Notes
to Consolidated Financial Statements (Audited)
For
the year Ended December 31, 2007
Note
A - Organization and Principal Activities
China
Finance, Inc. (the “Company”) was incorporated on March 28, 2000 in the state of
Utah, and its principal office is in New York, New York. In late 2007, the
Company learned that it had inadvertently failed to file certain annual reports
with the state of Utah and, as a result, the Company had been administratively
dissolved effective as of July 14, 2005. While the administrative
dissolution presents certain complications as discussed below, no aspect of the
Company’s business operations has changed as a result of this
development.
The
Company is in the process of seeking reinstatement as a corporation with the
state of Utah by, among other things, filing an administrative appeal and taking
other appropriate steps in an effort to reverse the administrative
dissolution. In the event that the reinstatement is not granted, the
Company will take appropriate steps to reincorporate through merger, conversion
or other appropriate means as soon as practicable.
The
Company believes that, if it is not reinstated, then it will be deemed to have
continued its corporate existence from the date of administrative dissolution
until the date of its reincorporation through merger, conversion or
otherwise. In that case, shareholders will have had limited liability
due to the Company’s corporate structure without
interruption. However, in the unlikely event that the Company is (i)
not reinstated and (ii) not deemed to have continued its corporate existence
pending reincorporation, then the Company will be deemed to have been conducting
its business as an unincorporated business association. Such a
situation could have adverse tax and liability consequences for
shareholders.
The
Company’s principal business, which is primarily conducted through its
wholly-owned indirect subsidiary Shenzhen Hua Yin Guaranty and Investment
Limited Liability Corporation (“SHY”), is (i) providing surety guarantees for
privately-owned small and medium enterprises (or operating companies) (“SMEs”)
in the People’s Republic of China’s (“PRC” or “China”) entering into
transactions whereby the SME will be acquired by a publicly-traded United States
reporting company in a “reverse merger” or other merger and acquisition
(“M&A”) transaction; (ii) providing loan guarantees to assist SMEs and
individuals in the PRC in obtaining loans from Chinese banks for business
operations and/or personal use; (iii) making direct loans to SMEs for business
operations; and (iv) providing consulting services to SMEs including, without
limitation, providing business and introduction services, translation services
and access to office facilities (e.g., conference rooms, computers, telephone
and fax lines through its New York office) from time to time.
Surety
Guarantees
. The Company provides surety guarantee services to
Chinese SMEs seeking to become publicly-traded companies in the United States by
being acquired by a United States reporting company in a “reverse merger” or
other M&A transaction. The surety guarantee business generates
revenues through fees, which typically are based on a percentage of the
transaction. Although the Company may be paid in cash for its surety
guarantee services, the Company generally expects that it will receive
compensation for its surety guarantee services in the form of stock from client
companies (“Payment Securities”). The Company’s clients generally pay
for the Company’s surety guarantee services with Payment Securities because they
do not have sufficient cash flow at the time the services are rendered to pay
for the surety guarantee services. To the extent that the Company
receives Payment Securities as compensation, the Company generally allows the
Payment Securities to mature in the market for a period of time (normally, at
least one year), then typically will strategically sell the Payment Securities
taking into consideration the performance of the SME, the market for the SME’s
stock and the market price of the Payment Securities. Payment
Securities received by the Company may also be unregistered and subject to
restrictions on resale for a period of time (generally, six months until the
holding period under Rule 144 of the Securities Act of 1933
expires). Accordingly, the Payment Securities that the Company
receives as compensation may be held for a significant period of time from the
date the Company acquires them.
Loan
Guarantees
. The Company also provides guarantees to SMEs and
individuals obtaining loans from Chinese banks for their business operations
and/or personal use. In exchange for the Company’s guarantee
services, the borrower pays the Company a certain percentage of the loan amount
as an upfront loan guarantee fee; however, the Company may also receive periodic
fee payments for its loan guarantees. Loan maturities for loans
guaranteed by the Company will generally range from six months to five years,
and are secured by bank deposits made by the Company. If a borrower
fails to fulfill its obligations to a lender, the bank will take possession of
the Company’s deposit.
Loans
. The
Company may make loans to SMEs from time to time (the “Loans”). In
general, the Company expects its Loans will typically be made to SMEs to which
it has provided or will provide surety guarantee services. Loans may
be made to SMEs that the Company determines have been profitable in the past and
have attractive prospects for future profitability, have experienced or are
experiencing or projected to experience growth, or have an attractive credit
profile. To the extent Loans are made to SMEs to which the Company
provides guarantee services, the Loans may be made before or after the Reverse
Merger Transactions are consummated. The Company evaluates the
creditworthiness of the SMEs to which it considers making loans using a number
of criteria related to the strength of the SMEs management, employees, financial
status and overall performance.
Other
Services
. The Company may also provide other services to SMEs
including, without limitation, providing business and introduction services,
translation services and access to office facilities (e.g., conference rooms,
computers, telephone and fax lines through its New York office) from time to
time (“Other Services”). The Company may provide Other Services to
SMEs to which it has provided or will provide surety guarantee, loan or other
services in the past, or to other SMEs that it has not worked with
previously. The Company’s business and introduction services may
include introducing SMEs to third party service providers, such as auditors,
lawyers, consultants and other service professionals, as well as potential
business contacts. The Company’s translation and facilities access
services will be provided on an as-needed basis. The Company
generally expects to be paid a monthly fee for the Other Services that will be
negotiated with the SMEs based on the Other Services to be
provided.
Note B - Summary of Significant
Accounting Policies
Principals
of Consolidation
The
consolidated financial statements include the accounts of China Finance, Inc.
and its wholly-owned subsidiary, Value Global International Limited (“Value
Global”) and its wholly-owned indirect subsidiary, SHY. All
significant intercompany accounts have been eliminated.
Cash
For
financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturity of three months or less to be
cash. The majority of the cash balances are held in financial
institutions in PRC. Restricted Cash is not part of cash and is shown
separately.
Valuation
of Marketable Securities
The
Company generally receives compensation for its surety guarantee services in the
form of Payment Securities. Most of the Payment Securities are shares
of small companies that are traded in the over-the-counter market and are,
therefore, generally considered to be thinly-traded penny stocks. The
Company has adopted policies for the valuation of securities held by the Company
as part of the Company’s Pricing Policies and Procedures. These
Pricing Policies and Procedures state that the Company will generally value its
portfolio securities at the quoted market price or pricing service valuation;
however, pursuant to these Pricing Policies, the Board has adopted guidelines
and instructions that substitute the Company’s good-faith estimate of fair value
for the quoted market price or pricing service valuation when pricing securities
that may be held by the Company including, without limitation, Payment
Securities (the “Fair Value Pricing Instructions”). These Fair Value
Pricing Instructions are used by the Company when:
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·
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its
portfolio securities are subject to restrictions on resale because they
have not been held by the Company for six
months;
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·
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there
are few transactions or market-makers in the
security;
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·
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the
spread between the bid and asked price is large;
and
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·
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there
are substantial variations in the price quotations over
time.
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The Fair
Value Pricing Instructions are implemented by the Board, which determines the
fair value price of Payment Securities on a periodic basis (at least quarterly)
in accordance with the Fair Value Pricing Instructions. Using the
Fair Value Pricing Instructions, the Board seeks to determine the price that is
representative of the amount that the Company might reasonably expect to receive
for the Payment Securities upon their current sale.
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·
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the
financial standing of the issuer;
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·
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the
business and financial plan of the issuer and comparison of actual results
with the plan;
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·
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the
cost of the securities as of the date received by the
Company;
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·
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the
size of position held and the liquidity of the
market;
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·
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contractual
and statutory restrictions on
disposition;
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·
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any
pending public offering with respect to the financial
instrument;
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·
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any
pending reorganization activity affecting the financial instrument (such
as merger proposals, tender offers, debt restructurings, and
conversions);
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·
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the
reported prices and the extent of public trading in similar financial
instruments of the issuer or comparable
companies;
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·
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the
ability of the issuer to obtain needed
financing;
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·
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any
changes in the economic conditions affecting the
issuer;
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·
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recent
purchases or sales of securities of the issuers of the
securities;
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·
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Pricing
by other dealers in similar securities;
and
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·
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the
financial statements of the issuers of the
securities.
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In
addition, the accounting principals used to value the securities in the
Company’s portfolio changed from those used to prepare the financial statements
for the fiscal year ended December 31, 2006 when it became registered as a
closed-end investment company in June 2007. Under Financial
Accounting Standards release number 154 (“FAS 154”), companies that have made a
change to their accounting principals are generally required to restate
their past financial statements (such as those used herein for the fiscal year
ended December 31, 2006) in a manner consistent with the current accounting
principals. However, while the accounting principals used to value
the securities in the Company’s portfolio changed for the fiscal year ended
December 31, 2007, FAS 154 also states that, under certain circumstances, if a
company determines that it would not be practical to apply the new accounting
principals retrospectively, the company may determine to apply the methodology
only prospectively. In considering whether to restate the Company’s
valuation of restricted securities for the fiscal year ending December 31, 2006,
in accordance with accounting principals applicable to investment companies, the
Company’s management and its Board of Directors considered the general guideline
and exceptions to those guidelines under FAS 154. Among the
exceptions are circumstances where retrospective application requires
significant estimates of amounts, and it is impossible to distinguish
objectively information about those estimates that: (1) provides evidence
of circumstances that existed on the date(s) at which those amounts would be
recognized, measured, or disclosed under retrospective application, and (2)
would have been available when the financial statements for that prior period
were issued, then it would be impractical for a company to apply new accounting
principals retrospectively.
After
evaluating the information required to fair value the securities in the
Company’s portfolio (each of which was a restricted security of a publicly
traded U.S. company whose operations are primarily based in China) as of the
fiscal year ended December 31, 2006, the Board has determined that, while some
of information may be available, it would be impractical and, in some cases,
impossible, to recreate all of the information that would be necessary for the
Board to determine the fair value decisions that would have been made at that
time. As a result, the Company and its Board of Directors has
determined, consistent with the exceptional circumstances set forth in FAS 154,
that it is impractical to retroactively apply the new accounting principals that
apply to the Company as an investment company with respect to the fair valuation
of its restricted securities.
Surety
Guarantee Fee Receivables
Surety
guarantee fee receivables consist of cash consideration receivable when the
merger agreement and plan of merger are completed.
Surety
Guarantee Fee Receivables are considered impaired if payment of the surety
guarantee fee is not received by the Company in accordance with terms of the
Surety Guarantee Agreement with each client. It is the Company’s policy to
charge off uncollectible receivables when management determines the receivable
will not be collected.
Loan
Receivables
Loans
receivable are amounts owed to the company under the Loans. In a
typical Loan transaction, the Company loans a party a specified amount and is
repaid the principal together with interest at the specified due dates. Interest
is accrued as revenue by the Company over the term of the loan. As of
December 31, 2007, the Company has two loans outstanding from the loan segment
of its business. Details are listed in Schedule of Investments.
The
Company monitors the Loan activity to help ensure that the interest and
principal are paid to the Company in a timely manner. If necessary, the Company
uses the collateral it receives from clients to secure the Loan as the payment
for the interest and/or principal on the Loan. Loan Receivables are
considered impaired if repayment of the Loan is not received by the Company in
accordance with the terms of the Loan Agreement with each client. It is the
Company’s policy to charge off uncollectible receivables when management
determines the receivable will not be collected.
Loan
Guarantee Fee Receivables
Loan
guarantee fees receivable are fees owed to the company for its loan guarantee
services but not yet received from its clients. In the loan guarantee
transactions, the Company will place funds on deposit with the primary lender to
guaranty repayment by the borrower to the primary lender. Fees received in
connection with loan guarantee transactions are accrued as revenue over the term
of the loan on a straight line basis. Net fees and costs incurred by the Company
are deferred and amortized as a charge to income over the term of the loan on a
straight line basis. The Company provided nine loan guarantees in
2007. As of December 31, 2007, the Company had four loan guarantees
outstanding.
The
Company monitors the loan guarantee activity to help ensure that the interest
and principal are paid to the primary lender in a timely manner and that the
Company receives its loan guarantee fee. If necessary, the Company uses the
collateral it receives from clients as the payment for the loan guarantee
fee. Loan Guarantee Fee Receivables are considered impaired if
payment of the fee is not received by the Company in accordance with the terms
of the Loan Guarantee Agreement with each client. It is the Company’s policy to
charge off uncollectible receivables when management determines the receivable
will not be collected.
Real
Estate Held for Investment
The
Company’s real estate held for investment consists of a building and related
land use rights. The Company values the real estate based on the cost to
purchase and construct a building on the real estate. The Company
evaluates the market price semi-annually for possible impairment loss, and, as
needed, a certified independent agent performs a property inspection and a
market price evaluation.
Property,
Plant and Equipment
Property,
plant and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements are
capitalized.
When
assets are retired or disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gains or losses are included in
income in the year of disposition.
Depreciation
is calculated on a straight-line basis over the lesser of the estimated useful
life of the assets and lease terms. The estimated useful lives are:
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Electronic
Equipment
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5
Years
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Furniture
and Fixtures
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5
Years
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Automobile
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10
Years
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Leasehold
Improvements
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Term
of Lease or Useful Life
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Income
Taxes
Taxes on
profits earned by SHY are calculated in accordance with taxation principles
currently effective in the PRC. We expect that the Chinese government
will continue its stable financial policy, move forward with its reform of its
tax system, and continue to emphasize financial and economic
efficiency. The essential aim of the tax policy of China is to
sustain the current stable economic and social development
pace. Specifically, in terms of the reform of the tax collection
policy, the principles underlying such reform include simplifying the tax
system, expanding the tax foundation, lowering the tax rate, and implementing a
strict collection system. These principles are aimed at immediate and
efficient economic development, the development of science and technology, and
economic usage of energy and resources. We expect that the Add-Value
Tax system will be continued in China.
The
previous Chinese income tax law (the “Previous Income Tax Law”) differentiated
between resident and non-resident enterprises with respect to applicable income
tax rates, tax deductions and incentives/preferential tax policies.
1
This resulted – after taking into account
incentives and deductions – in resident enterprises paying an average
effective tax rate of approximately 25% and non-resident enterprises paying an
average effective tax rate of 15%. The Previous Income Tax Law
generally used the place of incorporation to determine the residence of a
corporation. In addition, Chinese resident enterprises are taxed on
their worldwide income while non-resident enterprises are taxed only on certain
China-sourced income and their effectively connected income from an
establishment in China.
On
January 1, 2008, a new income tax law took effect in the PRC (the “Current
Income Tax Law”), which is designed to implement uniform regulations with
respect to income tax rates, tax deductions and incentives/preferential tax
policies for resident and non-resident enterprises. An EIT rate of
25% will be paid by resident and non-resident enterprises
alike.
2
The Current Income Tax Law also adds
an additional “effective management” test to the residency determination of a
corporation. An otherwise non-resident corporation that is managed or
controlled from China is a Chinese tax resident and, thus, subject to an EIT on
its worldwide income in the same manner as a resident corporation.
1
See
Provisional
Regulations of the People’s Republic of China on Enterprise Income Tax (1993)
for resident enterprises and Income Tax Law of the People's Republic of China
for Enterprises with Foreign Investment and Foreign Enterprises (1991) for
non-resident enterprises.
2
A non-resident
company that does not have an establishment in China or does not derive income
from an establishment in China will pay an EIT at a rate of
20%.
Under the
Previous Income Tax Law, the Company was considered a non-resident corporation
because it was incorporated in Utah and, therefore, paid the lower, non-resident
EIT effective rate on the income it earns in China. Beginning on
January 1, 2008,
the Company is likely
considered to be a tax resident of the PRC because it may be deemed to be
managed and controlled from China because its board of directors and certain
other personnel are located in the PRC and, therefore, will pay an EIT at a rate
of 25% on its worldwide income.
The main
reason behind the wide-ranging tax reform in China is to broaden the impact of
the tax collection system. Under the reforms, we expect tax
collection systems in different enterprises will be coordinated. For
the Personal Income Tax, the reform will emphasize combining comprehensive and
categorized tax collection systems. The Natural Resource Tax will be
re-adjusted and improved. The Upstream Oil Exploiters will be
taxed. The national middle and long-term plan for the development of
sciences and technology will continue, with tax system being used to promote
innovation. The collection and processing of the Add-Value Tax system
on products will be further improved. For the western and northeast
under-developed regions of the PRC, favorable tax systems will be practiced to
promote economic development. Relevant favorable tax systems will be
created to prompt natural resources conservation, economic usages and
re-collection of recoverable resources and industrial
wastes. Meanwhile, with aims to promote employment, relevant tax
policies will be employed. Relevant studies are underway to explore
suitable tax systems that encourage development of non state-owned
enterprises.
We
account for income taxes paid to tax authorities using the liability method.
Taxes on profits earned by our wholly-owned subsidiary Value Global are
calculated in accordance with taxation principles currently effective in the
British Virgin Islands. Value Global is an International Business
Company (IBC) registered in the British Virgin Islands and is exempt from all
taxes and withholding taxes in the British Virgin Islands, paying only
registration fees and annual license fees that amount to $1,300 per
annum.
We
account for income taxes payable on U.S. taxable income in accordance with SFAS
No. 109, “Accounting for Income Taxes,” using the asset and liability approach,
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax basis of such assets and liabilities. This method
utilizes enacted statutory tax rates in effect for the year in which the
temporary differences are expected to reverse and gives immediate effect to
changes in income tax rates upon enactment. Deferred tax assets are
recognized, net of any valuation allowance, for temporary differences and net
operating loss and tax credit carryforwards. Deferred income tax
expense represents the change in net deferred assets and liability
balances.
Foreign
Currency Translation and Transaction
The
accompanying financial statements are presented in the United States dollars
(US$). The functional currency of SHY is the Renminbi (RMB). The
financial statements are translated into the United States dollars from the RMB
at year-end exchange rate as to assets and liabilities and weighted average
exchange rate as to revenues and expenses. Foreign currency cash flows are
translated at the weighted average exchange rate in effect during the period due
to the minimal fluctuation in the currency exchange rates during the period.
Management believed that substantially the same results would be derived if
foreign cash flows were translated at the rates in effect at the time of the
cash flows. Capital accounts are translated at their historical exchange rate
when the capital transactions occurred. Foreign currency translation gains and
losses, if any, are included with the net realized and unrealized gain (loss)
from investments and foreign currency.
Foreign
currency transaction losses resulting from exchange rate fluctuations
denominated in a currency other than the functional currency totaled
approximately $0 and $22,700 for the years ended December 31, 2007 and 2006,
respectively, and are included in General and Administrative Expenses in the
accompanying consolidated statements of operations.
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December
31,
|
2007
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2006
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Year
End
1US
Dollar =
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7.290
RMB
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7.800
RMB
|
|
Weighted
Average
1US
Dollar =
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7.595
RMB
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7.964
RMB
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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 the US
Dollars at the rates used in translation.
Economic
and Political Risks
The
Company faces a number of risks and challenges since its operation is in the PRC
and its primary market is in the PRC. The Company's operations in the PRC are
subject to special considerations and significant risks not typically associated
with companies in North America and Western Europe. The Company's
results may be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with respect to
laws and regulations, anti-inflationary measures, currency conversion and
remittance abroad, and rates and methods of taxation, among other
things.
Use
of Estimates
The
preparation of the 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 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.
Revenue
Recognition
Surety
Guarantees
. The Company determines the surety guarantee
revenue by using the fair value of the Payments Securities. The
Company recognizes the surety guarantee revenue when the service has been
performed and payment can be reasonably estimated.
Loan
Guarantees
. The Company recognizes the loan guarantee revenue
over the term of the loan on a straight line basis.
Loans
. The
Company recognizes Loan revenue over the term of the loan on a straight line
basis.
Other
Services
. The Company recognizes the revenue from Other
Services when the services have been completed, the price is fixed and
determinable and collectibility is reasonably assured.
Reclassifications
Certain
amounts for the fiscal year ended December 31, 2006 have been reclassified to
conform with the presentation of amounts for the fiscal year ended December 31,
2007.
Recent
Pronouncements
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (“SFAS”) No. 141(R), "Business
Combinations”. SFAS 141(R) establishes principles and requirements
for how the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, an any noncontrolling
interest in the acquiree, recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase, and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. As such, the Company
is required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2009. The Company is currently evaluating the impact of
SFAS 141(R) on its consolidated financial statements but does not expect it to
have a material effect.
In
December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (“SFAS”) No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS
160 establishes accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008. As such, the Company is required to adopt these provisions at
the beginning of the fiscal year ended December 31, 2009. The Company
is currently evaluating the impact of SFAS 160 on its consolidated financial
statements but does not expect it to have a material effect.
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities, including an amendment of
FASB Statement No. 115”. SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value at
specified election dates. This Statement applies to all entities,
including not-for-profit organizations. SFAS 159 is effective as of
the beginning of an entity’s first fiscal year that begins after November 15,
2007. As such, the Company is required to adopt these provisions at
the beginning of the fiscal year ended December 31, 2008. The Company
is currently evaluating the impact of SFAS 159 on its consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”. SFAS 157 defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value
measurements. SFAS 157 is effective as of the beginning of the first
fiscal year that begins after November 15, 2007. As such, the Company
is required to adopt these provisions at the beginning of the fiscal year ended
December 31, 2008. The Company is currently evaluating the impact of
SFAS 157 on its consolidated financial statements.
Note
C – Restricted Cash
Restricted
cash is in the form of bank deposits and certificates of deposit that are being
used by the Company to secure loans made by banks to the Company’s loan
guarantee clients. As of December 31, 2007, the Company had four loan
guarantees outstanding, resulting in approximately $5,000,000 in restricted cash
as of the end of the fiscal year.
On July
19, 2007, the Company entered into a loan guarantee agreement with Shenzhen
Hongda Gongyi Limited (“SHGL”) to guarantee a loan from China Construction Bank
Shenzhen Branch to SHGL in the amount of approximately $1,400,000
(RMB10,000,000) with a term of one year. The Company charged a loan
guarantee fee of approximately $40,000 (RMB300,000) for this transaction.. The
Company deposited approximately $400,000
(RMB3,000,000) in
China Construction Bank Shenzhen Branch on July 19, 2007 to secure the loan made
by China Construction Bank Shenzhen Branch to SHGL.
On July
30, 2007, the Company entered into a loan guarantee agreement with Shenzhen
YuZhiLu (“SYZL”) to guarantee a loan from China Construction Bank Shenzhen
Branch to SYZL in the amount of approximately $1,400,000 (RMB10,000,000) with a
term of one year. The Company charged a loan guarantee fee of approximately
$50,000 (RMB400,000) for this transaction. The Company deposited approximately
$300,000 (RMB2,000,000) in China Construction Bank Shenzhen Branch on July 30,
2007 to secure the loan made by China Construction Bank Shenzhen Branch to
SYZL.
On
October 17, 2007, the Company entered into a loan guarantee agreement with
Shengzhen YiJinLi Technology Development Ltd. (“YiJinLi”) to
guarantee a loan from China Construction Bank Shenzhen Branch to YiJinLi in the
amount of approximately $1,400,000 (RMB10,000,000) with a term of one year. The
Company charged a loan guarantee fee of approximately $40,000 (RMB300,000) for
this transaction.. The Company deposited approximately $400,000
(RMB3,000,000) in China Construction Bank Shenzhen Branch on October 17,
2007 to secure the loan made by China Construction Bank Shenzhen Branch to
SHGL.
On
October 31, 2007, the Company entered into a loan guarantee agreement with
ShouGuang Yuxin Chemical Limited (“SGYX”) to guarantee a loan from Citibank
China, Shanghai Branch to SGYX in the amount of approximately $3,800,000
(RMB27,500,000) with a term of five months. The Company charged a loan guarantee
fee of approximately $200,000 (RMB1,375,000) for this transaction. The Company
deposited approximately $3,900,000 (RMB28,520,000) including a six-month
certificate of deposit due on April 26, 2008 with an annual interest rate of
1.42% in the amount of $2,800,000 (RMB20,270,000) in Industrial and Commercial
Bank of China, Shenzhen Branch on October 31, 2007 to secure the loan made by
Citibank China, Shanghai Branch to SGYX.
Note D – Loan Guarantee Fee
Receivables
The
Company provided nine loan guarantees in 2007. The four outstanding
loan guarantees as of December 31, 2007 are described in “Note C – Restricted
Cash” above. The five completed loan guarantee transactions are
described below.
On
February 7, 2007, the Company entered into a loan guarantee agreement with
Shenzhen YuZhiLu (“SYZL”) to guarantee a loan from Shenzhen Commercial Bank to
SYZL in the amount of approximately $500,000 (RMB3,870,000) with a term of six
months. The Company waived its guarantee fee for this transaction. The Company
deposited approximately $500,000 (RMB4,000,000) in Shenzhen Commercial Bank on
February 9, 2007 to secure the loan made by Shenzhen Commercial Bank to
SYZL. SYZL repaid the loan on August 13, 2007.
On March
30, 2007, the Company entered into a loan guarantee agreement with ShouGuang
QingHe (“SGOH”) to guarantee a loan from Shenzhen Commercial Bank to SGOH in the
amount of approximately $1,350,000 (RMB10,000,000) with a term of six
months. The Company waived its guarantee fee for this transaction.
The Company deposited approximately $1,350,000 (RMB9,870,000) in Shenzhen
Commercial Bank on March 30, 2007 to secure the loan made by Shenzhen Commercial
Bank to SGOH. SGOH repaid the loan on September 30,
2007.
On April
11, 2007, the Company entered into a loan guarantee agreement with Zhongshan
City Oceanic International (“ZCOI”) to guarantee a loan from China Construction
Bank Shenzhen Branch to ZCOI in the amount of approximately $2,050,000
(RMB15,000,000) with a term of six months. The Company charged a loan guarantee
fee of approximately $60,000 (RMB450,000) for this transaction. The Company
deposited approximately $2,050,000 (RMB15,000,000) in China Construction Bank
Shenzhen Branch on April 11, 2007 to secure the loan made by China Construction
Bank Shenzhen Branch to ZCOI. ZCOI repaid the loan on September 19,
2007.
On March
15, 2007, the Company entered into loan guarantee agreement with SYZL to
guarantee a loan from Shenzhen Commercial Bank to SYZL in the amount of
approximately $700,000 (RMB5,100,000) with a term of six months. The Company
charged a loan guarantee fee of approximately $20,000 (RMB153,000) for this
transaction. The Company deposited approximately $700,000 (RMB 5,100,000)
in Shenzhen Commercial Bank on March 19, 2007 to secure the second loan
made by Shenzhen Commercial Bank to SYZL. SYZL repaid the loan on
September 19, 2007.
On April
21, 2007, the Company entered into a loan guarantee agreement with Zhongshan
City Oceanic International (“ZCOI”) to guarantee a loan from China Construction
Bank Shenzhen Branch to ZCOI in the amount of approximately $2,100,000
(RMB15,550,000) with a term of six months. The Company waived its guarantee
fee for this transaction. The Company deposited approximately $2,100,000
(RMB15,550,000) in China Construction Bank Shenzhen Branch on April 21,
2007 to secure the loan made by China Construction Bank Shenzhen Branch to
ZCOI. ZCOI repaid the loan on September 19, 2007.
Note
E -- Property, Plant and Equipment
Property,
plant and equipment consisted of the following at December 31, 2007 and
2006:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Cost:
|
|
|
|
|
|
|
|
Electronic
Equipment and Office Furniture
|
|
$
|
228,907
|
|
|
$
|
54,998
|
|
|
Automobile
|
|
|
308,200
|
|
|
|
288,194
|
|
|
Total
Cost
|
|
$
|
537,107
|
|
|
$
|
343,192
|
|
|
Less: Accumulated
Depreciation
|
|
|
(69,089
|
)
|
|
|
(19,985
|
)
|
|
|
|
$
|
468,018
|
|
|
$
|
323,207
|
|
|
Leasehold
Improvement, Net
|
|
|
88,783
|
|
|
|
156,121
|
|
|
Net
Property, Plant and Equipment
|
|
$
|
556,801
|
|
|
$
|
479,328
|
|
Depreciation
and Amortization expenses relating to property, plant and equipment was $121,112
and $68,105 for the years ended December 31, 2007 and 2006,
respectively.
Note
F – Commitments and Contingencies
(1)
Lease
Agreements
. The Company rents office space under two operating
leases. One lease is for office space in Shenzhen, China and the other is for
office space in New York, New York. Previously, the Company had two lease
agreements for a term of 3 years expiring January 1, 2009 and March 31, 2009,
respectively; however, they were terminated by the Company in March
2007. The Company entered into its current lease for its Shenzhen
office on April 1, 2007, and it expires on March 31, 2010. The lease
for its New York office was entered into on August 8, 2007 and expires on August
7, 2017. Minimum lease payments for these two current leases for the
next five years are as follows:
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
$
|
2,400,000
|
|
|
$
|
2,400,000
|
|
|
$
|
2,200,000
|
|
|
$
|
2,100,000
|
|
|
$
|
2,200,000
|
|
Rent
expenses for the years ended December 31, 2007 and 2006 were $1,362,917 and
$196,123, respectively.
(2)
Guarantees
. In
the normal course of its business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements (see “Note B - Summary of
Significant Accounting Policies – Revenue Recognition” above).
As of
December 31, 2007, the Company has four loan guarantees
outstanding. Details are listed in “Note C – Restricted Cash”
above. If the Company’s clients default on their loans so that the
Company is obligated to pay on its guarantees, the Company would be responsible
for paying a maximum of approximately $8,000,000 (RMB57,500,000) in total to the
respective banks.
As of
December 31, 2007, the Company has three outstanding surety guarantee
transactions. If the merger transactions are not successfully
completed so that the Company is obligated to pay on its guarantees, the Company
would be responsible for paying a maximum of $6,000,000.
Note
G - Restricted Securities
China 9D
Construction Group(CNAG).
The 2,901,588
shares of CNAG represent approximately a 3.63% interest in the current issued
and outstanding common shares of CNAG. A portion (2,251,621) of the
CNAG shares were received as payment for surety guarantee services provided for
CNAG’s August 10, 2007 merger transaction with China 9D Decoration Group
Limited. The closing price of the CNAG shares was $0.51 per share on
August 10, 2007. On October 17, 2007, the Company received an
additional 649,967 shares of CNAG as payment of a promissory note for $974,950
owed to the Company from CNAG as payment for the original surety guarantee
services the Company provided.
As of December 31,
2007, the market value of unrestricted shares of CNAG was $1.50 per share, and
the Company’s board determined the fair value of its shares of CNAG to be $0.51
per share.
Jade Art
Group Inc. (JADG).
The 13,022,100
shares of JADG represent approximately a 5.43% interest in the current issued
and outstanding common shares of JADG. A portion (4,340,700) of the
JADG shares were received as payment for surety guarantee services provided for
JADG’s October 2, 2007 merger transaction with Guoxi Holding
Limited. The closing price of the JADG shares was $1.00 per share on
October 2, 2007. On December 28, 2007, the Company received an
additional 8,681,400 shares of JADG due to a three-for-one forward stock split
of JADG. As of December 31, 2007, the market value of unrestricted
shares of JADG was $0.83 per share, and the Company’s board determined the fair
value of its shares of JADG to be $0.50 per share.
Beijing
Logistic Limited (BJGL).
The 5,619,124
shares of BJGL represent approximately a 6% interest in the current issued and
outstanding common shares of BJGL. The BJGL shares were received as
payment for surety guarantee services provided for BJGL’s October 19, 2007
merger transaction with China Baolong Logistic Limited. The closing
price of the BJGL shares was $0.75 per share on October 19, 2007. As
of December 31, 2007, the market value of unrestricted shares of BJGL was $0.75
per share, and the Company’s board determined the fair value of its shares of
BJGL to be $0.75 per share.
Orient
Paper Inc. (OPAI).
The 1,877,525
shares of OPAI represent approximately a 4.68% interest in the current issued
and outstanding common shares of OPAI. The OPAI shares were received
as payment for surety guarantee services provided for OPAI’s October 29, 2007
merger transaction with Dongfang Zhiye Holding Limited. The closing
price of the OPAI shares was $0.75 per share on October 29, 2007. As
of December 31, 2007, the market value of unrestricted shares of OPAI was $1.25
per share, and the Company’s board determined the fair value of its shares of
OPAI to be $0.50 per share.