007 and 2006 and December 31, 2002.
Such financial data should be read in conjunction with the consolidated
financial statements and the notes to the consolidated financial statements
starting on page F-1 and with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Any
investment in our common stock involves a high degree of risk. Investors should
carefully consider the risks described below and all of the information
contained in this prospectus before deciding whether to purchase our common
stock. Our business, financial condition or results of operations could be
materially adversely affected by these risks if any of them actually occur.
Our
shares of common stock are not currently listed or quoted for trading on any
national securities exchange or national quotation system. If and when our
common stock is traded, the trading price could decline due to any of these
risks, and an investor may lose all or part of his investment. Some of these
factors have affected our financial condition and operating results in the
past
or are currently affecting our company. This prospectus also contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including the risks we face as
described below and elsewhere in this prospectus. With respect to this
discussion, the terms, “we,”“us,” or “our” refer to China Architectural
Engineering, Inc., and our 100%-owned subsidiary Full Art International, Ltd.
(“Full Art”).
RISKS
RELATED TO OUR OPERATIONS
Because
we depend on governmental agencies for a significant portion of our revenue,
our
inability to win or renew government contracts could harm our operations and
significantly reduce or eliminate our profits.
Revenues
from Chinese government contracts represented approximately 70% of our revenues
for the six months ended June 30, 2007 and 67% for the year ended December31,2006. Our inability to win or renew Chinese government contracts could harm
our
operations and significantly reduce or eliminate our profits. Chinese government
contracts are typically awarded through a regulated procurement process. Some
Chinese government contracts are awarded to multiple competitors, causing
increases in overall competition and pricing pressure. The competition and
pricing pressure, in turn may require us to make sustained post-award efforts
to
reduce costs in order to realize revenues under these contracts. If we are
not
successful in reducing the amount of costs we anticipate, our profitability
on
these contracts will be negatively impacted. Finally, Chinese government clients
can generally terminate or modify their contracts with us at their convenience.
If
we are unable to accurately estimate and control our contract costs and
timelines, then we may incur losses on our contracts, which may result in
decreases in our operating margins and in a significant reduction or elimination
of our profits.
If
we do
not control our contract costs, we may be unable to maintain positive operating
margins or experience operating losses. Approximately 90% of our sales are
from-fixed price contracts. The remaining 10% of our sales are from
cost-plus-fee contracts. Under fixed-price contracts, we receive a fixed price.
Consequently, we realize a profit on fixed-price contracts only if we control
our costs and prevent cost over-runs on the contracts. Approximately 70% of
contracts are modified after they begin, usually to accommodate requests from
clients to increase project size and scope. In cases where fixed-price contracts
are modified, the fixed price is renegotiated and adjusted upwards accordingly.
Under cost-plus-fee contracts, which may be subject to contract ceiling amounts,
we are reimbursed for allowable costs and fees, which may be fixed or
performance-based. If our costs exceed the contract ceiling or are not allowable
under the provisions of the contract or any applicable regulations, we may
not
be reimbursed for all our costs. Under each type of contract, if we are unable
to estimate and control costs and/or project timelines, we may incur losses
on
our contracts, which may result in decreases in our operating margins and in
a
significant reduction or elimination of our profits.
If
we fail to timely complete, miss a required performance standard or otherwise
fail to adequately perform on a project, then we may incur a loss on that
project, which may affect our overall profitability.
We
may
commit to a client that we will complete a project by a scheduled date. We
may
also commit that a project, when completed, will achieve specified performance
standards. If the project is not completed by the scheduled date or subsequently
fails to meet required performance standards, we may either incur significant
additional costs or be held responsible for the costs incurred by the client
to
rectify damages due to late completion or failure to achieve the required
performance standards. The uncertainty of the timing of a project can present
difficulties in planning the amount of personnel needed for the project. If
the
project is delayed or canceled, we may bear the cost of an underutilized
workforce that was dedicated to fulfilling the project. In addition, performance
of projects can be affected by a number of factors beyond our control, including
unavoidable delays from weather conditions, unavailability of vendor materials,
changes in the project scope of services requested by clients or labor
disruptions. In some cases, should we fail to meet required performance
standards, we may also be subject to agreed-upon financial damages, which are
determined by the contract. To the extent that these events occur, the total
costs of the project could exceed our estimates and we could experience reduced
profits or, in some cases, incur a loss on that project, which may affect our
overall profitability.
8
Our
use of the “percentage-of-completion” method of accounting could result in
reduction or reversal of previously recorded revenues and
profits.
A
substantial portion of our revenues and profits are measured and recognized
using the “percentage-of-completion” method of accounting, which is discussed
further in Note 2, “Summary Of Significant Accounting Policies” to our
“Financial Statements.” Our use of this method results in recognition of
revenues and profits ratably over the life of a contract, based generally on
the
proportion of costs incurred to date to total costs expected to be incurred
for
the entire project. The effect of revisions to revenues and estimated costs
is
recorded when the amounts are known or can be reasonably estimated. Such
revisions could occur in any period and their effects could be material.
Although we have historically made reasonably reliable estimates of the progress
towards completion of long-term engineering, program and construction management
or construction contracts in process, the uncertainties inherent in the
estimating process make it possible for actual costs to vary materially from
estimates, including reductions or reversals of previously recorded revenues
and
profits.
Our
future revenues depend on our ability to consistently bid and win new contracts
and renew existing contracts and, therefore, our failure to effectively obtain
future contracts could adversely affect our profitability.
Our
future revenues and overall results of operations require us to successfully
bid
on new contracts and renew existing contracts. Contract proposals and
negotiations are complex and frequently involve a lengthy bidding and selection
process, which is affected by a number of factors, such as market conditions,
financing arrangements and required governmental approvals. If negative market
conditions arise, or if we fail to secure adequate financial arrangements or
the
required governmental approval, we may not be able to pursue particular
projects, which could adversely affect our profitability.
Our
results could be adversely impacted by product quality and
performance.
We
manufacture or install products based on specific requirements of each of our
customers. We believe that future orders of our products or services will depend
on our ability to maintain the performance, reliability and quality standards
required by our customers. If our products or services have performance,
reliability or quality problems, we may experience delays in the collection
of
accounts receivables, higher manufacturing or installation costs, additional
warranty and service expense, and reduced, cancelled or discontinued orders.
Additionally, performance, reliability or quality claims from our customers,
with or without merit, could result in costly and time-consuming litigation
that
could require significant time and attention of management and involve
significant monetary damages.
Continued
price volatility and supply constraints in the steel and aluminum markets could
prevent us from meeting delivery schedules to our customers or reduce our profit
margins.
Our
business is dependent on the prices and supply of steel and aluminum, which,
along with glass, are the principal raw materials used in our products. The
steel and aluminum industries are highly cyclical in nature, and steel and
aluminum prices have been volatile in recent years and may remain volatile
in
the future. Our purchases of aluminum ranged from approximately $1.00 to $1.40
per pound between December 15, 2005 and 2006, a fluctuation of approximately
40%, and from $0.60 to $1.40 per pound during the five years ended December15,2006, a fluctuation of approximately 133%. The price we paid for steel also
fluctuated. For the year ended December 31, 2006, prices for seamless steel
tubes ranged from approximately RMB 4,730 to 5,700 RMB per ton (a difference
of
approximately 21%), prices for angled steel ranged from approximately RMB 3,143
to RMB 3,465 per ton (a difference of approximately 10%), and prices for steel
plates ranged from approximately RMB 3,332 to RMB 4,688 per ton (a difference
of
approximately 41%). The fluctuations remain consistent at June 30,2007.
9
Steel
and
aluminum prices are influenced by numerous factors beyond our control, including
general economic conditions, competition, labor costs, production costs, import
duties and other trade restrictions. In the past there have been unusually
rapid
and significant increases in steel and aluminum prices and severe shortages
in
the steel and aluminum industries due in part to increased demand from China’s
expanding economy and high energy prices. We do not have any long-term contracts
for the purchase of steel and aluminum and normally do not maintain inventories
of steel and aluminum in excess of our current production requirements. We
can
give you no assurance that steel and aluminum will remain available or that
prices will not continue to be volatile. If the available supply of steel and
aluminum declines, we could experience price increases that we are not able
to
pass on to our customers, a deterioration of service from our suppliers or
interruptions or delays that may cause us not to meet delivery schedules to
our
customers. Any of these problems could adversely affect our results of
operations and financial condition.
Our
business is characterized by long periods for collection from our customers
and
short periods for payment to our suppliers, the combination of which may cause
us to have liquidity problems.
We
experience an average accounts settlement period ranging from three months
to as
high as one year from the time we provide services to the time we receive
payment from our customers. In contrast, we typically need to place certain
deposit with our suppliers on a portion of the purchase price in advance and
for
some suppliers we must maintain a deposit for future orders. We are typically
paid by the contractor the entire amount due to us for our services and products
once the entire project is completed, which could be significantly after we
complete the curtain wall portion of the project. National policy requires
the
contractor to pay 85% of our total contract value to us before the project
is
completed, and the remainder may be paid when the contractor completes the
entire project. Because our payment cycle is considerably shorter than our
receivable cycle, we may experience working capital shortages. Working capital
management, including prompt and diligent billing and collection, is an
important factor in our results of operations and liquidity. We cannot assure
you that system problems, industry trends or other issues will not extend our
collection period, adversely impact our working capital.
The
industries in which we operate are highly competitive.
The
markets we serve are very competitive, price and lead-time sensitive and are
impacted by changes in the commercial construction industry, including
unforeseen delays in project timing and work flow. In addition, competition
in
the markets of the building industry and in the metal coil coating industry
is
intense. It is based primarily on:
– quality;
–
service;
– delivery;
– ability
to provide added value in the design and engineering of buildings;
– price;
– speed
of
construction in buildings and components; and
– personal
relationships with customers.
We
compete with several large integrated glass manufacturers, numerous specialty,
architectural glass and window fabricators, and major contractors and
subcontractors. We also compete with a number of other manufacturers of
engineered building systems ranging from small local firms to large national
firms. Many of our competitors have greater financial or other resources than
we. In addition, we and other manufacturers of engineered high-end curtain
walls
compete with alternative methods of building construction. If these alternative
building methods compete successfully against us, such competition could
adversely affect us. Demand for our services is cyclical and vulnerable to
economic downturns. If the economy weakens, then our revenues, profits and
our
financial condition may deteriorate. Many of our competitors have greater
financial or other resources than us.
10
Our
business activities may require our employees to travel to and work in high
security risk countries, which may result in employee death or injury,
repatriation costs or other unforeseen costs.
As
a
multinational company, our employees often travel to and work in high security
risk countries around the world that are undergoing political, social and
economic upheavals resulting in war, civil unrest, criminal activity or acts
of
terrorism. For example, we will have had approximately 150 different employees
working in Qatar from time to time and approximately 12 employees working in
Vietnam from time to time. We have also had employees in Dubai. As a result,
we
may be subject to costs related to employee death or injury, repatriation or
other unforeseen circumstances.
Force
majeure events, including natural disasters and terrorists’ actions have
negatively impacted and could further negatively impact the economies in which
we operate, which may affect our financial condition, results of operations
or
cash flows.
Force
majeure
events,
including natural disasters, such as Typhoon Pai Bi An that affected the
Southeastern China Coast in August 2006 and terrorist attacks, such as those
that occurred in New York and Washington, D.C. on September 11, 2001, could
negatively impact the economies in which we operate.
We
typically remain obligated to perform our services after a terrorist action
or
natural disaster unless the contract contains a force
majeure clause
that relieves us of our contractual obligations in such an extraordinary event.
If we are not able to react quickly to force
majeure,
our
operations may be affected significantly, which would have a negative impact
on
our financial condition, results of operations or cash flows.
We
may suffer as a result of product liability or defective
products.
We
may
produce products which injure or kill individuals despite proper testing.
Existing PRC laws and regulations do not require us to maintain third party
liability insurance to cover product liability claims. However, if a product
liability claim is brought against us, it may, regardless of merit or eventual
outcome, result in damage to our reputation, breach of contract with our
customers, decreased demand for our products, costly litigation, product
recalls, loss of revenue, and the inability to commercialize some products.
We
incur costs to comply with environmental laws and have liabilities for
environmental cleanups.
Because
we have air emissions, discharge wastewater, and handle hazardous substances
and
solid waste at our fabrication facilities, we incur costs and liabilities to
comply with environmental laws and regulations and may incur significant
additional costs as those laws and regulations change in the future or if there
is an accidental release of hazardous substances into the environment. The
operations of our fabrication facilities are subject to stringent and complex
environmental laws and regulations that regulate the cleanup of hazardous
substances that may have been released at properties currently or previously
owned or operated by us or locations to which we have sent waste for disposal.
Failure to comply with these laws and regulations may trigger a variety of
administrative, civil and criminal enforcement measures, including the
assessment of monetary penalties, the imposition of remedial requirements,
and
the issuance of orders enjoining future operations.
If
our partners fail to perform their contractual obligations on a project, we
could be exposed to legal liability, loss of reputation or reduced
profits.
We
sometimes enter into subcontracts, joint ventures and other contractual
arrangements with outside partners to jointly bid on and execute a particular
project. The success of these joint projects depends upon, among other things,
the satisfactory performance of the contractual obligations of our partners.
If
any of our partners fails to satisfactorily perform its contractual obligations,
we may be required to make additional investments and provide additional
services to complete the project. If we are unable to adequately address our
partner’s performance issues, then our client could terminate the joint project,
exposing us to legal liability, loss of reputation or reduced
profits.
11
We
are dependent on certain key personnel and loss of these key personnel could
have a material adverse effect on our business, financial condition and results
of operations.
Our
success is, to a certain extent, attributable to the management, sales and
marketing, and operational expertise of key personnel. Luo Ken Yi, our Chief
Executive Officer and Chief Operating Officer, Tang Nianzhong, our Vice General
Manager and Ye Ning, our Vice General Manager perform key functions in the
operation of our business. There can be no assurance that we will be able to
retain these managers after the term of their employment contracts expire.
The
loss of these managers could have a material adverse effect upon our business,
financial condition, and results of operations. We must attract, recruit and
retain a sizeable workforce of technically competent employees. Our ability
to
effectively implement our business strategy will depend upon, among other
factors, the successful recruitment and retention of additional highly skilled
and experienced management and other key personnel. We cannot assure you that
we
will be able to hire or retain such employees.
We
cannot guarantee the protection of our intellectual property rights and if
infringement or counterfeiting of our intellectual property rights occurs,
our
reputation and business may be adversely affected.
Our
success depends in part on our ability to preserve our patents and trade secrets
and operate without infringing the proprietary rights of third parties. We
currently own approximately 32 patents in China. If we fail to maintain our
patents and trade secret protections, we may not be able to prevent third
parties from using our proprietary rights. In addition, our issued patents
may
not contain claims sufficiently broad to protect us against third parties with
similar technologies or products or provide us with any competitive advantage.
If a third party initiates litigation regarding our patents, and is successful,
a court could revoke our patents or limit the scope of coverage for those
patents. We also rely upon trade secrets, proprietary know-how and continuing
technological innovation to remain competitive. We attempt to protect this
information with security measures such as the use of confidentiality agreements
with our employees, consultants and corporate collaborators. It is possible
that
these individuals will breach these agreements and that any remedies for a
breach will be insufficient to allow us to recover our costs. Furthermore,
our
trade secrets, know-how and other technology may otherwise become known or
be
independently discovered by our competitors.
Furthermore,
we have registered and applied for registration of our trademarks in the PRC,
where we have a substantial business presence, to protect the reputation of
our
products. Our products are sold under these trademarks. There is no assurance
that there will not be any infringement of our brand name or other registered
trademarks or counterfeiting of our products in the future. Should any such
infringement or counterfeiting occur, our reputation and business may be
adversely affected. We may also incur significant expenses and substantial
amounts of time and effort to enforce our intellectual property rights in the
future. Such diversion of our resources may adversely affect our existing
business and future expansion plans.
We
enjoy certain preferential tax concessions and loss of these preferential tax
concessions will cause our tax liabilities to increase and our profitability
to
decline.
We
enjoy
preferential tax concessions in the PRC as a high-tech enterprise. Pursuant
to
the State Council’s Regulations on Encouraging Investment in and Development, we
were granted a reduction in our income tax rate to a rate of 15%. In addition,
there is no assurance that the preferential tax treatment in the PRC will remain
unchanged and effective. Our tax liabilities will increase and our profits
may
accordingly decline if our reduced income tax rate is no longer applicable
and/or the tax relief on investment in PRC is no longer available.
Additionally,
the PRC Enterprise Income Tax Law (the “EIT Law”) was enacted on March 16, 2007.
Under the EIT Law, effective January 1, 2008, China will adopt a uniform tax
rate of 25.0% for all enterprises (including foreign-invested enterprises)
and
cancel several tax incentives enjoyed by foreign-invested enterprises. However,
for foreign-invested enterprises established before the promulgation of the
EIT
Law, a five-year transition period is provided during which reduced rates will
apply but gradually be phased out. Since the PRC government has not announced
implementation measures for the transitional policy with regards to such
preferential tax rates, we cannot reasonably estimate the financial impact
of
the new tax law to us at this time. Further, any future increase in the
enterprise income tax rate applicable to us or other adverse tax treatments,
such as the discontinuation of preferential tax treatments for high and new
technology enterprises altogether, would have a material adverse effect on
our
results of operations and financial condition.
12
Our
actual results could differ from the estimates and assumptions that we use
to
prepare our financial statements, which may significantly reduce or eliminate
our profits.
To
prepare financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions as of
the
date of the financial statements, which affect the reported values of assets
and
liabilities and revenues and expenses and disclosures of contingent assets
and
liabilities. Areas requiring significant estimates by our management include:
·
the
application of the “percentage-of-completion” method of accounting, and
revenue recognition on contracts, change orders, and contract
claims;
·
provisions
for uncollectible receivables and customer claims and recoveries
of costs
from subcontractors, vendors and
others;
·
provisions
for income taxes and related valuation
allowances;
·
value
of goodwill and recoverability of other intangible assets;
and
·
accruals
for estimated liabilities, including litigation and insurance
reserves.
Our
actual results could differ from those estimates, which may significantly reduce
or eliminate our profits.
RISKS
RELATED TO US DOING BUSINESS IN CHINA
All
of our assets are located in China and substantially all of our revenues are
derived from our operations in China, and changes in the political and economic
policies of the PRC government could have a significant impact upon the business
we may be able to conduct in the PRC and the results of operations and financial
condition.
Our
business operations may be adversely affected by the current and future
political environment in the PRC. The PRC has operated as a socialist state
since the mid-1900s and is controlled by the Communist Party of China. The
Chinese government exerts substantial influence and control over the manner
in
which we must conduct our business activities. The PRC has only permitted
provincial and local economic autonomy and private economic activities since
1988. The government of the PRC has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy,
particularly the pharmaceutical industry, through regulation and state
ownership. Our ability to operate in China may be adversely affected by changes
in Chinese laws and regulations, including those relating to taxation, import
and export tariffs, raw materials, environmental regulations, land use rights,
property and other matters. Under current leadership, the government of the
PRC
has been pursuing economic reform policies that encourage private economic
activity and greater economic decentralization. There is no assurance, however,
that the government of the PRC will continue to pursue these policies, or that
it will not significantly alter these policies from time to time without notice.
Failure
to comply with the United States Foreign Corrupt Practices Act could subject
us
to penalties and other adverse consequences.
We
are
subject to the United States Foreign Corrupt Practices Act, which generally
prohibits United States companies from engaging in bribery or other prohibited
payments to foreign officials for the purpose of obtaining or retaining
business. In addition, we are required to maintain records that accurately
and
fairly represent our transactions and have an adequate system of internal
accounting controls. Foreign companies, including some that may compete with
us,
are not subject to these prohibitions, and therefore may have a competitive
advantage over us. Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in the PRC, particularly in our
industry since it deals with contracts from the Chinese Government, and our
executive officers and employees have not been subject to the United States
Foreign Corrupt Practices Act prior to the completion of the Share Exchange.
We
can make no assurance that our employees or other agents will not engage in
such
conduct for which we might be held responsible. If our employees or other agents
are found to have engaged in such practices, we could suffer severe penalties
and other consequences that may have a material adverse effect on our business,
financial condition and results of operations.
13
The
PRC laws and regulations governing ourcurrent
business operations are sometimes vague and uncertain. Any changes in such
PRC
laws and regulations may have a material and adverse effect on our
business.
The
PRC’s
legal system is a civil law system based on written statutes, in which system
decided legal cases have little value as precedents unlike the common law system
prevalent in the United States. There are substantial uncertainties regarding
the interpretation and application of PRC laws and regulations, including but
not limited to the laws and regulations governing our business, or the
enforcement and performance of our arrangements with customers in the event
of
the imposition of statutory liens, death, bankruptcy and criminal proceedings.
The Chinese government has been developing a comprehensive system of commercial
laws, and considerable progress has been made in introducing laws and
regulations dealing with economic matters such as foreign investment, corporate
organization and governance, commerce, taxation and trade. However, because
these laws and regulations are relatively new, and because of the limited volume
of published cases and judicial interpretation and their lack of force as
precedents, interpretation and enforcement of these laws and regulations involve
significant uncertainties. New laws and regulations that affect existing and
proposed future businesses may also be applied retroactively. We are considered
a foreign persons or foreign funded enterprise under PRC laws, and as a result,
we are required to comply with PRC laws and regulations. We cannot predict
what
effect the interpretation of existing or new PRC laws or regulations may have
on
our businesses. If the relevant authorities find us in violation of PRC laws
or
regulations, they would have broad discretion in dealing with such a violation,
including, without limitation:
·
levying
fines;
·
revoking
our business and other licenses;
·
requiring
that we restructure our ownership or operations;
and
·
requiring
that we discontinue any portion or all of our
business.
Inflation
in the PRC could negatively affect our profitability and
growth.
While
the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. During the past decade, the rate of inflation in China has been
as
high as approximately 20% and China has experienced deflation as low as
approximately minus 2%. If prices for our products and services rise at a rate
that is insufficient to compensate for the rise in the costs of supplies such
as
raw materials, it may have an adverse effect on our profitability. In order
to
control inflation in the past, the PRC government has imposed controls on bank
credits, limits on loans for fixed assets and restrictions on state bank
lending. The implementation of such policies may impede economic growth. In
October 2004, the People’s Bank of China, the PRC’s central bank, raised
interest rates for the first time in nearly a decade and indicated in a
statement that the measure was prompted by inflationary concerns in the Chinese
economy. In April 2006, the People’s Bank of China raised the interest rate
again. Repeated rises in interest rates by the central bank would likely slow
economic activity in China which could, in turn, materially increase our costs
and also reduce demand for our products and services.
Recent
PRC regulations relating to acquisitions of PRC companies by foreign entities
may create regulatory uncertainties that could restrict or limit our ability
to
operate. Our failure to obtain the prior approval of theChina
Securities Regulatory Commission, or theCSRC,
for this offering and the listing and trading of our common stock on the
American Stock Exchange could have a material adverse effect on our business,
operating results, reputation and trading price of our common stock, and may
also create uncertainties for this offering.
The
PRC
State Administration of Foreign Exchange, or SAFE, issued a public notice in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company controlled by
PRC
residents intends to acquire a PRC company, such acquisition will be subject
to
strict examination by the relevant foreign exchange authorities. The public
notice also states that the approval of the relevant foreign exchange
authorities is required for any sale or transfer by the PRC residents of a
PRC
company’s assets or equity interests to foreign entities for equity interests or
assets of the foreign entities.
14
In
April
2005, SAFE issued another public notice further explaining the January notice.
In accordance with the April notice, if an acquisition of a PRC company by
an
offshore company controlled by PRC residents has been confirmed by a Foreign
Investment Enterprise Certificate prior to the promulgation of the January
notice, the PRC residents must each submit a registration form to the local
SAFE
branch with respect to their respective ownership interests in the offshore
company, and must also file an amendment to such registration if the offshore
company experiences material events, such as changes in the share capital,
share
transfer, mergers and acquisitions, spin-off transaction or use of assets in
China to guarantee offshore obligations. The April notice also provides that
failure to comply with the registration procedures set forth therein may result
in restrictions on our PRC resident shareholders and subsidiaries. Pending
the
promulgation of detailed implementation rules, the relevant government
authorities are reluctant to commence processing any registration or application
for approval required under the SAFE notices.
In
addition, on August 8, 2006, the Ministry of Commerce (“MOFCOM”), joined by the
State-Owned Assets Supervision and Administration Commission of the State
Council, State Administration of Taxation, State Administration for Industry
and
Commerce, CSRC and SAFE, amended and released the Provisions for Foreign
Investors to Merge and Acquire Domestic Enterprises, new foreign-investment
rules which took effect September 8, 2006, superseding much, but not all, of
the
guidance in the prior SAFE circulars. These new rules significantly revise
China’s regulatory framework governing onshore-offshore restructurings and how
foreign investors can acquire domestic enterprises. These new rules signify
greater PRC government attention to cross-border merger, acquisition and other
investment activities, by confirming MOFCOM as a key regulator for issues
related to mergers and acquisitions in China and requiring MOFCOM approval
of a
broad range of merger, acquisition and investment transactions. Further, the
new
rules establish reporting requirements for acquisition of control by foreigners
of companies in key industries, and reinforce the ability of the Chinese
government to monitor and prohibit foreign control transactions in key
industries.
Specifically,
this regulation,
among other things, has some provisions that purport to require that an offshore
special purpose vehicle, or SPV, formed for listing purposes and controlled
directly or indirectly by PRC companies or individuals shall obtain the approval
of the CSRC prior to the listing and trading of such SPV’s securities on an
overseas stock exchange. On September 21, 2006, the CSRC published on its
official website procedures specifying documents and materials required to
be
submitted to it by SPVs seeking CSRC approval of their overseas listings.
However, the application of this PRC regulation remains unclear with no
consensus currently existing among the leading PRC law firms regarding the
scope
and applicability of the CSRC approval requirement.
Our
PRC
counsel, Guangdong Seagull Law Firm, has advised us that because we completed
our restructuring before September 8, 2006, the effective date of the new
regulation, it is not necessary for us to submit the application to the CSRC
for
its approval, and the listing and trading of our Common Stock on the American
Stock Exchange does not require CSRC approval.
If
the
CSRC or another PRC regulatory agency subsequently determines that CSRC approval
was required for this offering, we may face regulatory actions or other
sanctions from the CSRC or other PRC regulatory agencies. These regulatory
agencies may impose fines and penalties on our operations in the PRC, limit
our
operating privileges in the PRC, delay or restrict the repatriation of the
proceeds from this offering into the PRC, or take other actions that could
have
a material adverse effect on our business, financial condition, results of
operations, reputation and prospects, as well as the trading price of our Common
Stock. The CSRC or other PRC regulatory agencies also may take actions requiring
us, or making it advisable for us, to halt this offering before settlement
and
delivery of the Common Stock offered hereby. Consequently, if you engage in
market trading or other activities in anticipation of and prior to settlement
and delivery, you do so at the risk that settlement and delivery may not occur.
Also,
if
later the CSRC requires that we obtain its approval, we may be unable to obtain
a waiver of the CSRC approval requirements, if and when procedures are
established to obtain such a waiver. Any uncertainties and/or negative publicity
regarding this CSRC approval requirement could have a material adverse effect
on
the trading price of our Common Stock.
15
These
new
rules may significantly affect the means by which offshore-onshore
restructurings are undertaken in China in connection with offshore private
equity and venture capital financings, mergers and acquisitions. It is expected
that such transactional activity in China in the near future will require
significant case-by-case guidance from MOFCOM and other government authorities
as appropriate. It is anticipated that application of the new rules will be
subject to significant administrative interpretation, and we will need to
closely monitor how MOFCOM and other ministries apply the rules to ensure its
domestic and offshore activities continue to comply with PRC law. Given the
uncertainties regarding interpretation and application of the new rules, we
may
need to expend significant time and resources to maintain
compliance.
It
is
uncertain how our business operations or future strategy will be affected by
the
interpretations and implementation of the SAFE notices and new rules. Our
business operations or future strategy could be adversely affected by the SAFE
notices and the new rules. For example, we may be subject to more stringent
review and approval process with respect to our foreign exchange
activities.
If
we make equity compensation grants to persons who are PRC citizens, they may
be
required to register with the State Administration of Foreign Exchange of the
PRC, or SAFE. We may also face regulatory uncertainties that could restrict
our
ability to adopt additional equity compensation plans for our directors and
employees and other parties under PRC law.
On
April6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic
Individuals Participating in the Employee Stock Ownership Plan or Stock Option
Plan of An Overseas Listed Company, also know as “Circular 78.” It is not clear
whether Circular 78 covers all forms of equity compensation plans or only those
which provide for the granting of stock options. For any plans which are so
covered and are adopted by a non-PRC listed company, such as our company, after
April 6, 2007, Circular 78 requires all participants who are PRC citizens to
register with and obtain approvals from SAFE prior to their participation in
the
plan. In addition, Circular 78 also requires PRC citizens to register with
SAFE
and make the necessary applications and filings if they participated in an
overseas listed company’s covered equity compensation plan prior to April 6,2007. We believe that the registration and approval requirements contemplated
in
Circular 78 will be burdensome and time consuming.
Although
we have not made any equity compensation grants under our 2007 Equity Incentive
Plan, which was adopted by our board of directors and approved by our
shareholders in July 2007, future participants of our equity incentive plan
or
any other equity compensation plan we may adopt who are PRC citizens may be
required to register with SAFE. We have officers, directors, and employees
that
are eligible to receive grants under our equity incentive plan who are also
PRC
citizens. If it is determined that any of our equity incentive plan is subject
to Circular 78, failure to comply with such provisions may subject us and
participants of our equity incentive plan who are PRC citizens to fines and
legal sanctions and prevent us from being able to grant equity compensation
to
our PRC employees. In that case, our business operations may be adversely
affected.
Any
recurrence of Severe Acute Respiratory Syndrome (SARS), Avian Flu, or another
widespread public health problem, in the PRC could adversely affect our
operations.
A
renewed
outbreak of Severe Acute Respiratory Syndrome, Avian Flu or another widespread
public health problem in China, where all of our manufacturing facilities are
located and where all of our sales occur, could have a negative effect on our
operations. Such an outbreak could have an impact on our operations as a result
of:
·
quarantines
or closures of some of our manufacturing facilities, which would
severely
disrupt our operations,
·
the
sickness or death of our key officers and employees,
and
·
a
general slowdown in the Chinese
economy.
Any
of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
PRC
companies have historically not adopted a Western style of management and
financial reporting concepts and practices, which includes strong corporate
governance, internal controls and, computer, financial and other control
systems. In addition, we may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. 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. Therefore, we may, in turn, experience
difficulties in implementing and maintaining adequate internal controls as
required under Section 404 of the Sarbanes-Oxley Act of 2002. This may result
in
significant deficiencies or material weaknesses in our internal controls which
could impact the reliability of our financial statements and prevent us from
complying with SEC rules and regulations and the requirements of the
Sarbanes-Oxley Act of 2002. Any such deficiencies, weaknesses or lack of
compliance could have a materially adverse effect on our business.
16
You
may experience difficulties in effecting service of legal process, enforcing
foreign judgments or bringing original actions in China based upon U.S. laws,
including the federal securities laws or other foreign laws against us or our
management.
Most
of
our current operations are conducted in China. Moreover, almost all of our
directors and officers are nationals and residents of China. All or
substantially all of the assets of these persons are located outside the United
States and in the PRC. As a result, it may not be possible to effect service
of
process within the United States or elsewhere outside China upon these persons.
In addition, uncertainty exists as to whether the courts of China would
recognize or enforce judgments of U.S. courts obtained against us or our
officers and/or directors predicated upon the civil liability provisions of
the
securities law of the United States or any state thereof, or be competent to
hear original actions brought in China against us or such persons predicated
upon the securities laws of the United States or any state thereof.
RISKS
RELATED TO OUR CAPITAL STRUCTURE
There
is no current trading market for our
common stock, and there is no assurance of an established public trading market,
which would adversely affect the ability of our
investors to sell their securities in the public market.
Our
common stock is not currently listed or quoted for trading on any national
securities exchange or national quotation system. We are applying for the
listing of our common stock on the American Stock Exchange (“AMEX”) in the
future. There is no guarantee that the American Stock Exchange, or any other
exchange or quotation system, will permit our shares to be listed and traded.
If
we fail to obtain a listing on the American Stock Exchange, we may seek
quotation on the OTC Bulletin Board. The NASD has enacted changes that limit
quotations on the OTC Bulletin Board to securities of issuers that are current
in their reports filed with the Securities and Exchange Commission. The effect
on the OTC Bulletin Board of these rule changes and other proposed changes
cannot be determined at this time. The OTC Bulletin Board is an inter-dealer,
over-the-counter market that provides significantly less liquidity than the
NASDAQ Global Market or AMEX. Quotes for stocks included on the OTC Bulletin
Board are not listed in the financial sections of newspapers as are those for
the NASDAQ Global Market or AMEX. Therefore, prices for securities traded solely
on the OTC Bulletin Board may be difficult to obtain and holders of our common
stock may be unable to resell their securities at or near their original
offering price or at any price.
Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of outstanding stock in the
public marketplace could reduce the price of our common
stock.
Pursuant
to the terms of the Share Exchange, we agreed to file a registration statement
with the Securities and Exchange Commission to register a total of 2,320,875
shares of common stock issued in an equity financing that was conducted in
connection with the Share Exchange that closed on October 17, 2006. The
investors in the Private Placement also entered into a lock-up agreement
pursuant to which they agreed not to sell their shares until our common stock
begins to be traded on the New York Stock Exchange, American Stock Exchange,
NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board, after
which their shares are automatically released from the lock up on every 30
days
pro rata over a nine month period beginning with the date that is one month
from
the date that trading commences. We also agreed to register the IR Securities,
which consists of 100,000 shares of our common stock and common stock underlying
a five-year warrant to purchase 232,088 shares, in the registration statement
filed in connection with the Private Placement.
17
We
also
agreed to register all of the 2,275,000 shares of common stock held by our
shareholders who were shareholders immediately prior to the Share Exchange.
Because we issued shares to these shareholders that were issued shares while
we
were a “blank check” shell company with no operations, these shareholders are
considered to be promoters or affiliates. It should be noted that these shares
may not be sold by these promoters or affiliates, or their transferees, pursuant
to Rule 144 of the Securities Act, regardless of technical compliance with
the
rule. Any such resale transaction under Rule 144 would appear to be designed
to
distribute or redistribute such shares to the public without coming within
the
registration requirements of the Securities Act. Therefore, these promoters
or
affiliates, or their transferees, can only resell their shares through a
registration statement filed under the Securities Act. Of the 2,275,000 shares
held by our shareholders prior to the Share Exchange, we agreed to register
1,312,675 shares in the registration statement filed in connection with the
Private Placement and the remaining 962,325 shares in a subsequent registration
statement that we originally agreed to file by May 23, 2007; however, we have
verbally agreed with the WestPark affiliates and FirstAlliance to register
their
shares after the effective date of this registration statement. We also agreed
to register 2,000,000 shares that were issued to FirstAlliance Financial Group,
Inc. in the registration statement that we intend to file to register the shares
held by the affiliates of WestPark. We also agreed to register the Bonds, the
Bond Warrants, and the shares of common stock that may be issued upon the
conversion of the Bonds and exercise of the Bond Warrants that we issued in
a
financing transaction in April 2007, 4,761,905 shares of common stock may be
acquired upon conversion of the Bonds, subject to adjustment, and 800,000 may
be
acquired upon exercise of the Bond Warrants, subject to adjustment. All of
the
shares included in an effective registration statement as described above may
be
freely sold and transferred except if subject to a lock up
agreement.
Subject
to lock up agreements entered into with WestPark Capital, Inc. pursuant to
which
the former stockholder of Full Art and its designees agreed not to sell their
shares for a period of 12 months from the date of this prospectus, the former
stockholder of Full Art and its designees may be eligible to sell all or some
of
our shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act (“Rule
144”), subject to certain limitations. In general, pursuant to Rule 144, a
stockholder (or stockholders whose shares are aggregated) who has satisfied
a
one-year holding period may, under certain circumstances, sell within any
three-month period a number of securities which does not exceed the greater
of
1% of the then outstanding shares of common stock or the average weekly trading
volume of the class during the four calendar weeks prior to such sale. As of
the
closing of the Share Exchange, 1% of our issued and outstanding shares of common
stock was approximately 500,000 shares. Rule 144 also permits, under certain
circumstances, the sale of securities, without any limitations, by a
non-affiliate that has satisfied a two-year holding period. Any substantial
sale
of common stock pursuant to any resale prospectus or Rule 144 may have an
adverse effect on the market price of our common stock by creating an excessive
supply.
Following
the Share Exchange, the former principal stockholder of Full Art has significant
influence over us.
Our
largest
shareholder, KGE Group, Limited, or KGE Group, beneficially owns or controls
approximately 75.5%
of
our
outstanding shares as of the close of the Share Exchange. Luo
Ken
Yi,
who is
our
Chief
Executive Officer, Chief
Operating Officer,
and
Chairman of the Board, and Ye Ning, who is our
Vice
General Manager and a director, are directors of KGE Group. In addition,
Luo
Ken
Yi
and Ye
Ning own approximately 77.0% and 2.5%, respectively, respectively, of KGE
Group’s issued and outstanding shares. As a result of its holding, KGE Group has
controlling influence in determining the outcome of any corporate transaction
or
other matters submitted to our
shareholders for approval, including mergers, consolidations and the sale of
all
or substantially all of our assets, election of directors, and other significant
corporate actions. KGE Group also has the power to prevent or cause a change
in
control. In addition, without the consent of KGE Group, we could be prevented
from entering into transactions that could be beneficial to us. The interests
of
KGE Group, and its control persons, may differ from the interests of
our
shareholders.
We
recognized a charge to our earnings as a result of the Share Exchange and also
may not be able to achieve the benefits we
expect
to result from the Share Exchange.
On
August21, 2006, we entered into the Exchange Agreement, as amended on October 17,2006, with KGE Group, the sole shareholder of Full Art, pursuant to which we
agreed to acquire 100% of the issued and outstanding securities of Full Art
in
exchange for shares of our common stock. On October 17, 2006, the Share Exchange
closed, Full Art became our wholly-owned subsidiary, our sole business
operations became that of Full Art, and the management and directors of Full
Art
became the management and directors of us.
18
We
may
not realize the benefits that we hoped to receive as a result of the Share
Exchange, which includes:
·
access
to the capital markets of the United
States;
·
the
increased market liquidity expected to result from exchanging stock
in a
private company for securities of a public company that may eventually
be
traded;
·
the
ability to use registered securities to make acquisition of assets
or
businesses;
·
increased
visibility in the financial
community;
·
enhanced
access to the capital markets;
·
improved
transparency of operations; and
·
perceived
credibility and enhanced corporate image of being a publicly traded
company.
There
can
be no assurance that any of the anticipated benefits of the Share Exchange
will
be realized in respect to our new business operations. In addition, the
attention and effort devoted to achieving the benefits of the Share Exchange
and
attending to the obligations of being a public company, such as reporting
requirements and securities regulations, could significantly divert management’s
attention from other important issues, which could materially and adversely
affect our operating results or stock price in the future.
In
addition, we issued 2,000,000 shares of common stock to FirstAlliance Financial
Group, Inc. upon closing of the Share Exchange, and the shares were accounted
as
a non-reoccurring general and administrative expense in the amount of $3.2
million and, as a result, reduced our earnings for the quarter and year ended
December 31, 2006. As a result of the reduction in earnings, our results of
operation for the quarter and year ended December 31, 2006 suffered and the
value of our common stock and your investment may fall.
We
recently completed a placement of convertible bonds that included a beneficial
conversion feature and are mandatorily redeemable and 800,000 warrants
exercisable at $0.01 per share. The features of the bonds and the value of
the
warrants will have the effect of reducing our reported operating results during
the term of the bonds.
In
April
2007, we issued $10,000,000 Variable Rate Convertible Bonds due in 2012, or
the
Bonds. The terms of Bonds include conversion features allowing the holders
to
convert the Bonds into shares of our common stock. Certain of those conversion
features that allow for the reduction in conversion price upon the occurrence
of
stated events constitute a “beneficial conversion feature” for accounting
purposes. In addition, we may be required to repurchase the Bonds at the request
of the holders if certain events occur or do not occur, as set forth in
the Trust Deed. If our common stock ceases to be listed on AMEX or there is
a change of control of the company as defined in the Trust Deed, each holder
will have the right to require us to redeem all or part of that holder’s Bonds.
If on or before April 12, 2008, the Bonds, Bond Warrants, and shares underlying
the Bonds and Bond Warrants are not registered with the SEC, then holders of the
Bonds can require us to redeem the Bonds at 106.09% of the principal amount
of
the Bonds. In addition, at any time after April 12, 2010, each
holder can require us to redeem the Bonds at 126.51% of the principal
amount and we are required to redeem any outstanding Bonds at 150.87% of its
principal amount on April 4, 2012. If a triggering event occurs and we are
requested by the holders to repurchase all or a portion of the Bonds, we will
be
required to pay cash to redeem all or a portion of the Bonds. Finally, in
connection with the issuance of the Bonds, we issued the holder of the Bonds
the
Bond Warrants exercisable at a per share exercise price of $0.01.
The
accounting treatment related to the beneficial conversion and mandatory
redemption features of the Bonds and the value of the Bond Warrants will have
an
adverse impact on our results of operations for the term of the Bonds. The
application of Generally Accepted Accounting Principles required us to allocate
$2,467,951 to the beneficial conversion feature of the Bonds and $2,167,950
to
the Bonds Warrants, which have been reflected in our financial statements as
an
interest discount. Also, we have determined that the total redemption premium
associated with the mandatory redemption feature of the Bonds is $5,087,100.
All
of the aforementioned amounts associated with the beneficial conversion and
mandatory redemption feature of the Bonds and the value of the Bond Warrants
are
being amortized as additional interest expense over the term of the Bonds.
This
accounting will result in an increase in interest expense in all reporting
periods during the term of the Bonds, and, as a result, reduce our net income
accordingly.
19
Mandatory
redemption of the Bonds could have a material adverse effect on our liquidity
and cash resources.
If
we are
required to redeem all or any portion of the Bonds, this may have a material
adverse effect on our liquidity and cash resources, and may impair our ability
to continue to operate. If we are required to repurchase all or a portion of
the
Bonds and do not have sufficient cash to make the repurchase, we may be required
to obtain third party financing to do so, and there can be no assurances that
we
will be able to secure financing in a timely manner and on favorable terms,
which could have a material adverse effect on our financial performance, results
of operations and stock price. Furthermore, additional equity financing may
be
dilutive to the holders of our common stock, and debt financing, if available,
may involve restrictive covenants, and strategic relationships, if necessary
to
raise additional funds, may require that we relinquish valuable
rights.
If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
Our
internal control over financial reporting may have weaknesses and conditions
that need to be addressed, the disclosure of which may have an adverse impact
on
the price of our common stock. We are required to establish and maintain
appropriate internal controls over financial reporting. Failure to establish
those controls, or any failure of those controls once established, could
adversely impact our public disclosures regarding our business, financial
condition or results of operations. In addition, management’s assessment of
internal controls over financial reporting may identify weaknesses and
conditions that need to be addressed in our internal controls over financial
reporting or other matters that may raise concerns for investors. Any actual
or
perceived weaknesses and conditions that need to be addressed in our internal
control over financial reporting, disclosure of management’s assessment of our
internal controls over financial reporting or disclosure of our public
accounting firm’s attestation to or report on management’s assessment of our
internal controls over financial reporting may have an adverse impact on the
price of our common stock.
Our
officers and directors have no experience in public company reporting and
limited experience in financial accounting, which could impair our ability
to
satisfy public company filing requirements and increase our securities
compliance costs.
Our
officers and directors do not have any prior experience as officers and
directors of a publicly traded company, or in complying with the regulatory
requirements applicable to a public company. As a result, we could have
difficulty satisfying the regulatory requirements applicable to public
companies, which could adversely affect the market for our common stock. At
present, we rely upon outside experts to advise us on matters relating to
financial accounting and public company reporting. While we believe that it
will
be possible to satisfy our public company reporting requirements through the
use
of third party experts, our general and administrative costs will remain higher
to the extent our officers alone are not able to satisfy our public company
reporting requirements.
Standards
for compliance with Section 404 of the Sarbanes-Oxley Act Of 2002 are uncertain,
and if we fail to comply in a timely manner, our business could be harmed and
our stock price could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require annual assessment of our internal control over financial reporting,
and
attestation of this assessment by our company’s independent registered public
accountants. The SEC extended the compliance dates for non-accelerated filers,
as defined by the SEC. Accordingly, we believe that the annual assessment of
our
internal controls requirement will first apply to our annual report for the
2007
fiscal year and the attestation requirement of management’s assessment by our
independent registered public accountants will first apply to our annual report
for the 2008 fiscal year. The standards that must be met for management to
assess the internal control over financial reporting as effective are new and
complex, and require significant documentation, testing and possible remediation
to meet the detailed standards. We may encounter problems or delays in
completing activities necessary to make an assessment of our internal control
over financial reporting. In addition, the attestation process by our
independent registered public accountants is new and we may encounter problems
or delays in completing the implementation of any requested improvements and
receiving an attestation of our assessment by our independent registered public
accountants. If we cannot assess our internal control over financial reporting
as effective, or our independent registered public accountants are unable to
provide an unqualified attestation report on such assessment, investor
confidence and share value may be negatively impacted.
20
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and related SEC
regulations, have created uncertainty for public companies and significantly
increased the costs and risks associated with accessing the public markets
and
public reporting. Our management team will need to invest significant management
time and financial resources to comply with both existing and evolving standards
for public companies, which will lead to increased general and administrative
expenses and a diversion of management time and attention from revenue
generating activities to compliance activities.
Our
common
stock may be considered a “penny stock,” and thereby be subject to additional
sale and trading regulations that may make it more difficult to
sell.
Our
common stock, which is not currently listed or quoted for trading, may be
considered to be a “penny stock” if it does not qualify for one of the
exemptions from the definition of “penny stock” under Section 3a51-1 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) once, and if,
it starts trading. Our common stock may be a “penny stock” if it meets one or
more of the following conditions (i) the stock trades at a price less than
$5.00
per share; (ii) it is NOT traded on a “recognized” national exchange; (iii) it
is NOT quoted on the Nasdaq Capital Market, or even if so, has a price less
than
$5.00 per share; or (iv) is issued by a company that has been in business less
than three years with net tangible assets less than $5 million.
The
principal result or effect of being designated a “penny stock” is that
securities broker-dealers participating in sales of our common stock will be
subject to the “penny stock” regulations set forth in Rules 15-2 through 15g-9
promulgated under the Exchange Act. For example, Rule 15g-2 requires
broker-dealers dealing in penny stocks to provide potential investors with
a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document at least two business days before
effecting any transaction in a penny stock for the investor’s account. Moreover,
Rule 15g-9 requires broker-dealers in penny stocks to approve the account of
any
investor for transactions in such stocks before selling any penny stock to
that
investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor
and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide
the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor’s financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult and time consuming for holders of our common stock to resell their
shares to third parties or to otherwise dispose of them in the market or
otherwise.
The
ability of our Chinese operating subsidiaries to pay dividends may be restricted
due to foreign
exchange control regulations of China.
The
ability of our Chinese operating subsidiaries to pay dividends may be restricted
due to the foreign exchange control policies and availability of cash balance
of
the Chinese operating subsidiaries. Because substantially all of our operations
are conducted in China and a majority of our revenues are generated in China,
all of our revenue being earned and currency received are denominated in
Renminbi (RMB). RMB is subject to the exchange control regulation in China,
and,
as a result, we may unable to distribute any dividends outside of China due
to
PRC exchange control regulations that restrict our ability to convert RMB into
US Dollars.
21
We
do not foresee paying cash dividends in the foreseeable
future.
We
do not
plan to declare or pay any cash dividends on our shares of common stock in
the
foreseeable future and we currently intend to retain any future earnings for
funding growth. As a result, you should not rely on an investment in our
securities if you require dividend income. Capital appreciation, if any, of
our
shares may be your sole source of gain for the foreseeable future. Moreover,
you
may not be able to resell your shares in our company at or above the price
you
paid for them.
The
information contained in this prospectus, including in the documents
incorporated by reference into this prospectus, includes some statement that
are
not purely historical and that are “forward-looking statements.” Such
forward-looking statements include, but are not limited to, statements regarding
our and their management’s expectations, hopes, beliefs, intentions or
strategies regarding the future, including our financial condition, results
of
operations, and the expected impact of the Share Exchange on the parties’
individual and combined financial performance. In addition, any statements
that
refer to projections, forecasts or other characterizations of future events
or
circumstances, including any underlying assumptions, are forward-looking
statements. The words “anticipates,”“believes,”“continue,”“could,”“estimates,”“expects,”“intends,”“may,”“might,”“plans,”“possible,”“potential,”“predicts,”“projects,”“seeks,”“should,”“will,”“would” and
similar expressions, or the negatives of such terms, may identify
forward-looking statements, but the absence of these words does not mean that
a
statement is not forward-looking.
The
forward-looking statements contained in this prospectus are based on current
expectations and beliefs concerning future developments and the potential
effects on the parties and the transaction. There can be no assurance that
future developments actually affecting us will be those anticipated. These
forward-looking statements involve a number of risks, uncertainties (some of
which are beyond the parties’ control) or other assumptions that may cause
actual results or performance to be materially different from those expressed
or
implied by these forward-looking statements, including the
following:
Fluctuation
and unpredictability of costs related to our products and
services;
·
Changes
in the laws of the PRC that affect our
operations;
·
Our
failure to meet or timely meet contractual performance standards
and
schedules;
·
Any
recurrence of severe acute respiratory syndrome (SARS) or Avian
Flu;
·
Reduction
or reversal of our recorded revenue or profits due to “percentage of
completion” method of accounting;
·
Our
dependence on the steel and aluminum
markets;
·
Exposure
to product liability and defect
claims;
·
Our
ability to obtain all necessary government certifications and/or
licenses
to conduct our business;
·
Development
of a public trading market for our securities;
·
Expenses
and costs related to our issuance of the
Bonds;
·
The
cost of complying with current and future governmental regulations
and the
impact of any changes in the regulations on our operations;
and
·
The
other factors referenced in this prospectus, including, without
limitation, under the sections entitled “Risk Factors,”“Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
and “Description of Business.”
These
risks and uncertainties, along with others, are also described above under
the
heading “Risk Factors.” Should one or more of these risks or uncertainties
materialize, or should any of the parties’ assumptions prove incorrect, actual
results may vary in material respects from those projected in these
forward-looking statements. We undertake no obligation to update or revise
any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as may be required under applicable securities
laws.
23
USE
OF PROCEEDS
We
estimate that the net proceeds from the sale of the 600,000 shares of common
stock in the offering will be approximately $1.4 million, assuming an initial
public offering price of $3.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses. If
the
underwriters' over-allotment option is exercised in full, we estimate that
our
net proceeds will be approximately $1.6 million.
The
principal purposes of this offering are to increase our working capital, to
create a public market for our common stock, to facilitate our future access
to
the public capital markets. The net proceeds will be used for general corporate
purposes. We cannot specify with certainty the particular uses for the net
proceeds. The amounts and timing of our actual expenditures will depend on
numerous factors, including the status of our development efforts, sales and
marketing activities, the amount of cash generated or used by our operations
and
competition. We may find it necessary or advisable to use portions of the
proceeds for other purposes, and we will have broad discretion in the
application of the net proceeds. We have no current intentions to acquire any
other businesses. Pending these uses, the proceeds will be invested in
short-term, investment grade, interest-bearing securities.
DIVIDEND
POLICY
We
do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in their
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant.
We
did
not pay cash dividends during the six months ended June 30, 2007. We
paid
cash dividends of $1,576,796, $2,571,396, and $4,108,226 during the years ended
December 31, 2006, 2005, and 2004, respectively.
24
CAPITALIZATION
The
following table summarizes our capitalization as of June 30, 2007 (unaudited),
on an actual basis and as adjusted basis to reflect our receipt of estimated
net
proceeds from the sale of 600,000 shares of common stock (excluding the 90,000
shares which the underwriters have the option to purchase to cover
over-allotments, if any) in this offering at an assumed public offering price
of
$3.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses of approximately $427,000.
The
number of our shares of common stock shown above to be outstanding after this
offering is based on 50,000,000 shares outstanding as of June 30, 2007. The
information below does not reflect the financing transaction that we completed
on April 12, 2007 pursuant to which we issued (i) $10,000,000 Variable Rate
Convertible Bonds due in 2012 and (ii) 800,000 warrants to purchase an aggregate
of 800,000 shares of our common stock, subject to adjustments for stock splits
or reorganizations as set forth in the warrant, that expire in
2010.
You
should read this table in conjunction with “Use of Proceeds,”“Summary Financial
Information,”“Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and our consolidated financial statements and related
notes included elsewhere in this prospectus.
Preferred
stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued
and
outstanding at June 30, 2007
—
—
Common
stock, $0.001 par value, 100,000,000 shares authorized, 50,000,000
shares
outstanding at June 30, 2007, and 50,600,000 shares issued and outstanding
on an as-adjusted basis at June 30, 2007(1)
50
51
Additional
paid in capital
11,711
13,084
Statutory
reserves
1,521
1,521
Accumulated
other comprehensive income
516
516
Retained
earnings
17,372
17,372
Total
stockholders' equity
$
31,170
32,544
Total
capitalization
$
39,456
40,830
(1)
The
number of our shares of common stock shown above to be outstanding
after
this offering is based on 50,000,000 shares outstanding as of June30,2007. This information excludes 232,088 shares of our common stock
issuable upon exercise of outstanding warrants, 4,761,905 shares
of our
common stock issuable upon the conversion of the Bonds, and 800,000
shares
of our common stock issuable upon the exercise of the Bond
Warrants.
There
has
never been a public trading market for our common stock and our shares of common
stock are not currently listed or quoted for trading on any national securities
exchange or national quotation system. We are applying for the listing of our
common stock on the American Stock Exchange. We propose to obtain the trading
symbol “RCH.” As
of
August1,2007,
we had
71 registered shareholders.
DILUTION
If
you
invest in our shares of common stock, your interest will be diluted immediately
to the extent of the difference between the public offering price per share
you
will pay in this offering and the net tangible book value per share of common
stock immediately after this offering.
Investors
participating in this offering will incur immediate, substantial dilution.
Our
net tangible book value as of June 30, 2007 was $31.2 million, or $0.62 per
share (unaudited) based on 50,000,000 shares of common stock outstanding.
Assuming the sale by us of 600,000 shares of common stock offered in this
offering at an assumed public offering price of $3.00 per share, and after
deducting the estimated underwriting discount and commissions and estimated
offering expenses, our as adjusted net tangible book value as of June 30, 2007
would have been $32.5 million, or $0.64 per share. This represents an immediate
increase in net tangible book value of less than $0.02 per share to our existing
shareholders and an immediate dilution of $2.36 per share to the new investors
purchasing shares of common stock in this offering.
The
following table illustrates this per share dilution:
Assumed
public offering price per share
$
3.00
Net
tangible book value per share as of June 30, 2007
$
0.62
Increase
per share attributable to new public investors
0.02
Pro
forma net tangible book value per share after this offering
0.64
Dilution
per share to new public investors
$
2.36
The
following table sets forth, on an as adjusted basis as of June 30, 2007, the
difference between the number of shares of common stock purchased from China
Architectural Engineering, Inc., the total cash consideration paid, and the
average price per share paid by our existing shareholders and by new public
investors before deducting estimated underwriting discounts and commissions
and
estimated offering expenses payable by us, using an assumed public offering
price of $3.00 per share of common stock:
Shares
Purchased
Total
Cash Consideration
Number
Percent
Amount
(in
thousands)
Percent
Average
Price Per Share
Existing
shareholders
50,000,000
98.8
%
$
3,757
67.6
%
$
0.08
New
investors
600,000
1.2
%
$
1,800
32.4
%
$
3.00
Total
50,600,000
100
%
$
5,557
100
%
26
The
total
consideration amount for shares of common stock held by our existing
shareholders includes total cash paid for our outstanding shares of common
stock
as of June 30, 2007 and excludes the value of securities that we have issued
for
services. If the underwriters’ over-allotment option of 90,000 shares of common
stock is exercised in full, the number of shares held by existing shareholders
will be reduced to 98.6% of the total number of shares to be outstanding after
this offering; and the number of shares held by the new investors will be
increased to 690,000 shares, or 1.4%, of the total number of shares of common
stock outstanding after this offering.
The
discussion and tables above is based on 50,000,000 shares of common stock issued
and outstanding as of June 30, 2007. This information excludes (i) 232,088
shares of common stock issuable upon the exercise of warrants at an exercise
price of $1.60 per share, (ii) 4,761,905 shares that may be issued upon the
conversion of the Bonds, subject to adjustment, and (iii) 800,000 shares of
common stock underlying the Bond Warrants, subject to adjustment. To the extent
that these warrants and convertible debt are exercised or converted, there
will
be further dilution to new investors. In addition, we may choose to raise
additional capital due to market conditions or strategic considerations even
if
we believe we have sufficient funds for our current or future operating plans.
To the extent that additional capital is raised through the sale of equity
or
convertible debt securities, the issuance of these securities could result
in
further dilution to our shareholders.
ACCOUNTING
OF THE SHARE EXCHANGE
The
acquisition of Full Art by us pursuant to the Share Exchange Transaction was
accounted for as a recapitalization by us. The recapitalization was, at the
time
of the Share Exchange, the merger of a private operating company (Full Art)
into
a non-operating public shell corporation (us) with nominal net assets and as
such is treated as a capital transaction, rather than a business combination.
As
a result no goodwill is recorded. The transaction is the equivalent to the
issuance of stock by the private company for the net monetary assets of the
shell corporation. The pre acquisition financial statements of Full Art are
treated as the historical financial statements of the consolidated companies.
The financial statements presented will reflect the change in capitalization
for
all periods presented, therefore the capital structure of the consolidated
enterprise, being the capital structure of the legal parent, is different from
that appearing in the financial statements of Full Art in earlier periods due
to
the recapitalization.
27
SELECTED
CONSOLIDATED FINANCIAL DATA
The
following selected consolidated statement of operations data contains
consolidated statement of operations data for the six months ended June 30,2007
and 2006 (unaudited) and each of the years in the five-year period ended
December 31, 2006 and the consolidated balance sheet data as of June 30, 2007
and 2006 (unaudited) and year-end for each of the years in the five-year period
ended December 31, 2006. The consolidated statement of operations data and
balance sheet data were derived from the audited consolidated financial
statements, except for data for the periods ended and as of June 30, 2007 and
2006 and December 31, 2002. Such financial data should be read in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements starting on page F-1 and with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
The
following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this prospectus.
This
prospectus contains forward-looking statements. The words “anticipated,”“believe,” “expect, “plan,”“intend,”“seek,”“estimate,”“project,”“could,”“may,” and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect our management’s current views with respect to future events
and financial performance and involve risks and uncertainties, including,
without limitation, general economic and business conditions, changes in
foreign, political, social, and economic conditions, regulatory initiatives
and
compliance with governmental regulations, the ability to achieve further market
penetration and additional customers, and various other matters, many of which
are beyond our control. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove to be incorrect, actual results
may vary materially and adversely from those anticipated, believed, estimated
or
otherwise indicated. Consequently, all of the forward-looking statements made
in
this prospectus are qualified by these cautionary statements and there can
be no
assurance of the actual results or developments.
OVERVIEW
We
were
incorporated in the state of Delaware on March 16, 2004. We were originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation. On October 17, 2006, we closed a share exchange transaction
described below, pursuant to which we (i) became the 100% parent of Full Art
International, Ltd., a Hong Kong Company (“Full Art”), which has four
subsidiaries, including its wholly-owned subsidiary, Zhuhai King Glass
Engineering Co., Ltd., a company formed under the laws of the People’s Republic
of China (“PRC” or “China”), (ii) assumed the operations of Full Art and its
subsidiaries and (iii) changed our name from SRKP 1, Inc. to China Architectural
Engineering, Inc. Full Art was incorporated in Hong Kong on July 30, 1992 under
the Companies Ordinance of Hong Kong.
We
specialize in the design, engineering and installation of high-end specialty
curtain wall systems, including glass curtain walls, stone curtain walls, metal
curtain walls, roofing systems, and related products, for public works projects
and commercial real estate. We have designed and installed nearly one hundred
projects throughout China, including the National Grand Theater, Exhibition
Conservatory of Beijing Botanical Garden, The COSCO Tower at Changlian Avenue
Beijing, and the Wumen Exhibition Hall in Beijing’s Forbidden City, and a number
of commercial structures in Southeast Asia. We compete on the strength of our
reputation, track record, strong relationships with government clients and
our
ability to give expression to the vision of leading architects. By focusing
on
innovation while outsourcing commoditized manufacturing work, we are able to
add
artistic and technological value to projects at cost-effective price
points.
Our
work
is performed under cost-plus-fee contracts and fixed-price contracts. The length
of our contracts varies but typically has a duration of approximately two years.
Approximately 90% of our sales are from-fixed price contracts. The remaining
10%
of our sales are from cost-plus-fee contracts. Under fixed-price contracts,
we
receive a fixed price. Consequently, we realize a profit on fixed-price
contracts only if we control our costs and prevent cost over-runs on the
contracts. Approximately 70% of contracts are modified after they begin, usually
to accommodate requests from clients to increase project size and scope. In
cases where fixed-price contracts are modified, the fixed price is renegotiated
and adjusted upwards accordingly. Under cost-plus-fee contracts, which may
be
subject to contract ceiling amounts, we are reimbursed for allowable costs
and
fees, which may be fixed or performance-based. If our costs exceed the contract
ceiling or are not allowable under the provisions of the contract or any
applicable regulations, we may not be reimbursed for all our costs.
29
Recent
Events
October
2006 Share Exchange
On
August21, 2006, we entered into a share exchange agreement with KGE Group, Limited,
a
Hong Kong corporation and the sole shareholder of Full Art. Pursuant to the
share exchange agreement, as amended on October 17, 2006 (the “Exchange
Agreement”), we agreed to issue an aggregate of 45,304,125 shares of our common
stock in exchange for all of the issued and outstanding securities of Full
Art
(the “Share Exchange”). Upon the closing of the Share Exchange on October 17,2006, we issued an aggregate of 45,304,125 shares of our common stock to the
sole shareholder of Full Art and its designees in exchange for all of the issued
and outstanding securities of Full Art. Also at the closing of the Share
Exchange, we issued 100,000 shares of our common stock and a five-year warrant
to purchase 232,088 shares of our common stock at a per share exercise price
of
$1.60 for investor relations services (the “IR Securities”). In addition,
immediately prior to the closing of the Share Exchange and the Private
Placement, as described below, we and certain of our shareholders agreed to
cancel an aggregate of 3,125,000 shares of common stock such that there were
2,275,000 shares of common stock outstanding immediately prior to the Share
Exchange and Private Placement. We issued no fractional shares in connection
with the Share Exchange.
Immediately
after the closing of the Share Exchange and Private Placement, we had 50,000,000
outstanding shares of common stock and outstanding warrants to purchase 232,088
shares of our common stock. Upon the closing of the Share Exchange, the sole
shareholder of Full Art and its designees owned approximately 90.6% of our
issued and outstanding common stock, the pre-existing shareholders of the
Company owned 4.7% and investors in the Private Placement that closed
concurrently with the Share Exchange, as described below, owned 4.6% of our
outstanding common stock.
We
agreed
to register the following securities held by our shareholders in the
registration statement that we filed to register the shares issued in the
Private Placement:
·
the
IR Securities, which consist of 100,000 shares of common stock and
232,088
shares of common stock underlying warrants;
and
·
1,312,675
shares of common stock held by our shareholders who were shareholders
immediately prior to the Share Exchange.
In
addition, we agreed to register shares of common stock in a subsequent
registration statement that we agreed to file by May 23, 2007, which is six
months and ten days after the date on which we first filed the registration
statement to register the shares issued in the Private Placement, to register
the following securities:
·
962,325
shares held affiliates of WestPark Capital, Inc. (“WestPark”) who were
shareholders immediately prior to the Share Exchange, and
·
2,000,000
shares of common stock that were issued at the closing of the Share
Exchange to FirstAlliance Financial Group, Inc. (“FirstAlliance”) as a
designee of Full Art’s sole shareholder.
With
respect to the registration statement that we will file to cover the 962,325
shares of common stock held by the WestPark affiliates and the 2,000,000 shares
that were issued to FirstAlliance, we agreed to use our reasonable best efforts
to cause the registration statement to become effective within 120 days after
the required filing date or the actual filing date, whichever is earlier, or
150
days after the required filing date or the actual filing date, whichever is
earlier, if the registration statement is subject to a full review by the SEC.
In addition, we agreed to use our reasonable best efforts to maintain the
registration statement effective for a period of 24 months at our expense.
We
originally agreed to a penalty provision pursuant to which we would issue
additional shares of our common stock if we failed to timely file and maintain
the registration statement, but we subsequently entered into an agreement with
WestPark affiliates and FirstAlliance pursuant to which they waived the penalty
provision. There is also no penalty associated with the registration of the
IR
Securities. We have verbally agreed with the WestPark affiliates and
FirstAlliance to register their shares after the effective date of this
registration statement.
October
2006 Private Placement
On
October 17, 2006, concurrently with the close of the Share Exchange, we received
gross proceeds of $3,713,400 in a private placement transaction (the “Private
Placement”). Pursuant to subscription agreements entered into with the
investors, we sold an aggregate of 2,320,875 shares of common stock at $1.60
per
share. We were required to file a registration statement no later than 30 days
after the closing of the Share Exchange, which we met, and we must use our
reasonable best efforts to cause the registration statement to become effective
within one hundred and 150 days after the closing or 180 days after the closing
if the registration statement is subject to a full review by the SEC. We are
also required to use our reasonable best efforts to maintain the registration
statement effective for a period of 24 months at our expense. We originally
agreed that if we fail to register the shares, we would be obligated to pay
to
the investors a cash payment equal to 0.0333% of the purchase price of their
respective shares for each business day of the failure. There was no maximum
potential consideration to be transferred in respect to the potential penalty.
Subsequently, we entered into an agreement with a sufficient number of investors
necessary to bind all investor pursuant to which the penalty provision was
waived.
30
The
investors in the Private Placement also entered into a lock up agreement
pursuant to which they agreed not to sell their shares until our common stock
begins to be listed or quoted on the New York Stock Exchange, American Stock
Exchange, NASDAQ Global Market, NASDAQ Capital Market or the OTC Bulletin Board,
after which their shares will automatically be released from the lock up every
30 days pro rata over a nine month period beginning on the date that is 30
days
after listing or quotation of the shares. After commissions and expenses, we
received net proceeds of approximately $3,267,792 in the Private Placement.
WestPark Capital, Inc. acted as placement agent in connection with the Private
Placement. For its services as placement agent, WestPark received an aggregate
fee of approximately $445,608, which consisted of a commission equal to 9.0%
of
the gross proceeds from the financing and a non-accountable fee of 3% of the
gross proceeds. Some of the controlling shareholders and control persons of
WestPark were also, prior to the completion of the Share Exchange, controlling
shareholders and control persons of our company, including Richard Rappaport,
who is the Chief Executive Officer of WestPark and was the President and a
significant shareholder of our company prior to the Share Exchange, and Anthony
C. Pintsopoulos, who is the Chief Financial Officer of WestPark and an officer
and director our company prior to the Share Exchange. Each of Messrs. Rappaport
and Pintsopoulos resigned from all of their executive and director positions
with us upon the closing of the Share Exchange.
April
2007 Issuance of Bonds and Bond Warrants
On
April12, 2007, we completed a financing transaction with ABN AMRO Bank N.V. (the
“Subscriber”) issuing (i) $10,000,000 Variable Rate Convertible Bonds due in
2012 (the “Bonds”) and (ii) 800,000 warrants to purchase an aggregate of 800,000
shares of our common stock, subject to adjustments for stock splits or
reorganizations as set forth in the warrant, that expire in 2010 (the “Bond
Warrants”).
The
Bonds
were subscribed at a price equal to 97% of their principal amount, which is
the
issue price of 100% less a 3% commission to the Subscriber. The Bonds were
issued pursuant to, and are subject to the terms and conditions of, a trust
deed
dated April 12, 2007 between us and The Bank of New York, London Branch, as
amended on August 29, 2007 (the “Trust Deed”). The Bonds are also subject to a
paying and conversion agency agreement dated April 12, 2007 between us, The
Bank
of New York, and The Bank of New York, London Branch. The
terms
and conditions of the Bonds, as set forth in the Trust Deed include, among
other
thing, the following terms:
·
Interest
Rate. The
Bonds bear cash interest from April 12, 2007 at the rate of 6% per
annum
for the first year after April 12, 2007 and 3% per annum thereafter,
of
the principal amount of the Bonds.
·
Conversion.
Each
Bond is convertible at the option of the holder at any time at on
and
after a date that is 365 days after the date that the Company’s
securities commence trading on the American Stock Exchange
(“AMEX’) through March 28, 2012, into shares of our common stock at an
initial conversion price equal to the price per share at which shares
are
sold in our proposed initial public offering of common stock on AMEX
with
minimum gross proceeds of $2,000,000. If no initial public offering
occurs
prior to conversion, the conversion price per share will be $2.00,
subject
to adjustment in accordance with the terms and conditions of the
Bonds.
The conversion price is subject to adjustment in certain events,
including
our issuance of additional shares of common stock or rights to purchase
common stock at a per share or per share exercise or conversion price,
respectively, at less than the applicable per share conversion price
of
the Bonds. If the average of the closing price for the Shares for
the
period of 20 consecutive trading days immediately prior to April12, 2009
or February 18, 2012 (each a "Reset Date") is lower than the conversion
price on the relevant reset date, the conversion price for the Bonds
is
higher than the average closing price for the shares, then the conversion
price will be reset to such average closing price; provided that,
the
conversion price will not be reset lower than 70% of the then existing
conversion price. In addition, the Trust Deed provides that the conversion
price of the Bonds cannot be adjusted pursuant to the above to lower
than
$0.25 per share of common stock (as adjusted for stock splits, stock
dividends, spin-offs, rights offerings, recapitalizations and similar
events) except in certain instances.
31
·
Mandatory
Redemptions. If
on or before April 12, 2008, either (i) our common stock (including
the
shares of common stock issuable upon conversion of the Bonds and
exercise
of the Bond Warrants) are not listed on AMEX or (ii) the Bonds, Bond
Warrants, and shares underlying the Bonds and Bond Warrants are not
registered with the Securities and Exchange Commission (the “SEC”), then
holders of the Bonds can require us to redeem the Bonds at 106.09%
of the
principal amount. In addition, at any time after April 12, 2010,
holders
of the Bonds can require us to redeem the Bonds at 126.51% of the
principal amount. We are required to redeem any outstanding Bonds
at
150.87% of its principal amount on April 4,2012.
On
April12, 2007, we entered into a warrant instrument with the Subscriber pursuant
to
which the Subscriber purchased the Bond Warrants from us (the “Warrant
Instrument”). The Bond Warrants, which are represented by a global certificate,
are also subject to a warrant agency agreement by and among us, The Bank
of New
York and The Bank of New York, London Branch dated April 12, 2007 (the “Warrant
Agency Agreement”). Pursuant to the
terms
and conditions of the Warrant Instrument and the Warrant Agency Agreement,
the
Bond Warrants become exercisable on October 12, 2008 and terminate on April12,2010. The Bond Warrants are exercisable at a per share exercise price of
$0.01.
We have agreed to list the shares of common stock underlying the Bond Warrants
on AMEX, or any alternative stock exchange by April 12, 2008.
On
April12, 2007 we also entered into a registration rights agreement with the
Subscriber pursuant to which we agreed to include the Bonds, the Bond Warrants,
and the shares of common stock underlying the Bonds and Bond Warrants in
a
pre-effective amendment to the registration statement of which this prospectus
is a part. Subsequently, we verbally agreed with the Subscriber not
to include its securities in this registration statement and to register
them in
a separate registration statement to be filed promptly after the effective
date
of this registration statement.
The
terms
of Bonds include conversion features allowing the holders to convert the Bonds
into shares of our common stock. Certain of those conversion features that
allow
for the reduction in conversion price upon the occurrence of stated events
constitute a “beneficial conversion feature” for accounting purposes. In
addition, we may be required to repurchase the Bonds at the request of the
holders if certain events occur or do not occur, as set forth in the Bond trust
deed. Upon the occurrence of any of the events that trigger a mandatory
redemption, as described above, and we are requested by the holders to
repurchase all or a portion of the Bonds, we will be required to pay cash to
redeem all or a portion of the Bonds.
The
accounting treatment related to the beneficial conversion and mandatory
redemption features of the Bonds and the value of the Bond Warrants will have
an
adverse impact on our results of operations for the term of the Bonds. The
application of Generally Accepted Accounting Principles required us to allocate
$2,467,951 to the beneficial conversion feature of the Bonds and $2,167,950
to
the Bonds Warrants, which have been reflected in our financial statements as
an
interest discount. Also, we have determined that the total redemption premium
associated with the mandatory redemption feature of the Bonds is $5,087,100.
All
of the aforementioned amounts associated with the beneficial conversion and
mandatory redemption feature of the Bonds and the value of the Bond Warrants
are
being amortized as additional interest expense over the term of the Bonds.
This
accounting will result in an increase in interest expense in all reporting
periods during the term of the Bonds, and, as a result, reduce our net income
accordingly.
In
addition, if we are required to redeem all or any portion of the Bonds, this
may
have a material adverse effect on our liquidity and cash resources, and may
impair our ability to continue to operate. If we are required to repurchase
all
or a portion of the Bonds and do not have sufficient cash to make the
repurchase, we may be required to obtain third party financing to do so, and
there can be no assurances that we will be able to secure financing in a timely
manner and on favorable terms, which could have a material adverse effect on
our
financial performance, results of operations and stock price.
32
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations
are
based upon our consolidated financial statements, which have been prepared
in
accordance with generally accepted accounting principles in the United States.
We believe the following are the critical accounting policies that impact the
financial statements, some of which are based on management’s best estimates
available at the time of preparation. Actual experience may differ from these
estimates.
Use
of Estimates -
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates.
Consolidation
- The
consolidated financial statements include our accounts and the accounts of
our
subsidiaries. Significant inter-company transactions have been eliminated in
consolidation.
Economic
and Political Risks -
For the
six months ended June 30, 2007 and 2006 and the years ended December 31, 2006,
2005 and 2004, substantially all of our sales were to companies located in
the
PRC and all of our assets were located in the PRC. Our operations may be
adversely affected by significant political, economic and social uncertainties
in the PRC. Although the Chinese government has pursued economic reform policies
in the past, we cannot assure you that the Chinese government will continue
to
pursue such policies or that such policies will not be significantly altered,
especially in the event of a change in leadership, social or political
disruption or unforeseen circumstances affect China’s political, economic and
social conditions. We can give no assurance that the Chinese government’s
pursuit of economic reforms will be consistent or effective.
Revenue
and Cost Recognition - Revenues
from fixed-price and modified fixed-price construction contracts are recognized
on the percentage-of-completion method, measured by the percentage of cost
incurred to date to the estimated total cost for each contract. The revenue
earned in a period is based on the ratio of costs incurred to the total
estimated costs required by the contract. Contract costs include all direct
material and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs, and depreciation
costs. Total estimated gross profit on a contract, being the difference between
total estimated contract revenue and total estimated contract cost, is
determined before the amount earned on the contract for a period can be
recognized. The measurement of the extent of progress toward completion are
used
to determine the amount of gross profit earned to date; the earned revenue
to
date is the sum of the total cost incurred on the contract and the amount of
gross profit earned.
Earned
revenue, cost of earned revenue, and gross profit are determined as
follows:
i.
Earned
Revenue is the amount of gross profit earned on a contract for a period plus
the
costs incurred on the contract during the period.
ii.
Cost
of Earned Revenue is the cost incurred during the period, excluding the cost
of
materials not unique to a contract that have not been used for the
contract.
iii.
Gross Profit earned on a contract are computed by multiplying the total
estimated gross profit on the contract by the percentage of completion. The
excess of that amount over the amount of gross profit reported in prior periods
is the earned gross profit that should be recognized in the income statement
for
the current period.
Selling,
General, And Administrative Costs -
Selling, general, and administrative costs are charged to expense as incurred.
Allowances for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions,
and estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
Profit incentives are included in revenues when their realization is reasonably
assured. An amount equal to contract costs attributable to claims is included
in
revenues when realization is probable and the amount can be reliably
estimated.
33
Contract
Receivable - Contract
receivable represents billings to customers on the percentage of work completed
and recognized to date based on contract price. An allowance is provided for
doubtful collections, which is based upon a review of outstanding receivables,
historical collection information, and existing economic conditions. We record
an allowance for doubtful collections for our outstanding contract receivable
at
the end of the period in accordance with generally accepted accounting
principles in the Untied States, and we consider that allowance to be reasonable
at June 30, 2007 and December 31, 2006, 2005 and 2004.
Comprehensive
Income - Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
all
items that are required to be recognized under current accounting standards
as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other consolidated
financial statements. Our current components of other comprehensive income
are
the foreign currency translation adjustment.
Income
Taxes -
We
use
the accrual method of accounting to determine and report its taxable income
and
use the flow through method to account for tax credits, which are reflected
as a
reduction of income taxes for the year in which they are available. We have
implemented Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Income
tax liabilities computed according to the United States, People’s Republic of
China (PRC) and Hong Kong SAR tax laws are provided for the tax effects of
transactions reported in the financial statements and consists of taxes
currently due plus deferred taxes related primarily to differences between
the
basis of fixed assets and intangible assets for financial and tax reporting.
The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred taxes also are recognized
for
operating losses that are available to offset future income taxes. A valuation
allowance is created to evaluate deferred tax assets if it is more likely than
not that these items will either expire before we are able to realize that
tax
benefit, or that future realization is uncertain.
Advertising
-
Advertising
costs are expensed as incurred.
Research
and Development -
Research
and development costs are expensed as incurred. The costs of material and
equipment acquired or constructed for research and development and having
alternative future uses are classified as property and equipment and depreciated
over their estimated useful lives.
Retirement
Benefits-
We
make
monthly contributions to various employee retirement benefit plans organized
by
provincial governments in the PRC in accordance with rates prescribed by them.
The provincial governments undertake to assume the retirement benefit
obligations of all existing and future retired employees of our company.
Contributions to these plans are charged to expense as incurred. The retirement
expense for the six months ended June 30, 2007 and the years ended December31,2006, 2005 and 2004 were $71,063, $118,856, $109,941, and $85,604,
respectively.
Plant
and Equipment - Plant
and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
The
cost and related accumulated depreciation of assets sold or otherwise retired
are eliminated from the accounts and any gain or loss is included in the
statement of income. The cost of maintenance and repairs is charged to income
as
incurred, whereas significant renewals and betterments are capitalized.
Land
Use Rights - Land
use
rights are stated at cost less accumulated amortization. Amortization is
provided over the respective useful lives, using the straight-line
method.
Accounting
for the Impairment of Long-Lived Assets - Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. It is
reasonably possible that these assets could become impaired as a result of
technology or other industry changes. Determination of recoverability of assets
to be held and used is by comparing the carrying amount of an asset to future
net undiscounted cash flows to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of
the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. During the reporting years, there
was
no impairment loss.
34
Inventories
- Inventories
are raw materials which are stated at the lower of weighted average cost or
market value.
Advances
to Suppliers - Advances
to suppliers represent the cash paid in advance for purchasing raw
materials.
Cash
and Cash Equivalents - All
highly liquid investments purchased with original maturities of three months
or
less to be cash equivalents. We maintain bank accounts only in the PRC and
Hong
Kong. We do not maintain any bank accounts in the United States of
America.
Restricted
Cash - Restricted
cash represents time deposit accounts to secure notes payable and bank
loans.
Foreign
Currency Translation - The
consolidated financial statements are presented in United States dollars. Our
functional currencies as well as the functional currencies of our subsidiaries
are the Hong Kong Dollar (HKD) and Renminbi (RMB). The consolidated financial
statements are translated into United States dollars from HKD and RMB at
year-end exchange rates as to assets and liabilities and average exchange rates
as to revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred. The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$
at
the rates used in translation.
Statutory
Reserves - Surplus
reserves for foreign investment enterprises are referring to the amount
appropriated from the net income in accordance with laws or regulations, which
can be used to recover losses and increase capital, as approved, and are to
be
used to expand production or operations.
Intangibles
-
Under
the Statement of Accounting Standards (“SFAS”) No. 142, “Goodwill and Other
Intangible Assets,” all goodwill and certain intangible assets determined to
have indefinite lives will not be amortized, but will be tested for impairment
at least annually. Other intangible assets will be amortized over their useful
lives and reviewed for impairment in accordance with SFAS No. 144 “Accounting
for Impairment or Disposal of Long-Lived Assets.”
35
Results
of Operations
The
following table sets forth our statements of operations for the six months
ended
June 30, 2007 and 2006 (unaudited) and the years ended December 31, 2006, 2005
and 2004 in U.S. dollars:
Contract
revenues earned for six months ended June 30, 2007 were $33.9 million, an
increase of $6.7 million, or 24.8%, from the contract revenues earned of $27.1
million for the comparable period in 2006. The primary reason for the increase
in contract revenues earned was an increase in the number of projects for the
six months ended June 30, 2007. In addition, we also experienced a general
increase in the amount of revenue generated per project for the six months
ended
June 30, 2007 as compared to the same period in 2006.
Cost
of
contract revenues earned for the six months ended June 30, 2007 was $23.5
million, an increase of $4.3 million, or 22.4%, from $19.2 million for the
comparable period in 2006. Cost of contract revenues earned consists of the
raw
materials, labor and other operating costs related to manufacturing. The
increase in costs of contract revenues earned was primarily due to the increased
number of projects for the six months ended June 30, 2007. Gross profit for
the
six months ended June 30, 2007 was $10.4 million, an increase of $2.4 million,
or 30.6%, from $8.0 million for the comparable period of 2006. Our gross margin
for the six months ended June 30, 2007 was 30.7% as compared with 29.3% for
the
six months ended June 30, 2006. The increase was primarily a result of increased
prices for our services and products.
36
Selling,
general and administrative expenses were $2.6 million for the six months
ended
June 30, 2007, an increase of approximately $0.4 million, or 15.9%, from
$2.2
million for the comparable period in 2006. Selling expenses were $0.38 million
for the six months ended June 30, 2007, a decrease of approximately $0.07
million, or 15.6%, from $0.45 million for the six months ended June 30, 2006.
The decrease was primarily due to the implementation of internal controls
on
operating expenses during the six months ended June 30, 2007, including stricter
control on entertainment expenses and traveling expenses. General and
administrative expenses for the six months ended June 30, 2007 were $2.2
million
as compared to $1.8 million for the six months ended June 30, 2006. The increase
was due to the increase of staff costs due to growth in operations and the
increase of research and development during the three months ended June 30,2007.
Interest
expenses was approximately $576,000 for the six months ended June 30, 2007,
an
increase of approximately $556,000, or 2,661.35%, from $21,000 for the
comparable period in 2006. The increase was due to our issuance of $10,000,000
Variable Rate Convertible Bonds due in 2012 (the “Bonds”) at a discount and
800,000 warrants to purchase an aggregate of 800,000 shares of our common
stock during
the three months ended June 30, 2007, which incurred accretion of interest
discount for warrants, beneficial conversion feature and redemption premium,
and
amortization on bond discount.
Income
tax was $1.3 million for the six months ended June 30, 2007, an effective tax
rate of 17.4%, compared with $0.9 million for the six months ended June 30,
of
2006, an effective tax rate of 15.0%. The primary reason for the increase was
due to the increase in income before taxes and the different amounts of income
being recognized in the PRC and Hong Kong under different tax rates on corporate
profits derived from subsidiaries in each location. Through two of our
subsidiaries, Zhuhai King Glass Engineering Co., Ltd and Zhuhai King General
Glass Engineering Technology Co., Ltd, we are generally subject to a PRC income
tax rate of 33%; however, in accordance with the relevant tax laws and
regulations of PRC, the corporation income tax rate is currently 15%. In
addition, we and two of our subsidiaries are subject to a Hong Kong profits
tax
rate of 17.5%. We expect our effective tax rates to increase in future periods
as a result of new tax laws passed in China.
Net
income for the six months ended June 30, 2007 was $6.0 million, an increase
of
$1.1 million, or 22.8%, from $4.9 million for the comparable period in
2006.
Contract
revenues earned for year ended December 31, 2006 were $64.0 million, an increase
of $14.0 million, or 28.1%, from the contract revenues earned of $50.0 million
for the year ended December 31, 2005. The primary reason for the increase in
contract revenues earned was an increase in the number of projects for the
year
ended December 31, 2006. In addition, we also experienced a general increase
in
the amount of revenue generated per project in 2006 as compared to 2005.
Cost
of
contract revenues earned for the year ended December 31, 2006 was $46.8 million,
an increase of $10.4 million, or 28.7%, from $36.4 million for the year ended
December 31, 2005. The increase in costs of contract revenues earned was
primarily due to the increased number of projects for the year ended December31, 2006. Gross profit for the year ended December 31, 2006 was $17.2 million,
an increase of $3.6 million, or 26.6%, from $13.6 million for the year ended
December 31, 2005. Our gross margin for the year ended December 31, 2006 was
26.9% as compared with 27.2% for the year ended December 31, 2005.
Selling
and administrative expenses were $6.0 million for the year ended December 31,2006, a decrease of approximately $0.5 million, or 7.3%, from $6.5 million
for
the year ended December 31, 2005. The decrease was primarily due to the
implementation of internal controls on operating expenses during the year ended
December 31, 2006, including stricter control on staff costs, entertainment
expenses, and traveling expenses.
37
Non-recurring
general and administrative expenses for the year ended December 31, 2006 were
$3.8 million as compared to $nil for the year ended December 31, 2005. The
non-recurring general and administrative expense resulted from our payment,
through issuance of securities or payment of cash, to service providers that
rendered services in connection with the consummation of the Share Exchange
and
the related transactions. Included in the non-recurring general and
administrative expenses was the issuance at the closing of the Share Exchange
of
2,000,000 shares of common stock to First Alliance Financial Group for
consulting services, issuance of 100,000 shares of common stock, and payment
of
$445,608 to brokers for services related to the private placement that closed
concurrently with the Share Exchange. Each of the shares that were issued for
services were valued at $1.60 per share, which is the per share sales price
in
the private placement.
Income
tax was $1.3 million for the year ended December 31, 2006, an effective tax
rate
of 17%, compared with $1.2 million taxes for the year ended December 31, 2005,
an effective tax rate of 16%. The primary reason for the increase in the dollar
amount of the tax was due to the increase in income before taxes. Through two
of
our subsidiaries, Zhuhai King Glass Engineering Co., Ltd and Zhuhai King General
Glass Engineering Technology Co., Ltd, we are generally subject to a PRC income
tax rate of 33%; however, in accordance with the relevant tax laws and
regulations of PRC, the corporation income tax rate is currently 15%. In
addition, we and two of our subsidiaries are subject to Hong Kong profits tax
rate of 17.5%.
Net
income for the year ended December 31, 2006 was $6.2 million, an increase of
$0.3 million, or 4.1%, from $5.9 million for the comparable period in 2005.
Contract
revenues earned for year ended December 31, 2005 were $50.0 million, an increase
of $21.2 million, or 73.4%, from the contract revenues earned of $28.8 million
for the year ended December 31, 2004. The primary reason for the increase in
contract revenues earned was an increase in the number of projects for the
year
ended December 31, 2005. In addition, we also experienced a general increase
in
the amount of revenue generated per project in 2005 as compared to 2004.
Cost
of
contract revenues earned for the year ended December 31, 2005 was $36.4 million,
an increase of $15.0 million, or 69.8%, from $21.4 million for the year ended
December 31, 2004. The increase in costs of contract revenues earned was
primarily due to the increased number of projects for the year ended December31, 2005. Gross profit for the year ended December 31, 2005 was $13.6 million,
an increase of $6.2 million, or 84.0%, from $7.4 million for the year ended
December 31, 2004. Our gross margin for the year ended December 31, 2005 was
27.2% as compared with 25.7% for the year ended December 31, 2004.
Selling
and administrative expenses were $6.5 million for the year ended December 31,2005, an increase of approximately $1.8, or 39.4%, from $4.6 million for the
year ended December 31, 2004. The increase was primarily due to growth in
operations and related increases in staff costs and project-related expenses,
such as insurance, professional fees, and general expenses of onsite
offices.
There
were no non-recurring general and administrative expenses for the years ended
December 31, 2005 and 2004.
Income
tax was $1.2 million for the year ended December 31, 2005, an effective tax
rate
of 16%, compared with $491,000 taxes for the year ended December 31, 2004,
an
effective tax rate of 18%. The primary reason for the increase in the dollar
amount of the tax was due to the increase in income before taxes.
Net
income for the year ended December 31, 2005 was $5.9 million, an increase of
$3.7 million, or 167.5%, from $2.2 million for the comparable period in 2004.
Liquidity
and Capital Resources
At
June30, 2007, we had cash and cash equivalents of $6,008,770. Prior to October17,2006, we have historically financed our business operations through short-term
bank loans and cash provided by operations.
38
We
borrowed funds through short-term notes during the year ended December 31,2004
in the amounts of $3.6 million and $1.2 million that were due and repaid by
us
during the 2005 fiscal year. The notes carried interest rates of 5.04% and
6.786%, respectively, per annum. We also borrowed funds through a short-term
notes during the year ended December 31, 2005 in the amount of $743,000 that
we
repaid in 2006. The notes had an interest rate of 6.1065%.
In
October 2006, we opened a line of credit facility with the Zhuhai branch of
Bank
of East Asia for up to a maximum of $2,564,979, which is RMB 20,000,000. We
established and borrowed the full amount available under the line of credit
to
replace a 2005 short term loan from another bank that was expiring. Interest
expense on this line of credit was $18,678 for the year ended December 31,2006
and $71,634 for the six months ended June 30, 2007. The credit facility is
in
effect and does not require renewal until October 2011. In order to facilitate
the extension of the credit facility to us by the Zhuhai branch of Bank of
East
Asia, we agreed to deposit the same amount on fixed deposit terms into the
Hong
Kong branch of Bank of East Asia.
We
lease
certain administrative and production facilities from third parties.
Accordingly, for the six months ended June 30, 2007 and 2006, we incurred rental
expenses of approximately $183,000 and $76,000, respectively.
On
April12, 2007, we completed a financing transaction pursuant to which we issued
$10,000,000 Variable Rate Convertible Bonds that will be due in 2012 (the
“Bonds”). The Bonds bear cash interest at the rate of 6% per annum for the first
year after April 12, 2007 and 3% per annum thereafter, of the principal amount
of the Bonds. Each Bond is convertible at the option of the holder at any time
on and after a date that is 365 days after the date that our shares of common
stock commence trading on the American Stock Exchange (“AMEX’) at an initial
conversion price equal to the price per share at which shares are sold in our
proposed initial public offering on AMEX with minimum gross proceeds of
$2,000,000. If no initial public offering occurs prior to conversion, the
conversion price per share will be $2.00, subject to adjustment in accordance
with the terms and conditions of the Bonds. The conversion price is subject
to
adjustment in certain events, including our issuance of additional shares of
common stock or rights to purchase common stock at a per share or per share
exercise or conversion price, respectively, at less than the applicable per
share conversion price of the Bonds. If for the period of 20 consecutive trading
days immediately prior to April 12, 2009 or February 18, 2012, the conversion
price for the Bonds is higher than the average closing price for the shares,
then the conversion price will be reset to such average closing price; provided
that, the conversion price will not be reset lower than 70% of the then existing
conversion price. In addition, the Trust Deed provides that the conversion
price
of the Bonds cannot be adjusted to lower than $0.25 per share of common stock
(as adjusted for stock splits, stock dividends, spin-offs, rights offerings,
recapitalizations and similar events) except in certain instances.
If
on or
before April 12, 2008, (i) our common stock is not listed on AMEX or (ii) the
Bonds, Bond Warrants, and shares underlying the Bonds and Bond Warrants are
not
registered with the SEC, then holders of the Bonds can require us to redeem
the
Bonds at 106.09% of the principal amount. In addition, at any time after April12, 2010, holders of the Bonds can require us to redeem the Bonds at 126.51%
of
the principal amount. We are required to redeem any outstanding Bonds at 150.87%
of its principal amount on April 4, 2012. If we are required to repurchase
all
or a portion of the Bonds and do not have sufficient cash to make the
repurchase, we may be required to obtain third party financing to do so, and
there can be no assurances that we will be able to secure financing in a timely
manner and on favorable terms, which could have a material adverse effect on
our
financial performance, results of operations and stock price. We also issued
800,000 warrants on April 12, 2007 to purchase an aggregate of 800,000 shares
of
our common stock, subject to adjustments for stock splits or reorganizations
as
set forth in the warrant.
Working
capital management, including prompt and diligent billing and collection, is
an
important factor in our results of operations and liquidity. When we are awarded
construction project, we work according to the percentage-of-completion method
which matches the revenue streams with the relevant cost of construction based
on the percentage-of-completion of project as determined based on certain
criteria, such as, among other things, actual cost of raw material used compared
to the total budgeted cost of raw material and work certified by customers.
There is no guarantee that the cash inflow from these contracts is being
accounted for in parallel with the cash outflow being incurred in the
performance of such contract. In addition, a construction project is usually
deemed to be completed once we prepare a final project account, the account
is
agreed upon by our customers, and all amounts related to the contract must
be
settled according to the account within three months to a year from the
customer’s agreement on the final project account. As there may be different
time intervals to reach a consensus on the amount as being accounted for in
the
projects before the project finalization account is being mutually agreed by
each other. We experience an average accounts settlement period ranging from
three months to as high as one year from the time we provide services to the
time we receive payment from our customers. In contrast, we typically need
to
place certain deposit with our suppliers on a portion of the purchase price
in
advance and for some suppliers we must maintain a deposit for future orders.
We
attempt to maintain a credit policy of receiving certain amounts of deposit
from
customers before we begin a new project. Coupled with the return of retention
money and deposits from other previously-completed projects and credit granted
by suppliers, we have been able to maintain an overall net cash position in
our
operations in last two years, but there is no guarantee that we will be able
to
maintain a positive net cash flow position in the future.
39
Net
cash
used in operating activities for the six months ended June 30, 2007 was $5.8
million, as compared to $1.1 million used in the same period in 2006. The change
is primarily the result of an increase in receivables due to a relatively long
collection period typical of the architecture industry in China and a decrease
in payables for the six months ended June 30, 2007. Net cash used in operating
activities for the year ended December 31, 2006 was $3.0 million, as compared
to
$3.5 million provided by operating activities in the same period in 2005. The
decrease in cash provided from operating activities is primarily the result
of a
significant increase in receivables from $6.6 million to $18.3 million,
partially offset by an increase in net income and payables during the year
ended
December 31, 2006, both of which was the result of an increase in sales. We
experienced an increase of revenue of $14.1 million for the year ended December31, 2006 compared to an increase of $20.7 million for the same period in 2005.
Contracts receivables as of December 31, 2006 was $7.6 million, an increase
of
$3.3 million, or 76.1%, over contracts receivables of $4.3 million as of
December 31, 2005. The increase in contracts receivables reflected an increase
in contract revenue earned. We received eight new projects of total contract
sum
of approximately $12.4 million in the year ended December 31, 2005, which
account for approximately $6.3 million contract receivables for such period.
Net
cash
used in investing activities was approximately $279,000 for the six months
ended
June 30, 2007 compared to approximately $650,000 provided for the six month
ended June 30, 2006. The decrease was a result of a decrease in purchases of
plant and equipment and a decrease in security deposits during the six month
ended June 30, 2007 as compared to the comparable period in 2006. Net cash
used
by investing activities was $2.9 million for the year ended December 31, 2006,
as compared to net cash provided by investing activities of $1.0 million for
the
year ended December 31, 2005. The change was primarily a result of an increase
in restricted cash from $600,000 in 2005 as compared to $2.2 million in 2006.
The increase in restricted cash resulted from our deposit of such amount on
fixed deposit terms with the Hong Kong branch of Bank of East Asia to facilitate
a line of credit facility in the same amount from the Zhuhai branch of Bank
of
East Asia. We established and borrowed the full amount available under the
line
of credit to replace a 2005 short term loan from another bank that was expiring.
Net
cash
provided by financing activities was $9.9 million for the six months ended
June30, 2007 compared to $2.2 million used for the six months ended June 30, 2006.
The increase was primarily due to the receipt of $9.7 million for the issuance
of convertible bonds and warrants for the six months ended June 30, 2007. Net
cash provided by financing activities was $6.9 million for the year ended
December 31, 2006 compared to cash used by financing activities of $7.2 million
for the year ended December 31, 2005. The increase in cash provided was
primarily to $7.1 million received in 2006 from the issuance of common stock
and
$2.6 million received as proceeds from a long term loan, whereas there were
no
such cash provided in 2005. In addition, we had $4.8 million in repayment of
short term loans in 2005 and only repayment amounts of $743,742 in 2006.
As
of
June 30, 2007, contracts receivables were $11.3 million, an increase of $3.7
million, or 32.71%, over contracts receivables of $7.6 million as of December31, 2006. The increase in contracts receivable reflected an increase in contract
revenue earned. In addition, because the collection period typically runs from
three months to one year, the increase in contracts receivable reflects not
only
the increase in sales but also the long collection period. Since we require
an
average of one to two months to receive products we order from the date of
our
order, we have been increasing our inventories in order to enable us to meet
anticipated increases in sales. In addition, our payment cycle is considerably
shorter than our receivable cycle, since we typically pay our suppliers all
or a
portion of the purchase price in advance and for some suppliers we must maintain
a deposit for future orders. We are currently involved in three lawsuits in
which we are suing other parties for overdue payments. The total amount involved
is $1,292,520. We obtained judgment in our favor on one of the lawsuits and
anticipate full payment on all of the overdue amounts in the near
future.
40
At
June30, 2007, we had no material commitments for capital expenditures other than
for
those expenditures incurred in the ordinary course of business. During the
second half of 2007, we intend to expend approximately $35 to $40 million to
purchase materials and serve as deposits for performance bonds for new projects
that we have obtained. Additional capital for this objective may be
required that is in excess of our liquidity, requiring us to raise additional
capital through an equity offering or secured or unsecured debt financing.
The
availability of additional capital resources will depend on prevailing market
conditions, interest rates, and our existing financial position and results
of
operations.
Contractual
obligations
The
following table describes our contractual commitments and obligations as of
December 31, 2006:
Payments
due by period
Total
Less
than 1 year
1-3
years
3-5
years
More
than 5 years
Operating
Lease Obligations
$
582,821
$
282,795
$
150,013
$
150,013
$
—
Long
Term Bank Loan / Interest (1)
3,237,171
128,481
256,962
256,962
2,594,766
(1) We
intend
to repay the loan with a balloon payment upon maturity. Accordingly, servicing
of this debt in the years prior to repayment represents interest payments
only.
Quantitative
and Qualitative Disclosure Regarding Market Risk
Credit
Risk
We
are
exposed to credit risk from our cash at bank, fixed deposits and contract
receivables. The credit risk on cash at bank and fixed deposits is limited
because the counterparts are recognized financial institutions. Contract
receivables are subject to credit evaluations. We periodically record a
provision for doubtful collections based on an evaluation of the collectibility
of contract receivables by assessing, among other factors, the customer’s
willingness or ability to pay, repayment history, general economic conditions
and our ongoing relationship with the customers.
We
are
currently involved in three lawsuits in which we are suing other parties for
overdue payments. The total amount involved is $1,292,520. We obtained judgment
in our favor on one of the lawsuits and anticipate full payment on all of the
overdue amounts in the near future.
Foreign
Currency Risk
The
functional currencies of our company are the Hong Kong Dollar (HKD) and Renminbi
(RMB). Substantially all of our operations are conducted in the PRC. Our sales
and purchases are conducted within the PRC in RMB. Conversion of RMB into
foreign currencies is regulated by the People’s Bank of China through a unified
floating exchange rate system. Although the PRC government has stated its
intention to support the value of the RMB, there can be no assurance that such
exchange rate will not again become volatile or that the RMB will not devalue
significantly against the U.S. dollar. Exchange rate fluctuations may adversely
affect the value, in U.S. dollar terms, of our net assets and income derived
from our operations in the PRC. In addition, the RMB is not freely convertible
into foreign currency and all foreign exchange transactions must take place
through authorized institutions.
Country
Risk
A
substantial portion of our business, assets and operations are located and
conducted in China. While China’s economy has experienced significant growth in
the past twenty years, growth has been uneven, both geographically and among
various sectors of the economy. The Chinese government has implemented various
measures to encourage economic growth and guide the allocation of resources.
Some of these measures benefit the overall economy of China, but may also have
a
negative effect on us. For example, our operating results and financial
condition may be adversely affected by government control over capital
investments or changes in tax regulations applicable to us. If there are any
changes in any policies by the Chinese government and our business is negatively
affected as a result, then our financial results, including our ability to
generate revenues and profits, will also be negatively affected.
41
Off-Balance
Sheet Arrangements
None.
New
Accounting Pronouncements
In
May
2005, the FASB issued a SFAS 154, “Accounting Changes and Error Corrections” to
replace APB Opinion No. 20, “Accounting Changes” and SFAS 3, “Reporting
Accounting Changes in Interim Financial Statements” requiring retrospective
application to prior periods consolidated financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the period-specific effects of an accounting change
on one or more individual prior periods presented, SFAS 154 requires the new
accounting principle be applied to the balances of assets and liabilities as
of
the beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening balance
of retained earnings (or other appropriate components of equity or net assets
in
the statement of financial position) for that period rather than being reported
in an income statement. When it is impracticable to determine the cumulative
effect of applying a change in accounting principle to all prior periods, SFAS
154 requires that the new accounting principle be applied as if it were adopted
prospectively from the earliest date practicable. The effective date for this
statement is for accounting changes and corrections of errors made in fiscal
year beginning after December 15, 2005.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements, SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15,2007,and interim periods within those fiscal
years.
In
February 2007,the FASB issued SFAS No.159,”The Fair Value Option for Financial
Assets and Financial Liabilities- Including an Amendment of SFAS 115”(SFAS
No.159),which allows for the option to measure financial instruments and certain
other items at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. The objective
of
SFAS 159 is to provide opportunities to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having
to
apply hedge accounting provisions. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. We are currently evaluating
the
impact of SFAS No.159 on our consolidated financial statements.
We
do not
anticipate that the adoption of the above standards will have a material impact
on these consolidated financial statements.
42
DESCRIPTION
OF BUSINESS
Overview
We
specialize in the design, engineering and installation of high-end specialty
curtain wall systems, including glass curtain walls, stone curtain walls, metal
curtain walls, roofing systems, and related products, for public works projects
and commercial real estate. We have designed and installed nearly one hundred
projects throughout China, including the National Grand Theater, Exhibition
Conservatory of Beijing Botanical Garden, The COSCO Tower at Changlian Avenue
Beijing, and the Wumen Exhibition Hall in Beijing’s Forbidden City, and a number
of commercial structures in Southeast Asia. We believe that we compete on the
strength of our reputation, track record, strong relationships with government
clients and our ability to give expression to the vision of leading architects.
By focusing on innovation while outsourcing commoditized manufacturing work,
we
believe we are able to add artistic and technological value to projects at
cost-effective price points.
Market
Opportunities
The
continuing expansion of the Chinese economy has spurred the substantial growth
of China’s construction industry, especially in the commercial and public works
sectors. As architectural designs for these buildings have become more complex,
challenging and modern in scope, there has been an increased need for technology
driven companies providing high-end specialty curtain wall systems.
Increasingly,
architects have come to favor designs that focus on improved natural lighting,
active climate control and cost savings. Increasing demand for state-of-the-art
curtain wall glass cladding has spurred technological innovation within the
industry to provide new designs and engineering processes. Contractors are
relying on firms that can work with architects to develop and enhance their
vision and efficiently implement their design while maintaining high quality
standards and cost control.
There
is
an increasing trend in the construction industry toward complex, fast-track,
design-build projects. These projects require that all phases of construction
be
accomplished in accordance with compressed time schedules that involve the
hired
firm at early stages of the project. These projects also are characterized
by
numerous design changes requiring that all construction participants coordinate
their efforts in order to respond quickly and efficiently in implementing these
changes. Those firms capable of meeting this demand must have the ability to
provide a total overall solution, from design and project management, to
complete engineering services, through manufacturing, installation and
servicing.
As
China’s economy continues to develop, it is expected that increased construction
will be required to accommodate growth in education, culture, social welfare
and
business. Libraries, museums, exhibition halls, stadiums, planetariums and
science centers are among the types of structures increasingly needed in China
today. These large public structures can be very costly in terms of energy
consumption, calling for new ways to build efficient wall systems that actively
conserve energy. In addition, governmental agencies and international regulators
are becoming more environmentally conscious in the enactment of regulations
governing new construction. Rising fuel costs and environmental concerns have
resulted in regulation designed to ensure that new commercial and public works
buildings have a low environmental impact. Technologies such as solar lighting,
advanced shading systems and circulating sea water systems are constantly
improving the ability of structures to interact with the environment by taking
advantage of natural conditions, thus meeting the dual goals of reducing energy
costs and lessening environmental impact. Currently, most innovative, cutting
edge projects appear in the largest cities of China. Yet as development
continues, it is expected that mid- and small-sized cities will increasingly
move towards investing in these structures as well.
Products
and Services
For
over
10 years, we have implemented our technology-driven policy of design,
manufacturing, and engineering excellence to meet the exacting architectural
challenges of Chinese and international customers. We design and develop systems
to offer custom-designed solutions for developers of commercial and public
works
projects with special architectural features. In terms of project management,
we
exercises overall project planning and control over key areas of activities
such
as design and engineering, procurement, production scheduling, quality control
and site installation. Our comprehensive package of services allows us to offer
customized engineering solutions at an affordable cost to meet the requirements
of our clients.
43
Our
primary business focus is on designing, engineering and installing specialty
high-end curtain wall systems, including glass curtain walls, stone curtain
walls, metal curtain walls, roofing systems, and related products. For the
six
months ended June 30, 2007, approximately 91% of our sales came from new
construction projects and for the year ended December 31, 2006, approximately
95% of our sales came from new construction projects. The remainder is comprised
primarily of projects where we add new glass skins to old buildings. A number
of
these projects have been done in Hong Kong, where the goal was to preserve
the
original style and features of the structure while applying a new skin which
would protect the building and add new energy-saving and aesthetic
features.
Concept
and Project Management.
Initially, we work with the architect to develop, clarify and enhance the
overall creative vision for the project. In the design of a curtain wall system,
architects are freely able to choose different structure systems to meet the
requirements of various architectural models. All contracts awarded are assigned
a project number, which is used to track each component and man-hour associated
with the project through the entire construction process. All project drawings,
specifications and completion schedules on a project are reviewed by our senior
management team, and all projects are assigned to one or more project managers,
who assume primary responsibility for all aspects of the project. Reporting
to
the project manager are construction supervisors, safety and administration
staff, quality control staff and project engineering staff. Each of these
project team members coordinates with internal functional departments and
outside suppliers as appropriate. Often a project manager assigned to a given
project will have significant experience in similar projects. A project manager
generally will be responsible for a number projects in various stages of
completion at any given time, depending on the scope, complexity, and geographic
location of such projects. Each project is divided into critical sequences
that
follow the anticipated curtain wall construction path. Each sequence follows
a
timeline, the status of which is continually monitored. Project managers
coordinate and manage design changes or other changes in scheduled completion
deadlines in an effort to minimize overall project delays.
Design.
Specific
technical parameters of the concept are established as new design elements
are
created and combined with existing technologies. During the design phase, our
engineers and technicians review preliminary and completed designs and make
recommendations regarding types of connections, possible savings on fabrication
techniques, and methods of installation. Operating state-of-the art
computer-aided design (CAD) stations, these individuals provide customized
design solutions in the form of structural calculations, drawings, fabrication
and installation details, together with technical advice and consultancy on
specifications, feasibility studies and material procurement. At the
implementation stage of the project, detailed fabrications/shop-drawings are
produced, discussed and agreed with the project architect/manager. These form
the blueprint for project execution and scheduling. Every order is scheduled
for
production through CAD and computer-aided manufacturing (CAM) systems with
progress tracked at each stage of the project process. Quality control and
assurance programs are a combination of our specifications with quality
inspectors working at all production stages.
Engineering.
We
maintain significant in-house structural engineering and detailing capabilities
that enable us to implement and coordinate with our shop and field personnel
original project specifications and changes to building and structural designs
sought by our clients. These resources help influence critical determinations
as
to the most cost-effective systems, designs, connections, and installation
procedures for a particular project. Our engineers work on-site with suppliers
to machine our patented curtain wall elements and to procure the appropriate
raw
materials. Our detailers prepare detail shop drawings of the dimensions,
positions, locations, and connections, and the fabrication and installation
sequences, of each component utilized in a project, and continually update
these
drawings to accommodate design and other changes. Our automated detailing
systems produce updated detail drawings electronically, which can be delivered
to our domestic and foreign field locations. Detailers coordinate directly
with
customers and our suppliers and installation teams to determine and plan the
order of fabrication and installation of a project and associated personnel
and
equipment requirements.
Fabrication.
Although
we are responsible for hiring suppliers and manufacturers, we subcontract the
manufacture of parts made from glass, metal and other materials used in our
curtain wall systems. Once parts have been manufactured by subcontracted
factories, we will occasionally process them further. This processing takes
place in our facilities in Beijing, Shanghai and Zhuhai and usually entails
procedures such as adding metal frames to or drilling holes in glass panes,
or
cutting and bending steel rods into customized shapes. All of our products
are
fabricated in accordance with applicable industry and specific customer
standards and specifications. We have developed project-specific and
company-wide quality assurance and quality control programs, and utilize
sophisticated systems to inspect all fabricated components. We prepare load
lists that identify the sequence and date that each individual component is
required on a project, a procedure that reduces the handling of and the need
to
store materials in the field. After the completion of processing to customer
specifications, finished pieces are loaded for shipment to the construction
site.
44
Installation.
We have
154 full-time workers and supervisors who are engaged on our projects. Our
installation teams consist of highly-trained, skilled and experienced field
operatives with established lines of communication between the work site, the
technical design department and the factory, ensuring that clients are provided
with optimum and cost-effective practical solutions. Site installation is
managed through our trained project management staff, and each project has
a
dedicated project team. On site there are a number of our supervisors who are
each responsible for a different section of the curtain wall project. Each
supervisor typically manages 30 to 50 of our workers. A small project may have
just one work team while a very large project may have five or more. Because
the
workers are all trained by us and are familiar with the workflow process, they
can work on any project in any location. Our project supervisors are often
internally developed from our pool of workers. Occasionally, we will hire
additional contract labor for specific sections of a very large project or
if
there are several projects being installed simultaneously, but these extra
workers only supplement our core project team. The installation team coordinates
its site delivery program with the main contract schedule to meet completion
deadlines. The installation process typically consists of pre-assembly of metal
and glass component parts at the project site, the lifting of components by
crane to the appropriate location at the site and the final assembly of major
components.
Customer
Service.
Our
quality control and assurance department is comprised of trained technicians
who
are responsible for the quality assurance, including quality control of
in-process fabrication and site installation by a detailed inspection as well
as
continued maintenance after project completion. We have adopted important safety
policies that are administered and enforced by our senior management and provide
training on safety procedures and techniques to our shop and field
personnel.
Strategy
To
reach
the goal of being a preferred choice for Chinese and international government,
contractor and architectural clients, we are focusing on the following
strategies:
Emphasize
Innovative Services.
We are
committed to meeting the demands of the market, both in China and
internationally, through technical innovation and solutions. We focus our
design, engineering, and installation expertise on distinct product segments
requiring unique or innovative techniques as we have extensive experience in
providing services requiring complex design and installation techniques and
other unusual project needs. These service capabilities have enabled us to
address design-sensitive projects such as stadiums, uniquely designed commercial
buildings, and projects that typically carry higher margins than other
commercial and public works buildings.
Provide
Full Service Solutions.
We meet
the demand for fully integrated curtain wall contractors that can (i) avoid
the
coordination difficulties inherent in the use of multiple curtain wall
subcontractors; and (ii) implement rapid and multiple design changes in a
coordinated and timely manner, preventing project delays and reducing costs
to
the customer. We believe that a key factor in our success has been our ability
to provide, through our in-house personnel, valuable input and assistance to
our
customers with respect to overall project design, engineering fabrication and
installation sequences and other critical project decisions. This often results
in overall project cost savings and efficiencies and helps to solidify key
customer relationships. In addition to our centralized project management,
we
also uses a high percentage of skilled installation employees local to projects
and utilize advanced scheduling systems to enhance our ability to provide
project management services to customers complementary to our core engineering,
detail drawing, shop fabrication, and field installation services.
Leverage
Our Brand and Reputation.
We
believe that the strength of our brand is increasing in China and
internationally as we build on our large range of projects and our offering
of
comparative cost advantages and supply-chain management for some of the most
complex curtain wall systems in the world. We believe that we have gained a
reputation in the industry as a reliable, fully integrated provider of
design-build, engineering, installation services with the ability to complete
large, complex projects on a timely, cost-efficient basis.
45
Geographic
Expansion in China.
Our
objective is to achieve and maintain a leading position in the geographic
regions and project segments that we serve by providing timely, high-quality
services to our customers. We believe that our ability to offer design-build
services and our project management capabilities make us a preferred source
for
complex, design-build projects in the geographic regions we serve. We believe
that we have long-standing relationships with China’s top construction officials
and leading international architects, having completed high profile projects
in
China, including the National Theater in Beijing, Shenzhen International Airport
and the National Palace Museum. We plan to continue to meet the needs of
government and private sector customers in the larger cities within China where
we are able to leverage our relationships with national and regional accounts
and where commercial and public works development has been more prevalent.
We
believe that as China’s economic growth continues to reach down to second and
third tier cities across the country, governments of those cities will want
to
build their own high-end public works projects.
International
Expansion.
On May11, 2007, we entered into an agreement with CPD (Australia) Holding Pty Ltd.
(“CPD”), through our wholly-owned subsidiary Full Art International, Ltd., to
establish a company named KGE Australia Pty Ltd. (“KGE Australia”). Pursuant to
the terms of the agreement, KGE Australia, which is located in Sydney,
Australia, will have an initial registered capital of 1,000,000 Australian
dollars (which is approximately US $830,750), with us investing 550,000
Australian dollars (which is approximately US $456,912) and CPD investing
450,000 Australian dollars (which is approximately US $373,838). KGE Australia
will undertake contracting on projects in Southeast Asian and Pacific countries.
We intend to continue our efforts to perform work in other foreign countries
as
well. We have launched initiatives to expand sales outside of our traditional
China-based markets. We intend to build more projects in Hong Kong and Macau,
where demand continues to be brisk. We have also begun working on projects
in
Vietnam. In addition to building new projects, we intend to continue to add
advanced curtain wall technology to existing structures, enabling owners and
developers to modernize and improve cost efficiency. In the Middle East, we
believe that demand will grow along with trade expansion and continued windfalls
from ever-increasing oil prices. We are currently working on a project in Doha,
Qatar.
Product
Attributes
Our
curtain wall products are highly engineered specialty wall systems consisting
primarily of a series of glass panels set in metal frames, stone panels, or
metal panels, as well as roofing systems and related products. A curtain wall
is
fixed to the commercial building by mechanical connection, either in a primarily
inoperable mode or adjustable with special settings with spring or press
systems. Glass panels are connected to the metal support system by metal clamps
and fixing bolts. The support system of fixing bolts could be a steel, aluminum
and or glass structure, with glass flank or spidery tension rod or
cable.
We
offer
a variety of support systems:
Glass
Fin Support System. The
facial glass mixing with the glass fin provides facade with maximum
transparence, which eliminates the differential expansion among glass metal
structures.
Metal
Structure Support System. This
system utilizes both steel post and steel truss of aluminum post in a metal
structure. One of our most popular support systems, its flexibility can fully
meet the criteria of demanding modern architecture. At the same time, the
combination of transparent glass and steady metal structure completely realizes
a harmony between beauty and force, elegance and strength.
Spidery
Tension Rod/Cable Support System. This
system utilizes a stainless steel tension rod connector for connecting the
tension rod or the tension cable to the steel structure in order to form a
stable spidery structure for glass curtain wall supporting. A response to the
challenge of modern architecture, architects are able to create a smooth and
transparent facade.
We
use a
variety of clamping devices to integrate the glass frame to the support system.
Metal “spider” clamps are cast from stainless or high-strength carbonic steel in
and provide the features of high strength, simple installment and easy
maintenance. Our metal clamps integrate the facial glass with the structure,
enhancing the hardness of an entity. Transferable cabling structure makes the
curtain wall stretch higher, meeting designers’ requirements for the larger size
of vertical space. The combination of steel and glass embodies the feature
of
stability, lightness and transparency, expressing the majesty and originality
of
a building.
46
Our
fixing bolts are made of stainless steel and are used for holding the glass
glazing. These specifically designed bolts transfer the wind loads, deflection
stress and the weight of glass itself to the metal support system which helps
reduce the strain on the glass and ensure structural integrity. These bolts
are
offered in both countersink and flat head. Countersink head fixing bolts they
provide a smooth surface when fit flush in the outward surfaces of the glass.
They are typically utilized in single and double glazed glass structures. The
cylindrical head of our flat head fixing bolts protrude from the surface of
glass, which provides more strength against wind force and shear force and
can
use to fix laminated and insolated glass.
We
offer
a variety of glass panels allowing a diverse selection of styles to meet the
architectural demands of our clients:
Insulating
Glass.
Increases a window’s thermal performance and sound insulation; constructed with
two or more pieces of glass separated by a desiccant-filled spacer and sealed
with an organic sealant. The desiccant absorbs the insulating glass unit’s
internal moisture.
Laminated
Glass.
Consists of two or more pieces of glass fused with a vinyl or urethane
interlayer and is used primarily for skylight, security and hurricane-resistant
application.
Energy-
Efficient Coated Glass.
Provides
solar control, both minimizing heat gain and controlling thermal transfer,
by
adding coatings to glass. In addition, coatings add color and varying levels
of
reflectively.
Spandrel
Glass.
The use
of full coverage paint on insulated glass or polyester opacifier film backing
on
high performance coated glass for the non-vision areas of the
building.
Stone
or
metal may also be used as paneling
Projects
Our
work
is performed under cost-plus-fee contracts and fixed-price contracts. The length
of our contracts varies but typically has a duration of approximately two
years.
Approximately
90% of our sales are from fixed price contracts. The remaining 10% of our sales
are originated from are cost-plus-fee contracts. Under fixed-price contracts,
we
receive a fixed price. Approximately 70% of contracts are modified after they
begin, usually to accommodate requests from clients to increase project size
and
scope. In cases where fixed-price contracts are modified, the fixed price is
renegotiated and adjusted upwards accordingly. A disadvantage of fixed-price
contracts is that we realize a profit only if we control our costs and prevent
cost over-runs on the contracts, which can oftentimes be out of our control,
such as cost of materials. An advantage of these contracts is that we can adjust
the material and technology that we use in the project, as long as we satisfy
the requirements of our customer, and there is a potential to benefit from
lower
costs of materials.
Under
cost-plus-fee contracts, which may be subject to contract ceiling amounts,
we
are reimbursed for allowable costs and fees, which may be fixed or
performance-based. If our costs exceed the contract ceiling or are not allowable
under the provisions of the contract or any applicable regulations, we may
not
be reimbursed for all our costs. An advantage of cost-plus-fee contracts is
that
the cost of materials generally has no effect on our profit, since we are
reimbursed for costs. A disadvantage is that the profit resulting from any
cost
savings on the materials goes to the contractor and not us.
Noteworthy
or recently completed or awarded projects include the following:
47
Beijing
Botanical Garden Greenhouse
Bringing
the theme, “remembering roots”, to life, the greenhouse was constructed
with 8,000 pieces of irregular double glazed toughened glass panes
and a
steel structure to create a three-dimensional image of roots and
stems
intertwining. The spider and fixed-point glass curtain wall system
automatically adjusts for temperature, humidity, sun shading, UV
exposure
and irrigation. The structure is comprised of an elliptical atrium
(bud)
and a double -curved radiated sector (leaf). The “bud” is set on the
outside surface of the steel truss, and the “leaf” is on the inside, both
protecting the steel from the rain forest conditions inside and expressing
the theme.
National
Grand Theater - Beijing
· The
titanium roof and glass curtain wall form a multi-layered, color
shifting
elliptical shell
· Changes
in light and temperature will produce unpredictable color
effects
Palace
Museum, Wumen Exhibition Hall
Forbidden
City, Beijing
Using
patented point fixture glass technology, we created an installation
which
will at once preserve the ancient hall and offer maximum visibility
and
enjoyment for visitors.
Skyscraper
in Doha, Qatar
· In
June 2005, we were awarded the contract for construction of the glass
curtain wall and solar protection system of the Qatar high-rise office
tower, which will be located in West Bay, Doha and will be the tallest
building in Qatar when completed.
· The
design evokes the geometric complexity of the oriental moucharabieh,
a
typical Islamic style of interlaced wooden screenwork, while also
functioning as a form of solar protection.
· The
curtain wall is composed of four “butterfly” aluminum elements of
different scales. This overall pattern changes in order to provide
maximal
protection from the strong east and west sun. The inside layer
is a
reflective glass skin, which complements protection. A system of
roller-blinds can also be used when
needed.
48
Shenzhen
International Airport
“Flying
Eagle”
· Reflecting
its location at an airport, the structure was designed to give the
impression of a great bird in flight.
· Transparent
laminated toughened glass panes were fixed to the columns by spider
and
point-supported devices.
Zhongguancun
Software Park, Beijing
· The
“Disc”, with a diameter of 85 meters, is hung 20 meters in the air by
radial steel cables and tension cables fixed to four cone-shaped
steel
columns.
· The
“Disc” utilizes a high-tech photoelectric system for environmental
protection and conservation. Sunlight is converted to electrical
energy
and stored in photoelectric boards in the laminated glass.
· Spider
and point-fixed toughened laminated glass shows off the intricate
steel
structure.
Sales
and Marketing
Sales
Sales
managers lead our sales and marketing efforts through our headquarters in
Zhuhai, China, and our regional sales offices in Beijing, Shanghai, Nanjing,
Guangzhou and Hangzhou, China. Each sales manager is responsible primarily
for
our estimates, sales, and marketing efforts in defined geographic areas. In
addition, we employ full-time project estimators and chief estimators. Our
sales
representatives attempt to maintain relationships with the Chinese government,
general contractors, architects, engineers, and other potential sources of
business to determine potential new projects under consideration. Our sales
efforts are further supported by our executive officers and engineering
personnel, who have substantial experience in the design, fabrication, and
installation of high-end specialty curtain walls.
49
We
compete for new project opportunities through our relationships and interaction
with our active and prospective customer base, which we believe provides us
with
valuable current market information and sales opportunities. In addition, we
are
often contacted by governmental agencies in connection with public construction
projects, and by large private-sector project owners and general contractors
and
engineering firms in connection with new building projects.
Upon
selection of projects to bid or price, our estimating division reviews and
prepares projected costs of shop, field, detail drawing preparation, raw
materials, and other costs. On bid projects, a formal bid is prepared detailing
the specific services and materials we plans to provide, payment terms and
project completion timelines. Upon acceptance, our bid proposal is finalized
in
a definitive contract. We experience an average accounts settlement period
ranging from three months to as high as one year from the time we provide
services to the time we receive payment from our customers. In contrast, we
typically need to place certain deposit with our suppliers on a portion of
the
purchase price in advance and for some suppliers we must maintain a deposit
for
future orders. We are typically paid by the contractor the entire amount due
to
us for our services and products once the entire project is completed, which
could be significantly after we complete the curtain wall portion of the
project. National policy requires the contractor to pay 85% of our total
contract value to us before the project is completed, and the remainder may
be
paid when the contractor completes the entire project. Because our payment
cycle
is considerably shorter than our receivable cycle, we may experience working
capital shortages. We have used short-term bank loans, cash provided by
operations and financings to fund our operations.
Marketing
Management
believes that we have developed a reputation for innovative technology and
quality in the specialty high-end curtain wall industry. Marketing efforts
are
geared towards advancing us as a brand of choice for building the world’s most
modern and challenging projects.
The
focus
of our marketing plan is print advertising, participation in tradeshows and
exhibitions and lecture and technology briefings to designers and property
owners. The 2007 annual advertising budget is approximately $500,000. In 2005
and 2006, we maintained an annual advertising budget of approximately $300,000.
With
a
targeted approach, our print ads appear regularly in popular Chinese consumer
and industry publications and trade journals. To better showcase our diverse
products to potential customers, we regularly exhibit at the leading trade
shows
and exhibitions. Our dynamic, state-of-the-art trade show exhibits are developed
internally to showcase our latest product offerings.
Production
Supplier
Selection
We
procure high quality glass panes, metal support beams, and other curtain wall
components from a number of regional and international suppliers, depending
on
the requirements of the contract. Once the suppliers are chosen, our engineers
work with them to configure their production processes to manufacture anything
from a standard glass pane to a patented fixing bolt or connector. All
manufacturing is monitored and approved by our quality control and engineering
departments.
Component
Processing and Delivery
Once
the
curtain wall components are produced, they are either shipped directly to the
site or sent to one of our facilities for further processing. Such processing
typically involves drilling holes in glass panes, affixing metal frame pieces
to
glass panes, and cutting steel rods and bending them into customized shapes.
The
project manager and project engineer jointly approve all factory
purchases.
50
Quality
Control
Our
manufacturing production facilities are designed and maintained with a view
towards conforming with good practice standards. To comply with the strict
requirements of our customer base, we have implemented a quality assurance
plan
setting forth our quality assurance procedures. Our quality control department
is responsible for maintaining quality standards throughout the production
process. Quality control executes the following functions:
· setting
internal controls and regulations for semi-finished and finished
products;
· implementing
sampling systems and sample files;
· maintaining
quality of equipment and instruments;
· auditing
production records to ensure delivery of quality products;
· articulating
the responsibilities of quality control staff; and
· on-site
evaluation of supplier quality control systems.
We
have
received the following certifications in recognition of our production and
quality assurance program:
· ISO
9001
- International Quality System Certification, February 2005;
· ISO
14001
- International Environmental System Certification, April, 2005;
and
· ISO
18001
- International Safety System Certification, June 2005.
Research
and Development
Companies
such as us are under pressure from customers to respond more quickly with new
designs and product innovations to support rapidly changing consumer tastes
and
regulatory requirements. We believe that the engineering and technical expertise
of our management and key personnel, together with our emphasis on continuing
research and development in support of our high-end curtain wall technologies,
allows us to efficiently and timely identify and bring new, innovative products
to market for our customers using the latest technologies, materials and
processes. We believe that continued research and development activities are
critical to maintaining our offering of technologically-advanced products to
serve a broader array of our customers.
For
example, in an effort to add value and create new markets, we are working to
develop high performance systems that reduce the need for air conditioning
in
the summer and heat in the winter. Our products under development are designed
to both reduce the direct light and heat coming into the building and, through
the use of photovoltaic cells, to harness the energy collected from the sun
and
further reduce external energy costs by generating power for use in other areas
of the building. Other features are designed to add a level of programmed
intelligence, automatically adjusting louvers/blinds and other faēade controls
to achieve predetermined levels for user comfort. These efforts are made to
meet
the demand for self-sustaining buildings and clean, renewable power in response
to climbing energy prices and declining energy reserves.
Our
research and development strategy relies primarily on internal innovation and
development, supplemented with collaboration with academic and research
institutions. For example, we have been appointed by the Chinese Ministry of
Construction to lead the committee tasked with establishing national standards
for the fixing bolt glass curtain wall technology industry. Luo Ken Yi, our
Chief Executive Officer and Chief Operating Officer, will be the Editor-in-Chief
for the new standard code. Also, in recognition of our contributions to the
curtain wall industry, Luo Ken Yi and two other of our engineers were appointed
to senior posts at the Architectural Glass and Metal Structure Institute of
Qinghua University in Beijing, one of the most prestigious research institutions
in China. We actively track research developmental trends and government
regulations, and continually seek to both improve and perfect existing products
and develop new ones in accelerated product development cycles. In addition,
we
seek to recruit and retain qualified Chinese and foreign technical personnel.
As
of June 30, 2007, we employed 96 designers and engineers and 25 additional
research and development personnel.
51
We
expended approximately $259,692 on research and development activities for
the
six months ended June 30, 2007, and we expended approximately $50,117, $58,865,
and $nil on research and development activities for each of the years ended
December 31, 2006, 2005 and 2004, respectively. These amounts exclude design
and
construction of customized molds used to manufacture the pieces used for a
particular project, as well as sample and testing costs.
Backlog
At
June30, 2007, our total backlog of orders considered to be firm was approximately
$58.5 million, compared with $30.1 million at June 30, 2006. At December31, 2006, our total backlog of orders considered to be firm was approximately
$10.0 million, compared with $26.2 million at December 31, 2005. Of these
amounts, 100% of our 2006 backlog is expected to be produced and shipped in
fiscal 2007 compared to approximately $ 10.5 million, or 40%, of our 2005
backlog, in fiscal 2006. We view backlog as an important statistic in
evaluating the level of sales activity and short-term sales trends in our
business. However, as backlog is only one indicator, and is not an
effective indicator of the ultimate profitability of our sales, we do not
believe that backlog should be used as the sole indicator of our future
earnings.
Competition
The
markets that we serve are highly competitive, price and lead-time sensitive
and
are impacted by changes in the commercial construction industry, including
unforeseen delays in project timing and workflow. In addition, competition
in
the markets of the building industry is intense. It is based primarily on:
·
quality;
·
service;
·
delivery;
·
ability
to provide added value in the design and engineering of
buildings;
·
price;
·
speed
of construction in buildings and components;
and
·
personal
relationships with customers.
We
compete with several large integrated glass manufacturers, numerous specialty,
architectural glass and window fabricators, and major contractors and
subcontractors. We also compete with a number of other manufacturers of
engineered building systems ranging from small local firms to large national
firms. Many of our competitors have greater financial or other resources than
we
do. In addition, we and other manufacturers of engineered high-end curtain
walls
compete with alternative methods of building construction. If these alternative
building methods compete successfully against us, such competition could
adversely affect us. Demand for our services is cyclical and vulnerable to
economic downturns. If the economy weakens, then our revenues, profits and
financial condition may deteriorate.
Government
Regulation
China’s
construction industry is heavily regulated by the national government. On
November 1, 1997, the National Government of the PRC published the Construction
Law of the PRC, Presidential Order No. 91, which is the basic construction
law
of China. This law outlines the basic requirements and rules for all
construction activity in China. Underneath the National Government, the Ministry
of Construction also writes laws. On March 14, 2001, the Ministry of
Construction published Rule No. 87, which puts forth licensing requirements
for
all construction companies operating in China. The Ministry of Construction
also
writes specific standards for all different types of construction. The two
standards from the Ministry of Construction which are most relevant to our
business are: (i) the Curtain Wall Engineering and Design Licensing Standard,
and (ii) the Light-Duty Steel Building Structure Engineering and Design
Licensing Standard. These standards stipulate the basic requirements for
construction companies in China in such areas as registered capital, tangible
assets, liability insurance, employee regulations and engineering
certifications. The standards also have graded levels of qualification. We
have
first class certification for the Curtain Wall Standard and Second Class
Certification for the Light Steel Structure Standard. In addition, Provincial
and municipal governments may also enact regulations through their own
construction bureaus.
52
Employees
As
of
June 30, 2007, we had 352 full-time employees and an additional 341 part-time
on-site employees. Substantially all of our employees are located in China.
We
believe that our relationship with our employees is good.
We
our
required to contribute a portion of our employees’ total salaries to the Chinese
government’s social insurance funds, including medical insurance, unemployment
insurance and job injuries insurance, and a housing assistance fund, in
accordance with relevant regulations. In the six months ended June 30, 2007
and
2006, Zhuhai contributed approximately $71,063 and $61,936, respectively. In
the
last three years, Zhuhai contributed approximately $118,856, $109,941 and
$85,604 for the years ended December 31, 2006, 2005 and 2004, respectively.
We
expect the amount of Zhuhai’s contribution to the government’s social insurance
funds to increase in the future as we expand our workforce and
operations.
Facilities
We
have
offices and processing factories in six cities in China. All buildings and
land
are leased. The leases end around 2010, and we have the right to renew. The
central office is in Zhuhai, where the majority of design and engineering staff
are located. The Beijing and Shanghai offices have smaller design teams as
well.
All offices are sales centers for the area. The three factories are used for
further processing certain curtain wall components before they are shipped
to
the construction site.
Zhuhai
Jiuzhou
Avenue, 105 West Baishi Road
1,080
square meters (office)
1,700
square meters (factory)
Beijing
Jianwei
Building Room 302 - 305, 66 South Lishi Road
Caiyu
Economic Development Zone, East Part, Caiyu Town,
We
are
not a party to any material legal proceedings.
53
MANAGEMENT
Executive
Officers, Directors and Key Employees
The
following individuals constitute our board of directors and executive
management:
Name
Age
Position
Luo
Ken Yi
50
Chief
Executive Officer, Chief Operating Officer and Chairman of the
Board
Tang
Nianzhong
43
Vice
General Manager and Director
Ye
Ning
49
Vice
General Manager and Director
Li
Guoxing
32
Vice
General Manager of Design
Bai
Fei
35
Vice
General Manager of Marketing
Wang
Zairong
54
Chief
Technology Officer and General Engineer
Feng
Shu
69
Research
and Development Supervisor
Wang
Xin
44
Chief
Financial Officer
Zheng
Jinfeng
70
Director
Zhao
Bao Jiang
66
Director
Kelly
Wang
36
Director
Luo
Ken Yi has
been
Chief Executive Officer, Chief Operating Officer and Chairman of the Board
since
1992. Luo Ken Yi studied Medicine, Mechanical Engineering and Engineering
Management in China (1978 to 1983), the U.S. (1986 to 1988), Australia
(1996-1998) and Hong Kong and obtained a Master’s Degree 1997. He served as
Project Manager and Production Manager at P.X. Engineering, Inc. in the U.S.
from 1989 to 1991, Mr. Luo founded the Kangbao Electronics Co., Ltd. in 1988
in
Shunde, Guangdong, China, where he served as Chief Engineer, Technical Manager,
Vice Manager General and Deputy President from 1986 to 1989. Mr. Luo founded
us
in 1992 and served as Chief Managing Director. Later, he studied steel supported
glass curtain wall design in the U.S. and Europe 1992 to 1994. He was appointed
Vice President of the Architectural Glass and Metal Structure Institute of
Qinghua University in 1999. In 2000 he was appointed by the Chinese Ministry
of
Construction to head the committee on creating national standards for the glass
curtain wall industry. Mr. Luo owns over thirty patents related to point fixed
glass technology. He was honored as one of the “Ten Great Leaders in Technology”
and has published numerous books and articles.
Tang
Nianzhong
has been
Vice General Manager and a Director since 1995. Tang Nianzhong graduated from
the Guangzhou University of Chinese Medicine, Department of Medicine, in 1986.
In 1999 he received his MBA from Murdoch University in Australia. From 1986
to
1994, he worked in the bone surgery department of the Nanhai People’s Hospital
in Foshan. From 1994 to 1995 he was Vice General Manager of Foshan Xinhua
Advertising Co., Ltd. In 1995 he joined us, where he has served as Production
Manager, Sales Manager, Project Manager, Administration Manager and Vice General
Manager.
Ye
Ning
has been
Vice General Manager and a Director since 1995. Ye Ning graduated from the
Guangzhou University of Chinese Medicine, Department of Medicine in 1983. From
1983 to 1988 he served on the staff of the Guangzhou Institute of Physical
Education. From 1988 to 1993 he worked in the orthopedics department of the
Nanhai People’s Hospital in Foshan. In 1993 he joined us, where he has served as
Project Manager, Operations Manager, Purchasing Manager and Vice General
Manager.
Li
Guoxing
has been
Vice General Manager of Design since 2001. Li Guoxing graduated from Guizhou
Technology University, Department of Construction, in 1996. In 2003 he received
his MBA from the Royal Canadian College. From 1996 to 1998 he was a designer
at
the Guizhou Chemical Design Institute. In 1998 he joined us, where he has worked
and served as Designer, Chief Engineer, Leader of the Design Institute and
Vice
General Manager of Design.
54
Bai
Fei
has been
Vice General Manager of Marketing since 2004. Bai Fei graduated from Guizhou
Broadcasting and Television University with a major in construction in 1994.
In
1994 he worked briefly as a designer for the Guizhou Institute of Architectural
Science and Research before moving on to work as a Manager of Decoration and
Construction in the Aerospace department of the Liyang Group Decorated Project
Company until 1995. In 1995 he joined us, where he has served as Technical
Department Manager prior to becoming Vice General Manager of Marketing in
2004.
Wang
Zairong
has been
Chief Technology Officer and General Engineer since 2004. Wang Zairong graduated
from the Qinghua University School of Mechanical Engineering in 1977. From
1977
to 1979 he was a mechanical designer at Xi’an Research Institute of Mechanical
Engineering. From 1980 to 1982 he was a mechanical designer at Xi’an Physics and
Space Research Institute. From 1982 to 1993 Mr. Wang was a System Structure
Designer at the Xi’an Aerospace Ministry. From 1993 to 1997 he was Senior
Engineer and Vice General Manager of Technology at Yuantongqiao (Huizhou)
Industrial Co., Ltd. In 1997 he joined us, where he has served as Marketing
Manager, Production Manager, General Engineer prior to becoming Chief Technology
Officer in 2004.
Feng
Shu
has been
Research and Development Supervisor since 2000. She graduated from the Civil
Engineering Department of National Qinghua University in 1960. She is a member
of the Construction Glass and Metal Structure Research Committee of National
Qinghua University and is a professor at the Civil Engineering Academy of
Nanchang University. Feng Shu joined us in 1998, where she has served as
Supervisor of Research and Development. She is also Administrative Director
and
Secretary General of Jiangxi Mechanics Academy and Vice Superintendent of
Jiangxi Huajie Architecture Design Co., Ltd.
Wang
Xin
has been
Chief Financial Officer since 2001. Wang Xin graduated from the Yunnan Finance
and Economics University, Finance Department in 1984. From 1984 to 1988 she
was
Vice Section Chief at the Yunnan Province Finance Bureau. From 1988 to 1995
she
was an instructor at Yunnan Economics and Management College, where she taught
industrial accounting, financial management and other business courses. From
1995 to 2000 she was a Financial Manager at Zhuhai Advertising and Trade
Exhibition Company. From 2000 to 2001 she was Financial Manager at Zhuhai Jingyu
Science and Technology Equipment Company. She joined us in 2001, where she
has
served as Chief Financial Officer.
Zheng
Jinfeng
has
served as a director of the Company since July 2007. Since 2000, Mr. Zheng
has
served as the chief engineer of the China Construction Metal Structure
Association and the Aluminum Door, Window and Curtain Wall Association. Since
that time he has also served as the chief technology expert on the Technology
Expert Committee of the Chinese Construction Department. From 1988 to 2000,
Mr.
Zheng was the vice-president and secretary-general of the China Construction
Metal Structure Association and a director of the Aluminum Door, Window and
Curtain Wall Association. From 1979 to 1988, Mr. Zheng was the deputy director
of the Metal Structure Office of the Chinese Construction Metal Structure Office
and a vice-president of the China Construction Metal Structure Association.
Mr.
Zheng has a degree in Architecture and Mechanical Engineering from the Tangshan
Tiedao Institute.
Zhao
Bao Jiang
has
served as a director of the Company since July
2007.
Since 2003, Mr. Zhao has served as president of the China Association of City
Planning, vice-president of the China Association of Mayors, and vice-president
of the China Environmental Protection Federation. From 1997 to 2002, Mr. Zhao
served as vice minister of the Ministry of Construction of China. From 1993
to
1997, Mr. Zhao was the vice-governor of the Hubei province and mayor of Wuhan
city. From 1985 to 1993, Mr. Zhao served as vice mayor, of Wuhan. Mr. Zhao
graduated from the Department of Agriculture of Tsinghua University in 1966.
Kelly
Wanghas
served as a director of the Company since July 2007. Since August 2005, Ms.
Wang
has served as the manager of technical accounting and SEC reporting of Flow
International Corporation. From 2001 to 2005, Ms. Wang was a manager at Ernst
& Young LLP. Prior to joining Ernst & Young, Ms. Wang served as a senior
financial analyst at the Loewen Group from 1999 to 2000. In 1998, Ms. Wang
served as a supervisor for KPMG. From 1997 to 1998, Ms. Wang served as an
accountant and financial analyst of Chancellor LGT Asset Management in San
Francisco, Califorina. Ms. Wang also served as an accountant for Reg Baker
&
Co., a CPA firm, in 1997. Ms. Wang holds a B.S. in International Finance from
the Shanghai University of Finance and Economics and an MBA from the University
of Hawaii and is a certified public accountant.
55
Family
Relationships
None
The
Board of Directors and Committees
Board
Composition
Subject
to certain exceptions, under the listing standards of the American Stock
Exchange (“AMEX”), a listed company’s board of directors must consist of a
majority of independent directors. We are exempt from this requirement because
we are considered a “controlled company” pursuant to Section 801(a) of the AMEX
Company Guide as one of our shareholders, KGE Group Limited, owns more than
50%
of our voting power. Our Board of Directors has determined that three of the
six
members of our Board of Directors are independent under the listing standards
of
AMEX, as follows: Zheng Jinfeng, Zhao
Bao
Jiang
and
Kelly Wang.
Audit
Committee
We
established our audit committee in July 2007. The audit committee consists
of
Zheng Jinfeng, Zhao
Bao
Jiang,
and
Kelly Wang, each of whom is an independent director. Kelly Wang is an “audit
committee financial expert” as defined under Item 407(d) of Regulation S-K. The
purpose of the audit committee is to represent and assist our board of directors
in its general oversight of our accounting and financial reporting processes,
audits of the financial statements and internal control and audit functions.
The
audit committee’s responsibilities include:
·
The
appointment, replacement, compensation, and oversight of work of
the
independent auditor, including resolution of disagreements between
management and the independent auditor regarding financial reporting,
for
the purpose of preparing or issuing an audit report or performing
other
audit, review or attest services.
·
Reviewing
and discussing with management and the independent auditor various
topics
and events that may have significant financial impact on our company
or
that are the subject of discussions between management and the independent
auditors.
Our
Board
of Directors does not maintain a separate nominating or compensation committee.
Functions and duties customarily performed by such committees are performed
by a
majority of our independent directors in compliance with the requirements for
listing on AMEX. Such responsibilities include:
·
The
design, review, recommendation and approval of compensation arrangements
for our directors, executive officers and key employees, and for
the
administration of any equity incentive plans, including the approval
of
grants under any such plans to our employees, consultants and
directors.
·
The
review and determination of compensation of our executive officers,
including our Chief Executive
Officer.
·
The
selection of director nominees, the approval of director nominations
to be
presented for shareholder approval at our annual general meeting
and
filling of any vacancies on our board of directors, the consideration
of
any nominations of director candidates validly made by shareholders,
and
the review and consideration of developments in corporate governance
practices.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Prior
to
the Share Exchange on October 17, 2006, we were a “blank check” shell company
that was formed to investigate and acquire a target company or business seeking
the perceived advantages of being a publicly held corporation. The
officers and directors of our company prior to the Share Exchange are no longer
employed by or affiliated with our company. Richard Rappaport and Anthony
Pintsopoulos, our President and Chief Financial Officer, respectively, during
2006 prior to Share Exchange, received no compensation or other perquisites
for
serving in such capacity.
56
Our
Chief
Executive Officer, Chief Operating Officer and Chairman of the Board, Luo Ken
Yi, determined the compensation for our current executive officers that was
earned and paid in fiscal 2006 and our Board of Directors approved the
compensation. Compensation for our current executive officers, which
currently consists of Luo Ken Yi, Wang Xin, Ye Ning and Tang Nianzhong, is
determined with the goal of attracting and retaining high quality executive
officers and encouraging them to work as effectively as possible on our
behalf. Key areas of corporate performance taken into account in setting
compensation policies and decisions are growth of sales, cost control,
profitability, and innovation. The key factors may vary depending on which
area of business a particular executive officer’s work is focused on.
Compensation is designed to reward executive officers for successfully meeting
their individual functional objectives and for their contributions to our
overall development. For these reasons, the elements of compensation of
our executive officers are salary and bonus. Salary is paid to cover an
appropriate level of living expenses for the executive officers and the bonus
is
paid to reward the executive officer for individual and company achievement.
With respect to the amount of a bonus, Luo Ken Yi evaluates our company’s
achievements for the fiscal year based on performance factors and results of
operations such as revenues generated, cost of revenues, net income, and whether
we obtain significant contracts. Luo Ken Yi also conducts a monthly and annual
evaluation of the achievement level of an executive based on individual
performance measurements, such as contribution to the achievement of the
company’s goals and individual performance metrics based on their positions and
responsibilities. Bonus are paid at the end of each fiscal year.
We
believe that the salaries paid to our executive officers during 2006, 2005,
and
2004 are indicative of the objectives of our compensation program and reflect
the fair value of the services provided to our company, as measured by the
local
market in China. We determine market rate by conducting a comparison with
the local geographic area averages and industry averages in China.
Currently, we have no specific plans to provide raises after we have become
a
company with securities publicly traded in the United States. Although no
specific plans have yet been discussed, we may adopt such a plan to provide
raises to our executive officers in the future. Adopting higher
compensation in the future may be based on the increased amount of
responsibilities to be assumed by each of the executive officers after we become
a publicly listed company. Executive compensation for 2007 will follow the
same evaluation methods as were used for 2006. If we successfully complete
our
proposed listing on the American Stock Exchange and offering in 2007, we may
adjust our bonus evaluations upwards, but, in such case, we do not intend to
increase it by more than 10%. That determination would likely be made towards
the end of the fiscal year. We may also expand the scope of our compensation,
such as the possibility of granting options to executive officers and tying
compensation to predetermined performance goals.
Our
board
of directors does not currently have a compensation committee. We anticipate
that our board of directors will establish a compensation committee in fiscal
2007 that will be comprised of non-employee members of our board of directors.
Our current expectation is that the compensation committee of our board of
directors will perform, at least annually, a strategic review of the
compensation program for our executive officers to determine whether it provides
adequate incentives and motivation to our executive officers and whether it
adequately compensates our executive officers relative to comparable officers
in
other companies with which we compete for executives. Those companies may or
may
not be public companies or companies located in the PRC or even, in all cases,
companies in a similar business.
Until
such time as a formal compensation program and committee is established, which
we expect will occur in 2007, Ken Luo Yi will structure compensation and bonus
levels and our board of directors will approve the structure. After the
compensation committee is formed, it will determine the structure. Our board
has
established a compensation program for executive officers for 2007 that is
designed to attract, as needed, individuals with the skills necessary for us
achieve our business plan, to motivate those individuals, to reward those
individuals fairly over time, and to retain those individuals who continue
to
perform at or above the levels that we expect. For 2007, bonuses for
executive officers will be based on company and individual performance factors,
as described above, and will be based on a formula such that the amount of
the
bonus will be equal to the lower of a pre-determined dollar amount or a
percentage of revenues and net income. Luo Ken Yi’s bonus will be determined on
overall company performance, business development, sales, and strategy, and
the
amount of his bonus will be the lower of $220,000 or 0.1% of sales plus 2.5%
of
net income. Bonus determination for Ye Ning and Tang Nianzhong is based on
individual measurements for them and will be in an amount that is the lower
of
$120,000 or 0.1% of sales plus 1.0% of net income.
57
Summary
Compensation Tables
The
following table sets forth information concerning the compensation for the
three
fiscal years ended December 31, 2006, 2005, and 2004 of the principal executive
officer, principal financial officer, in addition to our three most highly
compensated officers whose annual compensation exceeded $100,000, and up to
two
additional individuals for whom disclosure would have been required but for
the
fact that the individual was not serving as an executive officer of the
registrant at the end of the last fiscal year.
Name
and Position
Year
Salary
Bonus
Total
Luo
Ken Yi
2006
$
53,786
$
159,245
$
213,031
Chief
Executive Officer, Chief Operating Officer and Chairman of the
Board
2005
52,500
24,783
77,283
2004
36,231
24,154
60,385
Wang
Xin
2006
11,679
8,743
20,422
Chief
Financial Officer
2005
11,301
6,196
17,497
2004
7,971
6,039
14,010
Ye
Ning
2006
46,102
72,354
118,456
Vice
General Manager and Director
2005
22,305
9,193
31,498
2004
14,493
9,662
24,153
Tang
Nianzhong
2006
38,418
79,402
117,820
Vice
General Manager and Director
2005
22,305
12,392
34,697
2004
21,793
9,662
31,455
Richard
Rappaport(1)
2006
—
—
—
Former
Chief Executive Officer and Former Director
2005
—
—
—
2004
—
—
—
Anthony
Pintsopoulos(1)
2006
—
—
—
Former
Chief Financial Officer and Former Director
2005
—
—
—
2004
—
—
—
(1)
Messrs. Rappaport and Pintsopoulos resigned
from all
positions with the Company upon the close of the Share Exchange on October 17,2006.
Grants
of Plan-Based Awards in 2006
There
were no option grants in 2006.
Outstanding
Equity Awards at 2006 Fiscal Year End
There
were no option exercises or options outstanding in 2006.
Option
Exercises and Stock Vested in Fiscal 2006
There
were no option exercises or stock vested in 2006.
58
Employment
Agreements
We
have
employment agreements with the following persons and terms:
·
Luo
Ken Yi is paid $52,500 annually pursuant to a three-year agreement
that
expires on December 31, 2009;
·
Tang
Nianzhong is paid $41,250 annually pursuant to a three-year agreement
that
expires on December 31, 2009;
·
Ye
Ning is paid $41,250 annually pursuant to a five-year agreement that
expires on December 31, 2009;
·
Li
Guoxing is paid $37,500 annually pursuant to a three-year agreement
that
expires on January 1, 2009;
·
Bai
Fei is paid $22,500 annually pursuant to a five-year agreement that
expires on December 31, 2009;
·
Wang
Zairong is paid $10,500 annually pursuant to a one-year agreement
that
expires on December 31, 2007;
·
Feng
Shu is paid $11,400 annually pursuant to a three-year agreement that
expires on December 31, 2008; and
·
Wang
Xin is paid $11,400 annually pursuant to a one-year agreement that
expires
on December 31, 2007.
None
of
the agreements provide for severance upon termination.
Director
Compensation
Name
Fees
Earned or Paid in Cash
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan Compensation ($)
Change
in Pension Value and Nonqualified Deferred Compensation Earnings
All
Other Compensation
($)
Total
($)
All
Directors (total of 3 persons)
-
-
-
-
-
-
-
For
the
year ended December 31, 2006, none of the members of our Board of Directors
received compensation for his or her service as a director. We do not currently
have an established policy to provide compensation to members of our Board
of
Directors for their services in that capacity. We intend to develop such a
policy in the near future.
2007
Equity Incentive Plan
We
adopted the China Architectural Engineering, Inc. 2007 Equity Incentive Plan
in
July 2007. The equity incentive plan became effective upon adoption and will
terminate upon the earliest of (i) the expiration of the 10 year period measured
from the date we adopted the plan, (ii) the date on which all shares available
under the plan have been issued as vested shares, or (iii) the termination
of
all outstanding options in connection with a change in our ownership or control.
The equity incentive plan authorizes the issuance of options to purchase shares
of common stock under the Option Grant Program and the grant of stock awards
under the Stock Issuance Program. Under the Option Grant Program no option
will
have a term in excess of 10 years measured from the date the option is granted
and no participant can receive more than 2,000,000 shares in any calendar year.
Under the Stock Issuance Program, shares of our common stock may be issued
through direct and immediate issuance without any intervening options grants.
Administration
of the equity incentive plan is carried out by our Board of Directors or any
committee of the Board of Directors to which the Board of Directors has
delegated all or a portion of responsibility for the implementation,
interpretation or administration of the equity incentive plan. Our employees,
officers and directors (including employees, officers and directors of our
affiliates) are eligible to participate in the equity incentive plan. The
administrator of the equity incentive plan will select the participants who
are
granted stock options or stock awards and, consistent with the terms of the
equity incentive plan, will establish the terms of each stock option or stock
award. The maximum period in which a stock option may be exercised will be
fixed
by the administrator. Under the equity incentive plan, the maximum number of
shares of common stock that may be subject to stock options or stock awards
is
5,000,000. As of June 30, 2007, we have not granted any securities under the
equity incentive plan.
59
Indemnifications
of Directors And Executive Officers And Limitations of
Liability
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in
such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our certificate of incorporation provides that, pursuant
to Delaware law, our directors shall not be liable for monetary damages for
breach of the directors’ fiduciary duty of care to our company and our
stockholders. This provision in the certificate of incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as injunctive or other forms of nonmonetary relief will remain available
under Delaware law. In addition, each director will continue to be subject
to
liability for breach of the director’s duty of loyalty to us or our
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of the law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval
of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director’s responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our Board of Directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay
those
amounts if it should be determined ultimately that he or she is not entitled
to
be indemnified under the bylaws or otherwise. We are not, however, required
to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our Board of Directors by a majority vote of
a
quorum of disinterested Board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
We
have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act
may
be permitted to our directors, officers and controlling persons pursuant to
the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In
the
event a claim for indemnification against such liabilities (other than the
our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel
the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us
is
against public policy as expressed in the Securities Act and will be governed
by
the final adjudication of such issue.
We
may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. We have not entered into any indemnification agreements with our
directors or officers, but may choose to do so in the future. Such
indemnification agreements may require us, among other things, to:
·
indemnify
officers and directors against certain liabilities that may arise
because
of their status as officers or directors;
·
advance
expenses, as incurred, to officers and directors in connection with
a
legal proceeding, subject to limited exceptions; or
·
obtain
directors’ and officers’ insurance.
60
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are
we
aware of any threatened litigation that may result in claims for
indemnification.
61
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Full
Art International, Ltd.
Full
Art
International, Ltd. (“Full Art”) is our wholly-owned subsidiary and has
interlocking executive and director positions with China Architectural
Engineering, Inc.
October
2006 Share Exchange
On
October 17, 2006, we completed the Share Exchange pursuant to the share exchange
agreement entered into with Full Art and KGE Group, Limited, which was the
sole
shareholder of Full Art. At the closing, Full Art became our wholly-owned
subsidiary and 100% of the issued and outstanding securities of Full Art were
exchanged for shares of our common stock. An aggregate of 45,304,125 shares
of
our common stock were issued to KGE Group and its designees. KGE Group owns
37,736,452 shares, which is approximately 75.5% of our issued and outstanding
stock. Luo Ken Yi, who is our Chief Executive Officer, Chief Operating Officer
and Chairman of the Board, and Ye Ning, who is our Vice General Manager and
director, are directors of KGE Group. In addition, Luo Ken Yi and Ye Ning own
approximately 77.0% and 2.5%, respectively, respectively, of KGE Group’s issued
and outstanding shares. Moreover, concurrent with the closing of the Share
Exchange, our board appointed Luo Ken Yi as Chief Executive Officer and Chief
Operating Officer, Wang Zairong as Chief Technology Officer and General
Engineer, and Wang Xin as Chief Financial Officer. Luo Ken Yi, Tang Nianzhong,
Ye Ning, Wang Zairong and Wang Xin are officers and/or directors of Full Art
and
Zhuhai, and were also appointed as our executive officers and/or directors
upon
closing of the Share Exchange.
WestPark
Capital, Inc.
WestPark
Capital, Inc. was the placement agent for the $3,713,400 equity financing
conducted by us on the close of the Share Exchange. For its services as
placement agent, WestPark received an aggregate fee of approximately $445,608,
which consisted of a commission equal to 9.0% of the gross proceeds from the
financing and a non-accountable fee of 3% of the gross proceeds. Richard
Rappaport, our President and one of our controlling stockholders prior to the
Share Exchange, indirectly holds a 100% interest in WestPark Capital, Inc.,
an
NASD member. Anthony C. Pintsopoulos, an officer and director prior to the
Share
Exchange, is the Chief Financial Officer of WestPark Capital, Inc. Debbie
Schwartzberg, one of our controlling stockholders prior to the Share Exchange,
is a noteholder of the parent company of WestPark Capital, Inc.; her note
entitles her to a 1.5% interest in the net profits of the parent company of
WestPark Capital, Inc. Each of Messrs. Rappaport and Pintsopoulos resigned
from
all of their executive and director positions with us upon the closing of the
Share Exchange.
Loans
to and from Insiders
We
have
made loans to one of our officers. Advances from KGE Group Limited to us for
the
six months ended June 30, 2007 and 2006 were $nil and $1,735, respectively
and
for the years ended December 31, 2006, 2005 and 2004 were $1,735, $420,556,
and
$205,095, respectively. Advances to Luo Ken Yi by us for the years ended
December 31, 2006, 2005, and 2004 were $nil, $nil, and $1,889,091, respectively.
All amounts due by Mr. Luo were repaid prior to completion of the transactions
contemplated by the Share Exchange Agreement. All of the advances were
unsecured, interest free, and have no fixed repayment terms.
Policy
for Approval of Related Party Transactions
We
do not
currently have a formal related party approval policy for review and approval
of
transactions required to be disclosed pursuant to Item 404 (a) of Regulation
S-K. We expect our audit committee to adopt such a policy in 2007.
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of the date of this prospectus are deemed outstanding even if they
have
not actually been exercised. Those shares, however, are not deemed outstanding
for the purpose of computing the percentage ownership of any other
person.
62
The
following table sets forth certain information with respect to beneficial
ownership of our common stock based on 50,000,000 issued and outstanding shares
of common stock, by:
·
Each
person known to be the beneficial owner of 5% or more of the outstanding
common stock of our company;
·
Each
executive officer;
·
Each
director; and
·
All
of the executive officers and directors as a
group.
The
number of shares of our common stock outstanding as of August15, 2007,
excludes (i) 232,088 shares of our common stock issuable upon exercise of
outstanding warrants, (ii) 4,761,905 shares of our common stock issuable upon
the conversion of the Bonds, subject to adjustment, (iii) 800,000 shares of
our
common stock issuable upon the exercise of the Bond Warrants, subject to
adjustment, and (iv) up to 600,000 shares of our common stock (excluding an
underwriters’ option to purchase an additional 90,000 shares to cover
over-allotments) to be offered by us in a firm commitment public offering
concurrently herewith. Unless otherwise indicated, the persons and entities
named in the table have sole voting and sole investment power with respect
to
the shares set forth opposite the stockholder’s name, subject to community
property laws, where applicable. Unless otherwise indicated, the address of
each
stockholder listed in the table is c/o China Architectural Engineering, Inc.,
105 Baishi Road, Jiuzhou West Avenue, Zhuhai, 519070, People’s Republic of
China.
Name
and Address
of
Beneficial Owner
Title
Beneficially
Owned
Prior
to and After the Offering
Percent
of Class Beneficially Owned Prior to Offering
Percent
of Class Beneficially Owned After Offering(1)
Luo
Ken Yi
Chief
Executive Officer, Chief Operating Officer and Chairman of the
Board
37,736,452
(2)
75.5
%
74.6
%
Bai
Fei
Vice
General Manager of Marketing
—
—
74.6
Tang
Nianzhong
Vice
General Manager and Director
37,736,452
(2)
75.5
74.6
Ye
Ning
Vice
General Manager and Director
37,736,452
(2)
75.5
74.6
Li
Guoxing
Vice
General Manager of Design
—
—
—
Wang
Zairong
Chief
Technology Officer and General Engineer
—
—
—
Feng
Shu
Research
and Development Supervisor
—
—
—
Wang
Xin
Chief
Financial Officer
—
—
—
Zheng
Jinfeng
Director
—
—
—
Zhao
Bao Jiang
Director
—
—
—
Kelly
Wang
Director
—
—
—
Officers
and Directors as a Group (total of 10 persons)
37,736,452
(2)
75.5
74.6
KGE
Group Limited
37,736,452
(2)
75.5
74.6
(1)
Assumes
offering of 600,000 shares without underwriters’ exercise of its 90,000
additional shares to cover
over-allotments.
63
(2)
Represents
shares of common stock in our company held by KGE Group, Limited,
a Hong
Kong corporation, of which Luo Ken Yi and Ye Ning are directors and
may be
deemed to have voting and investment control over the shares owned
by KGE
Group, Limited. In addition, Luo Ken Yi and Ye Ning own approximately
77.0% and 2.5%, respectively, of KGE Group, Limited’s issued and
outstanding shares. In addition, KGE Holding Limited owns approximately
18.0% of the issued and outstanding shares of KGE Group, Limited.
KGE
Holding Limited is owned by Luo Ken Yi, 32.5%, Tang Nianzhong, 30.5%,
and
Ye Ning, 30.5%. As a result, Tang Nianzhong may bee deemed to be
a
beneficial owner of the shares held by KGE Group Limited. Each of
the
foregoing persons disclaims beneficial ownership of the shares held
by KGE
Group Limited except to the extent of his pecuniary
interest.
DESCRIPTION
OF SECURITIES
Common
Stock
We
are
authorized to issue 100,000,000 shares of common stock, $.001 par value per
share, of which 50,000,000 shares are issued and outstanding as of the close
of
the Share Exchange. Each outstanding share of common stock is entitled to one
vote, either in person or by proxy, on all matters that may be voted upon by
their holders at meetings of the stockholders.
Holders
of our common stock:
(i)
have
equal ratable rights to dividends from funds legally available therefore,
if declared by the our Board of
Directors;
(ii)
are
entitled to share ratably in all our assets available for distribution
to
holders of common stock upon our liquidation, dissolution or winding
up;
(iii)
do
not have preemptive, subscription or conversion rights or redemption
or
sinking fund provisions; and
(iv)
are
entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of our
stockholders.
The
holders of shares of our common stock do not have cumulative voting rights,
which means that the holders of more than fifty percent (50%) of outstanding
shares voting for the election of directors can elect all of our directors
if
they so choose and, in such event, the holders of the remaining shares will
not
be able to elect any of the our directors.
64
At
the
completion of the Share Exchange and Private Placement, and after giving effect
to our cancellation of 3,125,000 shares immediately prior to the Share Exchange,
KGE Group, Limited, which was the sole shareholder of Full Art prior to the
Share Exchange, and its designees beneficially owns approximately 90.6% of
the
outstanding shares of our common stock. Accordingly, after completion of the
Share Exchange, this stockholder is in a position to control all of our affairs.
Preferred
Stock
We
may
issue up to 10,000,000 shares of our preferred stock, par value $.001 per share,
from time to time in one or more series. Immediately after the Share Exchange,
no shares of preferred stock have been issued. Our Board of Directors, without
further approval of the our stockholders, is authorized to fix the dividend
rights and terms, conversion rights, voting rights, redemption rights,
liquidation preferences and other rights and restrictions relating to any
series. Issuances of shares of preferred stock, while providing flexibility
in
connection with possible financings, acquisitions and other corporate purposes,
could, among other things, adversely affect the voting power of the holders
of
our common stock and prior series of preferred stock then outstanding.
Warrants
At
the
closing of the Share Exchange, we issued a five-year warrant to purchase 232,088
shares of our common stock at a per share exercise price of $1.60 for investor
relations services. We agreed to register the warrants in the registration
statement that we file to register the common stock issued in our Private
Placement that closed on October 17, 2006. In addition, further to the Bond
offering we issued three-year warrants (the “Bond Warrants”) to purchase 800,000
shares of our common stock subject to the terms of a warrant instrument entered
into by and between us and the Subscriber and a warrant agency agreement entered
into by and among us, The Bank of New York and The Bank of New York, London
Branch, both dated April 12, 2007. We agreed to register the Bond Warrants
and
the shares of common stock underlying the Bond Warrants.
Bonds
On
April12, 2007, we issued $10,000,000 Variable Rate Convertible Bonds due in 2012
(the
“Bonds”). Each
Bond
is convertible at the option of the holder at any time on and after a date
that
is 365 days after the date that the Company’s securities commence trading on
AMEX into shares of our common stock at an initial conversion price equal to
the
price per share at which shares are sold in our proposed initial public offering
of our common stock on AMEX with minimum gross proceeds of $2,000,000. If no
initial public offering occurs prior to conversion, the conversion price per
share will be $2.00, subject to adjustment in accordance with the terms and
conditions of the Bonds. The conversion price is subject to adjustment in
certain events, including our issuance of additional shares of common stock
or
rights to purchase common stock at a per share or per share exercise or
conversion price, respectively, at less than the applicable per share conversion
price of the Bonds. If for the period of 20 consecutive trading days immediately
prior to April 12, 2009 or February 18, 2012, the conversion price for the
Bonds
is higher than the average closing price for the shares, then the conversion
price will be reset to such average closing price; provided that, the conversion
price will not be reset lower than 70% of the then existing conversion price.
In
addition, the conversion price will only be adjusted pursuant to the Trust
Deed
to an amount not less then $0.25 per share (as adjusted for stock splits, stock
dividends, spin-offs, rights offerings, recapitalizations and similar events
except in certain circumstances).
Market
Price of Our Common Stock
The
shares of our common stock are not currently listed or quoted for trading on
any
national securities exchange or national quotation system. We are applying
for
the listing of our common stock on the American Stock Exchange. If and when
our
common stock is listed or quoted for trading, the price of our common stock
will
likely fluctuate in the future. The stock market in general has experienced
extreme stock price fluctuations in the past few years. In some cases, these
fluctuations have been unrelated to the operating performance of the affected
companies. Many companies have experienced dramatic volatility in the market
prices of their common stock. We believe that a number of factors, both within
and outside of our control, could cause the price of our common stock to
fluctuate, perhaps substantially. Factors such as the following could have
a
significant adverse impact on the market price of our common stock:
·
Our
ability to obtain additional financing and, if available, the terms
and
conditions of the financing;
65
·
Our
financial position and results of
operations;
·
Concern
as to, or other evidence of, the reliability and efficiency of our
proposed products and services or our competitors’ products and
services;
·
Announcements
of innovations or new products or services by us or our
competitors;
·
U.S.
federal and state governmental regulatory actions and the impact
of such
requirements on our business;
·
The
development of litigation against
us;
·
Period-to-period
fluctuations in our operating
results;
·
Changes
in estimates of our performance by any securities
analysts;
·
The
issuance of new equity securities pursuant to a future offering or
acquisition;
·
Changes
in interest rates;
·
Competitive
developments, including announcements by competitors of new products
or
services or significant contracts, acquisitions, strategic partnerships,
joint ventures or capital
commitments;
Delaware
Anti-Takeover Law and Charter Bylaws Provisions
We
are
subject to Section 203 of the Delaware General Corporation Law. This provision
generally prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder,
unless:
·
prior
to such date, the Board of Directors approved either the business
combination or the transaction that resulted in the stockholder
becoming
an interested stockholder;
·
upon
consummation of the transaction that resulted in the stockholder
becoming
an interested stockholder, the interested stockholder owned at
least 85%
of the voting stock of the corporation outstanding at the time
the
transaction commenced, excluding for purposes of determining
the number of
shares outstanding those shares owned by persons who are directors
and
also officers and by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares
held
subject to the plan will be tendered in a tender or exchange
offer;
or
·
on
or subsequent to such date, the business combination is approved
by the
Board of Directors and authorized at an annual meeting or special
meeting
of stockholders and not by written consent, by the affirmative vote
of at
least 66 2/3% of the outstanding voting stock that is not owned by
the
interested stockholder.
Section
203 defines a business combination to include:
·
any
merger or consolidation involving the corporation and the interested
stockholder;
66
·
any
sale, transfer, pledge or other disposition of 10% or more of the
assets
of the corporation involving the interested stockholder;
·
subject
to certain exceptions, any transaction that results in the issuance
or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
·
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
·
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided
by or
through the corporation.
In
general, Section 203 defines an “interested stockholder” as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a
corporation, or an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of a corporation at any time
within three years prior to the time of determination of interested stockholder
status; and any entity or person affiliated with or controlling or controlled
by
such entity or person.
Our
certificate of incorporation and bylaws contain provisions that could have
the
effect of discouraging potential acquisition proposals or making a tender offer
or delaying or preventing a change in control of our, including changes a
stockholder might consider favorable. In particular, our certificate of
incorporation and bylaws, as applicable, among other things, will:
·
provide
our board of directors with the ability to alter our bylaws without
stockholder approval;
·
provide
for an advance notice procedure with regard to the nomination of
candidates for election as directors and with regard to business
to be
brought before a meeting of
stockholders;
·
provide
that vacancies on our board of directors may be filled by a majority
of
directors in office, although less than a
quorum.
Such
provisions may have the effect of discouraging a third-party from acquiring
our
company, even if doing so would be beneficial to its stockholders. These
provisions are intended to enhance the likelihood of continuity and stability
in
the composition of our board of directors and in the policies formulated by
them, and to discourage some types of transactions that may involve an actual
or
threatened change in control of our company. These provisions are designed
to
reduce our vulnerability to an unsolicited acquisition proposal and to
discourage some tactics that may be used in proxy fights. We believe that the
benefits of increased protection of our potential ability to negotiate with
the
proponent of an unfriendly or unsolicited proposal to acquire or restructure
us
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals could result in an improvement of their
terms.
However,
these provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes in
our
management.
Transfer
Agent
The
transfer agent and registrar for our common stock is Computershare Trust
Company, N.A.
Listing
We
are
applying to have our common stock approved for listing on the American Stock
Exchange under the trading symbol “RCH.”
67
SHARES
ELIGIBLE FOR FUTURE SALE
Prior
to
this offering, there has been no public market for our common stock. Future
sales of substantial amounts of our common stock in the public market could
adversely affect market prices. Upon completion of this offering, we will have
outstanding an aggregate of 50,600,000 shares of common stock, assuming no
exercise of the underwriters' over-allotment option and no exercise of
outstanding warrants. Of these shares, the 600,000 shares sold in the offering
will be freely tradeable without restriction or further registration under
the
Securities Act, except that any shares purchased by our "affiliates," as that
term is defined in Rule 144 of the Securities Act, may generally only be sold
in
compliance with the limitations of Rule 144 described below. All other
outstanding shares not sold in this offering will be deemed "restricted
securities" as defined under Rule 144. Restricted securities may be sold in
the
public market only if registered or if they qualify for an exemption from
registration under Rule 144 promulgated under the Securities Act, which rules
are summarized below. Subject to the lock-up agreements described below and
the
provisions of Rules 144, additional shares will be available for sale in the
public market as follows:
Approximate
Number of
Shares
Eligible for
Future
Sale
Date
600,000
After
the date of this prospectus, freely tradeable shares sold in this
offering.
3,733,550
After
the date of this prospectus, these shares will have been registered
under
a separate prospectus (“Resale Prospectus”) and will be freely tradeable
by certain selling stockholder listed in the Resale Prospectus. These
shares consist of all of the shares of common stock registered under
the
Resale Prospectus, excluding 232,088 shares of common stock that
are
issuable upon the exercise of warrants. Of the 3,733,550 shares,
selling
stockholders holding an aggregate of 2,320,875 shares of common stock
have
agreed that they will not sell any of such securities until our common
stock begins to be listed or quoted on the New York Stock Exchange,
American Stock Exchange, NASDAQ Global Market, NASDAQ Capital Market
or
the OTC Bulletin Board, after which their shares will automatically
be
released from the lock up every 30 days pro rata over a nine month
period
beginning on the date that is 30 days after listing or quotation
of the
shares.
2,962,325
These
shares will be freely tradeable after the Securities and Exchange
Commission declares effective the registration statement that we
will file
within ten days after the end of the six-month period that immediately
follows November 10, 2006 (the date on which we first filed the Resale
Prospectus).
43,304,125
On
October 17, 2007, which is one year after the closing of the share
exchange transaction, these shares, which were issued in connection
with
the share exchange transaction, may be sold under and subject to
Rule 144.
However, all of the holders of these shares have agreed with WestPark
Capital not to directly or indirectly sell, offer, contract or grant
any
option to sell, pledge, transfer (excluding intra-family transfers,
transfers to a trust for estate planning purposes or to beneficiaries
of
officers, directors and shareholders upon their death), or otherwise
dispose of or enter into any transaction which may result in the
disposition of any shares of our common stock or securities convertible
into, exchangeable or exercisable for any shares of our common stock,
without the prior written consent of WestPark Capital, for a period
of 12
months after the date of this
prospectus.
68
Rule
144
In
general, under Rule 144 as currently in effect, a person, or persons whose
shares are aggregated, who has beneficially owned shares of our common stock
for
at least one year, including the holding period of any prior owner, except
if
the prior owner was one of our affiliates, would be entitled to sell within
any
three-month period a number of shares that does not exceed the greater
of:
·
1%
of the number of shares of our common stock then outstanding (which
will
equal approximately 506,000 shares immediately after this offering);
or
·
the
average weekly trading volume of our common stock during the four
calendar
weeks preceding the filing of a notice on Form 144 with respect to
the
sale.
Sales
under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about our
company.
Approximately
4.6% of our issued and outstanding shares are not currently eligible for resale
under Rule 144; however, we have agreed to register all of these shares under
the Securities Act of 1933, as amended. We issued 2,275,000 shares of common
stock to shareholders prior to the Share Exchange. Because we issued these
shares while we were a “blank check” shell company with no operations, these
shareholders are considered to be promoters or affiliates. It should be noted
that these shares may not be sold by these promoters or affiliates, or their
transferees, pursuant to Rule 144 of the Securities Act, regardless of technical
compliance with the rule. Any such resale transaction under Rule 144 would
appear to be designed to distribute or redistribute such shares to the public
without coming within the registration requirements of the Securities Act.
Therefore, these promoters or affiliates, or their transferees, can only resell
their shares through a registration statement filed under the Securities Act.
Of
the 2,275,000 shares held by our shareholders prior to the Share Exchange,
we
agreed to register 1,312,675 shares in the registration statement filed in
connection with the Private Placement. We agreed to register the remaining
962,325 shares, which are beneficially owned by affiliates of WestPark Capital,
Inc., in a subsequent registration statement filed by us within ten days after
the end of the six-month period that immediately follows the date on which
we
file the registration statement to register the shares issued in the Private
Placement. All of the shares included in an effective registration statement
may
be freely sold and transferred except if subject to a lock up
agreement.
Rule
144(k)
Under
Rule 144(k), a person who is not deemed to have been one of our affiliates
at
any time during the 90 days preceding a sale, and who has beneficially owned
the
shares proposed to be sold for at least two years, including the holding
period of any prior owner except one of our affiliates, is entitled to sell
the
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144; therefore, unless otherwise
restricted, 144(k) shares could be sold immediately upon the completion of
this
offering.
Lock-Up
Agreements
The
investors in our private offering that closed on October 17, 2006, in which
we
sold 2,320,875 shares of common stock, entered into a lock-up agreement pursuant
to which they agreed not to sell their shares until our common stock begins
to
be traded on the New York Stock Exchange, American Stock Exchange, NASDAQ Global
Market, NASDAQ Capital Market or the OTC Bulletin Board, after which their
shares will automatically be released from the lock up every 30 days pro rata
over a nine month period beginning on the date that is 30 days after listing
or
quotation of the shares. We agreed to file a registration statement covering
the
common stock sold in the private placement within 30 days of the closing of
the
Share Exchange pursuant to the subscription agreement with each investor.
Subject to the lock up agreement, the shares will be freely tradeable upon
effectiveness of the registration statement.
We
have
agreed with WestPark Capital, Inc. that we will not, without the prior written
consent of WestPark Capital, directly or indirectly sell, offer, contract or
grant any option to sell, pledge, transfer, or otherwise dispose of or enter
into any transaction which may result in the disposition of any shares of our
common stock or securities convertible into, exchangeable or exercisable for
any
shares of our common stock (excluding the exercise of certain warrants and/or
options currently outstanding and exercisable) for a period of 12 months after
the date of this prospectus.
69
In
addition, each of our executive officers and directors, in addition to
significant shareholders holding an aggregate of 7,567,673 shares of common
stock, have agreed with WestPark Capital not to directly or indirectly sell,
offer, contract or grant any option to sell, pledge, transfer (excluding
intra-family transfers, transfers to a trust for estate planning purposes or
to
beneficiaries of officers, directors and shareholders upon their death), or
otherwise dispose of or enter into any transaction which may result in the
disposition of any shares of our common stock or securities convertible into,
exchangeable or exercisable for any shares of our common stock, without the
prior written consent of WestPark Capital, for a period of 12 months after
the
date of this prospectus.
We
have
been advised by WestPark Capital that it has no present intention and there
are
no agreements or understandings, explicit or tacit, relating to the early
release of any locked-up shares. WestPark
Capital may, however, consent to an early release from
the
lock-up period if, in its opinion, the market for the common stock would not
be
adversely impacted by sales. The
release of
any
lock up would be considered on a case-by-case basis. Factors that WestPark
Capital may consider in deciding whether to release shares from the lock up
restriction include the length of time before the lock-up expires, the number
of
shares involved, the reason for the requested release, market conditions, the
trading price
of
our securities, historical trading volumes of our securities and whether the
person seeking the release is an officer, director or affiliate of
us.
Registration
We
are
also concurrently registering for resale under a separate prospectus up to
3,965,638 shares of our common stock held by the selling stockholders named
under the prospectus, including 232,088 shares that may be acquired upon the
exercise of warrants. None of these shares are being offered by us and we will
not receive any proceeds from the sale of these shares. We also agreed to file
a
registration statement with the Securities and Exchange Commission to register
(i) 962,325
shares
of common stock held by shareholders of our company prior to the share exchange
who are affiliates of Westpark Capital, Inc. and (ii) 2,000,000 shares of common
stock that were issued to FirstAlliance Financial Group, Inc. as designee of
KGE
Group, Limited (the former majority shareholder of Full Art International,
Ltd.)
in connection with the share exchange. We agreed to file the registration
statement by
May23, 2007, which is six months and ten days after the date on which we first
filed the registration statement to register the shares issued in the Private
Placement. We originally agreed to a penalty provision pursuant to which we
would issue additional shares of our common stock if we failed to timely file
and maintain the registration statement, but we subsequently entered into an
agreement with WestPark affiliates and FirstAlliance pursuant to which they
waived the penalty provision. We have verbally agreed with the WestPark
affiliates and FirstAlliance to register their shares after the effective date
of this registration statement.
In
addition, we entered into a registration rights agreement with the Subscriber
pursuant to which we agreed to register the Bonds, the Bond Warrants, and the
shares of common stock underlying the Bonds and Bond Warrants. A total of
4,761,905 shares may be issued upon conversion of the Bonds, subject to
adjustment, and 800,000 shares upon may be issued upon exercise of the Bond
Warrants, subject to adjustment. However, the Bonds may not be converted until
365 days after the date of this prospectus and the Bond Warrants may not be
exercised until October 12, 2008. For additional information of registration
obligations, see above under “Prospectus
Summary - Recent Events - April 2007 Issuance of Bonds and Bond
Warrants.”
70
UNDERWRITING
Subject
to the terms and conditions of the underwriting agreement dated [________],
2007, the underwriters named below, through their representative WestPark
Capital, Inc., have severally agreed to purchase from us the number of shares
of
common stock set forth opposite their names at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
prospectus.
Underwriter
Number
of Shares
WestPark
Capital, Inc.
Total
The
underwriting agreement provides that the agreement may be terminated by WestPark
Capital at any time prior to delivery of and payment for the shares if, in
WestPark Capital’s judgment, payment for and delivery of the shares is rendered
impracticable or inadvisable by reason of events specified in the underwriting
agreement, including but not limited to the state of the financial markets
and
our financial condition. Subject to the foregoing, the underwriters are
severally committed to purchase all of the common stock being offered by us
if
any of such shares are purchased, other than those covered by the over-allotment
option described below.
The
underwriters propose to offer the common stock directly to the public at the
public offering price set forth on the cover page of this prospectus. The
underwriters may offer the common stock to some dealers at that price less
a
concession not in excess of $[_______] per share. Dealers may reallow a
concession not in excess of $[_______] per share to some other dealers. After
the shares of common stock are released for sale to the public, the underwriters
may vary the offering price and other selling terms.
We
have
granted to the underwriters an option, exercisable for up to 60 days after
the
date of this prospectus, to purchase up to 90,000 additional shares of common
stock at the public offering price set forth on the cover of this prospectus
solely to cover over-allotments, if any. If the underwriters exercise their
over-allotment option, the underwriters have severally agreed, subject to
limited conditions, to purchase approximately the same percentage that the
number of shares of common stock to be purchased by each of them, as shown
in
the foregoing table, bears to the common stock covered by this prospectus.
We
have
agreed with WestPark Capital, Inc. that we will not, without the prior written
consent of WestPark Capital, directly or indirectly sell, offer, contract or
grant any option to sell, pledge, transfer, or otherwise dispose of or enter
into any transaction which may result in the disposition of any shares of our
common stock or securities convertible into, exchangeable or exercisable for
any
shares of our common stock (excluding the exercise of certain warrants and/or
options currently outstanding and exercisable) for a period of 12 months after
the date of this prospectus.
Each
of
our executive officers and directors, in addition to significant shareholders
holding an aggregate of 7,567,673 shares of common stock, have agreed with
WestPark Capital not to directly or indirectly sell, offer, contract or grant
any option to sell, pledge, transfer (excluding intra-family transfers,
transfers to a trust for estate planning purposes or to beneficiaries of
officers, directors and shareholders upon their death), or otherwise dispose
of
or enter into any transaction which may result in the disposition of any shares
of our common stock or securities convertible into, exchangeable or exercisable
for any shares of our common stock, without the prior written consent of
WestPark Capital, for a period of 12 months after the date of this prospectus.
In addition, ABN AMRO Bank N.V. may not convert the Bonds or exercise the Bond
Warrants until one year after the date of this prospectus.
We
have
agreed to indemnify the underwriters against some liabilities, including
liabilities under the Securities Act, and to contribute to payments that the
underwriters may be required to make in respect thereof.
We
have
agreed to pay the representative a $[_____] non-accountable expense
allowance.
Upon
the
closing of this offering, we have agreed to sell to WestPark Capital, Inc.
warrants to purchase up to 60,000 shares of our common stock. The warrants
will
be exercisable commencing upon their date of issuance at a per share exercise
price equal to 120% of the public offering price, subject to standard
anti-dilution adjustments for stock splits and similar transactions, and will
expire five years from the date of this prospectus. The holders of shares of
common stock acquired upon exercise of the warrants have the right to include
such shares in any future registration statements filed by us and to demand
one
registration for the shares. The warrants and underlying shares are not
transferable during the 180 day period immediately following the date of this
prospectus, except to officers of WestPark Capital, Inc.
71
We
have
also agreed to retain WestPark Capital, Inc. as a consultant to assist us with
shareholder and investor matters. The consulting arrangement will be for a
period of 12 months, commencing upon the closing of this offering, at a rate
of
$3,000 per month.
The
representative may engage in over-allotment, stabilizing transactions, syndicate
covering transactions, penalty bids and passive market making in accordance
with
Regulation M under the Securities Exchange Act of 1934. Over- allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representative to reclaim
a
selling concession from a syndicate member when the common stock originally
sold
by the syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions. Penalty bids may have the effect of deterring
syndicate members from selling to people who have a history of quickly selling
their shares. In passive market making, market makers in the common stock who
are underwriters or prospective underwriters may, subject to some limitations,
make bids for or purchases of the common stock until the time, if any, at which
a stabilizing bid is made. These stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the common stock to be
higher than it would otherwise be in the absence of these transactions. These
transactions may be effected on the American Stock Exchange or otherwise and,
if
commenced, may be discontinued at any time.
In
connection with the offering, the underwriters may make short sales of the
issuer’s shares and may purchase the issuer’s shares on the open market to cover
positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase
in
the offering. Covered’ short sales are sales made in an amount not greater than
the underwriters’ ‘overallotment’ option to purchase additional shares in the
offering. The underwriters may close out any covered short position by either
exercising their overallotment option or purchasing shares in the open market.
In determining the source of shares to close out the covered short position,
the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the overallotment option. ‘Naked’ short sales are sales
in excess of the overallotment option. The underwriters must close out any
naked
short position by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned that there may
be
downward pressure on the price of the shares in the open market after pricing
that could adversely affect investors who purchase in the offering. Similar
to
other purchase transactions, the underwriters’ purchases to cover the syndicate
short sales may have the effect of raising or maintaining the market price
of
the issuer’s stock or preventing or retarding a decline in the market price of
issuer’s stock. As a result, the price of the issuer’s stock may be higher than
the price that might otherwise exist in the open market.
Prior
to
this offering, there has been no public market of the common stock.
Consequently, the initial public offering price will be determined by
negotiations between us and the underwriters. Among the factors considered
in
these negotiations will be prevailing market conditions, the market
capitalizations and the stages of development of other companies that we and
the
underwriters believe to be comparable to us, estimates of our business
potential, our results of operations in recent periods, the present state of
our
development and other factors deemed relevant.
We
estimate that our out of pocket expenses for this offering will be approximately
$[____________].
72
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus will be passed upon
for
us by Kirkpatrick & Lockhart Preston Gates Ellis LLP, Los Angeles,
California. Stubbs Alderton & Markiles, LLP, Sherman Oaks, California is
acting as counsel for the underwriters.
EXPERTS
Our
consolidated financial statements as of December 31, 2006 and 2005 and for
the
years ended December 31, 2006, 2005, and 2004 appearing in this Prospectus
and
Registration Statement have been audited by Samuel H. Wong & Co., LLP,
Certified Public Accountants, an independent registered public accounting firm,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
ADDITIONAL
INFORMATION
We
filed
with the Securities and Exchange Commission a registration statement under
the
Securities Act of 1933 for the shares of common stock in this offering. This
prospectus does not contain all of the information in the registration statement
and the exhibits and schedule that were filed with the registration statement.
For further information with respect to us and our common stock, we refer you
to
the registration statement and the exhibits and schedule that were filed with
the registration statement. Statements contained in this prospectus about the
contents of any contract or any other document that is filed as an exhibit
to
the registration statement are not necessarily complete, and we refer you to
the
full text of the contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
and schedules that were filed with the registration statement may be inspected
without charge at the Public Reference Room maintained by the Securities and
Exchange Commission at 100 F Street, N.E. Washington, DC 20549, and copies
of
all or any part of the registration statement may be obtained from the
Securities and Exchange Commission upon payment of the prescribed fee.
Information regarding the operation of the Public Reference Room may be obtained
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a web site that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the SEC. The address of the website is
www.sec.gov.
We
file
periodic reports under the Securities Exchange Act of 1934, including annual,
quarterly and special reports, and other information with the Securities and
Exchange Commission. These periodic reports, and other information are available
for inspection and copying at the regional offices, public reference facilities
and website of the Securities and Exchange Commission referred to
above.
Additional
paid in capital from issuance of common stock in cash, to third
party for
services, and from conversion of original capital from Full Art
(Note
9)
7,068,979
7,068,979
Adjustment
of Additional Paid in Capital to Retained Earnings in connection
with
Share Exchange
37,582
37,582
Increase
to Additional Paid in Capital from Reverse Acquisition Transaction
reflecting Cash held by SRKP 1, Inc.
Net
cash provided by (used in) investing activities
(797,634
)
(636,466
)
(278,930
)
(649,725
)
Cash
flows from financing activities
Repayment
of long-term loan
(34,735
)
(560,036
)
35,285
(743,742
)
Proceeds
from long-term loan
-
-
176,522
-
Amount
due to shareholder
(716,839
)
825,921
(1,735
)
2,938,769
Issuance
of convertible bond and warrants
9,700,000
-
9,700,000
-
Net
cash provided by (used in) financing activities
8,948,426
265,885
9,910,072
2,195,027
Net
(decrease)/increase in cash and cash equivalents
3,384,407
(41,654
)
3,846,981
499,293
Effect
of foreign currency translation on cash
and
cash equivalents
55,974
6,671
45,823
(54,470
)
Cash
and cash equivalents - beginning of year
2,568,389
991,623
2,115,966
511,817
Cash
and cash equivalents - end of year
$
6,008,770
$
956,640
$
6,008,770
$
956,640
Other
supplementary information
Interest
paid
$
52,691
$
8,050
$
56,771
$
20,080
Income
tax paid
$
508,606
$
98,130
$
760,170
$
404,210
See
notes
to consolidated financial statements and accountant’s report
F-6
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.
ORGANIZATION
AND PRINCIPAL ACTIVITIES
China
Architectural Engineering, Inc. (“CAEI” or the “Company”) formerly SKRP 1 Inc.,
was incorporated in the State of Delaware, United State on March 16, 2004.
On
October 17, 2006, the Company underwent a reverse-merger with Full Art
International Ltd. (a Hong Kong company) and its four wholly-owned subsidiaries
as detailed in 2. (b)Consolidation
below,
involving an exchange of shares whereby the Company issued an aggregate of
43,304,125 shares of common stock in exchange for all of the issued and
outstanding shares of Full Art. CAEI was the accounting acquiree. For financial
reporting purposes, this transaction is classified as a recapitalization of
China Architectural Engineering, Inc. and the historical financial statements
of
Full Art. The accompanying audited consolidated financial statements were
retroactively adjusted to reflect the effects of the
recapitalization.
The
Company through its subsidiaries conducts its principal activity as glass wall
contractors, specifically specializing in the design, manufacturing,
installation and maintenance of structural glass and other light structure
building systems, throughout China, the Middle East and the United
States.
The
Company's work is performed under cost-plus-fee contracts, fixed-price
contracts, and fixed-price contracts modified by incentive and penalty
provisions. These contracts are undertaken by the Company or its wholly owned
subsidiary. The length of the Company's contracts varies but is typically about
one to two years.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
(a)
Method
of accounting
The
Group
maintains its general ledger and journals with the accrual method accounting
for
financial reporting purposes. The consolidated financial statements and notes
are representations of management. Accounting policies adopted by the Group
conform to generally accepted accounting principles in the United States of
America and have been consistently applied in the presentation of consolidated
financial statements, which are compiled on the accrual basis of
accounting.
(b)
Consolidation
The
consolidated financial statements include the accounts of China Architectural
Engineering, Inc. (the Company) and its six subsidiaries constituting the group.
Inter-company transactions have been eliminated in consolidation. The
consolidated financial statements include 100% of the assets and liabilities
of
these majority-owned subsidiaries, and the ownership interests of minority
investors are recorded as minority interests.
F-7
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
Zhuhai
King General Glass Engineering Technology Co., Ltd
PRC
100
King
General Engineering (HK) Ltd
Hong
Kong
100
KGE
Building System Ltd
Hong
Kong
100
KGE
Australia Pty Ltd
Australia
55
For
retrospective financial reporting purposes, the constituents of the group are
the same as of June 30, 2006.
(c)
Use
of estimates
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made; however actual results could differ materially
from
those estimates.
(d)
Economic
and political risks
The
Group’s operations are mainly conducted in the PRC, although there are also
operations in the Middle East and the United States. Accordingly, the Group’s
business, financial condition and results of operations in the PRC may be
influenced by the political, economic and legal environment in the PRC, and
by
the general state of the PRC economy.
The
Group’s major operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and
the Middle East. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Group’s results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect
to
laws and regulations, anti-inflationary measures, currency conversion,
remittances abroad, and rates and methods of taxation, among other
things.
F-8
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(e)
Plant
and equipment
Plant
and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows:
The
cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
(f)
Land
use rights
Land
use
rights are stated at cost less accumulated amortisation. Amortisation is
provided over the respective useful lives, using the straight-line
method.
(g)
Accounting
for the impairment of long-lived
assets
The
long-lived assets held and used by the Group are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
assets may not be recoverable. It is reasonably possible that these assets
could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets.
If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
During
the reporting periods, there was no impairment loss.
(h)
Inventories
Inventories
are raw materials which are stated at the lower of weighted average cost or
market value.
Contracts
receivable from performing construction of industrial and commercial buildings
are based on contracted prices. The company provides an allowance for doubtful
debts which is based upon a review of outstanding receivables, historical
collection information, and existing economic conditions.
F-9
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
(j)
Advances
to suppliers
Advances
to suppliers represent the cash paid in advance for purchasing raw
materials.
(k)
Cash
and cash equivalents
The
Group
considers all highly liquid investments purchased with original maturities
of
three months or less to be cash equivalents. The Group maintains bank accounts
only in the PRC and Hong Kong. The Group does not maintain any bank accounts
in
the United States of America.
(l)
Restricted
cash
Restricted
cash represents time deposit accounts to secure notes payable and bank
loans.
(m)
Earning
per share
The
Company computes earnings per share (“EPS’) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128
requires companies with complex capital structures to present basic and diluted
EPS. Basic EPS is measured as the income or loss available to common
shareholders divided by the weighted average common shares outstanding for
the
period. Diluted EPS is similar to basic EPS but presents the dilutive effect
on
a per share basis of potential common shares (e.g., convertible securities,
options, and warrants) as if they had been converted at the beginning of the
periods presented, or issuance date, if later. Potential common shares that
have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS. Approximately
2,857,143 dilutive shares on an “as converted” basis for the Convertible Bond
were excluded from the calculation of diluted EPS for the three and six months
ended June 30, 2007 since their effect would have been anti-dilutive.
The
calculation of diluted weighted average common shares outstanding for the three
months ended June 30, 2007 and 2006 and for the six months ended June 30, 2007
and 2006 is based on the estimate fair value of the Company’s common stock
during such periods applied to warrants and options using the treasury stock
method to determine if they are dilutive. The Convertible Bond is included
on an
“as converted “basis when these shares are dilutive.
The
following tables are a reconciliation of the weighted average shares used in
the
computation of basic and diluted earnings per share for the periods presented
(amounts in thousands, except per share data):
Revenues
from fixed-price and modified fixed-price construction contracts are recognized
on the percentage-of-completion method, measured by the percentage of time
cost
incurred to date to estimated total cost for each contract.
Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs.
Selling,
general, and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs
and
income and are recognized in the period in which the revisions are determined.
Profit incentives are included in revenues when their realization is reasonably
assured. An amount equal to contract costs attributable to claims is included
in
revenues when realization is probable and the amount can be reliably
estimated.
Total
estimated gross profit on a contract, being the difference between total
estimated contract revenue and total estimated contract cost, is determined
before the amount earned on the contract for a period can be determined.
The
measurement of the extent of progress toward completion is used to determine
the
amount of gross profit earned to date and that the earned revenue to date is
the
sum of the total cost incurred on the contract and the amount of gross profit
earned.
Earned
revenue, cost of earned revenue, and gross profit are determined as follows:
-
a.
Earned
Revenue is the amount of gross profit earned on a contract for a
period
plus the costs incurred on the contract during the
period.
b.
Cost
of Earned Revenue is the cost incurred during the period, excluding
the
cost of materials not unique to a contract that have not been used
for the
contract.
F-11
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
c.
Gross
Profit earned on a contract is computed by multiplying the total
estimated
gross profit on the contract by the percentage of completion. The
excess
of that amount over the amount of gross profit reported in prior
periods
is the earned gross profit that should be recognized in the income
statement for the current period.
Change
orders are common for the changes in specifications or design while claims
are
uncommon. Contract revenue and costs are adjusted to reflect change orders
approved by the customer and the contractor regarding both scope and price.
Recognition of amounts of additional contract revenue relating to claims is
appropriate only if it is probable that the claim will result in additional
contract revenue and if the amount can be reliably estimated.
(o)
Income
taxes
The
Company uses the accrual method of accounting to determine and report its
taxable reduction of income taxes for the year in which they are available.
The
Company has implemented Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
The
Company also adopted FIN
48, Accounting for Uncertainty in Tax Positions.
Income
tax liabilities computed according to the United States, People’s Republic of
China (PRC) and Hong Kong SAR tax laws are provided for the tax effects of
transactions reported in the financial statements and consists of taxes
currently due plus deferred taxes related primarily to differences between
the
basis of fixed assets and intangible assets for financial and tax reporting.
The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred taxes also are recognized
for
operating losses that are available to offset future income taxes. A valuation
allowance is created to evaluate deferred tax assets if it is more likely than
not that these items will either expire before the Company is able to realize
that tax benefit, or that future realization is uncertain.
In
respect of the Company’s subsidiaries domiciled and operated in China and Hong
Kong, the taxation of these entities can be summarized as follows:
·
Zhuhai
King Glass Engineering Co., Ltd and Zhuhai King General Glass Engineering
Technology Co., Ltd are located in the city of Zhuhai PRC, and are
subject
to the corporation income tax rate of 33%. However, in accordance
with the
relevant tax laws and regulations of PRC, the Zhuhai local corporation
income tax rate is 15%. Zhuhai KGE is presently dormant, and from
the time
that it has its first profitable tax year, it is exempt from corporate
income tax for its first two years and is then entitled to a 50%
tax
reduction for the succeeding three years. Zhuhai KGE has enjoyed
this tax
incentive in the previous years.
·
Full
Art International Limited, King General Engineering (HK) Ltd, and
KGE
Building System Ltd are subject to Hong Kong profits tax rate of
17.5%.
Currently, Full Art has around US$370,000 tax losses carried forward.
KGE
Building System has around US$33,000 tax losses carried forward.
And for
KGE (HK), it does not have any material tax
losses.
F-12
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
The
Company is subject to United States Tax according to Internal Revenue Code
Sections 951 and 957. Corporate income tax is imposed on graduated rates in
the
range of: -
Taxable
Income
Rate
Over
But
not over
Of
Amount Over
15%
0
50,000
0
25%
50,000
75,000
50,000
34%
75,000
100,000
75,000
39%
100,000
335,000
100,000
34%
335,000
10,000,000
335,000
35%
10,000,000
15,000,000
10,000,000
38%
15,000,000
18,333,333
15,000,000
35%
18,333,333
-
0
The
Company, after a reverse-merger on October 17, 2006, revived to be an active
business enterprise because of the operations of its subsidiaries in China
and
Hong Kong. Based on the consolidated net income for the three months ended
June30, 2007, the Company shall be taxed at the 34% tax rate. The Group’s net income
for the three months ended March 31, 2006, being prior to become a U.S. Company
before the reverse-merger on October 17, 2006, is not subject to U.S. tax.
Please refer to Note 12 for provision of United States and PRC Income
Taxes.
(p)
Advertising
The
Group
expensed all advertising costs as incurred. Advertising expenses included in
selling expenses were $83,630 and $21,512 for the periods ended June 30, 2007
and 2006, respectively.
(q)
Research
and development
Research
and development costs are expensed as incurred. Research and development costs
included in general and administrative expenses were $259,692 and $223,610
for
the three months ended June 30, 2007 and 2006, respectively.
(r)
Retirement
benefits
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred. The contributions were $46,910 and $30,968 for the three
months ended June 30, 2007 and 2006, respectively.
F-13
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
(s)
Foreign
currency translation
The
accompanying consolidated financial statements are presented in United States
dollars. The functional currencies of the Group companies are the Hong Kong
Dollar (HKD) and Renminbi (RMB). The consolidated financial statements are
translated into United States dollars from HKD and RMB at year-end exchange
rates as to assets and liabilities and average exchange rates as to revenues
and
expenses. Capital accounts are translated at their historical exchange rates
when the capital transactions occurred.
The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$
at
the rates used in translation.
(t)
Statutory
reserves
Statutory
reserves for foreign investment enterprises are referring to the amount
appropriated from the net income in accordance with laws or regulations, which
can be used to recover losses and increase capital, as approved, and are to
be
used to expand production or operations.
(u)
Comprehensive
income
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
all
items that are required to be recognized under current accounting standards
as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other consolidated
financial statements. The Group’s current components of other comprehensive
income are the foreign currency translation adjustment.
F-14
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
(v)Recent
accounting pronouncements
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those fiscal
years.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of SFAS
115”
(SFAS No. 159), which allows for the option to measure financial instruments
and
certain other items at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in earnings. The
objective of SFAS 159 is to provide opportunities to mitigate volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply hedge accounting provisions. SFAS 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar
types
of assets and liabilities. This statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company is
currently evaluating the impact of SFAS No. 159 on our consolidated financial
statements.
The
Company does not anticipate that the adoption of the above standards will have
a
material impact on these consolidated financial statements.
Less:
Reduction in allowance for doubtful accounts
(182,236
)
-
Foreign
exchange adjustments
5,837
14,053
Balances
$
206,912
$
417,648
4.
ADVANCES
FROM/TO DIRECTOR/EMPLOYEE
All
the
advances from/to with director/employee are unsecured, interest free, and have
no fixed repayment terms. Advances from/to employee are related to business
traveling and material purchasing.
Depreciation
expenses included in the selling and administrative expenses for the three-month
periods ended June 30, 2007 and 2006 were $51,751 and $38,972, respectively.
The
Company obtained a line of credit facility as reflected above up to a maximum
of
RMB 20,000,000, which does not need to renew until October 25,2011.
Interest
expenses were $52,691 and $8,050 for the three months ended June 30, 2007 and
2006, respectively.
On
April12, 2007, the Company completed a financing transaction with ABN AMRO Bank
N.V.
(the “Subscriber”) issuing (i) $10,000,000 Variable Rate Convertible Bonds due
in 2012 (the “Bonds”) and (ii) 800,000 warrants to purchase an aggregate of
800,000 shares of our common stock, subject to adjustments for stock splits
or
reorganizations as set forth in the warrant, that expire in 2010 (the
“Warrants”).
The
Bonds
were subscribed at a price equal to 97% of their principal amount, which is
the
issue price of 100% less a 3% commission to the Subscriber. The Bonds were
issued pursuant to, and are subject to the terms and conditions of, a trust
deed
dated April 12, 2007, as amended, between us and The Bank of New York, London
Branch (the “Trust Deed”). The Bonds are also subject to a paying and conversion
agency agreement dated April 12, 2007 between us, The Bank of New York, and
The
Bank of New York, London Branch. The terms and conditions of the Bonds, as
set
forth in the Trust Deed include, among other thing, the following
terms:
·
Interest
Rate.
The Bonds bear cash interest from April 12, 2007 at the rate of 6%
per
annum for the first year after April 12, 2007 and 3% per annum thereafter,
of the principal amount of the
Bonds.
·
Conversion.
Each Bond is convertible at the option of the holder at any time
on a date
that is 365 days after the date that our securities are traded on
the
American Stock Exchange (“AMEX’) through March 28, 2012, into shares of
our common stock at an initial conversion price equal to the price
per
share at which shares are sold in our proposed initial public offering
of
common stock on the American Stock Exchange (“AMEX”) with minimum gross
proceeds of $2,000,000. If no initial public offering occurs prior
to
conversion, the conversion price per share will be $2.00, subject
to
adjustment in accordance with the terms and conditions of the Bonds.
The
conversion price is subject to adjustment in certain events, including
our
issuance of additional shares of common stock or rights to purchase
common
stock at a per share or per share exercise or conversion price,
respectively, at less than the applicable per share conversion price
of
the Bonds. If for the period of 20 consecutive trading days immediately
prior to April 12, 2009 or February 18, 2012, the conversion price
for the
Bonds is higher than the average closing price for the shares, then
the
conversion price will be reset to such average closing price; provided
that, the conversion price will not be reset lower than 70% of the
then
existing conversion price. In addition, the Trust Deed provides that
the
conversion price of the Bonds cannot be adjusted to lower than $0.25
per
share of common stock (as adjusted for stock splits, stock dividends,
spin-offs, rights offerings, recapitalizations and similar
events).
·
Mandatory
Redemptions. If
on or before April 12, 2008, either (i) our common stock (including
the
shares of common stock issuable upon conversion of the Bonds and
exercise
of the Warrants) are not listed on AMEX or (ii) the Bonds, Warrants,
and
shares underlying the Bonds and Warrants are not registered with
the
Securities and Exchange Commission (the “SEC”), then holders of the Bonds
can require us to redeem the Bonds at 106.09% of the principal amount.
In
addition, at any time after April 12, 2010, holders of the Bonds
can
require us to redeem the Bonds at 126.51% of the principal amount.
The
Company are required to redeem any outstanding Bonds at 150.87% of
its
principal amount on April 4, 2012.
F-19
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
8.
CONVERTIBLE
BONDS AND BOND WARRANTS
(CONT’D)
On
April12, 2007, the Company entered into a warrant instrument with the Subscriber
pursuant to which the Subscriber purchased the Warrants from us (the “Warrant
Instrument”). The Warrants, which are represented by a global certificate, are
also subject to a warrant agency agreement by and among us, The Bank of New
York
and The Bank of New York, London Branch dated April 12, 2007 (the “Warrant
Agency Agreement”). Pursuant to the terms and conditions of the Warrant
Instrument and the Warrant Agency Agreement, the Warrants vested on April12,2007 and will terminate on April 12, 2010. The Bond Warrants are exercisable
at
a per share exercise price of $0.01. The Company has agreed to list the Warrants
on AMEX, or any alternative stock exchange by April 12, 2008.
On
April12, 2007the Company also entered into a registration rights agreement with
the
Subscriber pursuant to which the Company agreed to include the Bonds, the
Warrants, and the shares of common stock underlying the Bonds and Warrants
in a
pre-effective amendment to a registration statement that the Company have
on
file with the SEC. Subsequently, the Company verbally agreed with the Subscriber
not to include the Subscriber’s securities in this registration statement and to
register them in a separate registration statement to be filed promptly after
the effective date of this registration statement.
At
April12, 2007, the date of issuance, the Company determined the fair value of the
Bonds to be $9,700,000. The warrants and the beneficial conversion feature
were
$2,167,950 and $2,467,951 respectively, which were determined under the
Black-Scholes valuation method. They are included under stockholders’ equity as
additional paid in capital - stock warrants and additional paid in capital
-
beneficial conversion feature respectively in accordance with guidance of APB
14
and EITF No. 98-5. Accordingly, the interest discount on the warrants and
beneficial conversion feature were recorded, and are being amortized by the
interest method of 5 years.
As
addressed in an earlier paragraph under Mandatory Redemptions, the Company
will
redeem each bond at 150.87% of its principal amount on April 4, 2012 (the
maturity date). On the basis of this commitment, the Company has determined
the
total redemption premium to be $5,087,100, which is an addition to the original
face value of the Bonds of $10,000,000. This redemption premium is to be
amortized to interest expense over the term of the Bonds by the interest method.
Interest expense on the accretion of redemption premium for the period from
April 12, 2007 to June 30, 2007 amounted to $131,666 as disclosed in the
following schedule of Convertible Bonds Payable.
F-20
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
8.
CONVERTIBLE
BONDS AND BOND WARRANTS (CONT’D)
Because
of the fact that the $10,000,000 Variable Rate Convertible Bonds contain three
separate securities and yet merged into one package, the bond security must
identify its constituents and establish the individual value as determined
by
the Issuer as follows: -
(1)
Convertible
Bonds
$10,000,000
(2)
Bond
Discount
300,000
(3)
Warrants
2,167,950
(4)
Beneficial
Conversion Feature
2,467,951
The
above
items (2), (3), and (4) are to be amortized to interest expense over the term
of
the Bonds by the effective interest method as disclosed in the table
below.
The
Convertible Bonds Payable, net consists of the following: -
Accretion
of interest discount - Beneficial conversion feature
108,317
Amortization
of bond discount to interest expense
13,167
6%
Interest Payable
131,666
Accretion
of redemption premium
131,666
Net
$
5,544,064
F-21
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
9.
COMMON
STOCK AND ADDITIONAL PAID IN
CAPITAL
As
a
result of the reverse-merger on October 17, 2006 involving an exchange of shares
between China Architectural Engineering, Inc. and its subsidiaries led by Full
Art International Limited as well as issuance of shares to entities involved
in
the deal as fully described in the Company’s Form S-1/A (to Form SB-2) filed
with SEC, total capitalization of the Company by common stock and related
additional paid-in capital at June 30, 2007 and December 31, 2006 are depicted
in the following table: -
Name
of Shareholder
Number
of Shares
Common
Stock Capital
Additional
Paid-in Capital
%
of Equity Holdings
KGE
Group Ltd.
43,304,125
43,304
-
86.61
%
Investor
Relations Firm
100,000
100
159,900
0.20
%
First
Alliance Financial Group
2,000,000
2,000
3,198,000
4.00
%
Former
CAEI shareholders
2,275,000
2,275
-
4.55
%
Various
private investors
2,320,875
2,321
3,711,079
4.64
%
Increase
to Additional Paid-in Capital from Reverse Acquisition Transaction
reflecting Cash held by SRKP 1, Inc.
5,722
Stock
Warrants
2,167,950
Beneficiary
Conversion Feature
2,467,951
50,000,000
50,000
$
11,710,602
100.00
%
10.
SHARE
WARRANT
Upon
the
closing of the share exchange on October 17, 2006, the Company issued 100,000
shares of common stock and a five-year warrant to purchase 232,088 shares of
common stock at a per share exercise price of $1.60 for an investor relations
services firm (the “IR Securities”).
As
of
June 30, 2007, the 232,088 shares have not been exercised.
The
contract revenues earned for the three-month periods ended June 30, 2007 and
2006 consist of the following:
2007
2006
Billed
$
10,677,301
$
4,788,485
Unbilled
8,776,344
9,635,487
$
19,453,645
$
14,423,972
The
unbilled contract revenue earned represents those revenue that should be
recognized according to the percentage of completion method for accounting
for
construction contract because the Group is entitled to receive payment from
the
customers for the amount of work that has been rendered to and completed for
that customer according to the terms and progress being made as stipulated
under
that contract between the Group and that customer. As an industrial practice,
there are certain procedures that need to be performed, such as project account
finalization, by both the customer and the Group before the final billing is
issued; however this does not affect the Group’s recognition of revenue and
respective cost according to the terms of the contract with the consistent
application of the percentage-of-completion method.
12.
INCOME
TAXES
The
following table accounts for the differences between the actual tax provision
and the amounts obtained by applying the relevant applicable corporation income
tax rate to income before tax for the three months ended June 30, 2007 and
2006:
-
2007
2006
Income
before tax
$
5,230,407
$
3,947,098
Tax
at the domestic income tax rate
$
1,726,034
$
1,302,542
Effect
of government grants
(788,404
)
(751,919
)
Current
income tax expense
$
937,630
$
550,623
F-23
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
13.
COMMITMENTS
The
Company leases certain administrative and production facilities from third
parties. Accordingly, for the three months ended June 30, 2007 and
2006, the Group incurred rental expenses of $182,507 and $75,604
respectively.
The
Company has commitments with respect to non-cancelable operating leases for
these offices, as follows: -
The
following material transactions with related parties during the periods were
in
the opinion of the directors, carried out in the ordinary course of business
and
on normal commercial terms: -
The
advances from the shareholder at June 30, 2007 and 2006 were $0.00 and
$1,735.00, respectively.
F-24
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To:
The
Board of Directors and Stockholders of China
Architectural Engineering, Inc.
We
have
audited the accompanying consolidated balance sheets of China Architectural
Engineering, Inc. as of December 31, 2006, 2005, and 2004 and the related
consolidated statements of income, stockholders' equity and cash flows for
the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of China Architectural
Engineering, Inc. as of December 31, 2006, 2005, and 2004 and the results of
its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
Preferred
stock, $0.001 par value, 10,000,000 shares authorized, 0 shares
issued and
outstanding at December 31, 2006;
Common
stock, $0.001 par value, 100,000,000 shares authorized, 50,000,000
shares
issued and outstanding at December 31, 2006, and 43,304,125 shares
issued
and outstanding at December 31, 2005 and 2004
Increase
in additional paid in capital from
issuance of common stock
7,106,561
-
-
Dividends
paid
(1,576,796
)
(2,571,395
)
(4,108,226
)
Net
cash used in financing activities
$
6,938,877
$
(7,234,563
)
$
(2,088,364
)
Net
(decrease)/increase in cash and cash
Equivalents
$
1,082,228
$
(2,728,219
)
$
(257,531
)
Effect
of foreign currency translation on cash and cash
equivalents
521,921
251,765
33,619
Cash
and cash equivalents - beginning of year
511,817
2,988,271
3,212,183
Cash
and cash equivalents - end of year
$
2,115,966
$
511,817
$
2,988,271
Other
supplementary information
Interest
paid
$
71,656
$
116,750
$
232,330
Income
tax paid
$
798,988
$
446,850
$
-
See
notes
to consolidated financial statements
F-30
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
1.ORGANIZATION
AND PRINCIPAL
ACTIVITIES
China
Architectural Engineering, Inc. (the Company) formerly SRKP 1, Inc., was
incorporated in the State of Delaware, United States on March 16, 2004.
On
October 17, 2006, the Company underwent a reverse-merger with Full Art
International Ltd. (a Hong Kong company) and its four wholly-owned subsidiaries
as detailed in 2(b) Consolidation
below,
involving an exchange of shares whereby the Company issued an aggregate of
43,304,125 shares of common stock in exchange for all of the issued and
outstanding shares of Full Art. For financial reporting purposes, this
transaction is classified as a recapitalization of China Architectural
Engineering, Inc. and the historical financial statements of Full Art. The
accompanying audited consolidated financial statements, the share, and per
share
amounts were retroactively adjusted to reflect the effects of the
recapitalization.
The
Company, through its subsidiaries, conducts its principal business activity
in
the People’s Republic of China, the Middle East, and the United States as glass
wall contractors, specifically specializing in the design, manufacturing,
installation and maintenance of structural glass and other light structure
building systems.
The
Company's work is performed under cost-plus-fee contracts, fixed-price
contracts, and fixed-price contracts modified by incentive and penalty
provisions. These contracts are undertaken by the Company or its wholly owned
subsidiary. The length of the Company's contracts varies but is typically about
one to two years.
2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(a) Method
of accounting
The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The consolidated financial
statements and notes are representations of management. Accounting policies
adopted by the Company conform to generally accepted accounting principles
in
the United States of America and have been consistently applied in the
presentation of consolidated financial statements, which are compiled on the
accrual basis of accounting.
(b) Consolidation
The
consolidated financial statements include the accounts of China Architectural
Engineering, Inc. (the Company) and its wholly-owned subsidiaries. Inter-company
transactions have been eliminated in consolidation.
The
Company is the 100% owner of Full Art International Ltd, which owned the four
subsidiaries found in the following table for the entire reporting periods
ended
December 31, 2006, 2005, and 2004.
F-31
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(b)Consolidation
(Cont’d)
Name
of company
Place
of
incorporation
Attributable
equity interest %
Zhuhai
King Glass Engineering Co., Ltd
PRC
100
Zhuhai
King General Glass Engineering Technology Co., Ltd.
PRC
100
King
General Engineering (HK) Ltd.
Hong
Kong
100
KGE
Building System Ltd.
Hong
Kong
100
(c) Use
of estimates
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
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 consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made; however actual results could differ materially
from
those estimates.
(d) Economic
and political risks
The
Company’s operations are conducted in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced
by
the political, economic, and legal environment in the PRC, and by the general
state of the PRC economy.
The
Company’s operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America
and
Western Europe. These include risks associated with, among others, the
political, economic and legal environment and foreign currency exchange. The
Company’s results may be adversely affected by changes in the political and
social conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion, remittances abroad, and rates and methods of taxation, among other
things.
(e) Plant
and equipment
Plant
and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows: -
Motor
vehicle
5
years
Machinery
and equipment
5
-
10 years
Furniture
and office equipment
5
years
The
cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
F-32
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(f) Land
use rights
Land
use
rights are stated at cost less accumulated amortisation. Amortisation is
provided over the respective useful lives, using the straight-line
method.
(g) Accounting
for the impairment of long-lived assets
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
assets may not be recoverable. It is reasonably possible that these assets
could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets.
If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
During
the reporting years, there was no impairment loss.
(h) Inventories
Inventories
are raw materials, which are stated at the lower of weighted average cost or
market value.
Contracts
receivable from performing construction of industrial and commercial buildings
are based on contracted prices. The Company provides an allowance for doubtful
collections, which is based upon a review of outstanding receivables, historical
collection information, and existing economic conditions.
(j) Advances
to suppliers
Advances
to suppliers represent the cash paid in advance for purchasing raw
materials.
(k) Cash
and cash equivalents
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The Company maintains
bank accounts only in the PRC and Hong Kong. The Company does not maintain
any
bank accounts in the United States of America.
(l) Restricted
cash
Restricted
cash represents time deposit accounts to secure notes payable and bank
loans.
F-33
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(m) Revenue
and cost recognition
Revenues
from fixed-price and modified fixed-price construction contracts are recognized
on the percentage-of-completion method, measured by the percentage of time
cost
incurred to date to estimated total cost for each contract.
Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs.
Selling,
general, and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs
and
income and are recognized in the period in which the revisions are determined.
Profit incentives are included in revenues when their realization is reasonably
assured. An amount equal to contract costs attributable to claims is included
in
revenues when realization is probable and the amount can be reliably
estimated.
Total
estimated gross profit on a contract, the difference between total estimated
contract revenue and total estimated contract cost, are determined before the
amount earned on the contract for a period can be determined.
The
measurement of the extent of progress toward completion is used to determine
the
amount of gross profit earned to date, and that the earned revenue to date
is
the sum of the total cost incurred on the contract and the amount of gross
profit earned.
Earned
revenue, cost of earned revenue, and gross profit are determined as
follows:
a.
Earned
Revenue is the amount of gross profit earned on a contract for a
period
plus the costs incurred on the contract during the
period.
b.
Cost
of Earned Revenue is the cost incurred during the period, excluding
the
cost of materials not unique to a contract that have not been used
for the
contract.
c.
Gross
Profit earned on a contract is computed by multiplying the total
estimated
gross profit on the contract by the percentage of completion. The
excess
of that amount over the amount of gross profit reported in prior
periods
is the earned gross profit that should be recognized in the income
statement for the current period.
Change
orders are common for the changes in specifications or design while claims
are
uncommon. Contract revenue and costs are adjusted to reflect change orders
approved by the customer and the contractor regarding both scope and price.
Recognition of amounts of additional contract revenue relating to claims is
appropriate only if it is probable that the claim will result in additional
contract revenue and if the amount can be reliably estimated.
F-34
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(n) Income
taxes
The
Company uses the accrual method of accounting to determine and report its
taxable income and uses the flow through method to account for tax credits,
which are reflected as a reduction of income taxes for the year in which they
are available. The Company has implemented Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes.
Income
tax liabilities computed according to the United States, People’s Republic of
China (PRC) and Hong Kong SAR tax laws are provided for the tax effects of
transactions reported in the financial statements and consists of taxes
currently due plus deferred taxes related primarily to differences between
the
basis of fixed assets and intangible assets for financial and tax reporting.
The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred taxes also are recognized
for
operating losses that are available to offset future income taxes. A valuation
allowance is created to evaluate deferred tax assets if it is more likely than
not that these items will either expire before the Company is able to realize
that tax benefit, or that future realization is uncertain.
In
respect of the Company’s subsidiaries domiciled and operated in China and Hong
Kong, the taxation of these entities can be summarized as follows:
·
Zhuhai
King Glass Engineering Co. Ltd. (Zhuhai KGE) and Zhuhai King General
Glass
Engineering Technology Co. Ltd. are located in the City of Zhuhai
and are
subject to the corporation income tax rate of 33%. However, in accordance
with the relevant tax laws and regulations of PRC, the Zhuhai local
corporation income tax rate is 15%. Zhuhai KGE (HK) is presently
dormant,
and from the time that it has its first profitable tax year, it is
exempt
from corporate income tax for its first two years and is then entitled
to
a 50% tax reduction for the succeeding three years. Zhuhai KGE has
enjoyed
this tax incentive in the previous
years.
·
Full
Art International Limited, King General Engineering (HK) Ltd, and
KGE
Building System Ltd are subject to Hong Kong profits tax rate of
17.5%.
Currently, Full Art has around US$360,000 tax losses carried forward.
KGE
Building System has around US$33,000 tax losses carried forward.
And for
KGE (HK), it does not have any material tax
losses.
The
Company is subject to United States Tax according to Internal Revenue Code
Sections 951 and 957. Corporate income tax is imposed on graduated rates in
the
range of:
Taxable
Income
Rate
Over
But
not over
Of
Amount Over
15%
0
50,000
0
25%
50,000
75,000
50,000
34%
75,000
100,000
75,000
39%
100,000
335,000
100,000
34%
335,000
10,000,000
335,000
35%
10,000,000
15,000,000
10,000,000
38%
15,000,000
18,333,333
15,000,000
35%
18,333,333
-
0
F-35
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(n)Income
Taxes (cont’d)
The
Company, after a reverse-merger on October 17, 2006, revived to be an active
business enterprise because of the operations of its subsidiaries in China
and
Hong Kong. Based on the consolidated net income of 2006, the Company shall
be
taxed at the 34% tax rate. Please refer to Note 13 for provision of United
States and PRC Income Taxes.
(o) Advertising
The
Company expensed all advertising costs as incurred. Advertising expenses
included in selling expenses were $151,821 and $114,731 for the years ended
December 31, 2006 and 2005, respectively.
(p) Research
and development
Research
and development costs are expensed as incurred. Research and development costs
included in general and administrative expenses were $50,117, $58,865, and
$nil
for the years ended December 31, 2006, 2005, and 2004,
respectively.
(q) Retirement
benefits
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred. The retirement expense for the years ended December 31, 2006, 2005,
and 2004, were $118,856, $109,941, and $85,604, respectively.
(r) Foreign
currency translation
The
accompanying consolidated financial statements are presented in United States
dollars. The functional currencies of the Company are the Hong Kong Dollar
(HKD)
and Renminbi (RMB). The consolidated financial statements are translated into
United States dollars from HKD and RMB at year-end exchange rates as to assets
and liabilities and average exchange rates as to revenues and expenses. Capital
accounts are translated at their historical exchange rates when the capital
transactions occurred.
2006
2005
2004
Year
end HKD : US$ exchange rate
7.7794
7.7535
7.7760
Average
yearly HKD : US$ exchange rate
7.7690
7.7779
7.7893
2006
2005
2004
Year
end RMB : US$ exchange rate
7.8175
8.0734
8.2865
Average
yearly RMB : US$ exchange rate
7.9819
8.2033
8.2872
The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$
at
the rates used in translation.
F-36
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONT’D)
(s) Statutory
reserves
Surplus
reserves for foreign investment enterprises are referring to the amount
appropriated from the net income in accordance with laws or regulations, which
can be used to recover losses and increase capital, as approved, and are to
be
used to expand production or operations.
(t) Comprehensive
income
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
all
items that are required to be recognized under current accounting standards
as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other consolidated
financial statements. The Company’s current components of other comprehensive
income are the foreign currency translation adjustment.
(u) Recent
accounting pronouncements
In
May
2005, the FASB issued a SFAS 154, “Accounting Changes and Error Corrections” to
replace APB Opinion No. 20, “Accounting Changes” and SFAS 3, “Reporting
Accounting Changes in Interim Financial Statements” requiring retrospective
application to prior periods consolidated financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the period-specific effects of an accounting change
on one or more individual prior periods presented, SFAS 154 requires the new
accounting principle be applied to the balances of assets and liabilities as
of
the beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening balance
of retained earnings (or other appropriate components of equity or net assets
in
the statement of financial position) for that period rather than being reported
in an income statement. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle to all prior
periods, SFAS 154 requires that the new accounting principle be applied as
if it
were adopted prospectively from the earliest date practicable. The
effective date for this statement is for accounting changes and corrections
of
errors made in fiscal year beginning after December 15, 2005.
The
Company does not anticipate that the adoption of this standard will have a
material impact on these consolidated financial statements.
All
advances from shareholder are unsecured, interest free, and without fixed
repayment terms. Advances from/to employee are related to for business traveling
and sundry purchasing.
5.INVENTORIES
2006
2005
2004
Raw
materials
$
23,108
$
23,389
$
15,023
F-38
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
6.PLANT
AND EQUIPMENT
Plant
and
equipment consist of the following as of December 31:
2006
2005
2004
At
cost
Motor
vehicle
$
453,917
$
453,281
$
442,042
Machinery
and equipment
1,417,256
1,326,559
1,227,552
Furniture
and office
Equipment
669,480
605,297
410,914
$
2,540,653
$
2,385,137
$
2,080,478
Less:
Accumulated
depreciation
Motor
vehicle
$
401,862
$
338,663
$
250,279
Machinery
and equipment
1,190,795
1,141,698
1,130,467
Furniture
and office
Equipment
473,498
297,104
195,927
$
2,066,155
$
1,777,465
$
1,576,673
$
474,498
$
607,672
$
503,805
Depreciation
expenses included in the selling and administrative expenses for the years
ended
2006, 2005 and 2004 were $222,424, $159,641 and $144,305,
respectively.
7.LAND
USE RIGHTS
2005
2005
2004
Cost
of land use rights
$
-
$
-
$
696,654
Less:
Accumulated amortization
-
-
(13,933
)
Land
use rights, net
$
-
$
-
$
682,721
Amortization
expenses included in selling and administrative expenses for the years ended
2006, 2005, and 2004 were nil, nil, and $13,948, respectively.
The
entire land use right was disposed of during the year ended December 31, 2005.
Gain in disposal, included in other income for the year ended December 31,2005
amounted to $15,248.
F-39
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
8.SHORT-TERM
BANK LOANS
2006
2005
2004
Loan
from China Ever Bright Bank, interest rate at
All
of
the short-term bank loans due in 2006 and in 2005 were paid on their due dates.
Interest expense was nil, $116,750 and $260,271 in 2006, 2005, and 2004,
respectively. The principal amounts of the short-term bank loans are paid at
the
due dates.
The
Company obtained a line of credit facility up to a maximum of RMB 20,000,000,
which does not need to renew until October 25, 2011.
Interest
expense was $18,678 for 2006.
11.COMMON
STOCK AND ADDITIONAL PAID IN CAPITAL
As
a
result of the reverse-merger on October 17, 2006 involving an exchange of shares
between China Architectural Engineering, Inc. and its subsidiaries led by Full
Art International Limited as well as issuance of shares to entities involved
in
the deal, total capitalization of the Company by common stock and related
additional paid-in capital at December 31, 2006 is depicted in the following
table: -
Increase
to Additional Paid in Capital from Reverse Acquistion Transaction
reflecting Cash held by SRKP 1, Inc.
5,722
50,000,000
50,000
$
7,074,701
100.00
%
43,304
100.00
%
On
March12, 2007, the Company filed a registration statement with the SEC to register
300,000 shares of Common Stock at a price between US$3.00 and US$4.00 per
share.
The
unbilled contract revenue earned represents those revenue that should be
recognized according to the percentage of completion method for accounting
for
construction contract because the Company is entitled to receive payment from
the customers for the amount of work that has been rendered to and completed
for
that customer according to the terms and progress being made as stipulated
under
that contract between the Company and that customer. As an industrial practice,
there are certain procedures that needs to be performed, such as project account
finalization, by both the customer and the Company before the final billing
is
issued; however this does not affect the Company’s recognition of revenue and
respective cost according to the terms of the contract with the consistent
application of the percentage-of-completion method.
13.NON-RECURRING
GENERAL AND ADMINISTRATIVE EXPENSE
These
expenses are related to the following service providers that rendered valuable
services to the Company in consummating the reverse-merger plan:
(1)
First
Alliance Financial Group for consulting services by issuance of 2,000,000
shares at $1.60 per share
$
3,200,000
(2)
Brokers
to sell 2,320,875 shares to investors by private placement at $ 1.60
per
share, compensated by cash
445,608
(3)
Investors
Relations Firm for investor relationship services by issuance of
100,000
shares at $ 1.60 per share
160,000
$
3,805,608
F-42
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
14.OTHER
INCOME
2006
2005
2004
Net
exchange gains
2,209
1,501
-
Interest
income
25,347
20,732
63,108
Profit
on disposal of land use rights
-
15,248
-
Tax
refund from reinvestment of earnings in a subsidiary
-
-
136,090
$
27,556
$
37,481
$
199,198
15.INCOME
TAXES
The
following table accounts for the differences between the actual tax provision
and the amounts obtained by applying the relevant applicable corporation income
tax rate to income before tax for the year ended December 31, 2006 and
2005:
2006
2005
2004
Income
before tax
$
7,467,989
$
7,067,549
$
2,700,258
Tax
at the domestic income tax rate
$
2,464,436
$
2,332,291
$
891,085
Effect
of government grants
(1,146,215
)
(1,175,020
)
(400,128
)
Current
income tax expense for PRC
$
1,318,221
$
1,157,271
$
490,957
Hong
Kong income tax provision
-
-
-
U.S.
income tax provision
-
-
-
$
1,318,221
$
1,157,271
$
490,957
F-43
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Stated
in US Dollars)
16.COMMITMENTS
The
Company leases certain administrative and production facilities from third
parties. Accordingly, for the year ended December 31, 2006, 2005 and 2004,
the
Company incurred rental expenses of $385,386, $411,468, and $399,053
respectively.
The
Company has commitments with respect to non-cancelable operating leases for
these offices, as follows:
Commitments
Due
2006
2005
2004
Less
than 1 year
$
282,795
$
384,985
$
243,860
Between
1 and 3 years
300,026
2,406,586
53,571
Greater
than 3 years
-
72,527
-
$
582,821
$
2,864,098
$
297,431
17.RELATED
PARTIES TRANSACTIONS
The
following material transactions with related parties during the years were
in
the opinion of the directors, carried out in the ordinary course of business
and
on normal commercial terms:
The
advances to/(from) Luo Yi, the director for the years ended December 31, 2006,
2005, and 2004 were nil, nil, and $1,889,091, respectively.
The
advances from KGE Group Limited, the holding company for the years ended
December 31, 2006, 2005, and 2004 were $1,735, $420,556, $205,095 respectively.
All
of
the above amounts due with a director and the holding company are unsecured,
interest free, and have no fixed repayment terms.
F-44
Above:
Shenzhen International Airport, one of the Company’s projects.
Above:
National Grand Theater in Beijing, one of the Company’s
projects.
Above:
National Grand Theater in Beijing, one of the Company’s projects while under
construction.
600,000 Shares
of Common Stock
CHINA
ARCHITECTURAL ENGINEERING, INC.
PROSPECTUS
WestPark
Capital, Inc.
Until ,
2007, all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is
in addition to the dealers’ obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
_________,
2007
[RESALE
PROSPECTUS ALTERNATE PAGE]
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission becomes effective. This prospectus is not an offer
to
sell these securities and we are not soliciting offers to buy these securities
in any state where the offer or sale is not
permitted.
This
prospectus relates to the resale by the selling stockholders of up to 3,965,638
shares of our common stock. The selling stockholders may sell common stock
from
time to time in the principal market on which the stock is traded at the
prevailing market price or in negotiated transactions. We will not receive
any
proceeds from the sales by the selling stockholders, but we will receive funds
from the exercise of warrants held by selling stockholders, if exercised. Three
selling stockholders listed herein acquired their shares, an aggregate of
1,312,675 shares, while we were a “blank check” shell company and therefore are
deemed to be underwriters under the Securities Act of 1933. Rule 144 is
unavailable for resale transactions for these 1,312,675 shares. The other
selling stockholders named herein may be deemed underwriters of the shares
of
common stock which they are offering.
Our
shares of common stock are not currently listed or quoted for trading on any
national securities exchange or national quotation system. We have applied
for
listing of our common stock on the American Stock Exchange. We propose to obtain
the trading symbol “RCH.”
Once,
and
if, our shares of common stock are quoted on the American Stock Exchange and
there is an established market for these shares, the selling shareholders may
sell the shares from time to time at market price prevailing on the American
Stock Exchange at the time of offer and sale, or at prices related to such
prevailing market prices or in negotiated transactions or a combination of
such
methods of sale directly or through brokers.
The
purchase of the securities involves ahigh
degree of risk. See section entitled “Risk Factors” beginning on page
8.
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in 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 Is: ____________________, 2007
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
26
ACCOUNTING
OF THE SHARE EXCHANGE
27
SELECTED
CONSOLIDATED FINANCIAL DATA
28
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
29
DESCRIPTION
OF BUSINESS
43
MANAGEMENT
54
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
62
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
62
DESCRIPTION
OF SECURITIES
64
SELLING
STOCKHOLDERS
67A
SHARES
ELIGIBLE FOR FUTURE SALE
68
PLAN
OF DISTRIBUTION
71
LEGAL
MATTERS
73
EXPERTS
73
ADDITIONAL
INFORMATION
73
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS
II-1
SIGNATURES
II-9
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have not
authorized any other person to provide you with different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, these
securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date on the
front cover, but the information may have changed since that
date.
i
[RESALE
PROSPECTUS ALTERNATE PAGE]
The
Offering
Common
stock offered by selling stockholders
3,965,638
shares(1)
Common
stock outstanding
50,000,000
shares(2)
Use
of proceeds
We
will not receive any proceeds from the sale of the common stock by
the
selling stockholders, except for funds from the exercise of warrants
by
the selling stockholders, if and when
exercised.
(1)
Consists
of 3,733,550 shares of our common stock that were issued to the selling
stockholders and 232,088 shares of our common stock issuable upon
the
exercise of warrants that were issued to the selling
stockholders.
(2)
The
number of shares of our common stock outstanding as of August15, 2007,
excludes (i) 232,088 shares of our common stock issuable upon exercise
of
outstanding warrants, (ii) 4,761,905 shares of our common stock issuable
upon the conversion of the Bonds, subject to adjustment, (iii) 800,000
shares of our common stock issuable upon the exercise of the Bond
Warrants, subject to adjustment, and (iv) up to 600,000 shares of
our
common stock (excluding an underwriters’ option to purchase an additional
90,000 shares to cover over-allotments) to be offered by us in a
firm
commitment public offering concurrently
herewith.
Selling
stockholders holding an aggregate of 2,320,875 shares of common stock have
agreed not to sell any of these shares until our common stock begins to be
traded on the New York Stock Exchange, American Stock Exchange, NASDAQ Global
Market, NASDAQ Capital Market or the OTC Bulletin Board, after which their
shares will automatically be released from the lock up every 30 days pro rata
over a nine month period beginning on the date that is 30 days trading
begins.
5
[RESALE
PROSPECTUS ALTERNATE PAGE]
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale of the shares of common stock by the
selling stockholders, except for funds received from the exercise of warrants
held by certain of the selling stockholders, if and when exercised.
DIVIDEND
POLICY
We
do not
expect to declare or pay any cash dividends on our common stock in the
foreseeable future, and we currently intend to retain future earnings, if any,
to finance the expansion of our business. The decision whether to pay cash
dividends on our common stock will be made by our board of directors, in their
discretion, and will depend on our financial condition, operating results,
capital requirements and other factors that the board of directors considers
significant.
We
did
not pay cash dividends during the three months ended June 30, 2007. We paid
cash
dividends of $1,576,796, $2,571,396, and $4,108,226 during the years ended
December 31, 2006, 2005, and 2004, respectively.
24
[RESALE
PROSPECTUS ALTERNATE PAGE]
SELLING
STOCKHOLDERS
The
following table provides as of the date of this prospectus information regarding
the beneficial ownership of our common stock held by each of the selling
stockholders, including:
·
the
number of shares owned by each stockholder prior to this offering;
·
the
percentage owned by each stockholder prior to completion of the offering;
·
the
total number of shares that are to be offered for each stockholder;
·
the
total number of shares that will be owned by each stockholder upon
completion of the offering; and
·
the
percentage owned by each stockholder upon completion of the offering.
On
October 17, 2006, concurrently with the close of the Share Exchange, we received
gross proceeds of $3,713,400 in a private placement transaction (the “Private
Placement”). Pursuant to subscription agreements entered into with the
investors, we sold an aggregate of 2,320,875 shares of common stock at $1.60
per
share. We agreed to file a registration statement covering the common stock
sold
in the private placement within 30 days of the closing of the Share Exchange
pursuant to the subscription agreement with each investor. The investors in
the
Private Placement also entered into a lock up agreement pursuant to which they
agreed not to sell their shares until our common stock begins to be traded
on
the New York Stock Exchange, American Stock Exchange, NASDAQ Global Market,
NASDAQ Capital Market or the OTC Bulletin Board, after which their shares will
automatically be released from the lock up every 30 days pro rata over a nine
month period beginning on the date that is 30 days after commencement of trading
of the shares. The 2,320,875 shares are being registered under this prospectus.
In
addition, at
the
closing of the Share Exchange, we issued 100,000 shares of our common stock
and
a five-year warrant to purchase 232,088 shares of our common stock at a per
share exercise price of $1.60 for investor relations services (the “IR
Securities”). We agreed to register the IR Securities, and the IR Securities are
listed in the selling stockholder table below.
Furthermore,
pursuant to the terms of the Share Exchange, we
agreed
to register a total of 2,275,000 shares of common stock held by our shareholders
who were shareholders immediately prior to the Share Exchange. Of these
2,275,000 shares held by our shareholders, 1,312,675 shares would be covered
by
the resale registration statement filed in connection with the Private Placement
and 962,325
shares
that are held by affiliates of Westpark Capital, Inc. (“WestPark”) are to be
included in a subsequent registration statement filed by us within ten days
after the end of the six month period that immediately follows the date on
which
we file the registration statement to register the shares issued in the Private
Placement. The 1,312,675 shares are being registered under this
prospectus.
67A
[RESALE
PROSPECTUS ALTERNATE PAGE]
Name
of Selling Shareholder
Number
of Shares
of
Common Stock Beneficially Owned Prior to Offering
Percentage
of Shares of Common Stock Beneficially Owned Prior to the Offering
(1)
Number
of Shares of Common Stock Registered for Sale
Hereby
Number
of Shares of Common stock Beneficially Owned After Completion of
the
Offering (2)
Percentage
of Shares of Common Stock Beneficially Owned After Completion of
the
Offering (2)
Debbie
Schwartzberg
962,325
(3)
1.9
%
962,325
—
—
MidSouth
Investor Fund LP
375,000
(4)
*
375,000
—
—
Public
Equity Group, Inc.
332,088
(5)
*
332,088
—
—
Vision
Opportunity Master Fund, Ltd.
250,000
(6)
*
250,000
—
—
Glenn
Krinsky
227,500
(7)
*
227,500
—
—
Fredric
Colman
187,500
*
187,500
—
—
Lake
Street Fund, L.P.
187,500
(8)
*
187,500
—
—
SDS
Capital Group SPC, Ltd.
156,250
(9)
*
156,250
—
—
J&N
Invest, LLC
125,000
(10)
*
125,000
—
—
Charles
Frisco
122,850
(11)
*
122,850
—
—
Mark
Nielsen
81,250
*
81,250
—
—
Linda
Rosenberg
62,500
*
62,500
—
—
F
Berdon Co., LP
50,000
(12)
*
50,000
—
—
Nutmeg
Group
46,875
(13)
*
46,875
—
—
Paul
Masters IRA
31,500
(14)
*
31,500
—
—
Kathleen
Datys
31,250
*
31,250
—
—
Kagel
Family Trust
31,250
(15)
*
31,250
—
—
Victor
A. Voebel Jr.
31,250
*
31,250
—
—
Robin
Smith
31,250
*
31,250
—
—
Freeman,
Israel & Marilyn
31,250
*
31,250
—
—
David
H. Clarke
31,250
*
31,250
—
—
Arthur
Berrick & Sharon Berrick
31,250
31,250
—
—
Brent
Duane Butcher
25,000
*
25,000
—
—
David
E. and Marlan L. Fass
23,438
*
23,438
—
—
Alvin
S. Michaelson, Esq. Professional Corporate Retirement
Trust
20,000
(16)
*
20,000
—
—
Michael
Ira Glantz
18,750
*
18,750
—
—
David
L. Boyer
18,750
*
18,750
—
—
Richard
Pawlinger
18,750
*
18,750
—
—
William
& Ann Collins
18,125
*
18,125
—
—
Felicia
Grossman
15,625
*
15,625
—
—
Hanka
Lew
15,625
*
15,625
—
—
Phillip
Brill
15,625
*
15,625
—
—
George
Glenn Izmirian
15,625
*
15,625
—
—
Aaron
& Cindy Dobrinsky
15,625
*
15,625
—
—
Dennis
Holman
15,625
*
15,625
—
—
Gilbert
Raker
15,625
*
15,625
—
—
Michael
Nimaroff
15,625
*
15,625
—
—
Cherner
Irrevocable Trust
15,625
(17)
*
15,625
—
—
Bernard
Mermelstein
15,625
*
15,625
—
—
John
Konior
15,625
*
15,625
—
—
David
Weinberg
15,625
*
15,625
—
—
Joseph
& Gino Tedesco
15,625
*
15,625
—
—
William
& Rita Lurie JTWROS
15,625
*
15,625
—
—
David
Sinclair
15,625
*
15,625
—
—
Jeffrey
Schnapper
15,625
*
15,625
—
—
Solomon
Blisko
15,000
*
15,000
—
—
Richard
& Donna Hoefer
13,750
*
13,750
—
—
Tim
McCartney
12,500
*
12,500
—
—
David
C. Katz
12,500
*
12,500
—
—
Marvin
Rosenblatt
12,000
*
12,000
—
—
John
W. Hardy
10,000
*
10,000
—
—
John
W. Lahr
10,000
*
10,000
—
—
Jerry
Nathan Reiff
9,375
*
9,375
—
—
Scott
F. Jasper
9,375
*
9,375
—
—
Darryl
James Tyson
9,000
*
9,000
—
—
Steven
N. Collins
7,813
*
7,813
—
—
Armin
H. Gerhardt III
7,813
*
7,813
—
—
Francis
Elenio
7,813
*
7,813
—
—
William
Sheppard
7,810
*
7,810
—
—
Bel
Air LLC/Steve Fischer
7,813
(18)
*
7,813
—
—
Allan
Berry
3,375
*
3,375
—
—
*
Indicates
less than 1.0%.
67B
[RESALE
PROSPECTUS ALTERNATE PAGE]
(1)
Based
on 50,000,000 shares of common stock outstanding as of the date of
this
prospectus. The number of shares of our common stock outstanding
excludes
(i) 232,088 shares of our common stock issuable upon exercise of
outstanding warrants, (ii) 4,761,905 shares of our common stock issuable
upon conversion of the Bonds, subject to adjustment, (iii) 800,000
shares
of common stock issuable upon exercise of the Bond Warrants, subject
to
adjustment, and (iv) up to 600,000 shares of our common stock to
be
offered by us in a firm commitment public offering concurrently herewith
(excluding underwriters’ overallotment of 90,000 shares of common
stock).
(2)
Represents
the amount of shares that will be held by the selling stockholders
after
completion of this offering based on the assumption that all shares
registered for sale hereby will be sold. However, the selling stockholders
may offer all, some or none of the shares pursuant to this prospectus,
and
to our knowledge there are currently no agreements, arrangements
or
understanding with respect to the sale of any of the shares that
may be
held by the selling stockholders after completion of this
offering.
(3)
This
shareholder is considered to be a promoter or affiliate with respect
to
the shares being registered because the shares were issued shares
to this
shareholder while we were a “blank check” shell company with no
operations. These shares may not be sold pursuant to Rule 144 of
the
Securities Act, regardless of technical compliance with the
rule.
(4)
Lyman
O. Heidtke, as general partner, has voting and investment control
over the
shares owned by this entity.
(5)
Includes
100,000 shares of common stock underlying warrants that are currently
exercisable. Brad Stewart has voting and investment control over
the
shares owned by this entity.
(6)
Adam
Benowitz, as director, has voting and investment control over the
shares
owned by this entity
(7)
This
shareholder is considered to be a promoter or affiliate with respect
to
the shares being registered because the shares were issued shares
to this
shareholder while we were a “blank check” shell company with no
operations. These shares may not be sold pursuant to Rule 144 of
the
Securities Act, regardless of technical compliance with the
rule.
(8)
Scott
W. Hood, as managing director, has voting and investment control
over the
shares owned by this entity
67C
[RESALE
PROSPECTUS ALTERNATE PAGE]
(9)
Steve
Derby, as director and chief investment officer, has voting and investment
control over the shares owned by this
entity
(10)
Jeffrey
Rubin, as manager, has voting and investment control over the shares
owned
by this entity.
(11)
This
shareholder is considered to be a promoter or affiliate with respect
to
the shares being registered because the shares were issued shares
to this
shareholder while we were a “blank check” shell company with no
operations. These shares may not be sold pursuant to Rule 144 of
the
Securities Act, regardless of technical compliance with the
rule.
(12)
Frederick
Berdon, as general partner, has voting and investment control over
the
shares owned by this entity.
(13)
Randall
S. Goulding, as manager, has voting and investment control over the
shares
owned by this entity.
(14)
Paul
Masters has voting and investment control over these
shares.
(15)
David
L. Kagel and Ina P. Kagel, as trustees, have voting and investment
control
over the shares owned by this
entity.
(16)
Alvin
S. Michaelson has voting and investment control over the shares owned
by
this entity.
(17)
Steven
Cherner, as trustee, has voting and investment control over the shares
owned by this entity.
(18)
Steven
E. Fisher, as manager, has voting and investment control over the
shares
owned by this entity.
Except
as
described below and in this Selling Stockholders section, none of the selling
stockholders, to our knowledge, has had a material relationship with our company
other than as a shareholder at any time within the past three
years:
·
Debbie
Schwartzberg is a noteholder of the parent company of WestPark Capital,
Inc., which entitles her to a 1.5% interest in the net profits of
the
parent company of WestPark Capital, Inc. Some of the controlling
shareholders and control persons of WestPark Capital, Inc. were also,
prior to the completion of the Share Exchange, controlling shareholders
and control persons of our company, including Richard Rappaport,
who is
the Chief Executive Officer of WestPark and was the President and
a
significant shareholder of our company prior to the Share Exchange,
and
Anthony C. Pintsopoulos, who is the Chief Financial Officer of Westpark
and was a controlling stockholder and an officer and director of
our
company prior to the Share Exchange. Each of Messrs. Rappaport and
Pintsopoulos resigned from all of their executive and director positions
with our company upon the closing of the Share Exchange.
·
Glenn
Krinsky served as our Chief Financial Officer, Corporate Secretary
and as
a member of the Board of Directors from our inception (March 16,2004)
through August 16, 2006.
67D
[RESALE
PROSPECTUS ALTERNATE PAGE]
PLAN
OF DISTRIBUTION
The
selling stockholders of our common stock and any of their pledgees, assignees
and successors-in-interest may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be
at
fixed or negotiated prices. The selling stockholders may use any one or more
of
the following methods when selling shares:
• ordinary
brokerage transactions and transactions in which the broker-dealer solicits
purchasers;
• block
trades in which the broker-dealer will attempt to sell the shares as agent
but
may position and resell a portion of the block as principal to facilitate the
transaction;
• purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
• an
exchange distribution in accordance with the rules of the applicable
exchange;
• privately
negotiated transactions;
• settlement
of short sales entered into after the date of this prospectus;
• broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per share;
• a
combination of any such methods of sale;
• through
the writing or settlement of options or other hedging transactions, whether
through an options exchange or otherwise; or
• any
other
method permitted pursuant to applicable law.
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended (the “Securities Act”), if available, rather than under
this prospectus.
Debbie
Schwartzberg, Glenn Krinsky and Charles Frisco received their shares registered
by this prospectus while we were a “blank check” shell company with no
operations and are considered to be promoters or affiliates with respect to
the
shares, an aggregate of 1,312,675 shares of common stock. These shares may
not
be sold by these promoters or affiliates, or their transferees, pursuant to
Rule
144 of the Securities Act, regardless of technical compliance with the rule.
Any
such resale transaction under Rule 144 would appear to be designed to distribute
or redistribute such shares to the public without coming within the registration
requirements of the Securities Act. Therefore, these promoters or affiliates,
or
their transferees, can only resell these shares through a registration statement
filed under the Securities Act.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. Each
selling stockholder does not expect these commissions and discounts relating
to
its sales of shares to exceed what is customary in the types of transactions
involved. The maximum commission or discount to be received by any NASD member
or independent broker-dealer, however, will not be greater than eight (8)
percent for the sale of any securities being registered hereunder pursuant
to
Rule 415 of the Securities Act.
WestPark
Capital, Inc., underwriter of up to 600,000 shares of our common stock
(excluding an underwriters’ option to purchase an additional 90,000 shares to
cover over-allotments) to be offered by us in a firm commitment public offering
concurrently herewith, may dispose of shares on behalf of its account holders
who are also selling stockholders. The maximum commission or discount to
be
received by WestPark Capital will not be greater than five (5) percent for
the
sale of any securities being registered hereunder.
71
[RESALE
PROSPECTUS ALTERNATE PAGE]
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each selling stockholder has informed us
that it does not have any agreement or understanding, directly or indirectly,
with any person to distribute the common stock.
We
are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
selling stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act may be
sold
under Rule 144 rather than under this prospectus. Each selling stockholder
has
advised us that they have not entered into any agreements, understandings or
arrangements with any underwriter or broker-dealer regarding the sale of the
resale shares. There is no underwriter or coordinating broker acting in
connection with the proposed sale of the resale shares by the selling
stockholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares may be resold by the selling stockholders without registration and
without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to the prospectus or Rule 144 under the Securities
Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not
be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged
in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to our common stock for a period of two business
days prior to the commencement of the distribution. In addition, the selling
stockholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including Regulation M, which may limit
the timing of purchases and sales of shares of our common stock by the selling
stockholders or any other person. We will make copies of this prospectus
available to the selling stockholders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time
of
the sale.
72
[RESALE
PROSPECTUS ALTERNATE PAGE]
LEGAL
MATTERS
The
validity of the common stock offered by this prospectus will be passed upon
for
us by Kirkpatrick & Lockhart Preston Gates Ellis LLP, Los Angeles,
California.
EXPERTS
Our
consolidated financial statements as of December 31, 2006, 2005, and 2004 and
for the years ended December 31, 2006, 2005, and 2004 appearing in this
Prospectus and Registration Statement have been audited by Samuel H. Wong &
Co., LLP, Certified Public Accountants, an independent registered public
accounting firm, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority
of
such firm as experts in accounting and auditing.
ADDITIONAL
INFORMATION
We
filed
with the Securities and Exchange Commission a registration statement under
the
Securities Act of 1933, as amended, for the shares of common stock in this
offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to us and our
common stock, we refer you to the registration statement and the exhibits and
schedule that were filed with the registration statement. Statements contained
in this prospectus about the contents of any contract or any other document
that
is filed as an exhibit to the registration statement are not necessarily
complete, and we refer you to the full text of the contract or other document
filed as an exhibit to the registration statement. A copy of the registration
statement and the exhibits and schedules that were filed with the registration
statement may be inspected without charge at the Public Reference Room
maintained by the Securities and Exchange Commission at 100 F Street, N.E.
Washington, DC 20549, and copies of all or any part of the registration
statement may be obtained from the Securities and Exchange Commission upon
payment of the prescribed fee. Information regarding the operation of the Public
Reference Room may be obtained by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission maintains a web site
that contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the SEC. The address of
the
website is www.sec.gov.
We
file
periodic reports under the Securities Exchange Act of 1934, including annual,
quarterly and special reports, and other information with the Securities and
Exchange Commission. These periodic reports, and other information are available
for inspection and copying at the regional offices, public reference facilities
and website of the Securities and Exchange Commission referred to
above.
73
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
24. Indemnification of directors and officers
Under
Section 145 of the General Corporation Law of the State of Delaware, the Company
can indemnify its directors and officers against liabilities they may incur
in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the “Securities Act”). The Company’s certificate of incorporation
provides that, pursuant to Delaware law, its directors shall not be liable
for
monetary damages for breach of the directors’ fiduciary duty of care to the
Company and its stockholders. This provision in the certificate of incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director’s duty of loyalty to the Company
or its stockholders, for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of the law, for actions leading
to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision also does not affect a director’s responsibilities under any
other law, such as the federal securities laws or state or federal environmental
laws.
The
Company’s bylaws provide for the indemnification of its directors to the fullest
extent permitted by the Delaware General Corporation Law. The Company’s bylaws
further provide that its Board of Directors has discretion to indemnify its
officers and other employees. The Company is required to advance, prior to
the
final disposition of any proceeding, promptly on request, all expenses incurred
by any director or executive officer in connection with that proceeding on
receipt of an undertaking by or on behalf of that director or executive officer
to repay those amounts if it should be determined ultimately that he or she
is
not entitled to be indemnified under the Company’s bylaws or otherwise. The
Company is not, however, required to advance any expenses in connection with
any
proceeding if a determination is reasonably and promptly made by its Board
of
Directors by a majority vote of a quorum of disinterested Board members that
(a)
the party seeking an advance acted in bad faith or deliberately breached his
or
her duty to the Company or its stockholders and (b) as a result of such actions
by the party seeking an advance, it is more likely than not that it will
ultimately be determined that such party is not entitled to indemnification
pursuant to the applicable sections of its bylaws.
The
Company has been advised that in the opinion of the Securities and Exchange
Commission, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to the Company’s directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, such
indemnification is against public policy as expressed in the Securities Act
and
is therefore unenforceable. In the event a claim for indemnification against
such liabilities (other than the Company’s payment of expenses incurred or paid
by its director, officer or controlling person in the successful defense of
any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by the Company is against public policy as expressed in
the
Securities Act and will be governed by the final adjudication of such
issue.
The
Company will enter into indemnification agreements with each of its directors
and officers that are, in some cases, broader than the specific indemnification
provisions permitted by Delaware law, and that may provide additional procedural
protection. The indemnification agreements require the Company, among other
things, to:
•
indemnify
officers and directors against certain liabilities that may arise
because
of their status as officers or
directors;
•
advance
expenses, as incurred, to officers and directors in connection with
a
legal proceeding, subject to limited exceptions;
or
•
obtain
directors’ and officers’ insurance.
II-1
At
present, there is no pending litigation or proceeding involving any of the
Company’s directors, officers or employees in which indemnification is sought,
nor is the Company aware of any threatened litigation that may result in claims
for indemnification.
Item
25. Other expenses of issuance and distribution
The
following table sets forth the costs and expenses, other than underwriting
discounts and commissions, if any, payable by the Registrant relating to the
sale of common stock being registered. All amounts are estimates other than
the
Commission’s registration fee and NASD filing fee.
Securities
and Exchange Commission registration fee
$
1,865
NASD
Filing Fee
2,026
American
Stock Exchange Listing Fee
70,000
Transfer
Agent Fees
2,000
Blue
Sky Fees and Expenses
2,000
Accounting
fees and expenses
40,000
Legal
fees and expenses
60,000
Miscellaneous
15,000
Total
$
192,891
Item
26. Recent sales of unregistered securities
On
October 17, 2006, pursuant to the terms of the Exchange Agreement entered into
by and between the Company, Full Art International, Ltd. (“Full Art”) and the
sole shareholder of Full Art, the Company issued 45,304,125 shares of common
stock to the shareholder, which is KGE Group, Limited, and its designees in
exchange for all of the issued and outstanding securities of Full Art. The
securities were offered and issued to KGE Group and its designees in reliance
upon exemptions from registration pursuant to Section 4(2) under the Securities
Act of 1933, as amended, and Rule 506 promulgated thereunder. Each of KGE Group
and its designees qualified as an accredited investor (as defined by Rule 501
under the Securities Act of 1933, as amended).
On
October 17, 2006, immediately following the closing of the Share Exchange,
the
Company received gross proceeds of $3,713,400 in a private placement transaction
(the “Private Placement”). Pursuant to subscription agreements entered into with
the investors, the Company sold an aggregate of 2,320,875 shares of its common
stock at a price of $1.60 per share. The Company agreed to file a registration
statement covering the common stock sold in the private placement within 30
days
of the closing of the Share Exchange pursuant to the subscription agreement
with
each investor. The securities were offered and sold to investors in reliance
upon exemptions from registration pursuant to Section 4(2) under the Securities
Act of 1933, as amended, and Rule 506 promulgated thereunder. Each of the
persons and/or entities receiving the Company’s securities qualified as an
accredited investor (as defined by Rule 501 under the Securities Act of 1933,
as
amended).
On
October 17, 2006, at the closing of the Share Exchange, the Company issued
to an
investor relations firm 100,000 shares of its common stock and a five-year
warrant to purchase 232,088 shares of the Company’s common stock at a per share
exercise price of $1.60 for investor relations services (the “IR Securities”).
The securities were offered and sold to investor relations firm in reliance
upon
exemptions from registration pursuant to Section 4(2) under the Securities
Act
of 1933, as amended, and Rule 506 promulgated thereunder. The investor relations
firm qualified as an accredited investor (as defined by Rule 501 under the
Securities Act of 1933, as amended).
On
April12, 2007, we completed a financing transaction with ABN AMRO Bank N.V. (the
“Subscriber”) under Regulation S of the Securities Act of 1933, as amended (the
“Securities Act”) and issued (i) $10,000,000 Variable Rate Convertible Bonds due
in 2012 (the “Bonds”) and (ii) 800,000 warrants to purchase an aggregate of
800,000 shares of our common stock, subject to adjustments for stock splits
or
reorganizations as set forth in the warrant, that expire in 2010 (the “Bond
Warrants”). The Bonds and Bond Warrants were offered and sold to the Subscriber
in reliance upon exemption from registration pursuant to Regulation S of the
Securities Act. We complied with the conditions of Rule 903 as promulgated
under
the Securities Act including, but not limited to, the following: (i) Subscriber
is a non-U.S. resident and has not offered or sold their shares in accordance
with the provisions of Regulation S; (ii) an appropriate legend was affixed
to
the securities issued in accordance with Regulation S; (iii) Subscriber has
represented that it was not acquiring the securities for the account or benefit
of a U.S. person; and (iv) Subscriber agreed to resell the securities only
in
accordance with the provisions of Regulation S, pursuant to a registration
statement under the Securities Act, or pursuant to an available exemption from
registration. We will refuse to register any transfer of the shares not made
in
accordance with Regulation S, after registration, or under an
exemption.
Share
Exchange Agreement, dated as of August 21, 2006, by and among the
Registrant, KGE Group, Limited, and Full Art International, Ltd.
(incorporated by reference from Exhibit 2.1 to the Current Report
on Form
8-K filed with the Securities and Exchange Commission on October20,2006).
2.1(a)
Amendment
No. 1 to the Share Exchange Agreement, dated as of October 17,2006, by
and among the Registrant, KGE Group, Limited, and Full Art International,
Ltd. (incorporated by reference from Exhibit 2.1(a) to the Current
Report
on Form 8-K filed with the Securities and Exchange Commission on
October20, 2006).
3.1
Certificate
of Incorporation of China Architectural Engineering, Inc. (incorporated
by
reference from Exhibit 3.1 to Registration Statement on Form SB-2
filed
with the Securities and Exchange Commission on April 20,2004).
Articles
of Merger Effecting Name Change (incorporated by reference from
Exhibit
3.3 to the Current Report on Form 8-K filed with the Securities
and
Exchange Commission on October 20, 2006).
Amended
and Restated Trust Deed, originally dated April 12, 2007, amended and
restated August 29, 2007 by
and between the Registrant and The Bank of New York, London Branch
(incorporated
by reference to Exhibit 4.1 of the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on September4,2007).
4.5
Paying
and Conversion Agency Agreement, dated April 12, 2007, by and among
the
Registrant, The Bank of New York, and The Bank of New York, London
Branch
(incorporated by reference to Exhibit 4.2 to
the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
April 18, 2007).
4.6
The
Warrant Instrument, dated April 12, 2007, by and between the Registrant
and ABN AMRO Bank N.V. (incorporated
by reference to Exhibit 4.3 to
the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
April 18, 2007).
4.7
Warrant
Agency Agreement, dated April 12, 2007 among Company, The Bank
of New York
and The Bank of New York, London Branch (incorporated by reference
to
Exhibit 4.4 to
the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
April 18, 2007).
4.8
Registration
Rights Agreement, dated April 12, 2007, by and between the Registrant
and
ABN AMRO Bank N.V. (incorporated
by reference to Exhibit 4.5 to
the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
April 18, 2007).
4.8(a)
Written
description
of oral agreement between the Registrant and ABN AMRO Bank
N.V.
5.1
Opinion
of Kirkpatrick & Lockhart Preston Gates Ellis
LLP
Employment
Agreement by and between the Registrant and Ye Ning (translated to
English) (incorporated by reference from Exhibit 10.5 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
October 20, 2006).
Office
and Factory Lease Agreement dated July 13, 2005 by and between the
Registrant and Zhuhai Yuping Kitchen Equipment Co., Ltd. (translated
to
English).
10.12**
Lease
Agreement by and between the Registrant and Beijing Aoxingyabo Technology
Development Co., Ltd (translated to English).
10.13**
Property
Rental Contract by and between the Registrant and Shanghai Sandi
CNC
equipment Ltd. Co (translated to English).
Joint
Venture Agreement dated May 11, 2007 entered into by and between
CPD
(Australia) Holding Pty Ltd. and the Registrant (incorporated by
reference
to Exhibit 10.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 15,2007).
10.16**
Form
of Registration Rights Agreement entered into by and between the
Registrant, First Alliance Financial Group, Inc. and WestPark Capital,
Inc. Affiliates.
10.16(a)**
Form
of Waiver of Penalties Related to Registration Rights entered into
by and
between the Registrant, First Alliance Financial Group, Inc. and
WestPark
Capital, Inc. Affiliates.
10.16(b)
Written
description of oral agreement between the Registrant, First
Alliance
Financial Group, Inc., and WestPark Capital, Inc.
Affiliates
10.17
China
Architectural Engineering, Inc. 2007 Equity Incentive Plan (incorporated
by reference from Exhibit 10.1 to the Current Report on Form 8-K
filed
with the Securities and Exchange Commission on July 12,2007).
10.18
Form
of Notice of Grant of Stock Option of the Registrant (incorporated
by
reference from Exhibit 10.2 to the Current Report on Form 8-K filed
with
the Securities and Exchange Commission on July 12,2007).
10.19
Form
of Stock Option Agreement (including Addendum) of the Registrant
(incorporated by reference from Exhibit 10.3 to the Current Report
on Form
8-K filed with the Securities and Exchange Commission on July 12,2007).
II-4
10.20
Form
of Stock Issuance Agreement (including Addendum) of the Registrant
(incorporated by reference from Exhibit 10.4 to the Current Report
on Form
8-K filed with the Securities and Exchange Commission on July 12,2007).
10.21
Form
of Stock Purchase Agreement (including Addendum) of the Registrant
(incorporated by reference from Exhibit 10.5 to the Current Report
on Form
8-K filed with the Securities and Exchange Commission on July 12,2007).
16.1
Letter
from AJ. Robbins, PC to the Securities and Exchange Commission dated
October 18, 2006 (incorporated by reference from Exhibit 16.1 to
the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 20, 2006).
The
undersigned registrant hereby undertakes with respect to the securities being
offered and sold in this offering:
The
undersigned Registrant hereby undertakes that to file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement:
i.
To
include any prospectus required by Section 10(a)(3) of the Securities
Act
of 1933;
ii.
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent
a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease
in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to
Rule 424(b) if, in the aggregate offering price set forth in the
“Calculation of Registration Fee” table in the effective registration
statement;
iii.
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change in such information in registration
statement.
That,
for
the purpose of determining any liability under the Securities Act of 1933,
each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
To
remove
from registration by means of post-effective amendment any of the securities
being registered which remain unsold at the termination of the
offering.
For
determining liability of the undersigned registrant
under
the Securities Act to any purchaser in the initial distribution of the
securities, the undersigned registrant
undertakes that in a primary offering of securities of the undersigned
registrant
pursuant
to this registration statement, regardless of the underwriting method used
to
sell the securities to the purchaser, if the securities are offered or sold
to
such purchaser by means of any of the following communications, the undersigned
registrant
will be
a seller to the purchaser and will be considered to offer or sell such
securities to the purchaser:
i
in
any preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
ii.
any
free writing prospectus relating to the offering prepared by or on
behalf
of the undersigned registrant
or
used or referred to by the undersigned registrant;
iii.
the
portion of any other free writing prospectus relating to the offering
containing material information about the undersigned registrant
or
its securities provided by or on behalf of the undersigned registrant;
and
iv.
any
other communication that is an offer in the offering made by the
undersigned registrant
to
the purchaser.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
(the
“Act”) may be permitted to directors, officers and controlling persons of the
registrant
pursuant
to the foregoing provisions, or otherwise, the registrant
has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In
the
event that a claim for indemnification against such liabilities, other than
the
payment by the registrant
of
expenses incurred and paid by a director, officer or controlling person of
the
registrant
in the
successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered hereby, the registrant
will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
II-6
The
undersigned Registrant hereby undertakes that it will:
(i)
for
determining any liability under the Securities Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant
under Rule 424(b)(1), or (4) or 497(h) under the Securities Act as
part of
this registration statement as of the time the Commission declared
it
effective.
(ii)
for
determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a
new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the
initial
bona fide offering of those
securities.
For
the
purpose of determining liability under the Securities Act to any purchaser,
the
undersigned registrant
undertakes that each prospectus filed pursuant to Rule 424(b) as part of a
registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance
on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of
the
registration statement or made in any such document immediately prior to such
date of first use.
For
the
purpose of determining liability under the Securities Act to any purchaser,
the
undersigned registrant undertakes that:
(i)
if
the undersigned registrant is relying on Rule
430B:
(a)
each
prospectus filed by the undersigned registrant pursuant to Rule 424(b)(3) shall
be deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration statement;
and
(b)
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7)
as
part of a registration
statement in reliance on Rule 430B relating to an offering made pursuant to
Rule 415(a)(1)(i),
(vii), or (x) for the purpose of providing the information required by section
10(a) of the
Securities Act shall be deemed to be part of and included in the registration
statement as of the earlier
of the date such form of prospectus is first used after effectiveness or the
date of the first contract
of sale of securities in the offering described in the prospectus. As provided
in Rule 430B, for
liability purposes of the issuer and any person that is at that date an
underwriter, such date shall be
deemed
to be a new effective date of the registration statement relating to the
securities in the registration
statement to which that prospectus relates, and the offering of such securities
at that time
shall be deemed to be the initial bona fide offering thereof. Provided, however,
that no statement
made in a registration statement or prospectus that is part of the registration
statement or made
in a
document incorporated or deemed incorporated by reference into the registration
statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of
contract of sale prior to such effective date, supersede or modify any statement
that was made in the
registration statement or prospectus that was part of the registration statement
or made in any such
document immediately prior to such effective date; or
II-7
(ii)
if
the undersigned registrant is subject to Rule
430C:
(a)
Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first
use,
supersede or modify any statement that was made in the registration statement
or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
II-8
SIGNATURES
Pursuant
to the requirements of the Securities Act, the Registrant has duly caused
this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Zhuhai, People’s Republic of China, on the 21st
day of September, 2007.
CHINA
ARCHITECTURAL ENGINEERING, INC.
By:
/s/
Luo Ken Yi
Name
Luo
Ken Yi
Title:
Chief
Executive Officer, Chief Operating Officer and
Chairman
of the Board
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on
the
dates indicated:
SIGNATURE
TITLE
DATE
/s/
Luo Ken Yi
Chief
Executive Officer, Chief Operating Officer and Chairman of the
Board
(Principal Executive Officer)
Share
Exchange Agreement, dated as of August 21, 2006, by and among the
Registrant, KGE Group, Limited, and Full Art International, Ltd.
(incorporated by reference from Exhibit 2.1 to the Current Report
on Form
8-K filed with the Securities and Exchange Commission on October20,2006).
2.1(a)
Amendment
No. 1 to the Share Exchange Agreement, dated as of October 17,2006, by
and among the Registrant, KGE Group, Limited, and Full Art International,
Ltd. (incorporated by reference from Exhibit 2.1(a) to the Current
Report
on Form 8-K filed with the Securities and Exchange Commission on
October20, 2006).
3.1
Certificate
of Incorporation of China Architectural Engineering, Inc. (incorporated
by
reference from Exhibit 3.1 to Registration Statement on Form SB-2
filed
with the Securities and Exchange Commission on April 20,2004).
Articles
of Merger Effecting Name Change (incorporated by reference from
Exhibit
3.3 to the Current Report on Form 8-K filed with the Securities
and
Exchange Commission on October 20, 2006).
Amended
and Restated Trust Deed, originally dated April 12, 2007, amended and
restated August 29, 2007 by
and between the Registrant and The Bank of New York, London Branch
(incorporated
by reference to Exhibit 4.1 of the Registrant’s Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on September4,2007).
4.5
Paying
and Conversion Agency Agreement, dated April 12, 2007, by and among
the
Registrant, The Bank of New York, and The Bank of New York, London
Branch
(incorporated by reference to Exhibit 4.2 to
the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
April 18, 2007).
4.6
The
Warrant Instrument, dated April 12, 2007, by and between the Registrant
and ABN AMRO Bank N.V. (incorporated
by reference to Exhibit 4.3 to
the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
April 18, 2007).
4.7
Warrant
Agency Agreement, dated April 12, 2007 among Company, The Bank
of New York
and The Bank of New York, London Branch (incorporated by reference
to
Exhibit 4.4 to
the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
April 18, 2007).
4.8
Registration
Rights Agreement, dated April 12, 2007, by and between the Registrant
and
ABN AMRO Bank N.V. (incorporated
by reference to Exhibit 4.5 to
the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
April 18, 2007).
4.8(a)
Written
description of oral agreement between the Registrant and ABN AMRO
Bank
N.V.
5.1
Opinion
of Kirkpatrick & Lockhart Preston Gates Ellis
LLP
Form
of Subscription Agreement dated October 2004 (incorporated by
reference to
Exhibit 10.2 of the Registrant's Registration Statement on Form
SB-2 filed
October 1, 2004).
Employment
Agreement by and between the Registrant and Ye Ning (translated
to
English) (incorporated by reference from Exhibit 10.5 to the
Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
October 20, 2006).
Office
and Factory Lease Agreement dated July 13, 2005 by and between
the
Registrant and Zhuhai Yuping Kitchen Equipment Co., Ltd. (translated
to
English).
10.12**
Lease
Agreement by and between the Registrant and Beijing Aoxingyabo
Technology
Development Co., Ltd (translated to English).
10.13**
Property
Rental Contract by and between the Registrant and Shanghai Sandi
CNC
equipment Ltd. Co (translated to English).
Joint
Venture Agreement dated May 11, 2007 entered into by and between
CPD
(Australia) Holding Pty Ltd. and the Registrant (incorporated
by reference
to Exhibit 10.1 to the Current Report on Form 8-K filed with
the
Securities and Exchange Commission on May 15,2007).
10.16**
Form
of Registration Rights Agreement entered into by and between
the
Registrant, First Alliance Financial Group, Inc. and WestPark
Capital,
Inc. Affiliates.
10.16(a)**
Form
of Waiver of Penalties Related to Registration Rights entered
into by and
between the Registrant, First Alliance Financial Group, Inc.
and WestPark
Capital, Inc. Affiliates.
10.16(b)
Written
description of oral agreement between the Registrant, First
Alliance
Financial Group, Inc., and WestPark Capital, Inc.
Affiliates
10.17
China
Architectural Engineering, Inc. 2007 Equity Incentive Plan (incorporated
by reference from Exhibit 10.1 to the Current Report on Form
8-K filed
with the Securities and Exchange Commission on July 12,2007).
10.18
Form
of Notice of Grant of Stock Option of the Registrant (incorporated
by
reference from Exhibit 10.2 to the Current Report on Form 8-K
filed with
the Securities and Exchange Commission on July 12,2007).
10.19
Form
of Stock Option Agreement (including Addendum) of the Registrant
(incorporated by reference from Exhibit 10.3 to the Current Report
on Form
8-K filed with the Securities and Exchange Commission on July12,2007).
10.20
Form
of Stock Issuance Agreement (including Addendum) of the Registrant
(incorporated by reference from Exhibit 10.4 to the Current Report
on Form
8-K filed with the Securities and Exchange Commission on July 12,2007).
10.21
Form
of Stock Purchase Agreement (including Addendum) of the Registrant
(incorporated by reference from Exhibit 10.5 to the Current Report
on Form
8-K filed with the Securities and Exchange Commission on July 12,2007).
16.1
Letter
from AJ. Robbins, PC to the Securities and Exchange Commission
dated
October 18, 2006 (incorporated by reference from Exhibit 16.1 to
the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 20, 2006).
