Filed
Pursuant to Rule 424(b)(3)
File
Number 333-146851
PROSPECTUS
SUPPLEMENT NO. 2
to
Prospectus dated February 7, 2008
(Registration
No. 333-146851)
CHINA
ARCHITECTURAL ENGINEERING, INC.
This
Prospectus Supplement No. 2 supplements our Prospectus dated February 7,
2008
and Prospectus Supplement No. 1 dated March 18, 2008. The securities that
are
the subject of the Prospectus have been registered to permit their resale
to the
public by the selling security holders named in the Prospectus. We are not
selling any securities in this offering and therefore will not receive any
proceeds from this offering. You should read this Prospectus Supplement No.
2
together with the Prospectus and Prospectus Supplement No. 1.
This
Prospectus Supplement No. 2 includes the attached report, as set forth below,
as
filed by us with the Securities and Exchange Commission (the “SEC”): Annual
Report on Form 10-K filed with the SEC on March 31, 2008.
Our
common stock is traded on the American Stock Exchange under the symbol “RCH.”
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A
CRIMINAL OFFENSE.
The
date
of this Prospectus Supplement No. 2 is April 14, 2008.
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
FOR
THE TRANSITION PERIOD FROM _______
TO ___________
COMMISSION
FILE NO. 001-33709
CHINA
ARCHITECTURAL ENGINEERING, INC.
(Exact
Name Of Registrant As Specified In Its Charter)
Delaware
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51-05021250
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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105
Baishi Road, Jiuzhou West Avenue, Zhuhai 519070
People’s
Republic of China
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N/A
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(Address
of principal executive offices)
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(Zip
Code)
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REGISTRANT’S
TELEPHONE NUMBER, INCLUDING AREA CODE:
0086-756-8538908
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $0.001 par value
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American
Stock Exchange
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SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o
No
ý
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
o
No
ý
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
ý
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
|
Accelerated
filer
o
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Non-accelerated
filer
ý
|
Smaller
reporting company
o
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(Do
not check if a smaller
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|
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reporting
company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
o
No
ý
The
registrant’s common stock commenced trading on the American Stock Exchange on
September 28, 2007. The aggregate market value of the registrant's issued and
outstanding shares of common stock held by non-affiliates of the registrant
as
of March 28, 2008 (based on the price at which the registrant’s common stock was
last sold on such date) was approximately $100,247,992.
There
were 51,088,144 shares outstanding of the registrant’s common stock, par value
$0.001 per share, as of March 28, 2008. The registrant’s common stock is listed
on the American Stock Exchange under the ticker symbol “RCH.”
DOCUMENTS
INCORPORATED BY REFERENCE: The information required by Part III of Form 10-K
is
incorporated by reference from the registrant's definitive proxy statement
on
Schedule 14A that will be filed no later than the end of the 120-day period
following the registrant's fiscal year end, or, if the registrant's definitive
proxy statement is not filed within that time, the information will be filed
as
part of an amendment to this annual report on Form 10-K/A, not later than the
end of the 120-day period.
CHINA
ARCHITECTURAL ENGINEERING, INC.
TABLE
OF CONTENTS TO ANNUAL REPORT ON FORM 10-K
For
the Fiscal Year Ended December 31, 2007
ITEM
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Page
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PART I
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Item
1.
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Business
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4
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Item 1A.
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Risk
Factors
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12
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Item 1B.
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Unresolved
Staff Comments
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24
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Item
2.
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Properties
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25
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Item
3.
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Legal
Proceedings
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26
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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26
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PART II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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27
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Item
6.
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Selected
Financial Data
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29
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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30
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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39
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Item
8.
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Financial
Statements and Supplementary Data
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40
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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40
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Item
9A.
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Controls
and Procedures
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40
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Item
9B.
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Other
Information
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41
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PART III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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41
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Item
11.
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Executive
Compensation
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42
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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42
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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42
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Item
14.
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Principal
Accounting Fees and Services
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42
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PART IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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43
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Signatures
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44
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The
information contained in this report, including in the documents incorporated
by
reference into this report, includes some statements 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 report 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:
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·
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Our
dependence on government contracts;
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Fluctuation
and unpredictability of costs related to our products and
services;
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·
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Changes
in the laws of the PRC that affect our
operations;
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Our
failure to meet or timely meet contractual performance standards
and
schedules;
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Any
recurrence of severe acute respiratory syndrome (SARS) or Avian
Flu;
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Reduction
or reversal of our recorded revenue or profits due to “percentage of
completion” method of accounting;
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Our
dependence on the steel and aluminum
markets;
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Exposure
to product liability and defect
claims;
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Our
ability to obtain all necessary government certifications and/or
licenses
to conduct our business;
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Development
of a public trading market for our
securities;
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Expenses
and costs related to our issuance of the
Bonds;
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The
cost of complying with current and future governmental regulations
and the
impact of any changes in the regulations on our operations;
and
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·
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The
other factors referenced in this report, including, without limitation,
under the sections entitled “Risk Factors,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and
“Business.”
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These
risks and uncertainties, along with others, are also described below 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.
PART
I
Item
1. Business
Overview
We
specialize in high-end curtain wall systems (including glass, stone and metal
curtain walls), roofing systems, steel construction systems, eco-energy saving
building conservation systems and related products, for public works and
commercial real estate projects. We provide timely, high quality, reliable,
fully integrated and cost-effective service solutions to our clients using
specialized technical expertise in the design, engineering, fabrication and
construction of structural exterior cladding systems. We compete on the strength
of our reputation, track record, strong relationships with government and
commercial 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.
In
November 2007, we acquired Techwell Engineering Ltd. and its wholly owned
subsidiaries, Techwell Building Systems (Shenzhen) Ltd. and Techwell
International Ltd. in Macau for approximately $11.7 million. We believe this
acquisition is a natural step in the expansion of our overseas business
development. We believe Techwell’s experienced management teams will provide the
operating platform for us to enter into other international
markets.
Market
Opportunities in China and Internationally
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. 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. 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.
A
global
market opportunity for our products and services also exists, namely in Hong
Kong, Macau, Australia, Dubai (UAE), Doha (Qatar), and North America. Hong
Kong
has recently undergone an economic recovery, and the government has indicated
that it expects to increase its expenditures for infrastructure projects over
the next few years. Macau’s economy continues to be strong, particularly in the
gaming and tourism sector, and the Macau government has increased its investment
in infrastructure. In Australia, we are nearing completion of a small
engineering project, and we are seeking to obtain several additional projects
in
Australia and countries in Southeast Asia. The construction markets in Dubai,
UAE and Doha, Qatar are experiencing significant growth, and, in 2007, we agreed
upon the terms for a number of projects in Dubai and Doha. We are also in
discussions on several projects in Central Asia and Eastern Europe, and have
started to explore the North American market, where we believe there is a
significant potential for growth due to an increasing popularity of curtain
walls.
Products
and Services
We
specialize in high-end curtain wall systems (including glass, stone and metal
curtain walls), roofing systems, steel construction systems, eco-energy saving
building conservation systems and related products, for public works and
commercial real estate projects. We provide timely, high quality, reliable,
fully integrated and cost-effective service solutions to our clients using
specialized technical expertise in the design, engineering, fabrication and
construction of structural exterior cladding systems. 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.
For
the
year ended December 31, 2007, approximately 98% of our sales came from new
construction projects starting in 2007 and for the year ended December 31,
2006,
approximately 95% of our sales came from new construction projects starting
in
2006. 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
exterior cladding systems. Once parts have been manufactured by subcontracted
factories, we will occasionally process them further. This processing takes
place in our facilities in Beijing, Shunde 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.
Installation
We
have
76 full-time project managers/supervisors and 332 part-time on-site workers
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,
developer, contractor and architectural clients, we are focusing
on:
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·
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Emphasizing
innovative services.
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,
engineering and installation techniques and other unusual project
needs.
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·
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Providing
full service solutions.
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.
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·
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Leveraging
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 exterior cladding systems in the
world
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·
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Expanding
our coverage in China.
We
believe that we have long-standing relationships with China’s top
construction officials and leading Chinese and international architects,
having completed high profile projects in China, including the National
Grand Theater in Beijing, the Shanghai South Railway Station, the
Shenzhen
International Airport and the National Palace Museum in Beijing.
We plan
to continue to meet the needs of government and private sector customers
in the larger cities as well as expand to medium-sized second and
third
tier cities in China.
|
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·
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Expanding
our coverage internationally.
We
believe that international expansion of our business is attractive
because
it may provide us with higher margins as compared to similar projects
in
China, and we hope to increase our revenues from international projects
as
a percentage of our total revenue. We have launched initiatives to
expand
sales in Hong Kong, Macau, Australia, Southeast Asia, Dubai (UAE),
Doha
(Qatar), other Middle Eastern countries, Central Asia, Eastern Europe
and
North America.
|
Product
Attributes
Our
exterior cladding systems 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.
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 duration of one to 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. 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.
During
2007, we completed 26 projects, including the National Grand Theater in Beijing,
the Grand Theater and the Qintai Cultural & Art Center in
Wuhan.
Sales
and Marketing
Sales
Sales
managers lead our sales and marketing efforts through our domestic headquarters
in Zhuhai, China, and our regional sales offices in 12 cities. Outside of China,
we have sales managers in Hong Kong, Sydney (Australia), Dubai (the United
Arab
Emirates), Doha (Qatar), and New York (the United States). 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
governments, developers, 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,
engineering, fabrication, and installation of high-end specialty curtain
walls.
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 both in China and
other countries, sometimes at the recommendation of architects and engineers
we
have worked with in the past.
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. In addition, current
national policy in China dictates that for government projects sub-contractors
will be paid directly from the government budget offices, not through general
contractors and/or developers. Because our payment cycle is considerably shorter
than our receivable cycle, we may experience working capital shortages. We
have
used bank loans, cash provided by operations and other financings to fund our
operations.
Our
three
largest projects are the Grand Theater and the Qintai Cultural & Art Center
in Wuhan, the Guangzhou Opera House and the Dalian Star Development Project,
all
of which accounted for approximately 14%,7% and 5% of our sales, respectively,
for the year ended December 31, 2007.
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,
exhibitions, lecture and technology briefings to architects and property owners.
With a targeted approach, our print advertisements appear regularly in popular
consumer and industry publications and trade journals. To better showcase our
diverse products to potential customers, we regularly exhibit at 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.
Quality
Control
Our
manufacturing production facilities are designed and maintained with a view
towards conforming to 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:
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setting
internal controls and regulations for semi-finished and finished
products;
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implementing
sampling systems and sample
files;
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maintaining
quality of equipment and
instruments;
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auditing
production records to ensure delivery of quality
products;
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articulating
the responsibilities of quality control staff;
and
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on-site
evaluation of supplier quality control
systems.
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We
have
received the following certifications in recognition of our production and
quality assurance program:
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ISO
9001 - International Quality System Certification, valid from February
2005 to April 2008;
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ISO
14001 - International Environmental System Certification, valid from
April
2005 to April 2008; and
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ISO
18001 - International Safety System Certification, valid from June
2005 to
June 2008.
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We
are
finalizing approvals for the renewal for another three years for the above
three
certifications.
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 façade 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, in 2001, we were 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, was 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, which we helped to create in 1999. We were able to incorporate many
of
the academic research results by the Institute into our projects, including
the
National Grand Theater in Beijing and the Hangzhou Grand Theater, both completed
recently.
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 December
31,
2007, we employed 85 designers and engineers and additional 65 research and
development personnel.
We
currently own sixty-two patents, of which forty-nine are approved, four are
pending approval and nine are in the application stage. Of the forty-nine
approved, forty-seven are in China and two are in the US, Europe, Japan and
Hong
Kong.
We
expended $111,129, $50,117, and $58,865 on research and development activities
for each of the years ended December 31, 2007, 2006 and 2005, 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
As
of
December 31, 2007, our total backlog of orders considered to be firm was
approximately $106.3 million, compared with $10.0 million and $26.2 million
at
December 31, 2006 and 2005, respectively. Of our 2007 amounts, 76% of the
backlog, or $80.3 million, is expected to generate revenues in fiscal 2008,
compared to 100% of our 2006 backlog ($10.0 million) realized in fiscal 2007
and
40% of our 2005 backlog ($10.5 million) realized in fiscal 2006.
Of
the
2008 backlog, 36% consists of orders for projects outside our home market of
China.
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:
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ability
to provide added value in the design and engineering of
buildings;
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speed
of construction in buildings and components;
and
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personal
relationships with customers.
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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 three
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, and (iii) the Automated Building Control System 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.
Employees
As
of
December 31, 2007, we had 328 full-time employees, 4 part-time employees and
an
additional 332 part-time on-site employees. Substantially all of our employees
are located in China and Hong Kong. We now have a small number of employees
in
Doha (Qatar), Dubai (the United Arab Emirates), the United States &
Australia. Approximately one-quarter of our employees are designers and
engineers, one-third are project managers/supervisors and the remaining
employees are supply chain and administrative staff. We believe that our
relationship with our employees is good.
We
are
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. We are required to contribute to
government social security, medical insurance, unemployment insurance,
disability insurance and so on for our employees based in Hong Kong, Australia
and the United States.
Item
1A. Risk Factors
Any
investment in our securities involves a high degree of risk. Investors should
carefully consider the risks described below and all of the information
contained in this report before deciding whether to purchase our securities.
Our
business, financial condition or results of operations could be materially
adversely affected by these risks if any of them actually occur. The trading
price of our common stock and the value of the Bonds and Bond Warrants 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
report 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 report. With respect
to this discussion, the terms, “we,” “us,” or “our” refer to China Architectural
Engineering, Inc., and all of our subsidiaries.
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 72% of our revenues
for the year ended December 31, 2007. 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.
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
.
We
buy
semi-finished products made of aluminum, steel and glass, and, to a degree,
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 December
15,
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 continued through December 31,
2007.
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
deposits 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:
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ability
to provide added value in the design and engineering of
buildings;
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speed
of construction in buildings and components;
and
|
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personal
relationships with customers.
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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. 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 we do.
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, currently we have approximately 10 employees working
in
Doha, Qatar and 10 employees in Dubai, UAE. During the peak construction period,
we will have about 150 employees in Doha and about 200 employees in Dubai,
which
will consist of about 20% full-time company employees (engineers, project
managers and supervisors) and 80% non-company contract labor. 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, Qatar and UAE laws and regulations do not require us to maintain
third party liability insurance to cover product liability claims. In the United
States and Australia, we are required to maintain third party liability
insurance. 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.
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 sixty-two patents, of which forty-nine are approved, four are
pending approval and nine are in the application stage. Of the forty-nine
approved, forty-seven are in China and two are in the US, Europe, Japan and
Hong
Kong. 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. We are classified as high tech
foreign-invested enterprise, therefore prior to 2008 we were subject to a 15%
preferential tax rate in China. We believe that our tax rate will gradually
increase to 25% during a five-year transition period commencing in 2008 until
it
reaches 25% in 2012. 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.
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
the
late-1970s. The government of the PRC has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy 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 2007. 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.
The
PRC laws and regulations governing our
current
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:
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revoking
our business and other licenses;
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requiring
that we restructure our ownership or operations;
and
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requiring
that we discontinue any portion or all of our
business.
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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 three decades, 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. The central bank has raised interest rates a number of times since
then. Expected repeated rises in interest rates by the central bank to combat
inflation 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 the China Securities
Regulatory Commission, or the CSRC, for 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.
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.
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 our initial public offering that was completed on October
3,
2007, 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 our initial public
offering or subsequent offerings 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 future offerings before settlement
and delivery of the Common Stock offered thereby. 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.
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
April
6, 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:
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quarantines
or closures of some of our manufacturing facilities, which would
severely
disrupt our operations,
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the
sickness or death of our key officers and employees,
and
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a
general slowdown in the Chinese
economy.
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Any
of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
If
we fail to maintain effective internal controls over financial reporting, the
price of our common stock may be adversely affected.
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 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.
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, most 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
Our
stock price is volatile and you might not be able to resell your securities
at
or above the price you have paid.
Since
our
initial public offering and listing of our Common Stock on the American Stock
Exchange in October 2007, the price at which our common stock had traded has
been highly volatile, with a high and low sales price of $4.75 and $27.25,
respectively, as through March 28, 2008. You might not be able to sell the
shares of our common stock at or above the price you have paid. The stock market
has experienced extreme volatility that often has been unrelated to the
performance of its listed companies. Moreover, only a limited number of our
shares are traded each day, which could increase the volatility of the price
of
our stock. These market fluctuations might cause our stock price to fall
regardless of our performance. The market price of our Common Stock might
fluctuate significantly in response to many factors, some of which are beyond
our control, including the following:
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actual
or anticipated fluctuations in our annual and quarterly results
of
operations;
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changes
in securities analysts’ expectations;
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variations
in our operating results, which could cause us to fail to meet
analysts’
or investors’ expectations;
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announcements
by our competitors or us of significant new products, contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
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conditions
and trends in our industry;
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general
market, economic, industry and political conditions;
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changes
in market values of comparable companies;
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additions
or departures of key personnel;
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stock
market price and volume fluctuations attributable to inconsistent
trading
volume levels; and
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future
sales of equity or debt securities, including sales which dilute
existing
investors.
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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.
The
market price of our Common Stock could decline as a result of sales of a large
number of shares of our common stock in the market or the perception that these
sales could occur. These sales, or the possibility that these sales may occur,
also might make it more difficult for us to sell equity securities in the future
at a time and at a price that we deem appropriate.
As
of
December 31, 2007, we had 51,783,416 shares of Common Stock outstanding, and
approximately 5,443,425 are freely tradable without further restriction under
the Securities Act of 1933, as amended, by persons other than our affiliates
(within the meaning of Rule 144 under the Securities Act). Of these freely
tradable shares, 2,320,875 shares were sold in a private placement and are
subject to a lock up restriction pursuant to which one-ninth of the shares
are
released on a monthly basis with the last release scheduled to occur on May
25,
2008, subject to early release by us. In addition, we registered 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; 2,857,143 shares of common stock that
may
be acquired upon conversion of the Bonds, subject to adjustment; 800,000 shares
of common stock that may be acquired upon exercise of the Bond Warrants, subject
to adjustment; 2,000,000 shares of common stock that were issued to
FirstAlliance Financial Group, Inc. as a designee of Full Art’s sole shareholder
and 962,325 shares of common stock held by the affiliates of WestPark. The
registration of the Bonds, the Bond Warrants, the shares of common stock that
may be issued upon the conversion of the Bonds and Bond Warrants, and the
2,962,325 shares held by FirstAlliance Financial Group, Inc. and WestPark are
covered by an effective registration statement and the related prospectus.
All
of the shares included in the effective registration statement as described
above may be freely sold and transferred except if subject to a lock up
agreement.
In
connection with our initial public offering in October 2007, our principal
stockholder, which holds 33,122,554 shares, entered into a lock up agreement
with the underwriter pursuant to which it agreed not to sell or transfer any
of
its shares until October 2008, subject to release from the underwriter, after
which the shares may be sold subject to Rule 144. Under Rule 144, an affiliate
stockholder who has satisfied a the required 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 December 31, 2007, 1% of our issued and outstanding
shares of common stock was approximately 517,834 shares. Non-affiliate
stockholders are not subject to volume limitations. 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.
Our
principal stockholder has significant influence over us.
As
of
December 31, 2007, our largest shareholder, KGE Group, Limited, or KGE Group,
beneficially owns or controls approximately 64.0% 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 70% and 10%, 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
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 of the Bonds 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
approximately $4,342,857 to the beneficial conversion feature of the Bonds
and
$4,036,170 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.
We
may be unable to generate sufficient cash flow from which to redeem the
Bonds.
Our
ability to redeem the Bonds depends on our ability to generate sufficient cash
flow. We cannot assure you that we will be able to generate sufficient cash
flow
to service the Bonds and our existing indebtedness. In addition, at maturity,
the aggregate principal amount will become due and payable on all outstanding
Bonds. At maturity, we may not have sufficient funds to pay the aggregate
principal amount of the Bonds then outstanding. If we do not have sufficient
funds for the payment of any principal or early redemption amount due in respect
of the Bonds, we will be unable to meet our obligations under the Bonds and
we
will default. Upon a default the Trustee may declare that all amounts owing
on
the Bonds becomes immediately due and payable.
There
are limited restrictive covenants in the Trust Deed governing the Bonds relating
to our ability to incur future indebtedness.
The
Trust
Deed for the Bonds does not limit our ability to incur indebtedness, except
that
as long as any of the Bonds remains outstanding, we agreed not to create any
encumbrance upon our present or future assets or revenues to secure any
indebtedness or to secure any guarantee of or indemnity in respect of any such
indebtedness unless our obligations under the Bonds are secured by the same
encumbrance or have the benefit from a guarantee or indemnity in substantially
identical terms. The Trust Deed governing the Bonds does not contain any
financial or operating covenants or restrictions on the payment of dividends,
incurrence of indebtedness (other than as stated above), transactions with
affiliates, incurrence of liens, or the issuance or repurchase of securities
by
us or any of our subsidiaries. We, therefore, may incur additional debt,
including secured indebtedness or indebtedness by, or other obligations of,
our
subsidiaries to which the Bonds would be structurally subordinate. A higher
level of indebtedness increases the risk that we may default on our
indebtedness. We cannot assure you that we will be able to generate sufficient
cash flow to pay the interest on our indebtedness or that future working
capital, borrowings or equity financing will be available to pay or refinance
such indebtedness.
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.
Our
officers and directors have limited experience in public company reporting
and
financial accounting, which could impair our ability to satisfy public company
filing requirements and increase our securities compliance
costs.
Our
officers and directors have limited 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.
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.
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.
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.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
We
have
offices and processing factories in thirteen cities in China, a corporate office
in Hong Kong, one office in Sydney, Australia and one in Dubai, UAE. 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, which are located in Beijing, Zhuhai, and Shunde, are used for
further processing certain curtain wall components before they are shipped
to
the construction site.
Hong
Kong
|
|
|
Unit
B, 63
rd
Floor, Bank of China Tower, 1 Garden Road
|
|
240
square meters (office)
|
Central,
Hong Kong
|
|
|
|
|
|
Zhuhai
|
|
|
105
Baishi Road, Jiuzhou West Avenue, Zhuhai, Guangdong
|
|
1,080
square meters (office)
|
|
|
1,700
square meters (factory)
|
|
|
|
Beijing
|
|
|
2nd
floor, Jianbang Building, phase 1, No.19 South Lishi Road
|
|
646
square meters (office)
|
XiCheung
district, Beijing city
|
|
3,380
square meters (factory)
|
|
|
|
Shanghai
|
|
|
Room
501 business center, Shanghai hotel, No.505 north of Wulumuqi road,
shanghai city
|
|
500
square meters (office)
|
|
|
|
Shunde
|
|
|
No.5
Technology area, Xingtan town, Shunde district, Fo Shan
City
|
|
15,000
square meters (office & factory)
|
|
|
|
Shenzhen
|
|
|
13/F,
Excellence Times Square, 4068 YianTian road, Futian district, Shenzhen
city
|
|
887.21
square meters (office)
|
|
|
|
Wuhan
|
|
|
Floor
38, No. 568 Jianshe road, Wu Han International Trade Center, Jianghan
district,
WuHan
city
|
|
200
square meters (office)
|
|
|
|
Nanjing
|
|
|
18
floors, phase B, Huaqiaoyin Building, No.1 north of Nanjing bridge,
Nanjing city
|
|
600
square meters (office)
|
|
|
|
Tianjin
|
|
|
Rm
1906, No.2 Jinhaian building, Jinwei road,
Hebei
district, Tianjin city
|
|
2199
square meters (office)
|
|
|
|
Guangzhou
|
|
|
101
Chengjian building, 189 Tiyuxi road, Tianhe district, Guangzhou
city
|
|
300
square meters (office)
|
|
|
|
Hangzhou
|
|
|
Room
806, Tongfang Caifu building, 334 Fengqi Road, Hangzhou
city
|
|
86
square meters (office)
|
|
|
|
Qingdao
|
|
|
6
floor, phase B, No. 22 Jinfu building, Shandong road,
Nanshan
district, Qingdao city
|
|
100
square meters (office)
|
|
|
|
Chengdu
|
|
|
No.4
Changshou road, Wuhou distict, Chengdu city
|
|
100
square meters (office)
|
|
|
|
Zhanjiang
|
|
120
square meters (office)
|
3
rd
floor, 69 north of Shenchuan road, Chikan district, Zhanjiang
city
|
|
|
|
|
|
Australia
Suite
203 Level 2 4-8 Woodville Street Hurstville NSW 2220
|
|
100
square meters (office)
|
|
|
|
Dubai,
UAE
Room
603 Ahmed Saeed Abdullah Belhab Al Amri Building Bin #1979 Road 60
Al
Barsha First, Dubai UAE
|
|
100
square meters (office)
|
Item
3. Legal Proceedings
We
are
not a party to any material legal proceedings.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to the security holders to be voted on during the fourth
quarter of 2007.
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Commencing
on September 28, 2007, our shares of common stock have been listed for trading
on AMEX under the ticker symbol “RCH.” As of March 15, 2008, we had 83
registered shareholders.
From
September 28, 2007 through December 31, 2007, the high and low sales price
for
our common stock on AMEX was $4.80 and $27.25, per share, respectively. On
March
28, 2008, the closing sales price for our common stock on AMEX was $5.58 per
share.
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;
|
|
·
|
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;
|
|
·
|
Investor
perceptions of our company; and
|
|
·
|
General
economic and other national
conditions.
|
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 paid cash dividends of nil, $1,576,796 and $2,571,396 during
the
years ended December 31, 2007, 2006 and 2005, respectively.
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,
substantially 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.
Recent
sales of unregistered securities
On
November 6, 2007, pursuant to the terms of a stock purchase agreement (the
“Purchase Agreement”) entered into by and among Ng Chi Sum and Yam Mei Ling (the
“Shareholders”), the Company and Full Art international, Ltd. (“Full Art”), the
Company issued an aggregate of 703,778 shares of its common stock to the
Shareholders as consideration for 50% of the aggregate purchase price due and
payable by Full Art for the acquisition of all of the issued and outstanding
shares of Techwell Engineering Limited, a limited liability company incorporated
in Hong Kong. Thirty percent of such stock consideration, or 211,134 shares
of
the Company’s common stock, will be held in a third party escrow account for up
to two years to cover potential indemnification obligations of the Shareholders
pursuant to the Purchase Agreement. The securities were offered and issued
to
the Shareholders in reliance upon an exemption from registration pursuant to
Section 4(2) under the Securities Act of 1933, as amended (the “Securities
Act”), and Rule 901 promulgated thereunder. The Shareholders are not U.S.
persons (as defined by Rule 902 of Regulation S under the Securities
Act).
On
October 3, 2007, upon the closing of our initial public offering, we issued
to
WestPark Capital, Inc. warrants to purchase up to 73,700 shares of our common
stock in exchange for its underwriting services provided to us in connection
with our initial public offering. The warrants are exercisable at a per share
exercise price of $4.20, subject to standard anti-dilution adjustments for
stock
splits and similar transactions, and will expire after five years. The
securities were issued to WestPark Capital in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder.
On
April
12, 2007, we completed a financing transaction with ABN AMRO 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 the Bond
Warrants were offered and sold to ABN AMRO 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) ABN AMRO 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) ABN AMRO has represented that it was not acquiring
the
securities for the account or benefit of a U.S. person; and (iv) ABN AMRO 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.
Transfer
Agent
The
transfer agent and registrar for our common stock is Computershare Trust
Company.
Equity
Compensation Plan Information
Our
equity compensation plan information is provided as set forth in Part III,
Item
11.
Additional
Information
Copies
of
our annual reports, quarterly reports, current reports, and any amendments
to
those reports, are available free of charge on the internet at www.sec.gov.
All
statements made in any of our filings, including all forward-looking statements,
are made as of the date of the document in which the statement is included,
and
we do not assume or undertake any obligation to update any of those statements
or documents unless
we
are
required to do so by law.
Item
6. Selected Financial Data
The
following selected consolidated statement of operations data for each of the
years in the five-year period ended December 31, 2007 and the consolidated
balance sheet data as of year-end for each of the years in the five-year period
ended December 31, 2007 were derived from the audited consolidated financial
statements. Such selected 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 Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
|
|
Year
Ended December 31,
|
|
Consolidated Statements of Income
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except share amounts and earnings per
share)
|
|
Contract
revenues earned
|
|
$
|
86,617
|
|
$
|
63,359
|
|
$
|
49,515
|
|
$
|
28,816
|
|
$
|
22,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenues earned
|
|
|
(64,354
|
)
|
|
(46,796
|
)
|
|
(36,368
|
)
|
|
(21,419
|
)
|
|
(14,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
22,263
|
|
$
|
16,563
|
|
$
|
13,146
|
|
$
|
7,397
|
|
$
|
7,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
(5,525
|
)
|
|
(5,989
|
)
|
|
(6,463
|
)
|
|
(4,636
|
)
|
|
(3,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring
general and administrative expenses
|
|
|
—
|
|
|
(3,806
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Finance
Expense
|
|
|
208
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income
from operations
|
|
$
|
16,530
|
|
$
|
6,768
|
|
$
|
6,683
|
|
$
|
2,761
|
|
$
|
4,186
|
|
Interest
income
|
|
|
108
|
|
|
—
|
|
|
—
|
|
|
63
|
|
|
—
|
|
Interest
expense
|
|
|
(2,145
|
)
|
|
—
|
|
|
(117
|
)
|
|
(260
|
)
|
|
(116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
88
|
|
|
700
|
|
|
501
|
|
|
136
|
|
|
145
|
|
Other
expenses
|
|
|
127
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income
before taxation
|
|
$
|
14,455
|
|
$
|
7,468
|
|
$
|
7,068
|
|
$
|
2,700
|
|
$
|
4,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
(2,422
|
)
|
|
(1,318
|
)
|
|
(1,157
|
)
|
|
(491
|
)
|
|
(739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
12,032
|
|
$
|
6,150
|
|
$
|
5,910
|
|
$
|
2,209
|
|
$
|
3,476
|
|
Basic
and diluted net income per common share
|
|
|
0.24
|
|
|
0.14
|
|
|
0.14
|
|
|
0.05
|
|
|
0.08
|
|
Basic
and diluted dividend paid per common share
|
|
|
—
|
|
|
0.04
|
|
|
0.06
|
|
|
0.10
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
50,357,454
|
|
|
44,679,990
|
|
|
43,304,125
|
|
|
43,304,125
|
|
|
43,304,125
|
|
Diluted
weighted average common shares outstanding
|
|
|
51,088,144
|
|
|
44,679,990
|
|
|
43,304,125
|
|
|
43,304,125
|
|
|
43,304,125
|
|
|
|
December
31,
|
|
Consolidated
Balance Sheets
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Current
Assets
|
|
$
|
84,988
|
|
$
|
43,821
|
|
$
|
21,712
|
|
$
|
17,454
|
|
$
|
15,054
|
|
Total
Assets
|
|
|
95,737
|
|
|
44,861
|
|
|
22,320
|
|
|
18,642
|
|
|
15,394
|
|
Current
Liabilities
|
|
|
39,313
|
|
|
21,784
|
|
|
14,016
|
|
|
13,916
|
|
|
8,774
|
|
Long-term
Debt
|
|
|
3,910
|
|
|
2,565
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
Liabilities
|
|
|
43,272
|
|
|
24,349
|
|
|
14,016
|
|
|
13,916
|
|
|
8,774
|
|
Total
Stockholders' Equity
|
|
|
52,465
|
|
|
20,513
|
|
|
8,304
|
|
|
4,725
|
|
|
6,621
|
|
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Forward-Looking
Statements
The
following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this report. This
report 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 report 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 high-end curtain wall systems (including glass, stone and metal
curtain walls), roofing systems, steel construction systems, eco-energy saving
building conservation systems and related products, for public works and
commercial real estate projects. We have completed over one hundred projects
throughout China, Hong Kong, Macau, Australia and Southeast Asia, including
the
National Grand Theater in Beijing, the Meridian Gate Exhibition Hall of the
Palace Museum in Beijing’s Forbidden City (winner of the 2005 UNESCO Jury
Commendation for Innovation of Asia Pacific Heritage Award), the Beijing
Botanical Garden Conservatory (winner of the the Zhan Tian You award in 2003),
the Shenzhen Airport Terminal Building, the Shanghai South Railway Station
and
the Vietnam National Conference Center.. We compete on the strength of our
reputation, track record, strong relationships with government and commercial
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 one to
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.
Recent
Events
April
2007 Issuance of Bonds and Bond Warrants
On
April
12, 2007, we completed a financing transaction with ABN AMRO Bank N.V. (“ABN
AMRO”) 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
ABN
AMRO
.
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. T
he
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 September 28, 2008, through March 28, 2012, into shares of
our
common stock at an initial conversion price equal $3.50 per share,
the
price per share at which shares were sold in our initial public offering
of common stock on AMEX. 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, the
Bond
Warrants, and shares underlying the Bonds and the 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
April
12, 2007, we entered into a warrant instrument with
ABN
AMRO
pursuant
to which
ABN
AMRO
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
April
12, 2007 we also entered into a registration rights agreement with
ABN
AMRO
pursuant
to which we agreed to include the Bonds, the Bond Warrants, and the shares
of
common stock underlying the Bonds and the Bond Warrants in a pre-effective
amendment to the registration statement filed with the SEC and declared
effective on September 27, 2007 (the “Initial Registration Statement”).
Subsequently, we verbally agreed with
ABN
AMRO
not to
include its securities in the Initial Registration Statement and to register
them in a separate registration statement of which this prospectus is a
part.
October
2007 Initial Public Offering
On
October 3, 2007, we completed an initial public offering consisting of 847,550
shares of our common stock. Our sale of common stock, which was sold indirectly
by us to the public at a price of $3.50 per share, resulted in net proceeds
of
approximately $2.2 million. These proceeds were net of underwriting discounts
and commissions, fees for legal and auditing services, and other offering costs.
Upon the closing of the initial public offering, we sold to the underwriter
warrants to purchase up to 73,700 shares of our common stock. The warrants
are
exercisable at a per share price of $4.20 and will expire if unexercised after
five years from the date of issuance.
November
2007 Acquisition of Techwell
On
November 6, 2007, we, through Full Art, acquired all of the issued and
outstanding shares (the “Techwell Shares”) in the capital of Techwell
Engineering Limited (which has two subsidiaries), a limited liability company
incorporated in Hong Kong (“Techwell”) pursuant to a Stock Purchase Agreement
(the “Agreement”) dated November 6, 2007, entered into by and among Mr. Ng, Chi
Sum and Miss Yam, Mei Ling (the “Shareholders”), the Company and Full Art (the
“Techwell Acquisition”), to consummate the acquisition transaction. Pursuant to
the terms of the Stock Purchase Agreement, the Shareholders agreed to sell
and
transfer all of the Techwell Shares to Full Art for a purchase consideration
of
US$11,654,566 payable in cash and shares of common stock of our company. Thirty
percent of the stock consideration paid to the Shareholders will be held in
a
third-party escrow account for up to two years to cover potential
indemnification obligations of the Shareholders. Techwell is engaged in the
business of manufacturing and constructing external building facades, including
roofing systems for buildings and curtain wall systems and
accessories.
Critical
Accounting Policies, Estimates and Assumptions
Management’s
discussion and analysis of results of operations and financial condition are
based upon our consolidated financial statements. These statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. These principles require management to make certain
estimates and assumptions that affect amounts reported and disclosed in the
financial statements and related notes. The most significant estimates and
assumptions include valuation of inventories, provisions for income taxes,
allowance for doubtful accounts, and the recoverability of the long-lived
assets. Actual results could differ from these estimates. Periodically, we
review all significant estimates and assumptions affecting the financial
statements and record the effect of any necessary adjustments.
The
following critical accounting policies rely upon assumptions and estimates
and
were used in the preparation of our consolidated financial
statements:
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.
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 December 31, 2007, 2006, and 2005.
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), Hong Kong SAR, Macau SAR and Australia 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.
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 periods, there was no impairment loss.
Goodwill
and Intangible Assets
- In
accordance with Statement of Financial Accounting Standard 142 (“FAS 142”),
“Goodwill and Other Intangible Assets.” the Company does not amortize goodwill
or intangible assets with indefinite lives. For goodwill and other intangible
assets, impairment tests are performed annually and more frequently whenever
events or changes in circumstances indicate goodwill carrying values exceed
estimated reporting unit fair values. Upon indication that the carrying values
of such assets may not be recoverable, the Company recognizes an impairment
loss
as a charge against current operations. Based on the impairment tests performed,
there was no impairment of goodwill or other intangible assets in fiscal 2007,
2006 and 2005.
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 Renminbi (RMB), Hong Kong Dollar (HKD), Macau Pacata (MOP) & Australian
Dollars (AUD). The consolidated financial statements are translated into United
States dollars from RMB, HKD, MOP and AUD 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 USD 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 PRC 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.
Results
of Operations
The
following table sets forth our consolidated statements of income for the years
ended December 31, 2007, 2006 and 2005 in U.S. dollars:
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except share amounts and
earnings
per share)
|
|
Contract
revenues earned
|
|
$
|
86,617
|
|
$
|
63,359
|
|
$
|
49,515
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenues earned
|
|
|
(64,354
|
)
|
|
(46,796
|
)
|
|
(36,368
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
22,263
|
|
$
|
16,563
|
|
$
|
13,146
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
(5,525
|
)
|
|
(5,989
|
)
|
|
(6,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-recurring
general and administrative expenses
|
|
|
—
|
|
|
(3,806
|
)
|
|
—
|
|
Finance
Expense
|
|
|
208
|
|
|
—
|
|
|
—
|
|
Income
from operations
|
|
$
|
16,530
|
|
$
|
6,768
|
|
$
|
6,683
|
|
Interest
income
|
|
|
108
|
|
|
—
|
|
|
—
|
|
Interest
expense
|
|
|
(2,145
|
)
|
|
—
|
|
|
(117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
88
|
|
|
700
|
|
|
501
|
|
Other
expenses
|
|
|
127
|
|
|
—
|
|
|
—
|
|
Income
before taxation
|
|
$
|
14,455
|
|
$
|
7,468
|
|
$
|
7,068
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
(2,422
|
)
|
|
(1,318
|
)
|
|
(1,157
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
12,032
|
|
$
|
6,150
|
|
$
|
5,910
|
|
Basic
and diluted net income per common share
|
|
|
0.24
|
|
|
0.14
|
|
|
0.14
|
|
Basic
and diluted dividend paid per common share
|
|
|
—
|
|
|
0.04
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
50,357,454
|
|
|
44,679,990
|
|
|
43,304,125
|
|
Diluted
weighted average common shares outstanding
|
|
|
51,088,144
|
|
|
44,679,990
|
|
|
43,304,125
|
|
Years
Ended December 31, 2007 and 2006
Contract
revenues earned for the year ended December 31, 2007 were $86.6 million, an
increase of $23.3 million, or 37%, from the contract revenues earned of $63.3
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
year ended December 31, 2007. In addition, we also experienced a general
increase in the amount of revenue generated per project for the year ended
December 31, 2007 as compared to the same period in 2006.
Cost
of
contract revenues earned for the year ended December 31, 2007 was $64.4 million,
an increase of $17.6 million, or 38%, from $46.8 million for the comparable
period in 2006. Cost of contract revenues earned consists of raw materials,
labor and other operating costs related to contract performance. The increase
in
costs of contract revenues earned was primarily due to the increased number
of
projects for the year ended December 31, 2007.
Gross
profit for the year ended December 31, 2007 was $22.3 million, an increase
of
$5.7 million, or 34%, from $16.6 million for the comparable period of 2006.
Our
gross margin for the year ended December 31, 2007 was 25.7% as compared with
26.1% for the year ended December 31, 2006. The decrease was primarily a result
of moderately higher raw material and labor costs.
Selling,
general and administrative expenses were $5.5 million for the year ended
December 31, 2007, a decrease of approximately $0.5 million, or 8%, from $6.0
million for the comparable period in 2006. The decrease was primarily due to
higher expenses in 2006 related to organizational restructuring prior to our
IPO
in 2007 and operational expansion. There were nil non-recurring general and
administrative expenses in fiscal 2007 as compared to $3.8 million in fiscal
2006 due to a one-time brokerage and consulting fees related to our Share
Exchange and private placement that occurred in fiscal 2006.
Interest
expenses and finance expenses were approximately $2.4 million for the year
ended
December 31, 2007, an increase of approximately $2.4 million, from $nil 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
in April 2007, which incurred $589,729 accretion of interest discount for
warrants, $634,540 for accretion of interest discount for beneficial conversion
feature, $438,332 accretion of redemption premium, $43,835 for amortization
on
bond discount to interest expense and $438,332 for interest
payable.
Income
tax was $2.4 million for the year ended December 31, 2007 at an effective tax
rate of 16.8%, compared with $1.3 million for the year ended December 31, 2006
at an effective tax rate of 17.7%. 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, Hong Kong, Macau & Australia under different tax
rates on corporate profits derived from subsidiaries in each location. Our
four
PRC subsidiaries 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, our four Hong Kong subsidiaries
are subject to a Hong Kong profits tax rate of 17.5%. Our Macau subsidiary
is
subject to a Macau profit tax rate of 12%. Our Australia subsidiary is subject
to an Australian corporate income tax rate of 30%. We expect our effective
tax
rates to increase in future periods as a result of new tax laws passed in the
PRC.
Net
income for the year ended December 31, 2007 was $12.03 million, an increase
of
$5.88 million, or 96%, from $6.15 million for the comparable period in
2006.
Years
Ended December 31, 2006 and 2005
Contract
revenues earned for year ended December 31, 2006 were $63.3 million, an increase
of $13.8 million, or 28%, from the contract revenues earned of $49.5 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 29%, 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 December
31, 2006. Gross profit for the year ended December 31, 2006 was $16.6 million,
an increase of $3.5 million, or 26%, from $13.1 million for the year ended
December 31, 2005. Our gross margin for the year ended December 31, 2006 was
26.1% as compared with 26.6% 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%, 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.
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 17.7%, compared with $1.2 million taxes for the year ended December 31,
2005,
an effective tax rate of 16.4%. 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 $6.1 million, an increase of
$0.2 million, or 4%, from $5.9 million for the comparable period in 2005.
Liquidity
and Capital Resources
At
December 31, 2007, we had cash and cash equivalents of $4,040,168. Prior to
October 17, 2006, we have historically financed our business operations through
short-term bank loans, cash provided by operations, and credit provided by
suppliers. More recently, we have raised capital through debt and equity
offerings.
On
October 17, 2006, concurrently with the close of the Share Exchange, we received
gross proceeds of $3.7 million in a private placement transaction (the “Private
Placement”). For its services as placement agent, WestPark Capital, Inc.
received an aggregate fee of approximately $446,000, 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. We also incurred legal and
accounting expenses of approximately $150,000. After commissions and expenses,
we received net proceeds of approximately $3.1 million.
On
April
12, 2007, we completed a financing transaction pursuant to which we issued
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 September 28, 2008, at an initial conversion price of $3.50 per
share, the price per share at which shares were sold in our initial public
offering on AMEX. 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, including the shares of common
stock issuable upon conversion of the Bonds and exercise of the Bond Warrants,
is not listed on AMEX or (ii) the Bonds, the Bond Warrants, and shares
underlying the Bonds and the 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 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. 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
instrument.
In
October 2007, we completed an initial public offering consisting of 847,550
shares of our common stock. Our sale of common stock, which was sold indirectly
by us to the public at a price of $3.50 per share, resulted in net proceeds
of
approximately $2.0 million. These proceeds were net of underwriting discounts
and commissions, fees for legal and auditing services, and other offering costs.
Also in October 2007, a holder of warrants to purchase 232,088 shares of our
common stock at a per share exercise price of $1.60 exercised the warrants.
As a
result of the exercise, we received gross exercise proceeds of $371,341 and
issued 232,088 shares of common stock to the holder.
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 RMB20,000,000. The credit facility does
not
require renewal until October 2011. In order to facilitate the extension of
the
credit facility, we agreed to deposit the equivalent amount in HKD on fixed
deposit terms into the Hong Kong branch of Bank of East Asia. This facility
is
subject to a current interest rate of 5.508% and interest rate adjusts every
6
months. The amount outstanding as of December 31, 2007 was
$546,889.
Our
subsidiariy, Zhuhai King Glass Engineering Co., Limited, borrowed from Bank
of
East Asia with a condominium as collateral. This facility, which is due October
25, 2011, is subject to a current interest rate of 5.832% and interest rate
adjusts every 6 months. The amount outstanding as of December 31, 2007 was
$169,518.
Full
Art
International Limited incurred an automobile capital lease obligations due
November 12, 2009 that had an outstanding amount of $274,363 as of Decmeber
31,
2007.
We
also
opened a line of credit and a trust receipts line with the Hong Kong Branch
of
Dah Sing Bank. The credit facilities are set to expire on November 28 and
November 25, 2008, respectively, which had approximately $257,926 and $1,773,735
, respectively, outstanding as of December 31, 2007.
On
February 19, 2008, we and Techwell Engineering Limited were granted a
performance bond facility by the Hong Kong Branch of ABN AMRO Bank N.V. The
facility amount is $10,000,000, at a tenor of up to one year with 2% flat
interest rate on the issued amount of performance bond.ABN AMRO required
guarantees as follows: (i) an irrevocable and unconditional guarantee executed
by Zhuhai King Glass Engineering Co. Limited and (ii) share charge over the
shares of us for a minimum value of $5,000,000 or equivalent, executed by KGE
Group Limited.
We
also
lease certain administrative and production facilities from third parties.
Accordingly, for the years ended December 31, 2007 and 2006, we incurred rental
expenses of $437,750 and $385,386, respectively.
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.
Net
cash
used in operating activities for the year ended December 31, 2007 was $12.8
million, as compared to $5.8 million used in the same period in 2006. The change
is primarily the result of an add-back of non-cash amortization expense on
the
convertible bonds, an increase in receivables due to a relatively long
collection period typical of the architecture industry in China, an increase
in
net operating income and an increase in payables for the year ended December
31,
2007.
Net
cash
used in operating activities for the year ended December 31, 2006 was $5.8
million, as compared to $4.1 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 and an increase in restricted cash, 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. The increase in restricted
cash from $600,000 in 2005 as compared to an increase of $2.2 million in
2006,
resulting 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.
We
experienced an increase of revenue of $23.3 million for the year ended December
31, 2007 compared to an increase of $13.8 million for the same period in 2006.
Contracts receivables as of December 31, 2007 were $13.0 million, an increase
of
$5.4 million, over contracts receivables of $7.6 million as of December 31,
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.
Net
cash
used by investing activities was approximately $1.6 million for the year ended
December 31, 2007 compared to approximately $89,250 used for the year ended
December 31, 2006. The change was mainly a result of an increase of fixed assets
purchased. Net cash used by investing activities was $89,250 for the year ended
December 31, 2006, as compared to net cash provided by investing activities
of
$390,287 for the year ended December 31, 2005.
Net cash provided by financing activities was $14.9 million for the year
ended December 31, 2007 compared to $6.9 million used for the year ended
December 31, 2006. The increase was primarily due to the receipt of $9.7 million
for the issuance of convertible bonds and warrants, $3.3 million from the IPO
and $1.4 million repayment from shareholder. We borrowed short-term loans of
$2.6 million and repaid long-term loans of $2.1 million.
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.
At
December 31, 2007, we had no material commitments for capital expenditures
other
than for those expenditures incurred in the ordinary course of business. We
intend to expend a significant amount of capital 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, 2007:
|
|
Payments
due by period
|
|
|
|
Total
|
|
Less than
1
year
|
|
1-3 years
|
|
3-5 years
|
|
More
than 5
years
|
|
Operating
Lease Obligations
|
|
$
|
487,345
|
|
$
|
276,195
|
|
$
|
211,150
|
|
$
|
—
|
|
$
|
—
|
|
Long-term
debt(1)
|
|
$
|
10,443,881
|
|
$
|
—
|
|
$
|
274,363
|
|
$
|
10,169,518
|
|
$
|
—
|
|
(1)
Include the $10 million convertible bond at face value, which may convert into
our common stocks after April 12, 2008, accordingly we may re-classify upon
conversion.
Off-Balance
Sheet Arrangements
None.
New
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
years beginning after November 15, 2007. The Company is currently evaluating
the
impact of SFAS 157 on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of SFAS 115” (SFAS
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 159 on the Company’s consolidated financial
statements.
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations,
(‘‘SFAS 141(R)’’). SFAS 141(R) retains the fundamental requirements of the
original pronouncement requiring that the purchase method be used for all
business combinations, but also provides revised guidance for recognizing and
measuring identifiable assets and goodwill acquired and liabilities assumed
arising from contingencies, the capitalization of in-process research and
development at fair value, and the expensing of acquisition-related costs as
incurred. SFAS 141(R) is effective for fiscal years beginning after December
15,
2008. The Company will evaluate how the new requirements could impact the
accounting for any acquisitions completed beginning in fiscal 2009 and beyond,
and the potential impact on the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements − an amendment of ARB No. 51. SFAS 160
requires that ownership interests in subsidiaries held by parties other than
the
parent (previously referred to as minority interests), and the amount of
consolidated net income, be clearly identified, labeled and presented in the
consolidated financial statements. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value. Sufficient disclosures are
required to clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners as components of equity. It
is
effective for fiscal years beginning after December 15, 2008, and requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements are applied prospectively.
The Company is currently evaluating the impact of SFAS 160 on the Company’s
consolidated financial statements.
Item
7A. Quantitative and Qualitative Disclosures about 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 collectability
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 Renminbi (RMB), Hong Kong Dollar (HKD),
Macau Pacata (MOP) and Australian Dollar (AUD). Substantially all of our
operations are conducted in the PRC. Substantially all of 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.
Item
8. Financial Statements and Supplementary Data
The
information required by this Item 8 is incorporated by reference to China
Architectural Engineering, Inc.’s Consolidated Financial Statements and
Independent Auditors’ Report beginning at page F-1 of this Form
10-K.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
Applicable.
Item
9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed by us in the reports that
we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.
As
of the
end of the period covered by this Annual Report, we conducted an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms and
which also are effective in ensuring that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act
is
accumulated and communicated to the Company’s management, including the
Company’s Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
Management's
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting,
as
defined in Exchange Act Rule 13a-15(f), is a process designed by, or under
the supervision of, our principal executive and principal financial officers
and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of our assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that our receipts and expenditures are
being
made only in accordance with authorizations of our management and
directors; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use of disposition of our assets that could
have
a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control systems, no matter
how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect
to
financial statement preparation and presentation.
Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on this assessment, management believes that as of
December 31, 2007, our internal control over financial reporting is
effective based on those criteria.
This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the company’s registered
public accounting firm pursuant to temporary rules of the SEC to provide only
management’s report in this annual report.
Changes
in internal control over financial reporting
Based
on
the evaluation of our management as required by paragraph (d) of Rule 13a-15
or
15d-15 of the Exchange Act, we believe that there were no changes in our
internal control over financial reporting that occurred during our last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item
9B. Other Information
None.
PART
III
Item
10. Directors
,
Executive Officers and Corporate Governance
The
information required by this Item 10 is incorporated by reference from our
definitive proxy statement on Schedule 14A which will be filed before the end
of
the 120-day period immediately following the end of our 2007 fiscal year, or,
if
our definitive proxy statement is not filed within that time, the information
will be filed as part of an amendment to this annual report on Form 10-K/A,
not
later than the end of the 120-day period.
Item
11. Executive Compensation
The
information required by this Item 11 is incorporated by reference from our
definitive proxy statement on Schedule 14A which will be filed before the end
of
the 120-day period immediately following the end of our 2007 fiscal year, or,
if
our definitive proxy statement is not filed within that time, the information
will be filed as part of an amendment to this annual report on Form 10-K/A,
not
later than the end of the 120-day period.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The
information required by this Item 12 is incorporated by reference from our
definitive proxy statement on Schedule 14A which will be filed before the end
of
the 120-day period immediately following the end of our 2007 fiscal year, or,
if
our definitive proxy statement is not filed within that time, the information
will be filed as part of an amendment to this annual report on Form 10-K/A,
not
later than the end of the 120-day period.
Item
13. Certain Relationships and Related Transactions
,
and Director Independence
The
information required by this Item 13 is incorporated by reference from our
definitive proxy statement on Schedule 14A which will be filed before the end
of
the 120-day period immediately following the end of our 2007 fiscal year, or,
if
our definitive proxy statement is not filed within that time, the information
will be filed as part of an amendment to this annual report on Form 10-K/A,
not
later than the end of the 120-day period.
Item
14. Principal Accounting Fees and Services
The
information required by this Item 14 is incorporated by reference from our
definitive proxy statement on Schedule 14A which will be filed before the end
of
the 120-day period immediately following the end of our 2007 fiscal year, or,
if
our definitive proxy statement is not filed within that time, the information
will be filed as part of an amendment to this annual report on Form 10-K/A,
not
later than the end of the 120-day period.
PART
IV
Item
15. Exhibits, Financial Statement Schedules
1.
Financial Statements: See “Index to Consolidated Financial Statements” in Part
II, Item 8 of this Annual Report on Form 10-K.
2.
Financial Statement Schedule: See “Schedule II—Valuation and Qualifying
Accounts” below in this Item 15 of this Annual Report on Form 10-K.
3.
Exhibits: The exhibits listed in the accompanying “Exhibit Index” are filed or
incorporated by reference as part of this Form 10-K.
SCHEDULE
II
China
Architectural Engineering, Inc.
Valuation
and Qualifying Accounts and Reserves
Years
Ended December 31, 2007, 2006 and 2005
Allowance
for Doubtful Accounts:
|
|
Balance at the Beginning
of the Year
|
|
Charge to Cost
and Expenses
|
|
Deductions
|
|
Balance at the
End of the Year
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
$
|
427,668
|
|
$
|
-
|
|
$
|
(24,073
|
)
|
$
|
403,595
|
|
Year
ended December 31, 2006
|
|
|
403,595
|
|
|
14,053
|
|
|
-
|
|
|
417,648
|
|
Year
ended December 31, 2007
|
|
|
417,648
|
|
|
-
|
|
|
(201,947
|
)
|
|
215,701
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, in the City of Zhuhai, People’s
Republic of China, on March 31, 2008.
China
Architectural Engineering, Inc.
|
|
/s/
Luo Ken Yi
|
|
Luo
Ken Yi
|
Chief
Executive Officer, Chief Operating Officer and
|
Chairman
of the Board
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed by the following persons on behalf of the Registrant and 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)
|
|
March
31, 2008
|
Luo
Ken Yi
|
|
|
|
|
/s/
Xinyue Jasmine Geffner
|
|
Chief
Financial Officer (Principal Financial and
Accounting
Officer)
|
|
March
31, 2008
|
Xinyue
Jasmine Geffner
|
|
|
|
|
|
|
|
|
|
/s/
Tang Nianzhong
|
|
Vice
General Manager and Director
|
|
March
31, 2008
|
Tang
Nianzhong
|
|
|
|
|
|
|
|
|
|
/s/
Ye Ning
|
|
Vice
General Manager and Director
|
|
March
31, 2008
|
Ye
Ning
|
|
|
|
|
|
|
|
|
|
/s/
Zheng Jinfeng
|
|
Director
|
|
March
31, 2008
|
Zheng
Jinfeng
|
|
|
|
|
|
|
|
|
|
/s/
Zhao Bao Jiang
|
|
Director
|
|
March
31, 2008
|
Zhao
Bao Jiang
|
|
|
|
|
|
|
|
|
|
/s/
Kelly Wang
|
|
Director
|
|
March
31, 2008
|
Kelly
Wang
|
|
|
|
|
Exhibit
Index
Exhibit
No.
|
|
Exhibit
Description
|
|
|
|
2.1
|
|
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 Current Report on
Form 8-K
filed with the Securities and Exchange Commission on October 20,
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 Current Report
on
Form 8-K filed with the Securities and Exchange Commission on October
20,
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).
|
|
|
|
3.1(a)
|
|
Certificate
of Amendment of Certificate of Incorporation dated July 8, 2005
(incorporated by reference to Registrant's Quarterly Report on Form
10-QSB
filed August 11, 2005)
|
|
|
|
3.2
|
|
Bylaws
of the Registrant (incorporated by reference from Exhibit 3.2 to
Registration Statement on Form SB-2 filed with the Securities and
Exchange
Commission on April 20, 2004, and incorporated herein by reference).
|
|
|
|
3.3
|
|
Articles
of Merger Effecting Name Change (incorporated by reference from Exhibit
3.3 to Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 20, 2006).
|
|
|
|
4.1
|
|
Specimen
Certificate of Common Stock (incorporated by reference to Exhibit
4. 1 of
the Registrant's Registration Statement on Form SB-2 filed August
20,
2004).
|
|
|
|
4.2
|
|
Trust
Deed, dated April 12, 2007,
by
and between the Registrant and The Bank of New York, London Branch
(incorporated by reference to Exhibit 4.1
to
the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
April 18, 2007).
|
|
|
|
4.2(a)
|
|
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 September 4, 2007).
|
|
|
|
4.3
|
|
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).
|
|
|
|
4.4
|
|
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).
|
|
|
|
4.5
|
|
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).
|
|
|
|
4.6
|
|
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).
|
|
|
|
4.6(a)
|
|
Written
description of oral agreement between the Registrant and ABN AMRO
Bank
N.V. (incorporated by reference to Exhibit 4.8(a) to the Form S-1/A
filed
with the Securities and Exchange Commission on September 21,
2007).
|
|
|
|
10.1
|
|
Form
of Subscription Agreement dated October 17, 2006 (incorporated by
reference to Exhibit 10.1 to the Form S-1/A filed with the Securities
and
Exchange Commission on February 5,
2007).
|
Exhibit
No.
|
|
Exhibit
Description
|
|
|
|
10.1(a)
|
|
Form
of Waiver of Penalties dated August 29, 2007 Related to Registration
Rights (incorporated by reference to Exhibit 10.1 of the Registrant's
Quarterly Report on Form 10-Q filed with the Securities and Exchange
Commission on September 4, 2007).
|
|
|
|
10.2
|
|
Form
of Subscription Agreement dated October 2004 (incorporated by reference
to
Exhibit 10.2 to the Form SB-2/A filed with the Securities and Exchange
Commission on October 1, 2004).
|
|
|
|
10.3
|
|
Employment
Agreement dated December 30, 2005 by and between the Registrant and
Luo
Ken Yi (translated to English) (incorporated by reference from Exhibit
10.3 to the Current Report on Form 8-K filed with the Securities
and
Exchange Commission on October 20, 2006).
|
|
|
|
10.4
|
|
Employment
Agreement dated January 11, 2004 by and between the Registrant and
Tang
Nianzhong (translated to English) (incorporated by reference to Exhibit
10.4 to the Form S-1/A filed with the Securities and Exchange Commission
on February 5, 2007).
|
|
|
|
10.5
|
|
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).
|
|
|
|
10.6
|
|
Employment
Agreement dated January 1, 2006 by and between the Registrant and
Li
Guoxing (translated to English) (incorporated by reference to Exhibit
10.6
to the Form S-1/A filed with the Securities and Exchange Commission
on
February 5, 2007).
|
|
|
|
10.7
|
|
Employment
Agreement dated January 1, 2005 by and between the Registrant and
Bai Fai
(translated to English) (incorporated by reference to Exhibit 10.7
to the
Form S-1/A filed with the Securities and Exchange Commission on February
5, 2007).
|
|
|
|
10.8
|
|
Employment
Agreement dated December 26, 2005 by and between the Registrant and
Wang
Zairong (translated to English) (incorporated by reference to Exhibit
10.8
to the Form S-1/A filed with the Securities and Exchange Commission
on
February 5, 2007).
|
|
|
|
10.9
|
|
Employment
Agreement dated December 20, 2005 by and between the Registrant and
Feng
Shu (translated to English) (incorporated by reference to Exhibit
10.9 to
the Form S-1/A filed with the Securities and Exchange Commission
on
February 5, 2007).
|
|
|
|
10.10
|
|
Employment
Agreement dated December 26, 2006 by and between the Registrant and
Wang
Xin (translated to English) (incorporated by reference to Exhibit
10.10 to
the Form S-1/A filed with the Securities and Exchange Commission
on
February 5, 2007).
|
|
|
|
10.11
|
|
Office
and Factory Lease Agreement dated July 13, 2005 by and between the
Registrant and Zhuhai Yuping Kitchen Equipment Co., Ltd. (translated
to
English) (incorporated by reference to Exhibit 10.11 to the Form
S-1/A
filed with the Securities and Exchange Commission on February 5,
2007).
|
|
|
|
10.12
|
|
Lease
Agreement by and between the Registrant and Beijing Aoxingyabo Technology
Development Co., Ltd (translated to English) (incorporated by reference
to
Exhibit 10.12 to the Form S-1/A filed with the Securities and Exchange
Commission on February 5, 2007).
|
|
|
|
10.13
|
|
Property
Rental Contract by and between the Registrant and Shanghai Sandi
CNC
equipment Ltd. Co (translated to English) (incorporated by reference
to
Exhibit 10.13 to the Form S-1/A filed with the Securities and Exchange
Commission on February 5, 2007).
|
|
|
|
10.14
|
|
Subscription
Agreement, dated March 27, 2007, by and between the Registrant and
ABN
AMRO Bank N.V. (incorporated by reference to Exhibit 10.1 to the
Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
April 18, 2007).
|
|
|
|
10.15
|
|
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 (incorporated by reference to Exhibit 10.16 to Form
S-1/A
filed with the Securities and Exchange Commission on September 4,
2007).
|
Exhibit
No.
|
|
Exhibit
Description
|
|
|
|
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 (incorporated by reference to Exhibit 10.16(a)
to
the Form S-1/A filed with the Securities and Exchange Commission
on
September 4, 2007).
|
|
|
|
10.16(b)
|
|
Written
description of oral agreement between the Registrant, First Alliance
Financial Group, Inc., and WestPark Capital, Inc. Affiliates (incorporated
by reference to Exhibit 10.16(b) to the Form S-1/A filed with the
Securities and Exchange Commission on September 21,
2007).
|
|
|
|
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).
|
|
|
|
10.20
|
|
Form
of Stock Issuance 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).
|
|
|
|
10.21
|
|
Form
of Stock Purchase 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).
|
|
|
|
10.22
|
|
Stock
Purchase Agreement dated November 6, 2007, entered into by and among
Ng
Chi Sum, Yam Mei Ling, the Registrant and Full Art (incorporated
by
reference from Exhibit 10.1 to the Current Report on Form 8-K filed
with
the Securities and Exchange Commission on November 8,
2007).
|
|
|
|
21.1
|
|
List
of Subsidiaries (incorporated by reference from Exhibit 21.1 to Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
October 20, 2006).
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Item 601(b)(31) of
Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Item 601(b)(31) of
Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
32.1*
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
*
|
This
exhibit shall not be deemed "filed" for purposes of Section 18 of
the
Securities Exchange Act of 1934 or otherwise subject to the liabilities
of
that section, nor shall it be deemed incorporated by reference in
any
filing under the Securities Act of 1933 or the Securities Exchange
Act of
1934, whether made before or after the date hereof and irrespective
of any
general incorporation language in any
filings.
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
FINANCIAL
STATEMENTS
DECEMBER
31, 2007, 2006, AND 2005
(Stated
in US dollars)
CONTENTS
|
|
PAGE
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
F-2
|
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
F-3
|
|
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
F-5
|
|
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
F-6
|
|
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
F-7
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
F-9
|
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, 2007 and 2006, and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended
December 31, 2007, 2006 and 2005. 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, 2007 and 2006, and the results of its
operations and its cash flows for the years ended December 31, 2007, 2006 and
2005 in conformity with accounting principles generally accepted in the United
States of America.
South
San Francisco, California
|
Samuel
H. Wong & Co., LLP
|
February
6, 2008
|
Certified
Public Accountants
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2007 and 2006
(Stated
in US Dollars)
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
4,040,168
|
|
$
|
2,115,966
|
|
Restricted
cash
|
|
|
595,016
|
|
|
2,743,142
|
|
Contract
receivables, net
|
|
|
13,047,559
|
|
|
7,573,913
|
|
Costs
and earnings in excess of billings
|
|
|
57,488,693
|
|
|
22,487,792
|
|
Job
disbursements advances
|
|
|
2,454,106
|
|
|
5,236,327
|
|
Tender
and other site deposits
|
|
|
83,046
|
|
|
3,427,490
|
|
Other
receivables
|
|
|
6,640,865
|
|
|
213,257
|
|
Inventories
|
|
|
528,743
|
|
|
23,108
|
|
Other
current assets
|
|
|
109,533
|
|
|
|
|
Total
current assets
|
|
|
84,987,729
|
|
|
43,820,995
|
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
|
|
|
|
|
Plant
and equipment, net
|
|
|
2,582,554
|
|
|
474,498
|
|
Intangible
Assets
|
|
|
70,386
|
|
|
-
|
|
Security
deposits
|
|
|
-
|
|
|
565,795
|
|
Organization
cost
|
|
|
92,741
|
|
|
-
|
|
Goodwill
|
|
|
7,995,896
|
|
|
-
|
|
Other
non-current asset
|
|
|
7,505
|
|
|
-
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
95,736,811
|
|
$
|
44,861,288
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Short-term
bank loans
|
|
$
|
2,578,550
|
|
$
|
-
|
|
Accounts
payable
|
|
|
18,737,771
|
|
|
15,202,029
|
|
Amount
due to shareholder
|
|
|
1,334,856
|
|
|
1,735
|
|
Other
payables
|
|
|
9,193,186
|
|
|
1,091,382
|
|
Income
tax payable
|
|
|
2,673,643
|
|
|
1,263,491
|
|
Business
and other taxes payable
|
|
|
3,538,336
|
|
|
2,058,327
|
|
Customers’
deposits
|
|
|
757,079
|
|
|
1,272,312
|
|
Job
disbursements payable
|
|
|
-
|
|
|
-
|
|
Other
Accruals
|
|
|
499,684
|
|
|
894,329
|
|
Total
current liabilities
|
|
|
39,313,105
|
|
|
21,783,605
|
|
The
accompanying notes are an integral part of these financial
statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
CONSOLIDATED
BALANCE SHEETS (Continued)
AS
OF DECEMBER 31, 2007 and 2006
(Stated
in US Dollars)
|
|
As of December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
|
|
|
|
|
Long
term bank loans
|
|
$
|
443,881
|
|
$
|
2,564,979
|
|
Convertible
bond payable, net
|
|
|
3,465,741
|
|
|
-
|
|
Minority
interest
|
|
|
49,482
|
|
|
-
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
$
|
43,272,209
|
|
$
|
24,348,584
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued
and
outstanding at December 31, 2007 and 2006
|
|
|
-
|
|
|
-
|
|
Common
stock, $0.001 par value, 100,000,000 shares authorized, 51,783,416
and
50,000,000 shares issued and outstanding at December 31, 2007 and
2006,
respectively
|
|
|
51,784
|
|
|
50,000
|
|
Additional
paid in capital
|
|
|
23,665,558
|
|
|
7,074,701
|
|
Statutory
reserves
|
|
|
3,040,595
|
|
|
1,437,223
|
|
Accumulated
other comprehensive income
|
|
|
1,892,829
|
|
|
469,964
|
|
Retained
earnings
|
|
|
23,813,836
|
|
|
11,480,816
|
|
|
|
|
52,464,602
|
|
|
20,512,704
|
|
TOTAL
LIABILITEIS AND
STOCKHOLDERS’
EQUITY
|
|
$
|
95,736,811
|
|
$
|
44,861,288
|
|
The
accompanying notes are an integral part of these financial
statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
CONSOLIDATED
STATEMENTS OF INCOME
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Contract
revenues earned
|
|
$
86,617,239
|
|
$
63,359,174
|
|
$
49,514,654
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenues earned
|
|
|
(64,353,915
|
)
|
|
(46,796,419
|
)
|
|
(36,368,231
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
22,263,324
|
|
$
|
16,562,755
|
|
$
|
13,146,423
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
(5,525,130
|
)
|
|
(5,989,328
|
)
|
|
(6,463,252
|
)
|
Non-recurring
general and administrative expenses
|
|
|
-
|
|
|
(3,805,608
|
)
|
|
-
|
|
Finance
expenses
|
|
|
208,197
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
$
|
16,529,997
|
|
$
|
6,767,819
|
|
$
|
6,683,171
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
108,241
|
|
|
-
|
|
|
-
|
|
Interest
expense
|
|
|
(2,144,768
|
)
|
|
-
|
|
|
(116,750
|
)
|
Other
income
|
|
|
88,385
|
|
|
700,170
|
|
|
501,128
|
|
Other
expenses
|
|
|
127,043
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before taxation
|
|
$
|
14,454,812
|
|
$
|
7,467,989
|
|
$
|
7,067,549
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
(2,422,484
|
)
|
|
(1,318,221
|
)
|
|
(1,157,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
12,032,328
|
|
$
|
6,149,768
|
|
$
|
5,910,278
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
0.239
|
|
$
|
0.138
|
|
$
|
0.136
|
|
Diluted
net income per common share
|
|
$
|
0.236
|
|
$
|
0.138
|
|
$
|
0.136
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
50,357,454
|
|
|
44,679,990
|
|
|
43,304,125
|
|
Diluted
weighted average common shares outstanding
|
|
|
51,088,144
|
|
|
44,679,990
|
|
|
43,304,125
|
|
The
accompanying notes are an integral part of these financial
statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
|
|
Years ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
12,032,328
|
|
$
|
6,149,768
|
|
$
|
5,910,278
|
|
Depreciation
Expense
|
|
|
334,378
|
|
|
222,424
|
|
|
200,793
|
|
Bad
Debt Expense
|
|
|
291,666
|
|
|
-
|
|
|
-
|
|
Amortization
Expense on convertible bond
|
|
|
2,144,768
|
|
|
-
|
|
|
-
|
|
Profit
on disposal of land use rights
|
|
|
-
|
|
|
-
|
|
|
(15,248
|
)
|
Decrease/(increase)
in restricted cash
|
|
|
2,148,126
|
|
|
(2,224,783
|
)
|
|
600,247
|
|
Decrease/(increase)
in security deposit
|
|
|
565,795
|
|
|
(565,795
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)/decrease
in inventories
|
|
|
(505,635
|
)
|
|
281
|
|
|
(8,366
|
)
|
(Increase)/decrease
in receivables
|
|
|
(41,988,830
|
)
|
|
(18,279,917
|
)
|
|
(6,631,038
|
)
|
(Increase)/decrease
in other assets
|
|
|
(117,038
|
)
|
|
-
|
|
|
-
|
|
Increase/(decrease)
in payables
|
|
|
12,306,736
|
|
|
8,930,623
|
|
|
4,059,391
|
|
Net
cash provided/(used) in operating activities
|
|
$
|
(12,787,706
|
)
|
$
|
(5,767,399
|
)
|
$
|
4,116,057
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Disposals/(purchases)
of land use rights
|
|
$
|
-
|
|
$
|
-
|
|
$
|
694,946
|
|
Decrease/(increase)
in restricted cash
|
|
|
2,148,126
|
|
|
(2,224,783
|
)
|
|
600,247
|
|
Decrease/(increase)
in security deposit
|
|
|
565,795
|
|
|
(565,795
|
)
|
|
-
|
|
Purchases
of plant and equipment
|
|
|
(1,649,170
|
)
|
|
(89,250
|
)
|
|
(304,659
|
)
|
Net
cash provided/(used) in investing activities
|
|
$
|
(1,649,170
|
)
|
$
|
(89,250
|
)
|
$
|
390,287
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from short-term loans
|
|
$
|
2,578,550
|
|
$
|
-
|
|
$
|
-
|
|
Repayments
of short-term loans
|
|
|
-
|
|
|
(743,742
|
)
|
|
(4,795,738
|
)
|
Proceeds
from long-term loans
|
|
|
-
|
|
|
2,564,979
|
|
|
-
|
|
Repayments
of long-term loans
|
|
|
(2,121,098
|
)
|
|
-
|
|
|
-
|
|
Proceeds
for amount due to shareholder
|
|
|
1,442,291
|
|
|
-
|
|
|
132,570
|
|
Repayments
of amount due to shareholder
|
|
|
-
|
|
|
(418,821
|
)
|
|
-
|
|
Proceeds
from issuance of common stock
|
|
|
3,338,470
|
|
|
6,696
|
|
|
-
|
|
Increase
in additional paid in capital from issuance of common
stock
|
|
|
-
|
|
|
7,106,561
|
|
|
-
|
|
Dividends
paid
|
|
|
-
|
|
|
(1,576,796
|
)
|
|
(2,571,395
|
)
|
Issuance
of convertible bond and warrants
|
|
|
9,700,000
|
|
|
-
|
|
|
-
|
|
Net
cash provided/(used) in financing activities
|
|
$
|
14,938,213
|
|
$
|
6,938,877
|
|
$
|
(7,234,563
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase/(decrease) in cash and cash equivalents
|
|
$
|
501,337
|
|
$
|
1,082,228
|
|
$
|
(2,728,219
|
)
|
Effect
of foreign currency translation on cash and cash
equivalents
|
|
|
1,422,865
|
|
|
521,921
|
|
|
251,765
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - beginning of year
|
|
|
2,115,966
|
|
|
511,817
|
|
|
2,988,271
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents – end of year
|
|
$
|
4,040,168
|
|
$
|
2,115,966
|
|
$
|
511,817
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
supplementary information:
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
119,335
|
|
$
|
71,656
|
|
$
|
116,750
|
|
Income
tax paid
|
|
$
|
1,012,332
|
|
$
|
798,988
|
|
$
|
446,850
|
|
The
accompanying notes are an integral part of these financial
statements.
CONSOLIDATED
STATEMETN OF STOCKHOLDERS’ EQUITY
AS
OF DECEMBER 31, 2007, 2006, AND 2005
(Amount
Stated in USD)
|
|
Total
Number of
shares
|
|
Common
stock
|
|
Additional
paid in capital
|
|
Statutory
reserves
|
|
Accumulated
other
Comprehensive
income
|
|
Retained
earnings
|
|
Total
|
|
Balance,
January 1, 2005
|
|
|
43,304,125
|
|
$
|
43,304
|
|
$
|
-
|
|
$
|
1,299,156
|
|
$
|
(292,312
|
)
|
$
|
3,675,169
|
|
$
|
4,725,317
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,910,278
|
|
|
5,910,278
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,355
|
|
|
|
|
|
240,355
|
|
Total
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,150,633
|
|
Dividend
paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,571,396
|
)
|
|
(2,571,396
|
)
|
Increase
to additional paid in capital from reverse acquisition transaction
reflecting cash held by SRKP 1, Inc.
|
|
|
|
|
|
|
|
|
5,722
|
|
|
|
|
|
|
|
|
(5,722
|
)
|
|
-
|
|
Appropriations
to statutory revenue reserves
|
|
|
|
|
|
|
|
|
|
|
|
104,543
|
|
|
|
|
|
(104,543
|
)
|
|
-
|
|
Balance,
December 31, 2005
|
|
|
43,304,125
|
|
$
|
43,304
|
|
$
|
5,722
|
|
$
|
1,403,699
|
|
$
|
(51,957
|
)
|
$
|
6,903,786
|
|
$
|
8,304,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
|
43,304,125
|
|
|
43,304
|
|
|
5,722
|
|
|
1,403,699
|
|
|
(51,957
|
)
|
|
6,903,786
|
|
|
8,304,554
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,149,768
|
|
|
6,149,768
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521,921
|
|
|
|
|
|
521,921
|
|
Total
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,671,689
|
|
Dividend
paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,576,796
|
)
|
|
(1,576,796
|
)
|
Issuance
of common stock
|
|
|
6,695,875
|
|
|
6,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,696
|
|
Additional
paid in capital from issuance of common stock in cash
|
|
|
|
|
|
|
|
|
7,068,979
|
|
|
|
|
|
|
|
|
|
|
|
7,068,979
|
|
Adjustment
of additional paid in capital to retained earnings in connection
with
share exchange
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,582
|
|
|
37,582
|
|
Appropriations
to statutory revenue reserves
|
|
|
|
|
|
|
|
|
|
|
|
33,524
|
|
|
|
|
|
(33,524
|
)
|
|
-
|
|
Balance,
December 31, 2006
|
|
|
50,000,000
|
|
$
|
50,000
|
|
$
|
7,074,701
|
|
$
|
1,437,223
|
|
$
|
469,964
|
|
$
|
11,480,816
|
|
$
|
20,512,704
|
|
The
accompanying notes are an integral part of these financial
statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
CONSOLIDATED
STATEMETN OF STOCKHOLDERS’ EQUITY
AS
OF DECEMBER 31, 2007, 2006, AND 2005
(Amount
Stated in USD)
|
|
Total
Number of
shares
|
|
Common
stock
|
|
Additional
paid in capital
|
|
Statutory
reserves
|
|
Accumulated
other
Comprehensive
income
|
|
Retained
earnings
|
|
Total
|
|
Balance,
January 1, 2007
|
|
|
50,000,000
|
|
$
|
50,000
|
|
$
|
7,074,701
|
|
$
|
1,437,223
|
|
$
|
469,964
|
|
$
|
11,480,816
|
|
$
|
20,512,704
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,032,328
|
|
|
12,032,328
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422,865
|
|
|
|
|
|
1,422,865
|
|
Total
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,455,193
|
|
Proceed
from issuance of common stock
|
|
|
1,783,416
|
|
|
1,784
|
|
|
9,163,264
|
|
|
|
|
|
|
|
|
|
|
|
9,165,048
|
|
Less:
Cost of stock issuance
|
|
|
|
|
|
|
|
|
(951,434
|
)
|
|
|
|
|
|
|
|
|
|
|
(951,434
|
)
|
Adjustment
of Zhuhai KGE Co Ltd Retained Earnings to eliminate Dividend
Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,844,897
|
|
|
3,844,897
|
|
Adjustment
of Zhuhai Career Training School pre-acquisition Deficits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,429
|
|
|
14,429
|
|
Adjustment
of CAEI retained earnings/(deficits)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,955,262
|
)
|
|
(1,955,262
|
)
|
Additional
Paid-in Capital from warrants and beneficial conversion
feature
|
|
|
|
|
|
|
|
|
8,379,027
|
|
|
|
|
|
|
|
|
|
|
|
8,379,027
|
|
Appropriation
to statutory reserve
|
|
|
|
|
|
|
|
|
|
|
|
1,603,372
|
|
|
|
|
|
(1,603,372
|
)
|
|
-
|
|
Balance,
December 31, 2007
|
|
|
51,783,416
|
|
$
|
51,784
|
|
$
|
23,665,558
|
|
$
|
3,040,595
|
|
$
|
1,892,829
|
|
$
|
23,813,836
|
|
$
|
52,464,602
|
|
The
accompanying notes are an integral part of these financial
statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(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.
The
Company’s common stock was listed for trading on the American Stock Exchange on
September 28, 2007.
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 Note 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
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, Australia, Southeast Asia, 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
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 the Company and its
ten subsidiaries. Significant 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.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
The
Company owned the subsidiaries since its reverse-merger on October 17, 2006.
As
of December 31, 2007, detailed identities of the consolidating subsidiaries
are
as follows: -
Name
of Company
|
|
Place
of
Incorporation
|
|
Attributable Equity interest
%
|
|
|
|
|
|
Full
Art International Limited
|
|
Hong
Kong
|
|
100
|
|
|
|
|
|
Zhuhai
King Glass Engineering Co., Limited
|
|
PRC
|
|
100
|
|
|
|
|
|
Zhuhai
King General Glass Engineering Technology Co., Limited
|
|
PRC
|
|
100
|
|
|
|
|
|
King
General Engineering (HK) Limited
|
|
Hong
Kong
|
|
100
|
|
|
|
|
|
KGE
Building System Limited
|
|
Hong
Kong
|
|
100
|
|
|
|
|
|
KGE
Australia Pty Limited
|
|
Australia
|
|
55
|
|
|
|
|
|
Zhuhai
City, Xiangzhou District Career training School
|
|
PRC
|
|
72
|
|
|
|
|
|
Techwell
Engineering Limited
|
|
Hong
Kong
|
|
100
|
|
|
|
|
|
Techwell
International Limited
|
|
Macau
|
|
100
|
|
|
|
|
|
Techwell
Building System (Shenzhen) Co. Limited
|
|
PRC
|
|
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.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(d)
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
|
|
Building
|
|
|
20
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.
(e)
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 periods, there was no impairment loss.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(f)
Goodwill
and Intangible Assets
In
accordance with Statement of Financial Accounting Standard 142 (“FAS 142”),
“Goodwill and Other Intangible Assets.” the Company does not amortize goodwill
or intangible assets with indefinite lives.
For
goodwill and other intangible assets, impairment tests are performed annually
and more frequently whenever events or changes in circumstances indicate
goodwill carrying values exceed estimated reporting unit fair values. Upon
indication that the carrying values of such assets may not be recoverable,
the
Company recognizes an impairment loss as a charge against current operations.
Based on the impairment tests performed, there was no impairment of goodwill
or
other intangible assets in fiscal 2007, 2006 and 2005.
(g)
Inventories
Inventories
are raw materials, which are stated at the lower of weighted average cost or
market value.
(h)
Contracts
receivable
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.
(i)
Cash
and cash equivalents
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
(j)
Restricted
cash
Restricted
cash represents time deposit accounts to secure notes payable and bank
loans.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
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 year ended December
31, 2007 since their effect would have been anti-dilutive.
The
calculation of diluted weighted average common shares outstanding for the year
ended December 31, 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.
Components
of basic and diluted earnings per share were as follows:
|
|
Year
ended
December
31,
2007
|
|
Year
ended
December
31,
2006
|
|
Year
ended
December
31,
2005
|
|
Net
Income
|
|
$
|
12,032,328
|
|
$
|
6,149,768
|
|
$
|
5,910,278
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares
|
|
|
50,357,454
|
|
|
44,679,990
|
|
|
43,304,125
|
|
Dilutive
Shares:
|
|
|
|
|
|
|
|
|
|
|
-
Addition
to Common Stock from Conversion of Notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
-
Addition
to Common Stock from Exercise of Warrants
|
|
|
730,690
|
|
|
-
|
|
|
-
|
|
Diluted
Weighted Average Outstanding Shares:
|
|
|
51,088,144
|
|
|
44,679,990
|
|
|
43,304,125
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
|
|
|
-
Basic
|
|
$
|
0.239
|
|
$
|
0.138
|
|
$
|
0.136
|
|
-
Diluted
|
|
$
|
0.236
|
|
$
|
0.138
|
|
$
|
0.136
|
|
|
|
|
|
|
|
|
|
|
|
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(l)
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, 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:
-
|
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 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.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(m)
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), Hong Kong SAR, Macau SAR and Australia 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 be either
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., Limited and Zhuhai King General Glass
Engineering Technology Co., Limited (“Zhuhai KGGET”) are located in Zhuhai
and is subject to the PRC 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 KGGET 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
KGGET has enjoyed this tax incentive in the previous years. On March
16,
2007, the National People’s Congress of China enacted a new PRC Enterprise
Income Tax Law, under which foreign invested enterprises and domestic
companies will be subject to enterprise income tax at a uniform rate
of
25%. The new law will become effective on January 1, 2008. During
the
transition period for enterprises established before March 16, the
tax
rate will be gradually increased starting in 2008 and be equal to
the new
tax rate in 2012. Zhuhai KGGETanticipates that as a result of the
new EIT
law, its income tax provision will increase, which could adversely
affect
Zhuhai KGGETfinancial condition and results of
operations.
|
|
·
|
Full
Art International Limited, King General Engineering (HK) Limited,
and KGE
Building System Limited 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. King General Engineering (HK) does not have any material
tax
losses carried forward.
|
|
·
|
Techwell
Engineering Limited is subject to Hong Kong tax rate of 17.5%. Techwell
International Limited is a Macau registered company and therefore
is
subject to Macau profit tax rate of 12%. Techwell Building System
(Shenzhen) Co. Limited Is located in Shenzhen and is subject to PRC
corporate income tax rate of 33%. No tax was provisioned as the Company
acquired Techwell on November 6,
2007.
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
|
·
|
KGE
Australia Pty Limited is subject to corporate income tax rate of
30%.
|
|
·
|
The
Company is subject to United States Tax according to Internal Revenue
Code
Sections 951 and 957.
|
|
·
|
The
Company, after a reverse-merger on October 17, 2006, revived to be
an
active business enterprise because of the operations with subsidiaries
in
China and Hong Kong. Based on the consolidated net income for the
year
ended December 31, 2007, the Company shall be taxed at the 35% tax
rate.
|
(n)
Advertising
The
Company expensed all advertising costs as incurred. Advertising expenses
included in selling expenses were $140,236, $151,821, and $114,731 for the
periods ended December 31, 2007, 2006, and 2005, respectively.
(o)
Research
and development
All
research and development costs are expensed as incurred. Research and
development costs included in general and administrative expenses were $111,129,
$50,117, and $58,865 for the periods ended December 31, 2007, 2006, and 2005,
respectively.
(p)
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 $246,656, $118,856, and $109,941 for the
periods ended December 31, 2007, 2006, and 2005, respectively.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(q)
Foreign
currency translation
The
accompanying consolidated financial statements are presented in United States
dollars. The functional currencies of the Company are Renminbi (RMB), Hong
Kong
Dollar (HKD), Macau Pacata (MOP) and Australia Dollar (AUD). The consolidated
financial statements are translated into United States dollars from HKD and
RMB
at year-end exchange rates as to assets and liabilities and average exchange
rates as to revenues and expenses. Capital accounts are translated at their
historical exchange rates when the capital transactions occurred.
|
|
2007
|
|
2006
|
|
2005
|
|
Period
end RMB : US$ exchange rate
|
|
|
7.3141
|
|
|
7.8175
|
|
|
8.0734
|
|
Average
yearly RMB : US$ exchange rate
|
|
|
7.6172
|
|
|
7.9819
|
|
|
8.2033
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Period
end HKD : US$ exchange rate
|
|
|
7.8049
|
|
|
7.7794
|
|
|
7.7535
|
|
Average
yearly HKD : US$ exchange rate
|
|
|
7.8026
|
|
|
7.7690
|
|
|
7.7779
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Period
end MOP : US$ exchange rate
|
|
|
8.1594
|
|
|
-
|
|
|
-
|
|
Average
yearly MOP : US$ exchange rate
|
|
|
8.2166
|
|
|
-
|
|
|
-
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Period
end AUD : US$ exchange rate
|
|
|
1.1419
|
|
|
-
|
|
|
-
|
|
Average
yearly AUD : US$ exchange rate
|
|
|
1.1954
|
|
|
-
|
|
|
-
|
|
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.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(r)
Statutory
reserves
Statutory
reserves for foreign investment enterprises are referring to the amount
appropriated from the net income in accordance with PRC 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.
(s)
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.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
(t)
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
years beginning after November 15, 2007. The Company is currently evaluating
the
impact of SFAS 157 on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of SFAS 115” (SFAS
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 159 on the Company’s consolidated financial
statements.
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations,
(‘‘SFAS 141(R)’’). SFAS 141(R) retains the fundamental requirements of the
original pronouncement requiring that the purchase method be used for all
business combinations, but also provides revised guidance for recognizing and
measuring identifiable assets and goodwill acquired and liabilities assumed
arising from contingencies, the capitalization of in-process research and
development at fair value, and the expensing of acquisition-related costs as
incurred. SFAS 141(R) is effective for fiscal years beginning after December
15,
2008. The Company will evaluate how the new requirements could impact the
accounting for any acquisitions completed beginning in fiscal 2009 and beyond,
and the potential impact on the Company’s consolidated financial statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(CONT’D)
|
In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements − an amendment of ARB No. 51. SFAS 160
requires that ownership interests in subsidiaries held by parties other than
the
parent (previously referred to as minority interests), and the amount of
consolidated net income, be clearly identified, labeled and presented in the
consolidated financial statements. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value. Sufficient disclosures are
required to clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners as components of equity. It
is
effective for fiscal years beginning after December 15, 2008, and requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements are applied prospectively.
The Company is currently evaluating the impact of SFAS 160 on the Company’s
consolidated financial statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
|
|
December
31,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
Contract
receivables
|
|
$
|
13,263,260
|
|
$
|
7,991,561
|
|
Less
:
Allowance for doubtful accounts
|
|
|
(215,701
|
)
|
|
(417,648
|
)
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
13,047,559
|
|
$
|
7,573,913
|
|
Allowance
for Doubtful Accounts
|
|
|
December
31,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
417,648
|
|
$
|
403,595
|
|
Add:
Allowance created
|
|
|
|
|
|
14,053
|
|
Less
:
Bad debt charged against allowance
|
|
|
(201,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
215,701
|
|
$
|
417,648
|
|
|
|
December
31,
2007
|
|
December
31,
2006
|
|
Raw
materials at sites
|
|
$
|
528,743
|
|
$
|
23,108
|
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
Plant
and
equipment consist of the following as of: -
|
|
December
31,
2007
|
|
December
31, 2
006
|
|
At
cost
|
|
|
|
|
|
Motor
vehicle
|
|
$
|
1,223,692
|
|
$
|
453,917
|
|
Machinery
and equipment
|
|
|
3,383,123
|
|
|
1,417,256
|
|
Furniture,
software and office equipment
|
|
|
625,102
|
|
|
669,480
|
|
Building
|
|
|
290,652
|
|
|
-
|
|
Leasehold
improvement
|
|
|
189,403
|
|
|
-
|
|
|
|
$
|
5,711,972
|
|
$
|
2,540,653
|
|
|
|
|
|
|
|
|
|
Less
:
Accumulated depreciation
|
|
|
|
|
|
|
|
Motor
vehicle
|
|
$
|
593,141
|
|
$
|
401,862
|
|
Machinery
and equipment
|
|
|
2,227,231
|
|
|
1,190,795
|
|
equipment
|
|
|
269,695
|
|
|
473,498
|
|
Building
|
|
|
9,810
|
|
|
-
|
|
Leasehold
improvement
|
|
|
29,541
|
|
|
-
|
|
|
|
$
|
3,129,418
|
|
$
|
2,066,155
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,582,554
|
|
$
|
474,498
|
|
Depreciation
expenses included in the selling and administrative expenses for years ended
December 31 2007, 2006, and 2005 were $334,378, $222,424 and $159,641
respectively.
|
|
December
31,
2007
|
|
December
31,
2006
|
|
At
cost
|
|
|
|
|
|
Intangible
Assets
|
|
$
|
99,567
|
|
$
|
-
|
|
Less
:
Accumulated amortization
|
|
|
29,181
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,386
|
|
$
|
-
|
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
A.
SHORT-TERM BANK LOANS
|
|
December
31,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
Bank
of East Asia Ltd., line of credit, at 5.508% per annum, subject
to
variation every 6 months, due October 25, 2011
|
|
$
|
546,889
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Dah
Sing Bank, 5.0% per annum, line of credit, due November 28,
2008
|
|
|
257,926
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Dah
Sing Bank, 5.5% per annum, trust receipts, due November 25,
2008
|
|
|
1,773,735
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,578,550
|
|
$
|
-
|
|
In
October 2006, the Company opened a line of credit facility with the Zhuhai
branch of Bank of East Asia for a maximum of RMB20,000,000. The credit facility
does not require renewal until October 2011. In order to facilitate the
extension of the credit facility, the Company agreed to deposit the equivalent
amount in HKD on fixed deposit terms into the Hong Kong branch of Bank of East
Asia. This facility is subject to a current interest rate of 5.508% and interest
rate adjusts every 6 months.
|
|
December
31,
2007
|
|
December
31,
2006
|
|
|
|
|
|
|
|
Bank
of East Asia Ltd., line of credit, at 5.832% per annum, subject
to
variation ever 6 months, due October 25, 2011
|
|
$
|
169,518
|
|
$
|
2,564,979
|
|
|
|
|
|
|
|
|
|
Auto
capital lease obligations (hire purchase) due November 12,
2009
|
|
|
274,363
|
|
|
-
|
|
|
|
$
|
443,881
|
|
$
|
2,564,979
|
|
Zhuhai
King Glass Engineering Co., Limited borrowed from Bank of East Asia with a
condominium as collateral. This facility is subject to a current interest rate
of 5.832% and interest rate adjusts every 6 months.
Full
Art
International Limited borrowed a hire purchase (car) loan from DBS
Bank.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
8.
|
CONVERTIBLE
BONDS AND BOND WARRANTS
|
On
April
12, 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 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
after
April 12, 2008 up to 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 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. Based on the initial public offering completed
on
October 3, 2007 the initial conversion is now set at $3.50 per share
resulting initial conversion shares of 2,857,143. 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 is required to redeem any outstanding Bonds at 150.87% of
its
principal amount on April 4, 2012.
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
8.
|
CONVERTIBLE
BONDS AND BOND WARRANTS
(CONTINUED)
|
On
April
12, 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 April 12,
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
April
12, 2007, the 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 the pre-effective amendment to the
registration statement and to register them in a separate registration statement
to be filed promptly after the effective date of the previously filed
registration statement. The Company registered resale of the Bonds, the
Warrants, and the shares of common stock underlying the Bonds and Warrants
in a
registration statement that was declared effective by the SEC on February 7,
2008.
On
April
12, 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
$3,207,790 and $3,507,791 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.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
8.
|
CONVERTIBLE
BONDS AND BOND WARRANTS
(CONTINUED)
|
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)
|
|
Bond
Discount
|
|
300,000
|
(2)
|
|
Warrants
|
|
4,036,170
|
(3)
|
|
Beneficial
Conversion Feature
|
|
4,342,857
|
The
above
items (1), (2), and (3) 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: -
|
|
December
31, 2007
|
|
|
|
|
|
Convertible
Bonds Payable
|
|
$
|
10,000,000
|
|
Less:
Interest discount – Warrants
|
|
|
(4,036,170
|
)
|
Less:
Interest discount – Beneficial conversion feature
|
|
|
(4,342,857
|
)
|
Less:
Bond discount
|
|
|
(300,000
|
)
|
Accretion
of interest discount – Warrant
|
|
|
589,729
|
|
Accretion
of interest discount – Beneficial conversion feature
|
|
|
634,540
|
|
Amortization
of bond discount to interest expense
|
|
|
43,835
|
|
6%
Interest Payable
|
|
|
438,332
|
|
Accretion
of redemption premium
|
|
|
438,332
|
|
|
|
|
|
|
Net
|
|
$
|
3,465,741
|
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
9.
|
CONTRACT
REVENUES EARNED
|
The
contract revenues earned for the years ended December 31, 2007, 2006 and 2005
consist of the following: -
|
|
Year ended
December 31, 2007
|
|
Year ended
December 31, 2006
|
|
Year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Billed
|
|
$
|
60,241,592
|
|
$
|
41,906,743
|
|
$
|
37,825,662
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled
|
|
|
26,375,647
|
|
|
21,452,431
|
|
|
11,688,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
86,617,239
|
|
$
|
63,359,174
|
|
$
|
49,514,654
|
|
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 need 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.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
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 periods ended December 31, 2007, 2006,
and
2005: -
|
|
Year
ended
December 31, 2007
|
|
Year ended
December 31, 2006
|
|
Year ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
Tax
at the PRC, HK, Macau & Australia income tax rates
|
|
$
|
4,770,088
|
|
$
|
2,464,436
|
|
$
|
2,332,291
|
|
Effect
of PRC government grants
|
|
|
(2,347,604
|
)
|
|
(1,146,215
|
)
|
|
(1,175,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Current
income tax expense
|
|
$
|
2,422,484
|
|
$
|
1,318,221
|
|
$
|
1,157,271
|
|
Effective
January 1, 2008, the PRC government implemented a new 25% tax rate across the
board for all enterprises regardless of whether domestic or foreign enterprise
without any tax preferences which is defined as "two-year exemption followed
by
three-year half exemption" enjoyed by tax payers. As a result of the new tax
law, a standard 15% tax preference terminated as of December 31, 2007. The
PRC
government has established a set of transition rules to allow enterprises using
tax preferences before January 1, 2008 to continue using the tax preferences
on
a transitional basis until being the new tax rates are fully implemented over
a
five year period.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
The
Company leases certain administrative and production facilities from third
parties. Accordingly, for the years ended December 31, 2007 and 2006, the
Company incurred rental expenses of $437,750 and $385,386
respectively.
The
Company has commitments with respect to non-cancelable operating leases for
these offices, as follows: -
For
the years ended December 31,
|
|
|
|
2008
|
|
$
|
276,195
|
|
2009
|
|
|
113,730
|
|
2010
|
|
|
89,553
|
|
2011
|
|
|
7,867
|
|
|
|
$
|
487,345
|
|
12.
|
RELATED
PARTIES TRANSACTIONS
|
The
following material transactions with related parties during the periods were
carried out in the ordinary course of business and on normal commercial
terms:
The
amount due to shareholder at December 31, 2007 and December 31, 2006 were
$1,334,856 and $1,735, respectively.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
On
October 3, 2007, the Company issued 847,550 shares of common stock at $3.50
per
share upon the closing of an initial public offering. The Company’s sale of
common stock, which was sold indirectly by the Company to the public at a price
of $3.50 per share, resulted in net proceeds of approximately $2.0 million.
These proceeds were net of underwriting discounts and commissions, fees for
legal and auditing services, and other offering costs. Upon the closing of
the
initial public offering, the Company sold to the underwriter warrants to
purchase up to 73,700 shares of its common stock. The warrants are exercisable
at a per share price of $4.20 and will expire if unexercised after five years
from the date of issuance.
In
October 2007, a holder of warrants to purchase 232,088 shares of our common
stock at a per share exercise price of $1.60 exercised the warrants. As a result
of the exercise, we received gross exercise proceeds of $371,341 and issued
232,088 shares of common stock to the holder.
On
November 6, 2007, the Company, through Full Art, acquired all of the issued
and
outstanding shares (the “Techwell Shares”) in the capital of Techwell
Engineering Limited (which has two subsidiaries), a limited liability company
incorporated in Hong Kong (“Techwell”) pursuant to a Stock Purchase Agreement
(the “Agreement”) dated November 6, 2007, entered into by and among Mr. Ng, Chi
Sum and Miss Yam, Mei Ling (the “Shareholders”), the Company and Full Art (the
“Techwell Acquisition”), to consummate the acquisition transaction. Pursuant to
the terms of the Stock Purchase Agreement, the Shareholders agreed to sell
and
transfer all of the Techwell Shares to Full Art for a purchase consideration
of
US$11,654,566 payable in cash and shares of the Company (in equal portion).
Thirty percent of the stock consideration paid to the Shareholders will be
held
in a third-party escrow account for up to two years to cover potential
indemnification obligations of the Shareholders. Techwell is engaged in the
business of manufacturing and constructing external building facades, including
roofing systems for buildings and curtain wall systems and accessories. This
transaction resulted in goodwill of $7,995,896 for the year ended December
31,
2007.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
On
February 19, 2008, the Company and Techwell Engineering Limited were granted
a
performance bond facility by the Hong Kong Branch of ABN AMRO Bank N.V. The
facility amount is USD10,000,000, at a tenor of up to 1 year with 2% flat
interest rate on the issued amount of performance bond. ABN AMRO requires
guarantees as follows:
|
·
|
Irrevocable
and unconditional guarantee executed by Zhuhai KGGET
and
|
|
·
|
Share
charge over the shares of the Company for a minimum value of USD$5,000,000
or equivalent, executed by KGE Group
Limited.
|
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