As
Filed
with the Securities and Exchange Commission on May 12, 2008
Registration
No. _________________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
________________
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
________________
CHINA
ARCHITECTURAL ENGINEERING, INC.
(Name
of Registrant As Specified in its Charter)
Delaware
|
8711
|
51-05021250
|
(State
or Other Jurisdiction of
Incorporation
or
Organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer Identification No.)
|
105
Baishi Road
Jiuzhou
West Avenue
Zhuhai
519070
People’s
Republic of China
0086-756-8538908
(Address
and Telephone Number of Principal Executive Offices)
________________
Luo
Ken Yi
105
Baishi Road
Jiuzhou
West Avenue
Zhuhai
519070
People’s
Republic of China
0086-756-8538908
(Name,
Address and Telephone Number of Agent for Service)
________________
Copy
to
Thomas
J. Poletti, Esq.
Anh
Q. Tran, Esq.
Kirkpatrick
& Lockhart Preston Gates Ellis LLP
10100
Santa Monica Blvd., 7th Floor
Los
Angeles, CA 90067
Telephone
(310) 552-5000
Facsimile
(310) 552-5001
________________
Approximate
Date of Proposed Sale to the Public:
From
time
to time after the effective date of this Registration Statement
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box.
R
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
£
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
£
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement the same
offering.
£
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
£
Accelerated
filer
£
Non-accelerated
filer
R
Smaller
reporting company
£
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of
Securities
To Be Registered
|
|
Amount To Be
Registered
|
|
Proposed
Maximum
Offering
Price
Per
Share
|
|
Proposed
Maximum
Aggregate
Offering
Price
|
|
Amount
of
Registration
Fee
|
|
12%
Convertible Bonds Due 2011
|
|
$
|
20,000,000
|
(2)
|
|
100
|
%
|
$
|
20,000,000
|
(3)
|
$
|
786.00
|
|
Common
Stock, $.001 par value per share, issuable upon conversion of 12%
Convertible Bonds Due 2011
|
|
|
3,149,606
|
(4)
|
|
-
|
|
|
-
|
|
|
N/A
|
(5)
|
Bond
Warrants to Purchase Common Stock Expiring 2013
|
|
|
300,000
|
(6)
|
$
|
5.52
|
(1)
|
$
|
1,656,000
|
(1)
|
$
|
65.08
|
|
Common
Stock, $.001 par value per share issuable upon conversion of Bond
Warrants
Expiring 2013
|
|
|
300,000
|
(7)
|
|
-
|
|
|
-
|
|
|
N/A
|
(5)
|
Total
Registration Fee
|
|
|
|
|
|
|
|
|
|
|
$
|
851.08
|
(8)
|
|
(1)
|
Estimated
pursuant to Rule 457(c) of the Securities Act of 1933 solely for
the
purpose of computing the amount of the registration fee based on
the
average of the high and low sales prices reported on the American
Stock
Exchange on May 8, 2008.
|
|
(2)
|
Represents
the aggregate principal amount of the 12% Convertible Bonds due 2011
issued by the Registrant on April 15,
2008.
|
|
(3)
|
Equals
the aggregate principal amount of the 12% Convertible Bonds due 2011
being
registered. Estimated solely for purposes of calculating the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as
amended,
or the Securities Act.
|
|
(4)
|
Represents
the number of shares of common stock initially issuable upon conversion
of
the 12% Convertible Bonds due 2011 registered hereby. Solely for
purposes
of determining the number of shares of common stock to be registered
under
this Registration Statement that may be issued upon the conversion
of the
Bonds, the conversion price of $6.35 per share is used. Pursuant
to Rule
416 under the Securities Act, also includes such indeterminate number
of
shares of common stock as may be issued from time to time upon conversion
of the 12% Convertible Bonds due 2011 as a result of the anti-dilution
provisions contained therein.
|
|
(5)
|
No
separate consideration will be received for the shares of common
stock
issuable upon conversion of the 12% Convertible Bonds due 2011 or
the Bond
Warrants, and, therefore, no registration fee is required pursuant
to Rule
457(i) under the Securities Act.
|
|
(6)
|
Consists
of 300,000 warrants (the “Bond Warrants”) to purchase 300,000 shares of
Common Stock to be offered for sale by a selling security holder
under
this Registration Statement.
|
|
(7)
|
Represents
the number of shares of common stock initially issuable upon exercise
of
the Bond Warrants due 2013 registered hereby. Pursuant to Rule 416
under
the Securities Act, also includes such indeterminate number of shares
of
common stock as may be issued from time to time upon conversion of
the
Bond Warrants due 2013 as a result of the anti-dilution provisions
contained therein.
In
addition, this Registration Statement covers the issuance of Registrant’s
common stock upon the exercise of Bond Warrants by the holders other
than
the initial holder.
|
________________
The
Registrant amends this Registration Statement on such date or dates as may
be
necessary to delay its effective date until the registrant shall file a further
amendment which specifically states that this Registration Statement shall
hereafter become effective in accordance with Section 8(a) of the Securities
Act
of 1933, or until the Registration Statement shall become effective on such
date
as the Commission, acting pursuant to Section 8(a), may
determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission becomes effective. This prospectus is not an offer
to
sell these securities and we are not soliciting offers to buy these securities
in any state where the offer or sale is not
permitted.
PRELIMINARY
PROSPECTUS
Subject
to Completion, Dated May 12, 2008
$20,000,000
VARIABLE RATE CONVERTIBLE BONDS DUE 2011
300,000
WARRANTS EXPIRING 2013 TO PURCHASE COMMON STOCK
3,449,606
SHARES OF COMMON STOCK
CHINA
ARCHITECTURAL ENGINEERING, INC.
This
prospectus relates to the resale from time to time by the selling security
holders of (i) $20,000,000 12% convertible bonds due in 2011 (the “Bonds”)
issued by us in a private placement to selling security holders on April 15,
2008, (ii) 3,149,606 shares of common stock that are issuable upon conversion
of
the Bonds, subject to adjustment, (iii) 300,000 warrants issued by us in a
private placement to selling security holders on April 15, 2008 to purchase
an
aggregate of 300,000 shares of our common stock, subject to adjustment (the
“Bond Warrants”), and (iv) 300,000 shares of our common stock issuable upon
exercise of the Bond Warrants, subject to adjustment. In addition, this
prospectus covers the issuance of our common stock upon the exercise of the
Bond
Warrants by holders other than the initial holders.
The
Bonds
bear interest from April 15, 2008 at the rate of 12% per annum of the principal
amount of the Bonds. Each Bond is convertible at the option of the holder at
any
time during the period (i) beginning on the earlier of (a) the date that a
registration statement for the shares to be issued upon conversion of the Bonds
is first declared effective by the United States Securities and Exchange
Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending at the close of
business on April 8, 2011, subject to certain exceptions, into shares of our
common stock at an initial conversion price equal to $6.35 per share, which
is
the product of 1.1 and the average closing price per share of our
common stock on the American Stock Exchange (“AMEX”) for the period of 20
consecutive trading days immediately prior to April 15, 2008. 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. Interest is payable
semi-annually in arrears on April 15 and October 15 of each year (each an
“Interest Payment Date”) commencing October 15, 2008. On any Interest Payment
Date on or after April 15, 2010, the holders of the Bonds can require us to
redeem the Bonds at 116.61% of the principal amount of the Bonds redeemed,
plus
all accrued but unpaid interest. We are required to redeem any outstanding
Bonds
at 116.61% of its principal amount on April 15, 2011.
The
Bond
Warrants became exercisable on April 15, 2008, the date of issuance, and will
terminate on April 15, 2013. We may receive proceeds from the exercise of the
Bond Warrants, if they are exercised, at an initial exercise price per share
of
$6.35, subject to adjustment in certain events.
All
securities are being offered by the selling security holders of the securities
for resale. The selling security holders may offer the Bonds, the Bond Warrants,
and the shares underlying the Bonds and Bond Warrants through public or private
transactions, at prevailing market prices or at privately negotiated prices,
and
the other selling security holders may also sell their respective shares of
common stock through the same means. The selling security holders may sell
the
securities directly or through agents or broker-dealers acting as principal
or
agent, or in a distribution by underwriters. We will not receive any proceeds
from the sales of these securities by the selling security holders.
Commencing
on September 28, 2007, our shares of common stock have been listed for trading
on the American Stock Exchange (“AMEX”) under the ticker symbol “RCH.” On May 8,
2008, the closing sales price for our common stock on AMEX was $5.44 per
share.
Neither
the Bonds nor the Bond Warrants are currently listed or quoted for trading
on
any national securities exchange or national quotation system and we currently
have no intention to apply for the listing or quotation of the Bonds or Bond
Warrants for trading on any national securities exchange or national quotation
system.
________________
The
purchase of the Bonds, Bond Warrants, or shares of common stock issuable upon
conversion and exercise of the Bonds and Bond Warrants, respectively, involves
a
high
degree of risk. See section entitled “Risk Factors” beginning on page
8.
________________
Neither
the U.S. Securities and Exchange Commission nor any state securities commission
has approved or disapproved of anyone’s investment in these securities or
determined if this prospectus is truthful or complete. Any representation to
the
contrary is a criminal offense.
________________
The
Date
of This Prospectus Is: ____________________, 2008
Above:
Shanghai Railway Station, on-+e of the Company’s
projects.
Above:
Hangzhou Grand Theater, one of the Company’s projects.
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
|
1
|
SUMMARY
FINANCIAL DATA
|
6
|
RISK
FACTORS
|
8
|
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
|
23
|
USE
OF PROCEEDS
|
24
|
DIVIDEND
POLICY
|
24
|
RATIO
OF EARNINGS TO FIXED CHARGES
|
24
|
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|
24
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
25
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
27
|
DESCRIPTION
OF BUSINESS
|
39
|
MANAGEMENT
|
53
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
61
|
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
62
|
SELLING
SECURITY HOLDERS
|
64
|
DESCRIPTION
OF SECURITIES
|
66
|
DESCRIPTION
OF THE BONDS
|
70
|
DESCRIPTION
OF THE BOND WARRANTS
|
75
|
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES FOR HOLDERS OF BONDS
AND
BOND WARRANTS
|
77
|
SHARES
ELIGIBLE FOR FUTURE SALE
|
85
|
PLAN
OF DISTRIBUTION
|
87
|
LEGAL
MATTERS
|
89
|
EXPERTS
|
89
|
ADDITIONAL
INFORMATION
|
89
|
FINANCIAL
STATEMENTS
|
F-1
|
PART
II INFORMATION NOT REQUIRED IN THE PROSPECTUS
|
II-1
|
SIGNATURES
|
II-10
|
________________
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so that
you will have the information necessary to make an informed investment
decision.
You
should rely only on information contained in this prospectus. We have not
authorized any other person to provide you with different information. This
prospectus is not an offer to sell, nor is it seeking an offer to buy, these
securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date on the
front cover, but the information may have changed since that date.
PROSPECTUS
SUMMARY
Because
this is only a summary, it does not contain all of the information that may
be
important to you. You should carefully read the more detailed information
contained in this prospectus, including our financial statements and related
notes. Our business involves significant risks. You should carefully consider
the information under the heading "Risk Factors" beginning on page 8.
China
Architectural Engineering, Inc.
We
specialize in 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.
We
believe that our business has opportunities for growth through the following
growth strategies:
|
·
|
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.
|
|
·
|
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.
|
|
·
|
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 building envelope systems in the
world.
|
|
·
|
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.
|
|
·
|
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.
|
Corporate
Information
We
were
incorporated in the State of Delaware on March 16, 2004. We were originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation.
On
October 17, 2006, we closed a share exchange transaction, described below,
pursuant to which we (i) became the 100% parent of Full Art International,
Ltd.,
a Hong Kong Company (“Full Art”), which has four subsidiaries, including its
wholly-owned subsidiary Zhuhai King Glass Engineering Co., Ltd. (“Zhuhai”), a
company formed under the laws of the People’s Republic of China (“PRC” or
“China”), (ii) assumed the operations of Full Art and its subsidiaries and (iii)
changed our name from SRKP 1, Inc. to China Architectural Engineering,
Inc.
Our
corporate offices are located at 105 Baishi Road, Jiuzhou West Avenue, Zhuhai,
519070, People’s Republic of China.
Recent
Events
April
2008 Issuance of Bonds and Bond Warrants
On
April
15, 2008, we completed a financing transaction with ABN AMRO Bank N.V., London
Branch (“ABN AMRO”), CITIC Allco Investments Limited (together with ABN AMRO,
the “Subscribers,” and each a “Subscriber”), and CITIC Capital Finance Limited
issuing (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”) and (ii)
300,000 warrants to purchase an aggregate of 300,000 shares of our common stock,
subject to certain adjustments as set forth in the warrant instrument, that
expire in 2013 (the “Bond Warrants”). The transaction was completed in
accordance with a subscription agreement entered into by us, the Subscribers,
and CITIC Capital Finance Limited, dated April 2, 2008 (the “Subscription
Agreement”).
The
Bonds
were subscribed at a price equal to 100% of their principal amount. We agreed
to
pay to the Subscribers an aggregate commission of 2.5% of the principal amount
of the Bonds and of the aggregate warrant issue price for the Bond Warrants.
The
Bonds
were issued pursuant to, and are subject to the terms and conditions of, a
trust
deed dated April 15, 2008 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 15, 2008 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
things, the following terms:
|
·
|
Interest
Rate.
The
Bonds bear cash interest from April 15, 2008 at the rate of 12% per
annum
of the principal amount of the
Bonds.
|
|
·
|
Conversion.
Each Bond is convertible at the option of the holder at any time
during
the period (i) beginning on the earlier of (a) the date that a
registration statement for the shares to be issued upon conversion
of the
Bonds is first declared effective by the United States Securities
and
Exchange Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending
at the close of business on April 8, 2011, subject to certain exceptions,
into shares of our common stock at an initial conversion price equal
to
$6.35 per share, which is the product of 1.1 and the average closing
price per share of our common stock for the period of 20 consecutive
trading days immediately prior to April 15, 2008. 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.
|
|
·
|
Mandatory
Redemptions.
Interest is payable semi-annually in arrears on April 15 and October
15 of
each year (each an “Interest Payment Date”) commencing October 15, 2008.
On any Interest Payment Date on or after April 15, 2010, the holders
of
the Bonds can require us to redeem the Bonds at 116.61% of the principal
amount of the Bonds redeemed, plus all accrued but unpaid interest.
We are
required to redeem any outstanding Bonds at 116.61% of its principal
amount on April 15, 2011.
|
On
April
15, 2008, we entered into a warrant instrument with
the
Subscribers
pursuant
to which
the
Subscribers
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 15, 2008 (the “Warrant Agency Agreement”).
Pursuant to the terms and conditions of the Warrant Instrument and the Warrant
Agency Agreement, the Bond Warrants became exercisable on April 15, 2008 and
terminate on April 15, 2013. The Bond Warrants have an initial exercise price
per share of $6.35, subject to adjustment in certain events.
We
have
agreed to list the shares of common stock underlying the Bonds and the Bond
Warrants on AMEX, or any alternative stock exchange, by the earlier of October
15, 2008 and the date on which a registration statement registering the shares
of common stock underlying the Bond Warrants is first declared effective by
the
SEC. In addition, we have agreed to register the shares of common stock
underlying the Bonds and the Bond Warrants with the SEC on or prior to October
15, 2008 and will keep the registration effective until 30 days after the Bond
Warrants terminate.
On
April,
15, 2008, we also entered into a registration rights agreement with the
Subscribers pursuant to which we agreed to register the Bonds, the Bond
Warrants, and the shares of common stock underlying the Bonds and Bond Warrants
(the “Registrable Securities”). We agreed to prepare and file with the SEC, no
later than 30 days after April 15, 2008, a registration statement on Form S-1,
of which this prospectus is a part, to register the Registrable Securities
(the
“Registration Statement”) and, as promptly as possible, cause that Registration
Statement, as amended, to become effective and in any event within six months
after April 15, 2008. In addition, we agreed to list all the Registrable
Securities covered by the Registration Statement on each securities exchange
on
which similar securities issued by us are then listed.
Pursuant
to the terms of the Subscription Agreement, we were required as a condition
to
the closing to appoint a director designated by CITIC Capital Finance Limited
to
our Board of Directors. The closing condition was waived by the parties to
the
financing transaction and we agreed to appoint such a director within three
months from closing.
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, 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.
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.
The
Offering
12%
Convertible Bonds
|
Pursuant
to this prospectus, the selling security holders are offering for
resale
up to $20,000,000 12% Convertible Bonds Due 2011.
|
Interest
|
The
Bonds bear interest from April 15, 2008 at the rate of 12% per annum
of
the principal amount of the Bonds. Interest is payable semi-annually
in
arrears on April 15 and October 15 of each year (each an “Interest Payment
Date”) commencing October 15, 2008.
|
Ranking
|
The
Bonds constitute direct, unsubordinated, unconditional and, unsecured
obligations of us and will at all times rank
pari
passu
and without any preference or priority among themselves and our payment
obligations under the Bonds will rank at least equally with all of
our
other present and future unsecured and unsubordinated obligations,
(other
than any obligations preferred by mandatory provisions of applicable
law).
If we create any secure obligation in any debentures, loan stock,
bonds,
notes, bearer participation certificates, depository receipts,
certificates of deposit or other similar securities for the purpose
of
raising money which are, or are issued with the intention that they
will
be listed in any securities market, we must also secure the Bonds
in
substantially identical terms.
As
of December 31, 2007, we had approximately $444,000 of secured
indebtedness.
|
Mandatory
Redemption at Maturity
|
Unless
previously redeemed, converted or purchased and cancelled, we are
required
to redeem any outstanding Bonds at 116.61% of its principal amount
on
April 15, 2011.
|
Redemption
at the Bondholder’s Option
|
On
any Interest Payment Date on or after April 15, 2010, the holders
of the
Bonds can require us to redeem the Bonds at 116.61% of the principal
amount of the Bonds redeemed, plus all accrued but unpaid interest.
There
can be no guarantee that we will have sufficient financial resources
or be
able to arrange financing to redeem the Bonds.
|
Redemption
for Tax Reasons
|
At
any time, we may, having given not less than 30 nor more than 60
days’
notice to the Bondholders, redeem all, but not some only, of the
Bonds at
a redemption price equal to the early redemption amount on the redemption
date if (i) we have or will become obliged to pay additional amounts
for
any present or future taxes, duties, assessments or governmental
charges,
as a result of a change in, or amendment to, the laws of the United
States, the PRC or England, and (ii) the obligation to pay additional
amounts cannot be avoided provided that we do not give notice of
redemption earlier than 90 days prior to the earliest date on which
we
would be obliged to pay such additional amounts were a payment in
respect
of the Bonds then due.
|
Redemption
for Non-Listing or a Change in Control
|
If
our common stock ceases to be listed on AMEX, or the New York Stock
Exchange or NASDAQ, or if the trading of our common stock is suspended
for
20 or more consecutive trading days temporarily or otherwise on such
exchange or there is a change of control, as defined in the Trust
Deed, of
our company, each Bondholder will have the right to require us, within
60
days following the date on which the Bondholder has been given notice
of
non-listing or a change of control, to redeem all or some of that
holder’s
Bonds. There can be no guarantee that we will have sufficient financial
resources or be able to arrange financing to redeem the
Bonds.
|
Redemption
at Our Option
|
At
any time prior to April 15, 2011, we may, having given not less than
20
nor more than 60 days’ notice to the Bondholders, and The Bank of New
York, London Branch (the “Trustee”) and The Bank of New York, London
Branch (the “Principal Agent,”) which notice will be irrevocable, redeem
all and not some only of the Bonds at a redemption price equal to
the
early redemption amount, plus all accrued but unpaid interest, on
the
redemption date. The early redemption amount of a Bond is determined
so
that it represents for the Bondholder the higher of (i) the Minimum
Return
on Investment, defined as a payment to each bondholder equal to the
product of (x) the aggregate principal amount of Bonds held by such
bondholder and (y) 1.35, and (ii) the Minimum Gross Yield Amount,
defined
as an amount representing repayment of principal plus a gross yield
of 19%
per annum, calculated by us on a semi-annual basis.
|
Conversion
|
Each
Bond is convertible at the option of the holder at any time during
the
period (i) beginning on the earlier of (a) the date that a registration
statement for the shares to be issued upon conversion of the Bonds
is
first declared effective by the United States Securities and Exchange
Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending at the
close of business on April 8, 2011, subject to certain exceptions,
into
shares of our common stock at an initial conversion price equal to
$6.35
per share, which is the product of 1.1 and the average closing price
per
share of our common stock for the period of 20 consecutive trading
days
immediately prior to April 15, 2008.
|
Adjustment
to the Conversion Price
|
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. 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).
|
Bond
Warrants
|
Pursuant
to this prospectus, the selling security holders are offering for
resale
300,000 warrants exercisable for 300,000 shares of our common stock,
subject to adjustment.
|
Exercise
Price
|
The
initial exercise price per share of the Bond Warrants is $6.35, subject
to
adjustment in certain events.
|
Vesting
and Expiration Dates
|
The
Bond Warrants became exercisable on April 15, 2008 and will terminate
on
April 15, 2013.
|
Common
stock offered by selling security holders
|
3,449,606
shares (1)
|
Common
stock outstanding
|
51,783,416
shares (2)
|
Use
of proceeds
|
We
will not receive any proceeds from the sale of the Bonds, Bond Warrants
or
common stock by the selling security holders, except for funds from
the
exercise of Bond Warrants by the selling security holders, if and
when
exercised.
|
________
|
(1)
|
Consists
of (i) 3,149,606 shares of our common stock issuable upon the conversion
of the Bonds and (ii) 300,000 shares of our common stock issuable
upon the
exercise of the Bond Warrants.
|
|
(2)
|
Represents
the number of shares of our common stock outstanding as of the date
of
this prospectus, and excludes (i) 173,700 shares of our common stock
issuable upon exercise of outstanding warrants, (ii) 6,006,749 shares
of
our common stock issuable upon the conversion of issued and outstanding
bonds, subject to adjustment, (iii) 1,100,000 shares of our common
stock
issuable upon the exercise of the warrants issued in connection with
our
issuance of bonds, subject to adjustment, and (iv) 5,000,000 shares
of
common stock that may be issued and granted under our 2007 Equity
Incentive Plan.
|
SUMMARY
FINANCIAL DATA
The
following summary financial information contains 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. The consolidated
statement of operations data and balance sheet data were derived from the
audited consolidated financial statements. Such financial data should be read
in
conjunction with the consolidated financial statements and the notes to the
consolidated financial statements starting on page F-1 and with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.”
Consolidated
Statements of Income
|
|
Year
Ended December 31,
|
|
|
|
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
|
|
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 prospectus 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
prospectus also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
the risks we face as described below and elsewhere in this prospectus. With
respect to this discussion, the terms, “we,” “us,” or “our” refer to China
Architectural Engineering, Inc., and 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:
–
quality;
–
service;
–
delivery;
–
ability
to provide added value in the design and engineering of buildings;
–
price;
–
speed
of
construction in buildings and components; and
–
personal
relationships with customers.
We
compete with several large integrated glass manufacturers, numerous specialty,
architectural glass and window fabricators, and major contractors and
subcontractors. We also compete with a number of other manufacturers of
engineered building systems ranging from small local firms to large national
firms. 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
President of China Operations, and Ye Ning, our Vice President, 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 this offering and the listing and trading of our common stock on the
American Stock Exchange could have a material adverse effect on our business,
operating results, reputation and trading price of our common stock, and may
also create uncertainties for this offering.
The
PRC
State Administration of Foreign Exchange, or SAFE, issued a public notice in
January 2005 concerning foreign exchange regulations on mergers and acquisitions
in China. The public notice states that if an offshore company controlled by
PRC
residents intends to acquire a PRC company, such acquisition will be subject
to
strict examination by the relevant foreign exchange authorities. The public
notice also states that the approval of the relevant foreign exchange
authorities is required for any sale or transfer by the PRC residents of a
PRC
company’s assets or equity interests to foreign entities for equity interests or
assets of the foreign entities.
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 April 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 $10,000,000 Variable Rate Convertible Bonds due in
2012
that we issued in April 2007 (the “2007 Bonds”), 800,000 warrants to purchase an
aggregate of 800,000 shares of our common stock, subject to adjustments (the
“2007 Bond Warrants”), and the 2,857,143 and 800,000 shares of common stock
underlying the 2007 Bonds and 2007 Bond Warrants, respectively. In addition,
we
are registering 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 2008; 3,149,606
shares of common stock that may be acquired upon conversion of the Bonds,
subject to adjustment and 300,000 shares of common stock that may be acquired
upon exercise of the Bond Warrants, subject to adjustment. We also registered
2,962,325 additional outstanding shares of common stock. 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 President 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
2007 Bonds. The terms of 2007 Bonds include conversion features allowing the
holders to convert the 2007 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 2007
Bonds at the request of the holders if certain events occur or do not occur,
as
set forth in the Amended and Restated 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 Amended and Restated Trust Deed, each holder will have the right to require
us to redeem all or part of that holder’s 2007 Bonds. If on or before April 12,
2008, the 2007 Bonds, 2007 Bond Warrants, and shares underlying the 2007 Bonds
and 2007 Bond Warrants are not registered with the SEC, then holders of the
2007
Bonds can require us to redeem the 2007 Bonds at 106.09% of the principal amount
of the 2007 Bonds. In addition, at any time after April 12, 2010, each holder
can require us to redeem all or some of the 2007 Bonds at 126.51% of the
principal amount of the 2007 Bonds and we are required to redeem any outstanding
2007 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 2007 Bonds, we will be required to pay cash to redeem all or a portion
of
the 2007 Bonds. Finally, in connection with the issuance of the 2007 Bonds,
we
issued the holder of the 2007 Bonds the 2007 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 2007 Bonds and the value of the 2007 Bond Warrants
will have an adverse impact on our results of operations for the term of the
2007 Bonds. The application of Generally Accepted Accounting Principles required
us to allocate approximately $4,342,857 to the beneficial conversion feature
of
the 2007 Bonds and $4,036,170 to the 2007 Bond 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 2007 Bonds is $5,087,100. All of the aforementioned
amounts associated with the beneficial conversion and mandatory redemption
feature of the 2007 Bonds and the value of the 2007 Bond Warrants are being
amortized as additional interest expense over the term of the 2007 Bonds. This
accounting will result in an increase in interest expense in all reporting
periods during the term of the 2007 Bonds, and, as a result, reduce our net
income accordingly.
We
may be unable to generate sufficient cash flow from which to redeem bonds that
we have issued.
We
issued
$10 million bonds in April 2007 that are due in 2012 and $20 million bonds
in
April 2008 that are due in 2011. 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 Deeds governing our outstanding
bonds relating to our ability to incur future indebtedness.
Each
of
the Trust Deeds for the bonds that we issued in 2007 and 2008 does not limit
our
ability to incur indebtedness, except that as long as any of such 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 Deeds 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 $10 million and $20 million 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 annual assessment of our internal controls requirement first
applied 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.
RISKS
RELATED TO OWNING OUR BONDS AND BOND WARRANTS
Your
right to receive payment on the Bonds is unsecured without any preference or
priority and there may not be sufficient assets to pay amounts due on any or
all
of the Bonds.
The
Bonds
constitute direct, unsubordinated, and unsecured obligations for us and will
at
all times rank
pari
passu
and
without any preference or priority among themselves. Our payment obligations
under the Bonds rank equally with all of our other present and future unsecured
and unsubordinated obligations. Upon any distribution of our assets upon any
insolvency, dissolution or reorganization, the payment of principal and interest
on our senior indebtedness will have priority over the payment of principal
and
interest on the Bonds. There may not be sufficient assets remaining to pay
amounts due on any or all of the Bonds after we have made payment of principal
and interest on the senior indebtedness.
Your
ability to sell the Bonds and Bond Warrants is limited by the absence of a
trading market, which may never develop.
The
Bonds
and Bond Warrants were issued in April 2008 and there is no public market for
either, and we do not presently intend to apply for the listing of the Bonds
or
the Bond Warrants on any securities exchange or for inclusion in the automated
quotation system of the National Association of Securities Dealers, Inc. An
issue of securities with a smaller float may be more volatile in price than
a
comparable issue of securities with a greater float. Accordingly, the liquidity
of the Bonds and the Bond Warrants will be severely limited. We cannot assure
you as to your ability to sell the Bonds or the Bond Warrants or the price
at
which you would be able to sell the Bonds or Bond Warrants. If a trading market
does develop, the Bonds and Bond Warrants could trade at prices that may be
higher or lower than the principal amount or purchase price, depending on many
factors, including prevailing interest rates, the market for similar debt
securities, our financial performance and our stock price. No one is obligated
to make a market in the Bonds or the Bond Warrants. In addition, any market
making activities will be subject to the limits imposed by the Securities Act
and the Securities Exchange Act of 1934, as amended.
Before
conversion, holders of the Bonds and the Bond Warrants will not be entitled
to
any shareholder rights, but will be subject to all changes affecting our
shares.
If
you
hold Bonds or Bond Warrants, you will not be entitled to any rights with respect
to shares of our common stock, including voting rights and rights to receive
dividends or distributions. However, the common stock you would receive if
you
converted or exercised your Bonds and Bond Warrants will be subject to all
changes affecting our common stock. You will be entitled only to rights that
we
may grant with respect to shares of our common stock if and when we deliver
shares to you upon your election to convert and exercise your Bonds and Bond
Warrants into shares. For example, if we seek approval from shareholders for
a
potential merger, or if an amendment is proposed to our articles of
incorporation or by-laws that require shareholder approval, holders of Bonds
and
Bond Warrants will not be entitled to vote on the merger or amendment.
There
may be certain tax risks associated with the Bonds and the Bond
Warrants.
There
are
significant income tax risks in connection with the Bonds and Bond Warrants,
as
more fully described below under “Material United States Federal Income Tax
Consequences For Holders of Bonds and Bond Warrants.” The Bonds will contain
“original issue discount” requiring a U.S. Holder thereof to include such
“original issue discount” in income on a constant accrual basis prior to the
receipt of cash with respect thereto. Your purchase and holding of the Bonds
and
Bond Warrants may have certain other tax consequences to you depending on your
particular circumstances. See Section entitled “Material United States Federal
Income Tax Consequences for Holders of Bonds and Bond Warrants –
Consequences to U.S. Holders” on page 77.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The
information contained in this prospectus, including in the documents
incorporated by reference into this prospectus, 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 prospectus are based on current
expectations and beliefs concerning future developments and the potential
effects on the parties and the transaction. There can be no assurance that
future developments actually affecting us will be those anticipated. These
forward-looking statements involve a number of risks, uncertainties (some of
which are beyond the parties’ control) or other assumptions that may cause
actual results or performance to be materially different from those expressed
or
implied by these forward-looking statements, including the
following:
|
·
|
Our
dependence on government contracts;
|
|
·
|
Fluctuation
and unpredictability of costs related to our products and
services;
|
|
·
|
Changes
in the laws of the PRC that affect our
operations;
|
|
·
|
Our
failure to meet or timely meet contractual performance standards
and
schedules;
|
|
·
|
Any
recurrence of severe acute respiratory syndrome (SARS) or Avian
Flu;
|
|
·
|
Reduction
or reversal of our recorded revenue or profits due to “percentage of
completion” method of accounting;
|
|
·
|
Our
dependence on the steel and aluminum
markets;
|
|
·
|
Exposure
to product liability and defect
claims;
|
|
·
|
Our
ability to obtain all necessary government certifications and/or
licenses
to conduct our business;
|
|
·
|
Development
of a public trading market for our securities;
|
|
·
|
Expenses
and costs related to our issuance of our 2007 Bonds and 2007
Bond Warrants;
|
|
·
|
The
cost of complying with current and future governmental regulations
and the
impact of any changes in the regulations on our operations;
and
|
|
·
|
The
other factors referenced in this prospectus, including, without
limitation, under the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
and “Description of Business.”
|
These
risks and uncertainties, along with others, are also described above under
the
heading “Risk Factors.” Should one or more of these risks or uncertainties
materialize, or should any of the parties’ assumptions prove incorrect, actual
results may vary in material respects from those projected in these
forward-looking statements. We undertake no obligation to update or revise
any
forward-looking statements, whether as a result of new information, future
events or otherwise, except as may be required under applicable securities
laws.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale by the selling security holders of the
Bonds, Bond Warrants, or the shares of common stock. We will receive proceeds
from the exercise of the Bond Warrants, if and when they are exercised, at
an
initial exercise price per share of $6.35, subject to adjustment in certain
events.
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 be unable to distribute any dividends outside
of China due to PRC exchange control regulations that restrict our ability
to
convert RMB into US Dollars.
RATIO
OF EARNINGS TO FIXED CHARGES
The
following table sets forth our unaudited consolidated ratio of earnings to
fixed
charges for each of the last five years and for the year ended December 31,
2007:
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of earnings to fixed charges (1)
|
|
|
6.74
|
x
|
|
n/a
|
|
|
61.41
|
x
|
|
11.38
|
x
|
|
37.34
|
x
|
____________________
(1)
For
purposes of computing our consolidated ratio of earnings to fixed charges,
earnings consist of income before taxes plus fixed charges. Fixed charges
consist of interest expense and an estimate of the interest within rental
expense.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Commencing
on September 28, 2007, our shares of common stock have been listed for trading
on AMEX under the ticker symbol “RCH.” As of April 30, 2008, we had
approximately 80 registered shareholders.
On
September 28, 2007, which was our first day of trading, the high, low, and
closing sales price for our common stock on AMEX was $7.49, $4.80, and $6.00,
per share, respectively. On May 8, 2008, the closing sales price for our
common stock on AMEX was $5.44 per share.
The
following table summarizes the high and low sales prices of our common stock
as
reported by the American Stock Exchange.
|
|
High
|
|
Low
|
Year
ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
9.10
|
|
|
|
|
$
|
4.75
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$
|
27.25
|
|
|
|
|
$
|
4.80
|
|
|
|
SELECTED
CONSOLIDATED FINANCIAL DATA
The
following selected consolidated statement of operations data contains
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.
The consolidated statement of operations data and balance sheet data were
derived from the audited consolidated financial statements. Such financial
data
should be read in conjunction with the consolidated financial statements and
the
notes to the consolidated financial statements starting on page F-1 and with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
|
|
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
|
|
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 prospectus.
This
prospectus contains forward-looking statements. The words “anticipated,”
“believe,” “expect, “plan,” “intend,” “seek,” “estimate,” “project,” “could,”
“may,” and similar expressions are intended to identify forward-looking
statements. These statements include, among others, information regarding future
operations, future capital expenditures, and future net cash flow. Such
statements reflect our management’s current views with respect to future events
and financial performance and involve risks and uncertainties, including,
without limitation, general economic and business conditions, changes in
foreign, political, social, and economic conditions, regulatory initiatives
and
compliance with governmental regulations, the ability to achieve further market
penetration and additional customers, and various other matters, many of which
are beyond our control. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove to be incorrect, actual results
may vary materially and adversely from those anticipated, believed, estimated
or
otherwise indicated. Consequently, all of the forward-looking statements made
in
this prospectus are qualified by these cautionary statements and there can
be no
assurance of the actual results or developments.
OVERVIEW
We
were
incorporated in the state of Delaware on March 16, 2004. We were originally
organized as a “blank check” shell company to investigate and acquire a target
company or business seeking the perceived advantages of being a publicly held
corporation. On October 17, 2006, we closed a share exchange transaction
described below, pursuant to which we (i) became the 100% parent of Full Art
International, Ltd., a Hong Kong Company (“Full Art”), which has four
subsidiaries, including its wholly-owned subsidiary, Zhuhai King Glass
Engineering Co., Ltd., a company formed under the laws of the People’s Republic
of China (“PRC” or “China”), (ii) assumed the operations of Full Art and its
subsidiaries and (iii) changed our name from SRKP 1, Inc. to China Architectural
Engineering, Inc. Full Art was incorporated in Hong Kong on July 30, 1992 under
the Companies Ordinance of Hong Kong.
We
specialize in 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
2008 Issuance of Bonds and Bond Warrants
On
April
15, 2008, we completed a financing transaction with ABN AMRO Bank N.V., London
Branch (“ABN AMRO”), CITIC Allco Investments Limited (together with ABN AMRO,
the “Subscribers,” and each a “Subscriber”), and CITIC Capital Finance Limited
issuing (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”) and (ii)
300,000 warrants to purchase an aggregate of 300,000 shares of our common stock,
subject to certain adjustments as set forth in the warrant instrument, that
expire in 2013 (the “Bond Warrants”). The transaction was completed in
accordance with a subscription agreement entered into by us, the Subscribers,
and CITIC Capital Finance Limited, dated April 2, 2008 (the “Subscription
Agreement”).
The
Bonds
were subscribed at a price equal to 100% of their principal amount. We agreed
to
pay to the Subscribers an aggregate commission of 2.5% of the principal amount
of the Bonds and of the aggregate warrant issue price for the Bond Warrants.
The
Bonds
were issued pursuant to, and are subject to the terms and conditions of, a
trust
deed dated April 15, 2008 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 15, 2008 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
things, the following terms:
|
·
|
Interest
Rate.
The
Bonds bear cash interest from April 15, 2008 at the rate of 12% per
annum
of the principal amount of the
Bonds.
|
|
·
|
Conversion.
Each Bond is convertible at the option of the holder at any time
during
the period (i) beginning on the earlier of (a) the date that a
registration statement for the shares to be issued upon conversion
of the
Bonds is first declared effective by the United States Securities
and
Exchange Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending
at the close of business on April 8, 2011, subject to certain exceptions,
into shares of our common stock at an initial conversion price equal
to
$6.35 per share, which is the product of (i) 1.1 and (ii) the average
closing price per share of our common stock for the period of 20
consecutive trading days immediately prior to April 15, 2008. 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.
|
|
·
|
Mandatory
Redemptions.
Interest is payable semi-annually in arrears on April 15 and October
15 of
each year (each an “Interest Payment Date”) commencing October 15, 2008.
On any Interest Payment Date on or after April 15, 2010, the holders
of
the Bonds can require us to redeem the Bonds at 116.61% of the principal
amount of the Bonds redeemed, plus all accrued but unpaid interest.
We are
required to redeem any outstanding Bonds at 116.61% of its principal
amount on April 15, 2011.
|
On
April
15, 2008, we entered into a warrant instrument with
the
Subscribers
pursuant
to which
the
Subscribers
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 15, 2008 (the “Warrant Agency Agreement”).
Pursuant to the terms and conditions of the Warrant Instrument and the Warrant
Agency Agreement, the Bond Warrants became exercisable on April 15, 2008 and
terminate on April 15, 2013. The Bond Warrants have an initial exercise price
per share of $6.35, subject to adjustment in certain events.
We
have
agreed to list the shares of common stock underlying the Bonds and the Bond
Warrants on AMEX, or any alternative stock exchange by the earlier of October
15, 2008 and the date on which a registration statement registering the shares
of common stock underlying the Bond Warrants is first declared effective by
the
SEC. In addition, we have agreed to register the shares of common stock
underlying the Bonds and the Bond Warrants with the SEC on or prior to October
15, 2008 and will keep the registration effective until 30 days after the Bond
Warrants terminate.
On
April,
15, 2008, we also entered into a registration rights agreement with the
Subscribers pursuant to which we agreed to register the Bonds, the Bond
Warrants, and the shares of common stock underlying the Bonds and Bond Warrants
(the “Registrable Securities”). We agreed to prepare and file with the SEC, no
later than 30 days after April 15, 2008, a registration statement on Form S-1,
of which this prospectus is a part, to register the Registrable Securities
(the
“Registration Statement”) and, as promptly as possible, cause that Registration
Statement, as amended, to become effective and in any event within six months
after April 15, 2008. In addition, we agreed to list all the Registrable
Securities covered by the Registration Statement on each securities exchange
on
which similar securities issued by us are then listed.
Pursuant
to the terms of the Subscription Agreement, we were required as a condition
to
the closing to appoint a director designated by CITIC Capital Finance Limited
to
our Board of Directors. The closing condition was waived by the parties to
the
financing transaction and we agreed to appoint such a director within three
months from closing.
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, 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.
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.
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
“2007 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 “2007 Bond
Warrants”).
The
2007
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
2007 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 “Amended and Restated Trust
Deed”). The 2007 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
2007
Bonds,
as
set forth in the Amended and Restated Trust Deed include, among other thing,
the
following terms:
|
·
|
Interest
Rate.
The
2007 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 2007
Bonds.
|
|
·
|
Conversion.
Each 2007 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 2007 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 2007 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 Amended and Restated Trust Deed provides that the conversion
price of the 2007 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 2007 Bonds
and
exercise of the 2007 Bond Warrants) are not listed on AMEX or (ii)
the
2007 Bonds, the 2007 Bond Warrants, and shares underlying the 2007
Bonds
and the 2007 Bond Warrants are not registered with the Securities
and
Exchange Commission (the “SEC”), then holders of the 2007 Bonds can
require us to redeem the 2007 Bonds at 106.09% of the principal amount
of
the 2007 Bonds. In addition, at any time after April 12, 2010, holders
of
the 2007 Bonds can require us to redeem the 2007 Bonds at 126.51%
of the
principal amount of the 2007 Bonds. We are required to redeem any
outstanding 2007 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
2007
Bond
Warrants from us (the “Warrant Instrument”). The
2007
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
2007
Bond
Warrants become exercisable on October 12, 2008 and terminate on April 12,
2010.
The
2007
Bond
Warrants are exercisable at a per share exercise price of $0.01.
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 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.
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
April
12, 2007, we completed a financing transaction pursuant to which we issued
the
2007 Bonds in the principal amount of $10 million. The 2007 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 2007 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. At any time
after
April 12, 2010, holders of the 2007 Bonds can require us to redeem the 2007
Bonds at 126.51% of the principal amount. We are required to redeem any
outstanding 2007 Bonds at 150.87% of its principal amount on April 4, 2012.
If
we are required to repurchase all or a portion of the 2007 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.
On
April
15, 2008, we issued the Bonds in the principal amount of $20 million. The Bonds
bear cash interest at the rate of 12% per annum of the principal amount of
the
Bonds. The Bonds bear interest from April 15, 2008 at the rate of 12% per annum
of the principal amount of the Bonds. Interest is payable semi-annually in
arrears on April 15 and October 15 of each year (each an “Interest Payment
Date”) commencing October 15, 2008. On any Interest Payment Date on or after
April 15, 2010, the holders of the Bonds can require us to redeem the Bonds
at
116.61% of the principal amount of the Bonds. We are required to redeem any
outstanding Bonds at 116.61% of its principal amount on April 15, 2011. 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 300,000 warrants in connection with the
Bonds.
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.
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
subsidiary, 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 December
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)
|
Includes
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.
|
Quantitative
and Qualitative Disclosure Regarding Market Risk
Credit
Risk
We
are
exposed to credit risk from our cash at bank, fixed deposits and contract
receivables. The credit risk on cash at bank and fixed deposits is limited
because the counterparts are recognized financial institutions. Contract
receivables are subject to credit evaluations. We periodically record a
provision for doubtful collections based on an evaluation of the 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.
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.
DESCRIPTION
OF 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 building envelope 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 building envelope 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
building envelope 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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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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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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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 building envelope systems in the
world.
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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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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.
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Product
Attributes
Our
building envelope 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.
Noteworthy
or recently completed or awarded projects include the following:
National
Grand Theater - Beijing (completed in 2007)
The
external cladding system of the National Grand Theater uses a titanium-cladding
panel and the crystal clear ultra-white glass. The titanium roof and glass
curtain wall form a multi-layered, color shifting elliptical shell, which
changes in light and temperature and produces unpredictable color
effects.
Qintai
Cultural & Art Center - Wuhan (completed in 2007)
The
Cultural and Art Center of Wuhan represents a fusion between ancient culture
and
modern technology. We showcased over seven different curtain wall systems
in
this project and used numerous cladding materials, including aluminum, bronze,
and precast fair faced concrete cladding panels. This project won the “Annual
Energy-saving Construction Representative Project” award in China in 2007.
National
Conference Center - Vietnam (completed in 2006)
The
National Conference Center of Vietnam was funded by the Vietnamese government
and built for the APEC Summit held in Hanoi in 2006. With a total area of
approximately 600,000 square feet, the National Conference Center is a
contemporary architectural construction with distinctive, traditional Vietnamese
design. We were contracted for the design, engineering, supply and installation
of the external facade, including the roofing and glass curtain wall systems,
which met the artistic intent as well as the strict functional requirements
of
the architect.
Olympic
Sports Center - Nanjing (completed in 2005)
The
Nanjing Olympic Sports Centre was the main stadium for China’s 10th National
Games in 2005 and was the largest sports architectural complex before Beijing
hosts the 2008 Olympic Games. It was jointly designed by a renowned Australian
architect who designed some of the 2000 Sydney Olympics facilities. We used
a
combination of four curtain wall systems (including timber and steel, extruded
aluminum frames, full tension cable point support and stone curtain walls)
and
an aluminum sun shading system. The flowing face of the skylight was produced
with multi-dimensional temper-bending laminated double-Glazing glass technology.
This project was awarded the “Top Ten National Building Technology Achievement
Award” in China in 2005.
Guangzhou
Opera House (in progress)
The
Guangzhou Opera House will be China’s third largest opera house. This building
is shaped like two pieces of precious stone, forming a unique appearance
which
reflects strong post-modern architectural characteristics. The external façade
is characterized by an irregular three-dimensional geometric structure, and
the
roof is separated into a number of irregular faces. The great number of
irregular shapes resulted in a complex installation procedure and increased
installation difficulties. We were contracted to design, engineer, supply
and
install the entire external façade. This project is expected to be completed in
2008.
High
Rise Office Building in Doha, Qatar (in progress)
In
June
2005, we were awarded the contract for construction of the glass curtain
wall
and solar protection system of the Qatar high-rise office tower, which will
be
located in West Bay, Doha and will be the tallest building in Qatar when
completed in 2008. The design evokes the geometric complexity of the oriental
moucharabieh, a typical Islamic style of interlaced wooden screenwork, while
also functioning as a form of solar protection. The curtain wall is composed
of
four “butterfly” aluminum elements of different scales. This overall pattern
changes in order to provide maximal protection from the strong east and west
sun. The inside layer is a reflective glass skin, which complements protection.
A system of roller-blinds can also be used when needed.
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.
As
of
April 1, 2008, our total backlog was increased to approximately $200 million,
with 60% from order of projects outside our home market of China. We expect
approximately $130 million of the backlog to be realized in fiscal
2008.
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.
Facilities
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)
|
XiCheng
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
|
|
|
3
rd
floor, 69 north of Shenchuan road, Chikan district, Zhanjiang
city
|
|
120
square meters (office)
|
|
|
|
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)
|
Legal
Proceedings
We
are
not a party to any material legal proceedings.
MANAGEMENT
Executive
Officers, Directors and Key Employees
The
following individuals constitute our board of directors and executive
management:
Name
|
|
Age
|
|
Position
|
Luo
Ken Yi
|
|
51
|
|
Chief
Executive Officer, Chief Operating Officer and Chairman of the
Board
|
Tang
Nianzhong
|
|
45
|
|
Director
and Vice President, China Operations
|
Ye
Ning
|
|
51
|
|
Director
and Vice President
|
Li
Guoxing
|
|
34
|
|
General
Manager of Design
|
Bai
Fei
|
|
36
|
|
General
Manager of China Marketing
|
Wang
Zairong
|
|
55
|
|
Chief
Technology Officer
|
Feng
Shu
|
|
71
|
|
Research
and Development Supervisor
|
Charles
John Anderson
|
|
54
|
|
President,
U.S. Operations
|
Xinyue
Jasmine Geffner
|
|
35
|
|
Chief
Financial Officer
|
Zheng
Jinfeng
|
|
72
|
|
Director
|
Zhao
Bao Jiang
|
|
67
|
|
Director
|
Kelly
Wang
|
|
37
|
|
Director
|
Luo
Ken Yi
has
been
Chief Executive Officer, Chief Operating Officer and Chairman of the Board
since
1992. He served as Project Manager and Production Manager at P.X. Engineering,
Inc. in the U.S from 1989 to 1991. Mr. Luo founded Kangbao Electronics Co.,
Ltd.
in Shunde, Guangdong, China, where he served as Chief Engineer, Technical
Manager, Vice Manager General and Deputy President from 1986 to 1989. Mr. Luo
founded us in 1992 and served as Chief Managing Director. Later, he studied
steel supported glass curtain wall design in the U.S. and Europe 1992 to 1994.
He was appointed Vice President of the Architectural Glass and Metal Structure
Institute of Qinghua University in 1999. In 2000 he was appointed by the Chinese
Ministry of Construction to head the committee on creating national standards
for the glass curtain wall industry. Mr. Luo and the Company own over 62 patents
related to building envelope systems technology. He was honored as one of the
“Ten Great Leaders in Technology” and has published numerous books and articles.
Luo Ken Yi studied Medicine at the Guangzhou University of Chinese Medicine,
graduating in 1983, and Mechanical Engineering at Bunker Hill Community College,
graduating in 1988. Mr. Luo received an MBA from Australia Murdoch University
in
1998.
Tang
Nianzhong
has been
Vice President, China Operations and a Director since October 1995. From 1986
to
1994, he worked in the bone surgery department of the Nanhai People’s Hospital
in Foshan. From 1994 to 1995 he was Vice General Manager of Foshan Xinhua
Advertising Co., Ltd. In 1995 he joined us, where he has served as Production
Manager, Sales Manager, Project Manager, Administration Manager and Vice General
Manager. Tang Nianzhong graduated from the Guangzhou University of Chinese
Medicine, Department of Medicine, in 1986. In 1999 he received his MBA from
Murdoch University in Australia.
Ye
Ning
has been
Vice President and a Director since January 1993. From 1983 to 1988 he served
on
the staff of the Guangzhou Institute of Physical Education. From 1988 to 1993
he
worked in the orthopedics department of the Nanhai People’s Hospital in Foshan.
In 1993 he joined us, where he has served as Project Manager, Operations
Manager, Purchasing Manager and Vice General Manager. Ye Ning graduated from
the
Guangzhou University of Chinese Medicine, Department of Medicine in
1983.
Li
Guoxing
has been
Vice General Manager of Design since 2001. In 1998 he joined us, where he has
worked and served as Designer, Chief Engineer, and Leader of the Design
Institute prior to becoming our Vice General Manager of Design. From 1996 to
1998 he was a designer at the Guizhou Chemical Design Institute. Li Guoxing
graduated from Guizhou Technology University with a degree in Civil Engineering
in 1996 and earned an MBA from the Royal Canadian College in 2003.
Bai
Fei
has been
Vice General Manager of Marketing since May 2004. From May 2004 until March
2005, he also served as the General Manager of our Beijing Branch. Prior to
that, he served as the Marketing Manager of the Beijing Branch from June 2003
to
May 2004 and as the Technical Manager of the Beijing Branch from February 2002
to June 2003. Bai Fei also served as our Assistant General Manager from July
2001 to February 2002 and as our Technical Manager from October 1995 to July
2001. In 1994 he worked briefly as a designer for the Guizhou Institute of
Architectural Science and Research before moving on to work as a Manager of
Decoration and Construction in the Aerospace department of the Liyang Group
Decorated Project Company until 1995. Bai Fei graduated from Guizhou
Broadcasting and Television University with a major in Industrial and Civil
Architecture in 1994.
Wang
Zairong
has
served as our Chief Technology Officer and General Engineer October 2003. He
has
also served as our Factory Director of Production since February 2003. From
August 2001 to February 2003, he served as our Vice Manager of Engineering
(Beijing Branch). Prior to that, he served as our Scheduling Officer of
Engineering from August 1999 to August 2001 and our Production Manager from
August 1997 to August 1999. From 1993 to 1997 he was Senior Engineer and Vice
General Manager of Technology at Yuantongqiao (Huizhou) Industrial Co., Ltd.
From 1982 to 1993 Mr. Wang was a System Structure Designer at the Xi’an
Aerospace Ministry. From 1980 to 1982 he was a mechanical designer at Xi’an
Physics and Space Research Institute and from 1977 to 1979 he was a mechanical
designer at Xi’an Research Institute of Mechanical Engineering. Wang Zairong
graduated Qinghua University with a degree in Mechanical Engineering in
1977.
Feng
Shu
has been
Research and Development Supervisor since May 1998. She graduated from the
Civil
Engineering Department of National Qinghua University in 1960. She is a member
of the Construction Glass and Metal Structure Research Committee of National
Qinghua University and is a professor at the Civil Engineering Academy of
Nanchang University. Feng Shu joined us in 1998, where she has served as
Supervisor of Research and Development. She is also Administrative Director
and
Secretary General of Jiangxi Mechanics Academy and Vice Superintendent of
Jiangxi Huajie Architecture Design Co., Ltd.
Xinyue
Jasmine Geffner
,
CFA
has been
Chief Financial Officer since March 3, 2008. She has experience in the
investment and commercial banking industry covering a variety of sectors and
has
advised companies in Mainland China and the Americas region on mergers and
acquisitions, capital raising, and other financing activities. From August
2004
to February 2008, Ms. Geffner headed the China Desk for HSBC Bank USA in the
Americas region, where she led a team responsible for development and promotion
of cross-border business activities, such as mergers and acquisitions and
capital raising, between companies in China and the Americas. From August 1999
to June 2003, Ms. Geffner worked in the Investment Banking Group of Dresdner
Kleinwort Wasserstein, which is the international investment banking arm of
Dresdner Bank. She has also held positions as Calyon, a global bank, in addition
to Merrill Lynch and Furman Selz (ING). Ms. Geffner is a Chartered Financial
Analyst (CFA) and holds Series 7 and Series 63 license from FINRA. Ms. Geffner
joined the Board of the Hong Kong Association of New York in 2007. Ms. Geffner
earned her MBA from New York University's Stern School of Business in 1997,
double majoring in Finance and Accounting, and she earned her Bachelor of
Business Administration from City University of New York, Baruch College in
1994.
Charles
John Anderson
has
served as President of CAE Building Systems, Inc., a wholly-owned subsidiary
of
the Company, since February 2008. He has worked in the building envelope
industry for more than 33 years. His career began in 1974 and he has experience
in sales, estimating, engineering, manufacturing, testing, quality control,
installation, project management, contract administration and executive
management. Prior to joining the Company, Mr. Anderson worked as a senior
consultant for Israel Berger & Associates, LLC, specializing in building
envelope evaluation. From 1996 to 2004, Mr. Anderson worked for Glassalum
International Corporation, a custom curtain wall manufacturing and installation
company, where he was responsible for coordinating engineering, manufacturing
and project management activities. While at Glassalum International Corporation,
Mr. Anderson served in various positions, including President and Chief
Operating Officer. In 1987, Mr. Anderson founded Building Research, Inc., which
provided consulting, testing and inspection services from inception to 1992.
Mr.
Anderson also worked for other companies in the curtain wall and related
industries, including Midwest Curtain walls, Inc., Ampat Group, Inc.,
Construction Research Laboratory, Inc., and Miami Testing Laboratory,
Inc.
Zheng
Jinfeng
has
served as a director of the Company since July 2007. Since 2000, Mr. Zheng
has
served as the chief engineer of the China Construction Metal Structure
Association and the Aluminum Door, Window and Curtain Wall Association. Since
that time he has also served as the chief technology expert on the Technology
Expert Committee of the Chinese Construction Department. From 1988 to 2000,
Mr.
Zheng was the vice-president and secretary-general of the China Construction
Metal Structure Association and a director of the Aluminum Door, Window and
Curtain Wall Association. From 1979 to 1988, Mr. Zheng was the deputy director
of the Metal Structure Office of the Chinese Construction Metal Structure Office
and a vice-president of the China Construction Metal Structure Association.
Mr.
Zheng has a degree in Architecture and Mechanical Engineering from the Tangshan
Tiedao Institute.
Zhao
Bao Jiang
has
served as a director of the Company since July 2007. Since 2003, Mr. Zhao has
served as president of the China Association of City Planning, vice-president
of
the China Association of Mayors, and vice-president of the China Environmental
Protection Federation. From 1997 to 2002, Mr. Zhao served as vice minister
of
the Ministry of Construction of China. From 1993 to 1997, Mr. Zhao was the
vice-governor of the Hubei province and mayor of Wuhan city. From 1985 to 1993,
Mr. Zhao served as vice mayor, of Wuhan. Mr. Zhao graduated from the Department
of Agriculture of Qinghua University in 1966.
Kelly
Wang
has
served as a director of the Company since July 2007. Since March 2007, Ms.
Wang
has served as the manager in Financial Reporting for Starbucks Corporation.
Prior to joining Starbucks, Ms. Wang served as the manager of technical
accounting and SEC reporting of Flow International Corporation from August
2005
to March 2007. From May 2001 to August 2005, Ms. Wang was an assurance manager
at Ernst & Young LLP. Ms. Wang received a B.S. in International Finance from
the Shanghai University of Finance and Economics in 1992 and an MBA from the
University of Hawaii at Manoa in 1997 and is a certified public accountant
in
California and Washington.
Family
Relationships
None
The
Board of Directors and Committees
Board
Composition
Subject
to certain exceptions, under the listing standards of the American Stock
Exchange (“AMEX”), a listed company’s board of directors must consist of a
majority of independent directors. We are exempt from this requirement because
we are considered a “controlled company” pursuant to Section 801(a) of the AMEX
Company Guide as one of our shareholders, KGE Group Limited, owns more than
50%
of our voting power. Our Board of Directors has determined that three of the
six
members of our Board of Directors are independent under the listing standards
of
AMEX, as follows: Zheng Jinfeng,
Zhao
Bao
Jiang
and
Kelly Wang.
Audit
Committee
We
established our audit committee in July 2007. The audit committee consists
of
Zheng Jinfeng,
Zhao
Bao
Jiang
,
and
Kelly Wang, each of whom is an independent director. Kelly Wang is an “audit
committee financial expert” as defined under Item 407(d) of Regulation S-K. The
purpose of the audit committee is to represent and assist our board of directors
in its general oversight of our accounting and financial reporting processes,
audits of the financial statements and internal control and audit functions.
The
audit committee’s responsibilities include:
|
·
|
The
appointment, replacement, compensation, and oversight of work of
the
independent auditor, including resolution of disagreements between
management and the independent auditor regarding financial reporting,
for
the purpose of preparing or issuing an audit report or performing
other
audit, review or attest services.
|
|
·
|
Reviewing
and discussing with management and the independent auditor various
topics
and events that may have significant financial impact on our company
or
that are the subject of discussions between management and the independent
auditors.
|
Our
Board
of Directors does not maintain a separate nominating or compensation committee.
Functions and duties customarily performed by such committees are performed
by a
majority of our independent directors in compliance with the requirements for
listing on AMEX. Such responsibilities include:
|
·
|
The
design, review, recommendation and approval of compensation arrangements
for our directors, executive officers and key employees, and for
the
administration of any equity incentive plans, including the approval
of
grants under any such plans to our employees, consultants and
directors.
|
|
·
|
The
review and determination of compensation of our executive officers,
including our Chief Executive
Officer.
|
|
·
|
The
selection of director nominees, the approval of director nominations
to be
presented for shareholder approval at our annual general meeting
and
filling of any vacancies on our board of directors, the consideration
of
any nominations of director candidates validly made by shareholders,
and
the review and consideration of developments in corporate governance
practices.
|
Code
of Business Conduct and Ethics
Our
board
of directors has adopted a code of ethics, which applies to all our directors,
officers and employees. Our code of ethics is intended to comply with the
requirements of Item 406 of Regulation S-K. Our code of ethics is posted on
our
Internet website at
www.caebuilding.com
.
We will
provide our code of ethics in print without charge to any stockholder who makes
a written request to: Chief Financial Officer, China Architectural Engineering,
Inc., 105 Baishi Road, Jiuzhou West Avenue, Zhuhai 519070, People’s Republic of
China. Any waivers of the application and any amendments to our code of ethics
must be made by our board of directors. Any waivers of, and any amendments
to,
our code of ethics will be disclosed promptly on our Internet
website.
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Our
Chief
Executive Officer, Chief Operating Officer and Chairman of the Board, Luo Ken
Yi, determined the compensation for our current executive officers that was
earned and paid in fiscal 2007 and 2006 and our Board of Directors approved
the
compensation. Compensation for our current executive officers is
determined with the goal of attracting and retaining high quality executive
officers and encouraging them to work as effectively as possible on our
behalf. Key areas of corporate performance taken into account in setting
compensation policies and decisions are growth of sales, cost control,
profitability, and innovation. The key factors may vary depending on which
area of business a particular executive officer’s work is focused on.
Compensation is designed to reward executive officers for successfully meeting
their individual functional objectives and for their contributions to our
overall development. For these reasons, the elements of compensation of
our executive officers are salary and bonus.
Salary
is
paid to cover an appropriate level of living expenses for the executive officers
and the bonus is paid to reward the executive officer for individual and company
achievement. Accordingly, the amount of salary received by our executive
officers has traditionally been lower than the amount of the bonus. For fiscal
2007, Luo Ken Yi, Ye Ning and Tang Nianzhong received a salary of $57,423,
$49,220, and 49,220, respectively, as compared to $53,786, $46,102, and $38,418,
respectively, for fiscal 2006.
With
respect to the amount of a bonus, Luo Ken Yi evaluates our company’s
achievements for the fiscal year based on performance factors and results of
operations such as revenues generated, cost of revenues, net income, and whether
we obtain significant contracts. Luo Ken Yi also conducts a monthly and annual
evaluation of the achievement level of an executive based on individual
performance measurements, such as contribution to the achievement of the
company’s goals and individual performance metrics based on their positions and
responsibilities. Bonuses are paid at the end of each fiscal year. For the
fiscal 2007, Luo Ken Yi received a bonus of $nil, as compared to a bonus of
$159,245 received for fiscal 2006. Each of Ye Ning and Tang Nianzhong received
a
bonus of $nil and $nil, as compared to bonuses of $72,354 and $79,402,
respectively, for fiscal 2006. Since all three executives became shareholders
of
a public company, they decided not to accept any bonus in 2007.
We
believe that the salaries paid to our executive officers during 2007, 2006,
and
2005 are indicative of the objectives of our compensation program and reflect
the fair value of the services provided to our company, as measured by the
local
market in China, Hong Kong, the United States and those other areas where our
executive officers may work. We determine market rate by conducting a
comparison with the local geographic area averages and industry averages these
countries. Since we have become a publicly reporting company, we
have no specific plans to provide raises. Although no specific plans have
yet been discussed, we may adopt such a plan to provide raises to our executive
officers in the future. Adopting higher compensation in the future may be
based on the increased amount of responsibilities to be assumed by each of
the
executive officers as we expand our operations and continue as a publicly
reporting company.
Executive
compensation for 2008 will follow the same evaluation methods as were used
for
2007. We may adjust our bonus evaluations upwards, but, in such case, we do
not
intend to increase it by more than 10%. That determination would likely be
made
towards the end of the fiscal year. We may also expand the scope of our
compensation, such as the possibility of granting options to executive officers
and tying compensation to predetermined performance goals.
Our
board
of directors does not currently have a compensation committee. We anticipate
that our board of directors will establish a compensation committee in fiscal
2008 that will be comprised of non-employee members of our board of directors.
Our current expectation is that the compensation committee of our board of
directors will perform, at least annually, a strategic review of the
compensation program for our executive officers to determine whether it provides
adequate incentives and motivation to our executive officers and whether it
adequately compensates our executive officers relative to comparable officers
in
other companies with which we compete for executives. Those companies may or
may
not be public companies or companies located in the PRC or even, in all cases,
companies in a similar business. Until such time as a formal compensation
program and committee is established, which we expect will occur in 2008, the
independent directors of our board of directors will approve the structure.
After the compensation committee is formed, it will determine the structure.
Our
board has established a compensation program for executive officers for 2008
that is designed to attract, as needed, individuals with the skills necessary
for us achieve our business plan, to motivate those individuals, to reward
those
individuals fairly over time, and to retain those individuals who continue
to
perform at or above the levels that we expect. For 2008, bonuses for
executive officers will be based on company and individual performance factors,
as described above, and will be based on a formula such that the amount of
the
bonus will be equal to the lower of a pre-determined dollar amount or a
percentage of revenues and net income.
Summary
Compensation Tables
The
following table sets forth information concerning the compensation for the
three
fiscal years ended December 31, 2007, 2006, and 2005 of the principal executive
officer, principal financial officer, in addition to our three most highly
compensated officers whose annual compensation exceeded $100,000, and up to
two
additional individuals for whom disclosure would have been required but for
the
fact that the individual was not serving as an executive officer of the
registrant at the end of the last fiscal year.
Name
and Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Luo
Ken Yi
|
|
|
2007
|
|
$
|
57,423
|
|
$
|
-
|
|
$
|
57,423
|
|
Chief
Executive Officer, Chief Operating Officer
|
|
|
2006
|
|
|
53,786
|
|
|
159,245
|
|
|
213,031
|
|
and
Chairman of the Board
|
|
|
2005
|
|
|
52,500
|
|
|
24,783
|
|
|
77,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wang
Xin(1)
|
|
|
2007
|
|
$
|
14,201
|
|
$
|
-
|
|
$
|
14,201
|
|
Chief
Financial Officer
|
|
|
2006
|
|
|
11,679
|
|
|
8,743
|
|
|
20,422
|
|
|
|
|
2005
|
|
|
11,301
|
|
|
6,196
|
|
|
17,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ye
Ning
|
|
|
2007
|
|
$
|
49,220
|
|
$
|
-
|
|
$
|
49,220
|
|
Vice
President and Director
|
|
|
2006
|
|
|
46,102
|
|
|
72,354
|
|
|
118,456
|
|
|
|
|
2005
|
|
|
22,305
|
|
|
9,193
|
|
|
31,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tang
Nianzhong
|
|
|
2007
|
|
$
|
49,220
|
|
$
|
-
|
|
$
|
49,220
|
|
Vice
President, China Operations and Director
|
|
|
2006
|
|
|
38,418
|
|
|
79,402
|
|
|
117,820
|
|
|
|
|
2005
|
|
|
22,305
|
|
|
12,392
|
|
|
34,697
|
|
|
(1)
|
Wang
Xin resigned as Chief Financial Officer was reassigned to be the
Controller of our China operations in March 2008, and Xinyue Jasmine
Geffner became the new Chief Financial Officer at such
time.
|
Grants
of Plan-Based Awards in 2007
There
were no option grants in 2007.
Outstanding
Equity Awards at 2007 Fiscal Year End
There
were no option exercises or options outstanding in 2007.
Option
Exercises and Stock Vested in Fiscal 2007
There
were no option exercises or stock vested in 2007.
Employment
Agreements
We
have
employment agreements with the following persons and terms:
|
·
|
Luo
Ken Yi is paid $52,500 annually pursuant to a three-year agreement
that
expires on December 31, 2009;
|
|
·
|
Tang
Nianzhong is paid $41,250 annually pursuant to a three-year agreement
that
expires on December 31, 2009;
|
|
·
|
Ye
Ning is paid $41,250 annually pursuant to a five-year agreement that
expires on December 31, 2009;
|
|
·
|
Li
Guoxing is paid $37,500 annually pursuant to a three-year agreement
that
expires on January 1, 2009;
|
|
·
|
Bai
Fei is paid $22,500 annually pursuant to a five-year agreement that
expires on December 31, 2009;
|
|
·
|
Wang
Zairong is paid $10,500 annually pursuant to a one-year agreement
that
expires on December 31, 2008; and
|
|
·
|
Feng
Shu is paid $11,400 annually pursuant to a three-year agreement that
expires on December 31, 2008.
|
Pursuant
to each of the foregoing person’s employment agreement with us, we also agreed
to pay for we may terminate the agreement if, among other things, the executive
neglects his or her duties, violates our rules and regulations, is convicted
of
a criminal, or undergoes bankruptcy. In addition, none of the agreements provide
for severance upon termination.
In
addition, we entered into an employment agreement with Xinyue Jasmine Geffner
and Charles John Anderson on March 12, 2008. Pursuant to her agreement, which
is
for a term of two years, Ms. Geffner is paid approximately $107,871 annually.
We
also agreed to pay Ms. Geffner an annual housing allowance in the amount of
HK$720,000, which is equal to approximately US$92,461, and an annual cash bonus
that will be no less than HK$400,000, which is equal to approximately US$51,367.
We also agreed to issue Ms. Geffner 70,000 shares as a signing bonus. Ms.
Geffner will also receive an additional 70,000 shares of common stock on the
one-year anniversary of her agreement, in addition to being eligible to receive
additional issuances of a minimum of 60,000 shares on each of the first and
second anniversary of the agreement if she has performed her services under
the
agreement to the satisfaction of our Chief Executive Officer and the Board
of
Directors. Shares issued or transferred to Ms. Geffner will be subject to lock
up restrictions for a period of twelve months.
Mr.
Anderson’s employment agreement has a term of five years and it will
automatically renew for successive one-year periods thereafter unless either
party provides 180-day prior written notice or unless terminated earlier in
accordance with agreement. During the term of the Anderson Agreement, either
party may terminate the agreement with 120-day prior written notice. According
to the Anderson Agreement, Mr. Anderson will receive an annual base salary
of
$190,000, in addition to a commission that will be based on all cash received
by
the Company on all sales of our goods or services made pursuant to contracts
originated primarily as the result of the efforts of Mr. Anderson during the
term of the agreement (“Employee Sales”). Mr. Anderson will receive a cash
payment equal to one-half percent (0.50%) of Employee Sales up to $20 million
per annum. Mr. Anderson’s commission rate is adjusted to one-quarter percent
(0.25 %) for Employee Sales in excess of $20 million per annum. Mr. Anderson
will receive his commission payments in three installments, as follows: (i)
the
first payment will be 50% of the total commissions for a contract and will
be
paid once we receive the first payment from the customer, provided that,
however, the first payment on each contract cannot exceed a total of US$100,000;
(ii) the second payment will be 80% of total commissions, on a cumulative basis,
of a such contract, including any amounts paid in the first payment, and will
be
paid once we receive payment of at least 50% of the total payments due under
the
contract; and (iii) the third and final payment will be for the remaining 20%
of
the total commissions for the contract and will be paid once we receive the
last
payment from the customer.
Mr.
Anderson will also receive each year a number of shares of our common stock
that
is equal to (i) twice the amount of Mr. Anderson’s total commissions on US sales
for the year divided by (ii) the closing trading price of our common stock
on
December 31 on such year; provide that, however, the US sales for purposes
of
this calculation will be capped at $50 million. All shares received by Mr.
Anderson will be subject to a twelve-month lock up restriction. Mr. Anderson
will be eligible to receive an annual bonus at the sole discretion of the Chief
Executive Officer and Board of Directors.
Director
Compensation
The
following table shows information regarding the compensation earned during
the
fiscal year ended December 31, 2007 by our board of directors.
Name
|
|
Fees
Earned or
Paid in
Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
Zheng
Jinfeng
|
|
|
10,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,000
|
|
Zhao
Bao Jiang
|
|
|
10,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,000
|
|
Kelly
Wang
|
|
|
10,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
10,000
|
|
We
have a
policy to pay our non-employee directors $20,000 per year as cash consideration
for serving on the Board of Directors. We further agree to reimburse all
reasonable travel and other expenses incurred for attendance at a board or
committee meeting, and we agree to pay the fees and documented reimbursements
within a reasonable time and in accordance with our current payment practices.
Directors are also eligible to participate in our 2007 Equity Incentive Plan.
To
date, we have not granted any options to Directors, but may do so in the future.
2007
Equity Incentive Plan
We
adopted the China Architectural Engineering, Inc. 2007 Equity Incentive Plan
in
July 2007. The equity incentive plan became effective upon adoption and will
terminate upon the earliest of (i) the expiration of the 10-year period measured
from the date we adopted the plan, (ii) the date on which all shares available
under the plan have been issued as vested shares, or (iii) the termination
of
all outstanding options in connection with a change in our ownership or control.
The equity incentive plan authorizes the issuance of options to purchase shares
of common stock under the Option Grant Program and the grant of stock awards
under the Stock Issuance Program. Under the Option Grant Program no option
will
have a term in excess of 10 years measured from the date the option is granted
and no participant can receive more than 2,000,000 shares in any calendar year.
Under the Stock Issuance Program, shares of our common stock may be issued
through direct and immediate issuance without any intervening options grants.
Administration
of the equity incentive plan is carried out by our Board of Directors or any
committee of the Board of Directors to which the Board of Directors has
delegated all or a portion of responsibility for the implementation,
interpretation or administration of the equity incentive plan. Our employees,
officers and directors (including employees, officers and directors of our
affiliates) are eligible to participate in the equity incentive plan. The
administrator of the equity incentive plan will select the participants who
are
granted stock options or stock awards and, consistent with the terms of the
equity incentive plan, will establish the terms of each stock option or stock
award. The maximum period in which a stock option may be exercised will be
fixed
by the administrator. Under the equity incentive plan, the maximum number of
shares of common stock that may be subject to stock options or stock awards
is
5,000,000. As of December 31, 2007, we have not granted any securities under
the
equity incentive plan.
Equity
Compensation Plan Information
The
following table sets forth certain information as of December 31, 2007 with
respect to securities authorized for issuance as equity
compensation.
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights (a)
|
|
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights (b)
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a)) (c)
|
|
Equity
compensation plans approved by shareholders
|
|
|
—
|
|
|
$
|
—
|
|
5,000,000
|
(1)
|
Equity
compensation plans not approved by shareholders
|
|
|
50,000
|
(2)
|
|
$
|
3.50
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
50,000
|
|
|
$
|
3.50
|
|
5,000,000
|
|
(1)
|
Represents
shares available for grant under our China Architectural Engineering,
Inc.
2007 Equity Incentive Plan in July
2007.
|
(2)
|
Represents
warrants issued to an investor relations
firm.
|
Indemnifications
of Directors and Executive Officers and Limitations of
Liability
Under
Section 145 of the General Corporation Law of the State of Delaware, we can
indemnify our directors and officers against liabilities they may incur in
such
capacities, including liabilities under the Securities Act of 1933, as amended
(the “Securities Act”). Our certificate of incorporation provides that, pursuant
to Delaware law, our directors shall not be liable for monetary damages for
breach of the directors’ fiduciary duty of care to our company and our
stockholders. This provision in the certificate of incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as injunctive or other forms of nonmonetary relief will remain available
under Delaware law. In addition, each director will continue to be subject
to
liability for breach of the director’s duty of loyalty to us or our
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of the law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval
of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director’s responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws.
Our
bylaws provide for the indemnification of our directors to the fullest extent
permitted by the Delaware General Corporation Law. Our bylaws further provide
that our Board of Directors has discretion to indemnify our officers and other
employees. We are required to advance, prior to the final disposition of any
proceeding, promptly on request, all expenses incurred by any director or
executive officer in connection with that proceeding on receipt of an
undertaking by or on behalf of that director or executive officer to repay
those
amounts if it should be determined ultimately that he or she is not entitled
to
be indemnified under the bylaws or otherwise. We are not, however, required
to
advance any expenses in connection with any proceeding if a determination is
reasonably and promptly made by our Board of Directors by a majority vote of
a
quorum of disinterested Board members that (i) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to us or our
stockholders and (ii) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the applicable
sections of our bylaws.
We
have
been advised that in the opinion of the Securities and Exchange Commission,
insofar as indemnification for liabilities arising under the Securities Act
may
be permitted to our directors, officers and controlling persons pursuant to
the
foregoing provisions, or otherwise, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable. In
the
event a claim for indemnification against such liabilities (other than the
our
payment of expenses incurred or paid by our director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel
the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by us
is
against public policy as expressed in the Securities Act and will be governed
by
the final adjudication of such issue.
We
may
enter into indemnification agreements with each of our directors and officers
that are, in some cases, broader than the specific indemnification provisions
permitted by Delaware law, and that may provide additional procedural
protection. We have not entered into any indemnification agreements with our
directors or officers, but may choose to do so in the future. Such
indemnification agreements may require us, among other things, to:
|
·
|
indemnify
officers and directors against certain liabilities that may arise
because
of their status as officers or directors;
|
|
·
|
advance
expenses, as incurred, to officers and directors in connection with
a
legal proceeding, subject to limited exceptions; or
|
|
·
|
obtain
directors’ and officers’ insurance.
|
At
present, there is no pending litigation or proceeding involving any of our
directors, officers or employees in which indemnification is sought, nor are
we
aware of any threatened litigation that may result in claims for
indemnification.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Full
Art International, Ltd.
Full
Art
International, Ltd. (“Full Art”) is our wholly-owned subsidiary and has
interlocking executive and director positions with China Architectural
Engineering, Inc.
October
2006 Share Exchange
On
October 17, 2006, we completed the Share Exchange pursuant to the share exchange
agreement entered into with Full Art and KGE Group, Limited, which was the
sole
shareholder of Full Art. At the closing, Full Art became our wholly-owned
subsidiary and 100% of the issued and outstanding securities of Full Art were
exchanged for shares of our common stock. An aggregate of 45,304,125 shares
of
our common stock were issued to KGE Group and its designees. KGE Group owns
33,122,554 shares, which is approximately 64.0% of our issued and outstanding
stock. Luo Ken Yi, Ye Ning, and Tang Nianzhong are directors of KGE Group.
In
addition, Luo Ken Yi, Ye Ning and Tang Nianzhong own approximately 70%, 10%
and
10% respectively, of KGE Group Limited’s issued and outstanding shares. In
addition, KGE Holding Limited owns approximately 5% of the issued and
outstanding shares of KGE Group Limited, of which is owned by Luo Ken Yi and
his
brother. Moreover, concurrent with the closing of the Share Exchange, our board
appointed Luo Ken Yi as Chief Executive Officer and Chief Operating Officer,
Wang Zairong as Chief Technology Officer and General Engineer, and Wang Xin
as
Chief Financial Officer. Luo Ken Yi, Tang Nianzhong, Ye Ning, Wang Zairong
and
Wang Xin are officers and/or directors of Full Art and Zhuhai, and were also
appointed as our executive officers and/or directors upon closing of the Share
Exchange.
WestPark
Capital, Inc.
WestPark
Capital, Inc. was the placement agent for the $3,713,400 equity financing
conducted by us on the close of the Share Exchange. For its services as
placement agent, WestPark received an aggregate fee of approximately $445,608,
which consisted of a commission equal to 9.0% of the gross proceeds from the
financing and a non-accountable fee of 3% of the gross proceeds. Richard
Rappaport, our President and one of our controlling stockholders prior to the
Share Exchange, indirectly holds a 100% interest in WestPark Capital, Inc.,
an
NASD member. Anthony C. Pintsopoulos, an officer and director prior to the
Share
Exchange, is the Chief Financial Officer of WestPark Capital, Inc. Debbie
Schwartzberg, one of our controlling stockholders prior to the Share Exchange,
is a noteholder of the parent company of WestPark Capital, Inc.; her note
entitles her to a 1.5% interest in the net profits of the parent company of
WestPark Capital, Inc. Each of Messrs. Rappaport and Pintsopoulos resigned
from
all of their executive and director positions with us upon the closing of the
Share Exchange.
WestPark
also acted as the managing underwriter for our initial public offering. Upon
the
closing of the offering in September 2007, we issued to WestPark warrants to
purchase up to 73,700 shares of our common stock. 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 holders of shares of common stock acquired upon exercise of
the
warrants have the right to include such shares in any future registration
statements filed by us and to demand one registration for the shares. In
addition, we agreed to indemnify the underwriters against some liabilities,
including liabilities under the Securities Act of 1933, as amended, and to
contribute to payments that the underwriters may be required to make in respect
thereof. We paid WestPark a non-accountable expense allowance of $77,385 and
an
underwriters’ discount of $296,643.
Loans
to and from Insiders
We
have
made loans to one of our officers. Advances from KGE Group Limited to us for
the
years ended December 31, 2007, 2006 and 2005 were $1,334,856, $1,735, and
$420,556, respectively. Advances to Luo Ken Yi by us for the years ended
December 31, 2007, 2006, and 2005 were $nil, $nil, and $nil, respectively.
All
amounts due by Mr. Luo were repaid prior to completion of the transactions
contemplated by the Share Exchange Agreement. All of the advances were
unsecured, interest free, and have no fixed repayment terms.
Policy
for Approval of Related Party Transactions
Our
policy is to have our Audit Committee review and pre-approve any related party
transactions and other matters pertaining to the integrity of management,
including potential conflicts of interest, or adherence to standards of business
conduct as required by our policies.
BENEFICIAL
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial
ownership is determined in accordance with the rules of the SEC. In computing
the number of shares beneficially owned by a person and the percentage of
ownership of that person, shares of common stock subject to options and warrants
held by that person that are currently exercisable or become exercisable within
60 days of May 9, 2008 are deemed outstanding even if they have not actually
been exercised. Those shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person.
The
following table sets forth certain information with respect to beneficial
ownership of our common stock based on 51,783,416 issued and outstanding shares
of common stock, by:
|
·
|
Each
person known to be the beneficial owner of 5% or more of the outstanding
common stock of our company;
|
|
·
|
Each
executive officer;
|
|
·
|
All
of the executive officers and directors as a
group.
|
The
number of shares of our common stock outstanding as of May 9, 2008, excludes
(i)
173,700 shares of our common stock issuable upon exercise of outstanding
warrants, (ii) 6,006,749 shares of our common stock issuable upon the conversion
of issued and outstanding bonds, subject to adjustment, (iii) 1,100,000 shares
of our common stock issuable upon the exercise of the warrants issued in
connection with our issuance of bonds, subject to adjustment, and (iv) 5,000,000
shares of common stock that may be issued and granted under our 2007 Equity
Incentive Plan. Unless otherwise indicated, the persons and entities named
in
the table have sole voting and sole investment power with respect to the shares
set forth opposite the stockholder’s name, subject to community property laws,
where applicable. Unless otherwise indicated, the address of each stockholder
listed in the table is c/o China Architectural Engineering, Inc., 105 Baishi
Road, Jiuzhou West Avenue, Zhuhai, 519070, People’s Republic of
China.
Name and Address
of Beneficial Owner
|
|
Title
|
|
Beneficially
Owned
|
|
Percent of
Class
Beneficially
Owned
|
|
|
|
|
|
|
|
|
|
Luo
Ken Yi
|
|
Chief
Executive Officer, Chief Operating Officer and Chairman of the
Board
|
|
|
33,122,554
|
(1)
|
|
64.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Bai
Fei
|
|
Vice
General Manager of Marketing
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Tang
Nianzhong
|
|
Vice
President, China Operations and Director
|
|
|
33,122,554
|
(1)
|
|
64.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Ye
Ning
|
|
Vice
President and Director
|
|
|
33,122,554
|
(1)
|
|
64.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Li
Guoxing
|
|
Vice
General Manager of Design
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Wang
Zairong
|
|
Chief
Technology Officer
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Feng
Shu
|
|
Research
and Development Supervisor
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Xinyue
Jasmine Geffner
|
|
Chief
Financial Officer
|
|
|
—
|
(2)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles
John Anderson
|
|
President,
U.S. Operations
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Zheng
Jinfeng
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhao
Bao Jiang
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Kelly
Wang
|
|
Director
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Officers
and Directors as a Group (total of 12 persons)
|
|
|
|
|
|
33,122,554
|
(1)
|
|
64.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
KGE
Group Limited
|
|
|
|
|
|
33,122,554
|
(1)
|
|
64.0
|
%
|
(1)
|
Represents
shares of common stock in our company held by KGE Group Limited,
a Hong
Kong corporation, of which Luo Ken Yi, Ye Ning and Tang Nianzhong
are
directors and may be deemed to have voting and investment control
over the
shares owned by KGE Group Limited. In addition, Luo Ken Yi, Ye Ning
and
Tang Nianzhong own approximately 70%, 10% and 10% respectively, of
KGE
Group Limited’s issued and outstanding shares. In addition, KGE Holding
Limited owns approximately 5% of the issued and outstanding shares
of KGE
Group Limited, of which is owned by Luo Ken Yi and his brother. As
a
result, Tang Nianzhong may be deemed to be a beneficial owner of
the
shares held by KGE Group Limited. Each of the foregoing persons disclaims
beneficial ownership of the shares held by KGE Group Limited except
to the
extent of his pecuniary interest.
|
(2)
|
Entitled
to issuance of 70,000 shares in connection with execution of employment
agreement.
|
SELLING
SECURITY HOLDERS
On
April
15, 2008, we completed a financing transaction with ABN AMRO Bank N.V., London
Branch (“ABN AMRO”), CITIC Allco Investments Limited (together with ABN AMRO,
the “Subscribers,” and each a “Subscriber”), and CITIC Capital Finance Limited
issuing (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”) and (ii)
300,000 warrants to purchase an aggregate of 300,000 shares of our common stock,
subject to certain adjustments as set forth in the warrant instrument, that
expire in 2013 (the “Bond Warrants”). Each Bond is convertible at the option of
the holder at any time during the period (i) beginning on the earlier of (a)
the
date that a registration statement for the shares to be issued upon conversion
of the Bonds is first declared effective by the United States Securities and
Exchange Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending at the
close of business on April 8, 2011, subject to certain exceptions, into shares
of our common stock at an initial conversion price equal to $6.35 per share,
which is the product of 1.1 and the average closing price per share of our
common stock for the period of 20 consecutive trading days immediately prior
to
April 15, 2008. 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. We agreed to register the Bonds, the Bond Warrants and the shares of
common stock underlying the Bonds and the Bond Warrants,
3,149,606
shares
of common stock may be acquired upon conversion of the Bonds and 300,000 may
be
acquired upon exercise of the Bond Warrants, each subject to adjustment.
The
selling security holders may from time to time offer for resale and sell (i)
the
Bonds, (ii) the Bond Warrants, and (iii)
up
to
3,449,606 shares of common stock, which includes
3,149,606
shares
that may be acquired upon conversion of the Bonds and 300,000 shares that may
be
acquired upon exercise of the Bond Warrants, subject to adjustment.
When
we
refer to the “selling security holders” in this prospectus, we mean those
persons listed in the table below or in any prospectus supplement, as well
as
the pledgees, donees, assignees, transferees, successors and others who later
hold any of the selling security holders’ interests.
The
selling security holders may resell the securities covered by this prospectus
as
provided under the section entitled “Plan of Distribution” and in any applicable
prospectus supplement.
The
following table sets forth information as of the date of this prospectus, with
respect to the selling security holders and the principal amounts of bonds
beneficially owned by each selling security holder that may be offered under
this prospectus. Information concerning the selling security holders may change
from time to time and any changed information will be set forth in supplements
to this prospectus if and when necessary. In addition, the conversion rate
and,
therefore, the number of shares of common stock issuable upon conversion of
the
bonds, is subject to adjustment under certain circumstances.
On
the
date of this prospectus, 51,783,416 shares of our commons stock were
outstanding. This number of shares of our common stock outstanding excludes
(i)
173,700 shares of our common stock issuable upon exercise of outstanding
warrants, (ii) 6,006,749 shares of our common stock issuable upon the conversion
of issued and outstanding bonds, subject to adjustment, (iii) 1,100,000 shares
of our common stock issuable upon the exercise of the warrants issued in
connection with our issuance of bonds, subject to adjustment, and (iv) 5,000,000
shares of common stock that may be issued and granted under our 2007 Equity
Incentive Plan.
Name of Selling
Security Holder
|
|
Beneficial Ownership
of Shares of Common
Stock Prior to the
Offering
|
|
Shares of
Common Stock
Being Offered
|
|
Principal Amount of
Bonds Beneficially
Owned Prior to the
Offering
|
|
Bonds Being
Offered
|
|
Number of Bond
Warrants Being
Offered
|
|
ABN
AMRO Bank, N.V.
|
|
|
1,293,602
|
(1)
|
|
1,293,602
|
(1)
|
$
|
7,500,000
|
(3)
|
$
|
7,500,000
|
|
|
112,500
|
|
CITIC
Allco Investments Ltd.
|
|
|
2,156,004
|
(2)
|
|
2,156,004
|
(2)
|
$
|
12,500,000
|
|
$
|
12,500,000
|
|
|
187,500
|
|
|
(1)
|
Consists
of (i) 1,181,102 shares of common stock may be acquired upon conversion
of
the Bonds, which are convertible during the period (i) beginning
on the
earlier of (a) the date that a registration statement for the shares
to be
issued upon conversion of the Bonds is first declared effective by
the
United States Securities and Exchange Commission (the “SEC”) and (b)
October 15, 2008 and (ii) ending at the close of business on April
8,
2011, subject to certain exceptions, and (ii) 112,500 shares of common
stock that may be acquired upon exercise of the Bond Warrants, which
became exercisable on April 15, 2008. Excludes 2,857,143 shares of
common
stock may be acquired upon conversion of the 2007 Bonds, which are
not
convertible until September 28, 2008, and (ii) 800,000 shares of
common
stock that may be acquired upon exercise of the 2007 Bond Warrants
which
become exercisable on October 12, 2008. Based on information provided
to
us by ABN AMRO,
ABN
AMRO
is
an affiliate of a broker-dealer and it acquired these securities
in the
ordinary course of business and that at the time of the acquisition
of
these securities, it had no agreements or understandings, directly
or
indirectly, with any person to distribute these securities. Graeme
Booth
and Alex Gardner have voting and investment control over the securities
owned by this entity.
|
|
(2)
|
Consists
of (i) 1,968,504 shares of common stock may be acquired upon conversion
of
the Bonds, which are convertible during the period (i) beginning
on the
earlier of (a) the date that a registration statement for the shares
to be
issued upon conversion of the Bonds is first declared effective by
the SEC
and (b) October 15, 2008 and (ii) ending at the close of business
on April
8, 2011, subject to certain exceptions, and (ii) 187,500 shares of
common
stock that may be acquired upon exercise of the Bond Warrants.
Zhang
Yichen, Emil Cheung, David Coe, as members of the investment committee,
have voting and investment control over the securities owned by this
entity.
|
|
(3)
|
Excludes
the 2007 Bonds that that have a principal amount of $10
million.
|
DESCRIPTION
OF SECURITIES
Common
Stock
We
are
authorized to issue 100,000,000 shares of common stock, $.001 par value per
share, of which 51,783,416 shares are issued and outstanding as of the date
hereof. Each outstanding share of common stock is entitled to one vote, either
in person or by proxy, on all matters that may be voted upon by their holders
at
meetings of the stockholders.
Holders
of our common stock:
|
(i)
|
have
equal ratable rights to dividends from funds legally available therefore,
if declared by the our Board of
Directors;
|
|
(ii)
|
are
entitled to share ratably in all our assets available for distribution
to
holders of common stock upon our liquidation, dissolution or winding
up;
|
|
(iii)
|
do
not have preemptive, subscription or conversion rights or redemption
or
sinking fund provisions; and
|
|
(iv)
|
are
entitled to one non-cumulative vote per share on all matters on which
stockholders may vote at all meetings of our
stockholders.
|
The
holders of shares of our common stock do not have cumulative voting rights,
which means that the holders of more than fifty percent (50%) of outstanding
shares voting for the election of directors can elect all of our directors
if
they so choose and, in such event, the holders of the remaining shares will
not
be able to elect any of the our directors.
Preferred
Stock
We
may
issue up to 10,000,000 shares of our preferred stock, par value $.001 per share,
from time to time in one or more series. Immediately after the Share Exchange,
no shares of preferred stock have been issued. Our Board of Directors, without
further approval of the our stockholders, is authorized to fix the dividend
rights and terms, conversion rights, voting rights, redemption rights,
liquidation preferences and other rights and restrictions relating to any
series. Issuances of shares of preferred stock, while providing flexibility
in
connection with possible financings, acquisitions and other corporate purposes,
could, among other things, adversely affect the voting power of the holders
of
our common stock and prior series of preferred stock then outstanding.
Warrants
In
connection with the Bond offering completed in April 2007, we issued three-year
warrants (the “2007 Bond Warrants”) to purchase 800,000 shares of our common
stock subject to the terms of a warrant instrument entered into by and between
us and
ABN
AMRO
and
a
warrant agency agreement entered into by and among us, The Bank of New York
and
The Bank of New York, London Branch, both dated April 12, 2007. We registered
the 2007 Bond Warrants and the shares of common stock underlying the 2007 Bond
Warrants. The 2007 Bond Warrants and the shares of common stock underlying
the
2007 Bond Warrants are covered by an effective registration statement and the
related prospectus. In connection with the Bond offering completed in April
2008, we issued five-year warrants (the “Bond Warrants”) to purchase 300,000
shares of our common stock that are exercisable at $6.35 per share, subject
to
adjustment. The Bond Warrants and the shares of common stock underlying the
Bond
Warrants are covered by this prospectus. Other outstanding warrants consist
of
warrants to purchase 73,700 at $4.20 per share and warrants to purchase 100,000
shares at $3.50 per share.
Convertible
Bonds
On
April
12, 2007, we issued the 2007 Bonds. The 2007 Bonds are convertible at the option
of the holder at any time on and after September 28, 2008 into shares of our
common stock at an initial conversion price of $3.50, the price per share at
which shares were sold in our initial public offering of our 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
2007
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
2007
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, pursuant to the Amended and Restated Trust Deed, the conversion price
will only be adjusted to an amount not less than $0.25 per share (as adjusted
for stock splits, stock dividends, spin-offs, rights offerings,
recapitalizations and similar events) except in certain circumstances.
On
April
15, 2008, we issued the Bonds. Each Bond is convertible at the option of the
holder at any time during the period (i) beginning on the earlier of (a) the
date that a registration statement for the shares to be issued upon conversion
of the Bonds is first declared effective by the United States Securities and
Exchange Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending at the
close of business on April 8, 2011, subject to certain exceptions, into shares
of our common stock at an initial conversion price equal to $6.35 per share,
which is the product of (i) 1.1 and (ii) the average closing price per share
of
our common stock for the period of 20 consecutive trading days immediately
prior
to April 15, 2008. 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.
Market
Price of Our Common Stock
Our
common stock is currently listed for trading on AMEX under the ticker symbol
“RCH.” 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 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.
|
Delaware
Anti-Takeover Law and Charter Bylaws Provisions
We
are
subject to Section 203 of the Delaware General Corporation Law. This provision
generally prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date the stockholder became an interested stockholder,
unless:
|
·
|
prior
to such date, the Board of Directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
|
|
·
|
upon
consummation of the transaction that resulted in the stockholder
becoming
an interested stockholder, the interested stockholder owned at least
85%
of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the
number of
shares outstanding those shares owned by persons who are directors
and
also officers and by employee stock plans in which employee participants
do not have the right to determine confidentially whether shares
held
subject to the plan will be tendered in a tender or exchange offer;
or
|
|
·
|
on
or subsequent to such date, the business combination is approved
by the
Board of Directors and authorized at an annual meeting or special
meeting
of stockholders and not by written consent, by the affirmative vote
of at
least 66 2/3% of the outstanding voting stock that is not owned by
the
interested stockholder.
|
Section
203 defines a business combination to include:
|
·
|
any
merger or consolidation involving the corporation and the interested
stockholder;
|
|
·
|
any
sale, transfer, pledge or other disposition of 10% or more of the
assets
of the corporation involving the interested stockholder;
|
|
·
|
subject
to certain exceptions, any transaction that results in the issuance
or
transfer by the corporation of any stock of the corporation to the
interested stockholder;
|
|
·
|
any
transaction involving the corporation that has the effect of increasing
the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder;
or
|
|
·
|
the
receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided
by or
through the corporation.
|
In
general, Section 203 defines an “interested stockholder” as any entity or person
beneficially owning 15% or more of the outstanding voting stock of a
corporation, or an affiliate or associate of the corporation and was the owner
of 15% or more of the outstanding voting stock of a corporation at any time
within three years prior to the time of determination of interested stockholder
status; and any entity or person affiliated with or controlling or controlled
by
such entity or person.
Our
certificate of incorporation and bylaws contain provisions that could have
the
effect of discouraging potential acquisition proposals or making a tender offer
or delaying or preventing a change in control of our, including changes a
stockholder might consider favorable. In particular, our certificate of
incorporation and bylaws, as applicable, among other things, will:
|
·
|
provide
our board of directors with the ability to alter our bylaws without
stockholder approval;
|
|
·
|
provide
for an advance notice procedure with regard to the nomination of
candidates for election as directors and with regard to business
to be
brought before a meeting of
stockholders;
|
|
·
|
provide
that vacancies on our board of directors may be filled by a majority
of
directors in office, although less than a
quorum.
|
Such
provisions may have the effect of discouraging a third-party from acquiring
our
company, even if doing so would be beneficial to its stockholders. These
provisions are intended to enhance the likelihood of continuity and stability
in
the composition of our board of directors and in the policies formulated by
them, and to discourage some types of transactions that may involve an actual
or
threatened change in control of our company. These provisions are designed
to
reduce our vulnerability to an unsolicited acquisition proposal and to
discourage some tactics that may be used in proxy fights. We believe that the
benefits of increased protection of our potential ability to negotiate with
the
proponent of an unfriendly or unsolicited proposal to acquire or restructure
us
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals could result in an improvement of their
terms.
However,
these provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. These provisions also may have the effect of preventing changes in
our
management.
Transfer
Agent
The
transfer agent and registrar for our common stock is Computershare Trust
Company, N.A.
Listing
Our
shares of common stock are currently listed for trading on the AMEX under the
ticker symbol “RCH.”
DESCRIPTION
OF THE BONDS
On
April
15, 2008, we completed a financing transaction with ABN AMRO Bank N.V., London
Branch (“ABN AMRO”), CITIC Allco Investments Limited (together with ABN AMRO,
the “Subscribers,” and each a “Subscriber”), and CITIC Capital Finance Limited
issuing (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”).
The
Bonds
were issued pursuant to, and are subject to the terms and conditions of, a
trust
deed, between us and The Bank of New York, London Branch, dated April 15, 2008
(the “Trust Deed”) and are represented by the global certificate in the form as
set forth in the Trust Deed. The Bonds are also subject to a paying and
conversion agency agreement dated April 15, 2008 between us, The Bank of New
York, and The Bank of New York, London Branch (the “Agency Agreement”). The Bank
of New York, London Branch (“Principal Agent”) will act as the principal agent
under the Trust Deed and
The
Bank
of New York will act as the registrar.
We
are
summarizing the material provisions of the Bonds and the Trust Deed. You should
refer to the specific terms of the Trust Deed, and the terms and conditions
of
the Bonds contained therein, for a complete statement of the terms of the Bonds.
When we use capitalized terms that we do not define here, those terms have
the
meanings given in the Trust Deed. Unless otherwise indicated, when we use
references to Sections or defined terms, we mean Sections or defined terms
in
the Trust Deed. The following summary is qualified by reference to the
applicable provisions of the Trust Deed, which we filed as an exhibit to the
registration statement of which this prospectus is a part which is incorporated
by reference herein.
General
The
Bonds
were subscribed at a price equal to 100% of their principal amount. The Company
agreed to pay to the Subscribers an aggregate commission of 2.5% of the
principal amount of the Bonds and of the aggregate warrant price for the Bond
Warrants. The terms and conditions of the Bonds, as set forth in the Trust
Deed
include, among other things, the following terms:
|
·
|
Interest
Rate.
The Bonds bear cash interest from April 15, 2008 at the rate of 12%
per
annum of the principal amount of the
Bonds.
|
|
·
|
Conversion.
Each Bond is convertible at the option of the holder at any time
during
the period (i) beginning on the earlier of (a) the date that a
registration statement for the shares to be issued upon conversion
of the
Bonds is first declared effective by the United States Securities
and
Exchange Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending
at the close of business on April 8, 2011, subject to certain exceptions,
into shares of our common stock at an initial conversion price equal
to
$6.35 per share, which is the product of 1.1 and the average closing
price per share of our common stock for the period of 20 consecutive
trading days immediately prior to April 15, 2008. 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. 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.
Interest
is payable semi-annually in arrears on April 15 and October 15 of
each
year (each an “Interest Payment Date”) commencing October 15, 2008. On any
Interest Payment Date on or after April 15, 2010, the holders of
the Bonds
can require us to redeem the Bonds at 116.61% of the principal amount
of
the Bonds redeemed, plus all accrued but unpaid interest. We are
required
to redeem any outstanding Bonds at 116.61% of its principal amount
on
April 15, 2011.
|
Ranking
The
Bonds
constitute direct, unsubordinated, unconditional and, unsecured obligations
of
us and will at all times rank
pari
passu
and
without any preference or priority among themselves and our payment obligations
under the Bonds will rank at least equally with all of our other present and
future unsecured and unsubordinated obligations, (other than any obligations
preferred by mandatory provisions of applicable law). If we create any secure
obligation in any debentures, loan stock, bonds, notes, bearer participation
certificates, depository receipts, certificates of deposit or other similar
securities for the purpose of raising money which are, or are issued with the
intention that they will be listed in any securities market, we must also secure
the Bonds in substantially identical terms.
Title
and Transfer
Title
to
the Bonds passes only by transfer and registration in the register of
Bondholders. The holder of any Bond will (except as otherwise required by law)
be treated as its absolute owner for all purposes (whether or not it is overdue
and regardless of any notice of ownership, trust or any interest in it or any
writing on, or the theft or loss of, the Bond certificate issued in respect
of
it) and no person will be liable for so treating the holder. Bondholder and
(in
relation to a Bond) holder mean the person in whose name a Bond is
registered.
A
Bond
may be transferred by delivery of the certificate issued in respect of that
Bond, with the form of transfer on the back duly completed and signed by the
holder or his attorney duly authorized in writing, to the specified office
of
the registrar or any of the agents appointed under the Trust Deed. No transfer
of a Bond will be valid unless and until entered on the register of Bondholders.
All transfers of Bonds and entries on the register of Bondholders will be made
subject to the detailed regulations concerning transfer of Bonds scheduled
to
the Agency Agreement. The regulations may be changed by us, but only with the
prior written approval of the trustee and the registrar as identified in the
Trust Deed. A copy of the current regulations will be mailed (free of charge)
by
the registrar to any Bondholder upon request.
Conversion
Conversion
Period
Bondholders
have the right to convert their Bonds into shares of our common stock at any
time during the conversion period, which is described below. Any Bond may be
converted, at the option of the holder, at any time during the period (i)
beginning on the earlier of (a) the date that a registration statement for
the
shares to be issued upon conversion of the Bonds is first declared effective
by
the SEC and (b) October 15, 2008 and (ii) ending at the close of business on
April 8, 2011, subject to certain exceptions.
The
number of shares of our common stock to be issued upon conversion of a Bond
will
be determined by dividing the principal amount of the Bond to be converted
by
the conversion price in effect at the conversion date, both as defined in the
Trust Deed, and as discussed below. Conversion of a Bond may only be exercised
in respect of one or more Bonds. If more than one Bond held by the same holder
is converted at any one time by the same holder, the number of shares of our
commons stock to be issued upon such conversion will be calculated on the basis
of the aggregate principal amount of Bonds to be converted.
Fractions
of shares of our common stock will not be issued on conversion and no cash
adjustments will be made for such conversions. Notwithstanding the foregoing,
in
the event of a consolidation or re-classification of the shares of our common
stock by operation of law or otherwise occurring after April 15, 2008 which
reduces the number of shares of common stock outstanding, we will upon
conversion of Bonds pay in cash (in US dollars by means of a US dollar check
drawn on a bank in New York or a wire transfer of same day funds) a sum equal
to
such portion of the principal amount of the Bond or Bonds evidenced by the
certificate deposited in connection with the exercise of conversion rights,
for
any fraction of a share of common stock not issued as a result of such
consolidation or re-classification aforesaid if such sum exceeds
$10.00.
Conversion
Price
The
price
at which shares of our common stock will be issued upon conversion will
initially be $6.35 per share, which is the product of (i) 1.1 and (ii) the
average closing price per share of our common stock for the period of 20
consecutive trading days immediately prior to April 15, 2008.
Adjustments
to Conversion Price
The
conversion price of the Bonds is subject to adjustment upon the occurrence
of
certain events, including:
|
·
|
The
alteration of the nominal value of shares of our common stock as
a result
of consolidation, subdivision or
reclassification;
|
|
·
|
If
we issue any shares of our common stock credited as fully paid to
our
shareholders by capitalization of profits or reserves including,
shares
paid up out of distributable profits or reserves and/or share premium
account issued;
|
|
·
|
A
capital distribution to our shareholders. The adjustment to the conversion
price upon a capital distribution will become effective on the date
of the
capital distribution is actually made and when the capital distribution
is
by means of a cash dividend, it will be fully taken into account
in the
fair market value of the portion of the capital distribution attributable
to one share;
|
|
·
|
If
we issue shares of our common stock to all or substantially all of
our
shareholders at less than the current market price per share on the
last
trading day preceding the date of the announcement or issue of the
grant;
and
|
|
·
|
If
we issue shares of our common stock at less than the conversion price
in
effect at the time of such issuance, the conversion price will be
reduced
concurrently with the issuance to a price equal to the consideration
per
share for which such shares were
issued.
|
Redemption
Unless
previously redeemed, converted or purchased and cancelled, we are required
to
redeem any outstanding Bonds at 116.61% of its principal amount on April 15,
2011 (the “Maturity Date”).
Redemption
at Our Option
At
any
time prior to April 15, 2011, we may, having given not less than 20 nor more
than 60 days’ notice to the Bondholders, the Trustee and the Principal Agent,
which notice will be irrevocable, redeem all and not some only of the Bonds
at a
redemption price equal to the early redemption amount, plus all accrued but
unpaid interest, on the redemption date. The early redemption amount of a Bond
is determined so that it represents for the Bondholder the higher of (i) the
Minimum Return on Investment, defined as a payment to each Bondholder equal
to
the product of (x) the aggregate principal amount of Bonds held by such
Bondholder and (y) 1.35 (which equates to a payment of US$1,350 for each
US$1,000 principal amount of the Bonds), and (ii) the Minimum Gross Yield
Amount, defined as an amount representing repayment of principal plus a gross
yield of nineteen percent (19%) per annum, calculated by us on a semi-annual
basis.
Redemption
for Taxation Reasons
At
any
time, we may, having given not less than 30 nor more than 60 days’ notice to the
Bondholders, redeem all, but not some only, of the Bonds at a redemption price
equal to the early redemption amount on the redemption date if (i) we have
or
will become obliged to pay additional amounts for any present or future taxes,
duties, assessments or governmental charges, as a result of a change in, or
amendment to, the laws of the United States, the PRC or England, and (ii) the
obligation to pay additional amounts cannot be avoided provided that we do
not
give notice of redemption earlier than 90 days prior to the earliest date on
which we would be obliged to pay such additional amounts were a payment in
respect of the Bonds then due.
Redemption
at the Option of the Bondholder
:
Interest
is payable semi-annually in arrears on April 15 and October 15 of each year
(each an “Interest Payment Date”) commencing October 15, 2008. On any Interest
Payment Date on or after April 15, 2010, the holders of the Bonds can require
us
to redeem the Bonds at 116.61% of the principal amount of the Bonds redeemed,
plus all accrued but unpaid interest. We are required to redeem any outstanding
Bonds at 116.61% of its principal amount on April 15, 2011. There can be no
guarantee that we will have sufficient financial resources or be able to arrange
financing to redeem the Bonds.
Redemption
for Non-Listing or a Change in Control
If
our
common stock ceases to be listed on AMEX, or the New York Stock Exchange or
NASDAQ, or if the trading of our common stock is suspended for 20 or more
consecutive trading days temporarily or otherwise on such exchange or there
is a
change of control, as defined in the Trust Deed, of our company, each Bondholder
will have the right to require us, within 60 days following the date on which
the Bondholder has been given notice of non-listing or a change of control,
to
redeem all or some of that holder’s Bonds. There can be no guarantee that we
will have sufficient financial resources or be able to arrange financing to
redeem the Bonds.
Purchase
and Cancellation
We
may at
any time and from time to time purchase Bonds at any price in the open market
or
otherwise. All Bonds which are redeemed, converted or purchased by us, will
be
cancelled. Certificates in respect of all Bonds cancelled will be forwarded
to
or to the order of the registrar and such Bonds may not be reissued or
resold.
Defaults
and Remedies
The
Trustee, in its sole discretion may, and if so requested in writing by the
holders of not less than 25% in principal amount of the Bonds then outstanding
or if so directed by an extraordinary resolution, give notice to us that the
Bonds are immediately due and repayable at an early redemption amount
if:
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a
default is made in the payment of any principal or early redemption
amount
due in respect of the Bonds;
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any
failure by us to deliver the shares of our common stock as and when
the
shares are required to be delivered following conversion of Bonds
and such
failure continues for seven days;
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we
do not perform or comply with one or more of our other obligations
in the
Bonds or the Trust Deed which default is incapable of remedy or,
if in the
opinion of the trustee capable of remedy, is not in the opinion of
the
trustee remedied within 21 days after written notice by the trustee
of
such default is delivered to us;
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(a)
we or any of our subsidiaries are or could be deemed by law or a
court to
be insolvent or bankrupt or unable to pay our debts, (b) we or any
of our
subsidiaries stop, suspend or threaten to stop or suspend payment
of all
or a material part of our debts, (c) we or any of our subsidiaries
propose
or make any agreement to defer, reschedule or readjust all of our
debts,
(d) we or any of our subsidiaries propose or make a general assignment
or
an arrangement or composition with or for the benefit of our creditors
for
any of such debts, (e) a moratorium is agreed or declared in respect
of or
affecting all or any part of the debts of us or any of our subsidiaries,
or (f) an administrator or liquidator or the whole or any material
part of
the assets and turnover of us or any of our subsidiaries is
appointed;
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(a)
any of present or future indebtedness or us or any of our subsidiaries
becomes, or becomes capable of being declared, due and payable prior
to
its stated maturity by reason of any actual or potential default,
event of
default or the like, or (b) any such indebtedness is not paid when
due or,
as the case may be, within any applicable grace period, or (c) we
or any
of our subsidiaries fail to pay when due any amount payable under
any
present or future guarantee for, or indemnity in respect of, any
moneys
borrowed or raised, provided that the aggregate amount of the relevant
indebtedness, guarantees and indemnities in respect of which one
or more
of the events mentioned above in (a), (b), or (c) equals or exceeds
$5,000,000;
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a
distress, attachment, execution, seizure before judgment or other
legal
process is levied, enforced or sued out on or against any of the
property
or assets of us or any of our
subsidiaries;
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an
order is made or an effective resolution passed for the winding-up
or
dissolution, judicial management or administration of us or any of
our
subsidiaries (except for a members’ voluntary solvent winding-up), or we
or any of our subsidiaries cease or threaten to cease to carry on
all or
substantially all of our business or operations and except for the
purpose
of and followed by a reconstruction, amalgamation, reorganization,
merger
or consolidation (a) on terms approved by an extraordinary resolution,
or
(b) in the case of any subsidiary, whereby the undertaking and assets
of
such subsidiary are transferred to or otherwise vested in us or any
of our
subsidiaries;
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a
lien holder or other holder of an encumbrance takes possession or
an
administrative or other receiver, manager, or administrator is appointed
of the whole or any material part of the property, assets or turnover
of
us or any of our subsidiaries and is not discharged within 30
days;
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any
step is taken by any person with a view to the seizure, compulsory
acquisition, expropriation or nationalization of all or a material
part of
the assets of us or any of our subsidiaries; or (b) we or any of
our
subsidiaries are prevented from exercising normal control over all
or any
substantial part of our property, assets or
turnover;
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any
action or condition (including obtaining or effecting of any necessary
consent, approval, authorization, exemption, filing, license, order,
recording or registration) at any time required to be taken or fulfilled
in order (a) to enable us to lawfully enter into, exercise our rights
and
perform and comply with our obligations under the Bonds and the Trust
Deed, (b) to ensure that those obligations are legally binding and
enforceable and (c) to make the Bonds and the Trust Deed admissible
in
evidence in the courts of the United States or the PRC is not taken,
fulfilled or done;
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it
is or will become unlawful for us to perform or comply with our
obligations under any of the Bonds or the Trust
Deed;
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the
conversion price is affected by any limitation to an adjustment to
the
conversion set forth in the relevant sections of the Trust
Deed;
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at
any time during the Conversion Period, the shares issuable upon conversion
of the Bonds and the exercise of the Bonds Warrants are not listed
on the
AMEX;
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(a)
Mr. Ken Yi Luo ceases to beneficially own at least 50% of the outstanding
common stock of KGE Group Limited (“KGE Group”) or (b) KGE Group ceases to
own at least 45% of the outstanding common stock of the Company or
(c) KGE
Group ceases to beneficially own more outstanding common stock of
the
Company than any other shareholder;
or
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any
event occurs which under the laws of any relevant jurisdiction has
an
analogous effect to any of the events referred to in any of the foregoing
paragraphs.
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Modification
and Waiver
The
Trust
Deed permits the Trustee, without the consent of the Bondholders, to agree
to
(i) a modification to, or waiver of any breach of, the Bonds, the Agency
Agreement or the Trust Deed, if in the opinion of the Trustee it is not
materially prejudicial to the interests of the Bondholders or (ii) any
modification to the Bonds or the Trust Deed, which, in the Trustee’s opinion, is
of a formal, minor, or technical nature or to correct a manifest or proven
error
to comply with the mandatory provisions of law.
Governing
Law
The
Trust
Deed and the Bonds are governed by English law.
Termination
of the Trust Deed
The
Trust
Deed will terminate when none of the Bonds remains outstanding.
DESCRIPTION
OF THE BOND WARRANTS
On
April
15, 2008, we completed a financing transaction under Regulation S with the
Subscribers and CITIC Capital Finance Ltd. issuing 300,000 warrants to purchase
an aggregate of 300,000 shares of our common stock expiring 2013, subject to
adjustment (the “Bond Warrants”). The warrant instrument between us and the
Subscribers is dated April 15, 2008 (the “Warrant Instrument”). The Bond
Warrants are subject to the terms of a warrant agency agreement by and among
us,
The
Bank
of
New York (the “Registrar”) and The Bank of New York, London Branch (the
“Agent”), dated April 15, 2008 (the “Warrant Agency Agreement”).
The
following is a summary of the material provisions of the Bond
Warrants
.
General
The
Bond
Warrants are in registered form and represented by a global certificate.
Pursuant to the
terms
and conditions of the Warrant Instrument and the Warrant Agency Agreement,
the
Bond Warrants became exercisable on April 15, 2008 and will terminate on April
15, 2013. On April, 15, 2008, we also entered into a registration rights
agreement with the Subscribers pursuant to which we agreed to register the
Bonds, the Bond Warrants, and the shares of common stock underlying the Bonds
and Bond Warrants (the “Registrable Securities”). We agreed to prepare and file
with the SEC, no later than 30 days after April 15, 2008, a registration
statement on Form S-1, of which this prospectus is a part, to register the
Registrable Securities (the “Registration Statement”) and, as promptly as
possible, cause that Registration Statement, as amended, to become effective
and
in any event within six months after April 15, 2008. In addition, we agreed
to
list all the Registrable Securities covered by the Registration Statement on
each securities exchange on which similar securities issued by us are then
listed.
Shares
of
our common stock issuable upon the exercise of the Bond Warrants
will:
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rank
pari
passu
in
all respects from the effective date of issue with the shares of
our
common stock then in issue;
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be
entitled to all dividends and distributions paid on any date or by
reference to any date on or after the exercise
date;
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otherwise
have the rights and privileges of shareholder as prescribed in our
Certificate of Incorporation.
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No
fraction of a Warrant Share will be issued on the exercise of a Bond Warrant
but, if more than one Bond Warrant is exercised at the same time by the same
holder, then, for the purpose of determining the number of the Warrant Shares
to
be issued upon exercise and whether any fraction of a Warrant Share arises,
the
number of shares arising on the exercise of each Bond Warrant will be
aggregated.
Exercise
Shares
of
our common stock can be issued upon the exercise of the Bond Warrants at an
initial exercise price per share of $6.35, subject to adjustment in certain
events, at any time from April 15, 2008 until April 15, 2013.
Adjustments
The
number of shares of common stock issuable upon the exercise of the Bond Warrants
and the subscription price are subject to adjustment for any stock split or
subdivision, reclassification, or reorganization of the common
stock.
Transfer
We
will
ensure that a register is kept at the specified office of the Registrar as
identified in the Warrant Instrument. Bond Warrants may, subject to the terms
of
the Warrant Instrument and the Warrant Agency Agreement, be transferred in
whole
or in part in an authorized denomination by submitting the relevant Bond Warrant
certificate at the specified office of the Registrar or Agent as indicated
in
the Warrant Instrument.
Winding
up
We
will
notify and invite as soon as reasonably practicable all Bond Warrant holders
to
attend any of our general shareholders’ meeting having on our agenda the
possible voluntary winding up or dissolution of our company by operation of
law.
In the event of our winding up or dissolution, each holder of a Bond Warrant
will be deemed to have exercised all his or her Bond Warrants and will be
treated as a holder of Warrant Shares equal to the maximum number of shares
issuable under his or her Bond Warrants. Each Bond Warrant holder will receive
out of the proceeds of our share capital resulting from winding up or
dissolution, in addition to any liquidation surplus to which the holder is
entitled to as the holder of those Warrant shares. Subject to compliance with
these conditions, the Bond Warrants will lapse upon our
liquidation.
Reservation
of Shares
While
the
Bond Warrants are outstanding, we will keep available for issue, and free from
pre-emptive rights, out of our authorized but unissued share capital the number
of shares of common stock that are issuable upon the exercise of all outstanding
Bond Warrants. We will also ensure that our directors have all necessary
authorizations to allot such common shares at any time.
MATERIAL
UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES
FOR HOLDERS OF BONDS AND BOND WARRANTS
The
following discussion of the material United States federal income tax matters
addressed herein is the opinion of Kirkpatrick & Lockhart Preston Gates
Ellis LLP.
The
following is a summary of certain material U.S. federal income tax consequences
relating to the purchase, ownership and disposition of the Bonds, the Bond
Warrants and common stock underlying the Bonds and the Bond Warrants, but is
not
a complete analysis of all the potential tax consequences relating thereto.
This
summary is based upon the provisions of the Internal Revenue Code of 1986,
as
amended, which we refer to as the “Code”, Treasury regulations promulgated
thereunder, administrative rulings and judicial decisions, all as of the date
hereof. These authorities may be changed, possibly retroactively, so as to
result in U.S. federal income tax consequences different from those set forth
below. We have not sought any ruling from the Internal Revenue Service, which
we
refer to as “IRS”, with respect to the statements made and the conclusions
reached in the following summary, and there can be no assurance that the IRS
will agree with such statements and conclusions.
This
summary is limited to holders who purchase Bonds or Bond Warrants for cash
and
who hold the Bonds, the Bond Warrants and the common stock underlying the Bonds
and the Bond Warrants as capital assets. This summary also does not address
the
tax consequences arising under the laws of any foreign, state or local
jurisdiction. In addition, this summary does not address tax consequences
applicable to a holder’s particular circumstances or to holders that may be
subject to special tax rules, including, without limitation:
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partnerships
or other pass-through entities or investors in such
entities;
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banks,
insurance companies or other financial
institutions;
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persons
subject to the U.S. federal estate, gift or alternative minimum tax
arising from the purchase, ownership or disposition of the
notes;
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tax-exempt
organizations;
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dealers
in securities or currencies;
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traders
in securities that elect to use a mark-to-market method of accounting
for
their securities holdings;
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certain
former citizens or long-term residents of the United States;
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U.S.
holders (as defined below) whose functional currency is not the U.S.
dollar;
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persons
who hold the Bonds, Bond Warrants or the common stock underlying
the Bonds
and the Bond Warrants in connection with a straddle, hedging, conversion
or other risk reduction transaction;
or
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persons
deemed to sell the Bonds, Bond Warrants or the common stock underlying
the
Bonds and the Bond Warrants under the constructive sale provisions
of the
Code.
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If
a
holder is an entity treated as a partnership for U.S. federal income tax
purposes, the tax treatment of each partner of such partnership will depend
upon
the status of the partner and the activities of the partnership. A holder that
is a partnership, and partners in such partnerships, should consult their own
tax advisors regarding the tax consequences of the purchase, ownership and
disposition of the Bonds, the Bond Warrants and common stock.
INVESTORS
CONSIDERING THE PURCHASE OF THE
BONDS OR THE BOND WARRANTS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT
TO
THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE U.S. FEDERAL ESTATE
OR GIFT TAX RULES OR UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
Consequences
to U.S. Holders
The
following is a summary of certain material U.S. federal income tax consequences
that will apply to you if you are a U.S. holder of the Bonds, the Bond Warrants
or our common stock. Certain consequences to “non-U.S. holders” of the Bonds,
the Bond Warrants or common stock are described under “—Consequences to Non-U.S.
Holders” below. As used herein, the term “U.S. holder” means a beneficial owner
of a Bond, a Bond Warrant or common stock who or that is:
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an
individual who is a citizen or resident of the United
States;
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a
corporation or other entity taxable as a corporation for U.S. federal
income tax purposes, created or organized in or under the laws of
the
United States or any political subdivision
thereof;
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an
estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
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a
trust if (1) the administration of the trust is subject to the primary
supervision of a court within the United States and one or more U.S.
persons have the authority to control all substantial decisions of
the
trust or (2) the trust has a valid election in effect under applicable
Treasury regulations to be treated as a U.S.
person.
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Payments
of Interest
Qualified
stated interest on the Bonds will be taxable to you as ordinary income at the
time it is accrued or received in accordance with your method of accounting
for
U.S. federal income tax purposes.
Original
Issue Discount
In
accordance with Sections 1271 through 1275 of the Code and the Treasury
regulations thereunder, the Bonds will bear “original issue discount” if its
“stated redemption price at maturity” exceeds its “issue price” by more than a
de
minimis
amount.
For U.S. federal income tax purposes, the Bonds and the Bond Warrants were
treated as an investment unit upon initial issuance. The “issue price” of the
investment unit is the first price at which we sold a substantial portion of
the
investment units, disregarding sales to bond houses, brokers, or similar persons
or organizations acting in the capacity of underwriters, placement agents,
or
wholesalers. The issue price of a Bond is determined by allocating the issue
price of an investment unit between the Bond and the Bond Warrant based on
their
relative fair market values. Our allocation of the issue price is binding on
a
U.S. holder of the Bonds and the Bond Warrants, unless the holder explicitly
discloses on a statement attached to its federal income tax return for the
year
in which it acquires the Bonds or the Bond Warrants that it has made a different
determination. Our allocation is not binding on the IRS, however, and the IRS
may challenge such allocation. If the IRS successfully asserts that the issue
price of a Bond is less than the amount allocated by us, a greater amount of
original issue discount will accrue on the Bonds.
The
stated redemption price at maturity of a Bond includes all amounts payable
other
than “qualified stated interest” (i.e., payments that are unconditionally
required to be paid at least annually at the lowest single fixed rate over
the
term of the Bonds). Because the Bonds were issued as part of an investment
unit
and we are required to redeem any outstanding Bonds at 116.61% of their
principal amount on April 15, 2011, the stated redemption price at maturity
of a
Bond exceeds its issue price, as determined above, and the Bonds were issued
with original issue discount.
Each
U.S.
holder of a Bond must include original issue discount in income as ordinary
interest income for U.S. federal income tax purposes as it accrues in advance
of
the receipt of cash payments attributable to such income, regardless of such
holder’s regular method of tax accounting. As a result, a U.S. holder will be
required to include original issue discount in income prior to the receipt
of
cash with respect thereto. The original issue discount will accrue daily in
accordance with a constant yield method based on a compounding of interest.
The
original issue discount allocable to any accrual period will be equal to the
product of the adjusted issue price of the Bonds as of the beginning of such
period and the yield to maturity of the Bonds. The adjusted issue price of
the
Bonds as of the beginning of any accrual period will equal its issue price,
increased by the amount of original issue discount previously included in the
gross income of the applicable U.S. holder, and decreased by the amount of
any
payment made on the Bonds other than payments of qualified stated interest.
If
you purchase a Bond for an amount that is greater than its adjusted issue price
but equal to or less its stated redemption price at maturity, you will be
considered to have purchased that Bond at an "acquisition premium" equal to
the
amount of such excess, and the amount of original issue discount that you must
include as ordinary interest income for any taxable year will be reduced by
the
portion of the acquisition premium properly allocable to that year.
Market
Discount
If
you
purchase a Bond for an amount that is less than its revised issue price (which
is generally equal to its adjusted issue price, determined as described above),
the amount of the difference will be treated as market discount for U.S. federal
income tax purposes, unless this difference is less than a specified
de
minimis
amount.
You
will
be required to treat any principal payment on, or any gain on the sale,
exchange, retirement or other disposition of a Bond as ordinary income to the
extent of the market discount accrued on the Bond at the time of the payment
or
disposition unless you previously have included in income this market discount
pursuant to an election to include market discount in income as it accrues,
or
pursuant to a constant yield election. If the Bond is disposed of in certain
non-taxable transactions (not including its conversion into common stock),
accrued market discount will be included as ordinary income to you as if you
had
sold the Bond in a taxable transaction at its then fair market value. In
addition, you may be required to defer, until the maturity of the Bond or its
earlier disposition (including certain nontaxable transactions, but not
including its conversion into common stock), the deduction of all or a portion
of the interest expense on any indebtedness incurred or maintained to purchase
or carry such Bond.
Upon
conversion of a Bond acquired at a market discount, any market discount not
previously included in income (including as a result of the conversion) will
carryover to the common stock received. Any such market discount that is carried
over to common stock received upon conversion will be taxable as ordinary income
upon the sale or other disposition of the common stock.
Amortizable
Premium
If
your
tax basis in a Bond, immediately after the purchase, is greater than the stated
redemption price at maturity of the Bond, you will be considered to have
purchased the Bond with amortizable Bond premium. Amortizable Bond premium
with
respect to any Bond will be equal in amount to the excess, if any, of the tax
basis (reduced as set forth in the following sentence) over the stated
redemption price at maturity of the Bond. For this purpose only, a holder’s tax
basis in a Bond is reduced by an amount equal to the value of the option to
convert the Bond into common stock; the value of this conversion option may
be
determined under any reasonable method. You may elect to amortize any such
Bond
premium, using a constant yield method, over the remaining term of the Bond.
You
may use the amortizable Bond premium allocable to an accrual period to offset
qualified stated interest required to be included in your income with respect
to
the Bond in that accrual period. If you elect to amortize Bond premium, you
must
reduce your tax basis in the Bond by the amount of the premium amortized in
any
year. An election to amortize Bond premium applies to all taxable debt
obligations then owned and thereafter acquired by you and may be revoked only
with the consent of the IRS.
Constructive
Dividends
Holders
of convertible debt instruments such as the Bonds may, in certain circumstances,
be deemed to have received distributions of stock if the conversion price of
such instruments is adjusted. Adjustments to the conversion price made pursuant
to a bona fide reasonable adjustment formula that has the effect of preventing
the dilution of the interest of the holders of the Bonds will not be deemed
to
result in a constructive distribution of stock. However, certain of the possible
adjustments provided in the Bonds may not qualify as being pursuant to a bona
fide reasonable adjustment formula. If such adjustments are made, you will
be
deemed to have received constructive distributions includible in your income
in
the manner described under “—Dividends” below even though you have not received
any cash or property as a result of such adjustments. In certain circumstances,
the failure to provide for such an adjustment may also result in a constructive
distribution to you.
Sale,
Exchange, Redemption, Repurchase or Other Taxable Disposition of the Bonds
Except
as
set forth below under “—Conversion of the Bonds,” upon the sale, exchange,
redemption, repurchase or other taxable disposition of a Bond, you will
recognize gain or loss to the extent of the difference between (1) the sum
of
the cash and the fair market value of any property received on such disposition
(except to the extent attributable to the payment of accrued and unpaid interest
on the Bond, which will be taxed as ordinary income to the extent that you
have
not previously recognized this income), and (2) your adjusted tax basis in
the
Bond. Your adjusted tax basis in a Bond will equal the portion of the purchase
price allocated to the Bond (as discussed above under “Original Issue
Discount”), increased by market discount and original issue discount that you
have previously included in income with respect to the Bond and decreased by
the
amount of payments of principal and any premium that you have taken into account
with respect to the Bond. Except as set forth above under “—Market Discount,”
any such gain or loss you recognize upon such taxable disposition of a Bond
will
be capital gain or loss. In the case of a non-corporate U.S. holder, such
capital gain will be subject to tax at a reduced rate if, at the time of such
disposition, the Bond had been held for more than one year. The deductibility
of
capital losses is subject to limitations.
Conversion
of the Bonds
You
will
not recognize any income, gain or loss upon conversion of a Bond into common
stock, except with respect to cash received in lieu of a fractional share of
common stock. Your tax basis in the common stock received on conversion of
a
Bond will be the same as your adjusted tax basis in the Bond at the time of
the
conversion, reduced by any basis allocable to a fractional share, and the
holding period for the common stock received on conversion will include the
holding period of the Bond converted.
To
the
extent, however, that any common stock received upon conversion is considered
attributable to accrued interest not previously included in income, the receipt
of the common stock will be taxable as ordinary income. Your tax basis in the
shares of common stock considered attributable to accrued interest will equal
the amount of such accrued interest included in income, and the holding period
for such common stock will begin on the day following the date of conversion.
Cash
received in lieu of a fractional share of common stock upon conversion should
be
treated as a payment in exchange for the fractional share of common stock.
Accordingly, the receipt of cash in lieu of a fractional share of common stock
should result in capital gain or loss, which is equal to the difference between
the cash received for the fractional share and your adjusted tax basis in the
fractional share. This gain or loss should be capital gain or loss and should
be
taxable as described below under “—Sale, Exchange, Redemption, or Other Taxable
Disposition of Common Stock.”
Dividends
If
you
convert your Bond into our common stock, distributions, if any, made on our
common stock will be included in your income as ordinary dividend income to
the
extent of our current or accumulated earnings and profits. With respect to
non-corporate U.S. holders for taxable years beginning after December 31, 2002
and before January 1, 2011 such dividends are taxed at a preferential maximum
rate of 15% provided certain holding period requirements are satisfied.
Distributions in excess of our current and accumulated earnings and profits
will
be treated as a return of capital to the extent of your adjusted tax basis
in
the common stock and thereafter as capital gain from the sale or exchange of
such common stock. Dividends received by a corporate U.S. holder may be eligible
for a dividends received deduction, subject to applicable limitations.
Sale,
Exchange, Redemption or Other Taxable Disposition of Common Stock
If
you
convert your Bonds into our common stock, then upon the sale, exchange,
redemption or other taxable disposition of our common stock, you will recognize
capital gain or loss equal to the difference between (i) the amount of cash
and
the fair market value of any property received upon such taxable disposition
and
(ii) your adjusted tax basis in the common stock. Your tax basis and holding
period in common stock received upon conversion of a Bond are determined as
discussed above under “—Conversion of the Bonds.” Except as set forth above
under “—Market Discount,” any such gain or loss will be capital gain or loss and
will be long-term capital gain or loss if your holding period in the common
stock is more than one year at the time of the taxable disposition. Long-term
capital gains recognized by certain non-corporate U.S. holders will be subject
to a reduced rate of U.S. federal income tax. The deductibility of capital
losses is subject to limitations.
Exercise
of the Bond Warrants
A
U.S.
holder will not recognize gain or loss upon exercise of a Bond Warrant (except
with respect to any cash received in lieu of a fractional share, which will
be
taxed in a manner similar to that described above under “Conversion of the
Bonds”). A U.S. holder will have a tax basis in the common stock received upon
the exercise of a Bond Warrant equal to the sum of its tax basis in the Bond
Warrant and the aggregate cash exercise price paid in respect of such exercise,
less any amount attributable to any fractional shares. The holding period of
common stock received upon the exercise of a Bond Warrant will commence on
the
day after the Bond Warrant is exercised.
Expiration
and Disposition of the Bond Warrants
If
a Bond
Warrant expires without being exercised, a U.S. holder will recognize a capital
loss in an amount equal to its tax basis in the Bond Warrant. Upon the sale,
exchange, or redemption of a Bond Warrant, a U.S. holder will recognize gain
or
loss equal to the difference between the amount realized on such sale, exchange,
or redemption and the U.S. holder’s tax basis in such Bond Warrant. Such gain or
loss will be long-term capital gain or loss if, at the time of such sale,
exchange, or redemption, the Bond Warrant has been held for more than one year.
The deductibility of capital losses is subject to limitations.
Information
Reporting and Backup Withholding
Information
returns will be filed with the IRS, other than with respect to corporations
and
other exempt holders, with respect to interest on the Bonds, dividends paid
on
the common stock and proceeds received from a disposition of the Bonds or shares
of common stock. Unless you are an exempt recipient such as a corporation,
you
may be subject to backup withholding tax (currently at a rate of 28%) with
respect to interest paid on the Bonds, dividends paid on the common stock or
with respect to proceeds received from a disposition of the Bonds or shares
of
common stock. You will be subject to backup withholding if you are not otherwise
exempt and you:
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fail
to furnish your taxpayer identification number, or “TIN”, which for an
individual, is ordinarily his or her social security
number;
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furnish
an incorrect TIN;
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are
notified by the IRS that you have failed to properly report payments
of
interest or dividends; or
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fail
to certify, under penalties of perjury, that you have furnished a
correct
TIN and that the IRS has not notified you that you are subject to
backup
withholding.
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Backup
withholding is not an additional tax but, rather, is a method of tax collection.
You will be entitled to credit any amounts withheld under the backup withholding
rules against your U.S. federal income tax liability and may be entitled to
a
refund provided that the required information is furnished to the IRS in a
timely manner.
Consequences
to Non-U.S. Holders
The
following is a summary of certain material U.S. federal income tax consequences
that will apply to you if you are a non-U.S. holder of the Bonds, the Bond
Warrants or our common stock. For purposes of this discussion, a “non-U.S.
holder” means a beneficial owner of Bonds, the Bond Warrants or common stock
that is a nonresident alien individual or a corporation, trust or estate that
is
not a U.S holder.
“Non-U.S.
holder” does not include an individual who is present in the United States for
183 days or more in the taxable year of disposition of the Bonds, the Bond
Warrants or common stock and is not otherwise a resident of the United States
for U.S. federal income tax purposes. Such an individual is urged to consult
his
or her own tax advisor regarding the U.S. federal income tax consequences on
the
sale, exchange or other disposition of the Bonds, the Bond Warrants or common
stock.
Payments
of Interest
Interest
paid (or accrued under the original issue discount rules) on a Bond to you
will
qualify for the “portfolio interest exemption” and will not be subject to U.S.
federal income tax or withholding tax, provided that such interest income is
not
effectively connected with your conduct of a U.S. trade or business and provided
that you:
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do
not actually or by attribution own 10% or more of the combined voting
power of all classes of our stock entitled to
vote;
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are
not a controlled foreign corporation for U.S. federal income tax
purposes
that is related to us actually or by attribution through stock ownership;
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are
not a bank that acquired the Bonds in consideration for an extension
of
credit made pursuant to a loan agreement entered into in the ordinary
course of business; and
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either
(a) provide a Form W-8BEN (or a suitable substitute form) signed
under
penalties of perjury that includes your name and address and certifies
as
to non-United States status in compliance with applicable law and
regulations, or (b) are a securities clearing organization, bank
or other
financial institution that holds customers’ securities in the ordinary
course of its trade or business and provides a statement to us or
our
agent under penalties of perjury in which it certifies that such
a Form
W-8 (or a suitable substitute form) has been received by it from
you or a
qualifying intermediary and furnishes us or our agent with a copy.
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If
you
cannot satisfy the requirements described above, payments of interest made
to
you will be subject to the 30% U.S. federal withholding tax.
If
interest on a Bond is effectively connected with a trade or business conducted
by you, you will not be subject to withholding if you comply with applicable
IRS
certification requirements (
i.e.
,
by
delivering a properly executed IRS Form W-8ECI) and will be subject to U.S.
federal income tax on a net income basis at regular graduated rates in the
same
manner as if you were a U.S. holder. If you are eligible for the benefits of
an
income tax treaty between the U.S. and your country of residence, any interest
income that is effectively connected with a U.S. trade or business will be
subject to U.S. federal income tax in the manner specified by the treaty and
will only be subject to such tax if such income is attributable to a permanent
establishment (or a fixed base in the case of an individual) maintained by
you
in the U.S. and you claim the benefit of the treaty by properly submitting
an
IRS form W-8BEN. If you are a corporation, effectively connected income also
may
be subject to the additional branch profits tax, which is imposed on a foreign
corporation on the deemed repatriation from the United States of effectively
connected earnings and profits at a 30% rate (or such lower rate as may be
prescribed by an applicable tax treaty).
Dividends
and Constructive Dividends
If
distributions are made with respect to our common stock (including any deemed
distributions resulting from certain adjustments, or failures to make certain
adjustments, to the conversion price of the Bonds, see “—Consequences to U.S.
Holders—Constructive Dividends” above), such distributions will be treated as
dividends to the extent of our current and accumulated earnings and profits
as
determined under the Code. Any portion of a distribution that exceeds our
current and accumulated earnings and profits will first be applied in reduction
of your tax basis in the common stock, and to the extent such portion exceeds
your tax basis, the excess will be treated as gain from the disposition of
the
common stock, the tax treatment of which is discussed below under “—Sale,
Exchange, Conversion, Redemption, Repurchase or Other Taxable Disposition of
the
Bonds or Common Stock.”
Dividends
paid to a non-U.S. holder will be subject to the U.S. federal withholding tax
at
a 30% rate, subject to the following two exceptions.
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Dividends
effectively connected with a trade or business of a non-U.S. holder
and,
if a tax treaty applies, attributable to a U.S. permanent establishment
maintained by the non-U.S. holder within the United States, will
not be
subject to withholding if the non-U.S. holder complies with applicable
IRS
certification requirements and will be subject to U.S. federal income
tax
on a net income basis. In the case of a non-U.S. holder that is a
corporation, such effectively connected income also may be subject
to the
branch profits tax, which is imposed on a foreign corporation on
the
deemed repatriation from the United States of effectively connected
earnings and profits at a 30% rate (or such lower rate as may be
prescribed by an applicable tax
treaty).
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The
withholding tax might not apply, or might apply at a reduced rate,
under
the terms of an applicable tax treaty. Under Treasury regulations,
to
obtain a reduced rate of withholding under a tax treaty, a non-U.S.
holder
will be required to satisfy applicable certification and other
requirements.
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Because
a
constructive dividend deemed received by a non-U.S. holder would not give rise
to any cash from which any applicable withholding tax could be satisfied, we
may
set-off any such withholding tax against cash payments of interest payable
on
the Bonds.
Conversion
of the Bonds or Exercise of the Bond Warrants
A
non−U.S. holder will not be subject to U.S. federal income tax on the conversion
of Bonds or exercise of Bond Warrants into common stock. However, if the
non−U.S. holder receives any cash in lieu of a fractional share of common stock,
the rules described below under “Sale, Exchange, Redemption, Repurchase or Other
Taxable Disposition of the Bonds or Common Stock” will apply.
Sale,
Exchange, Redemption, Repurchase or Other Taxable Disposition of the Bonds,
the
Bond Warrants or Common Stock
Any
gain
realized by you on the sale, exchange, redemption, repurchase or other taxable
disposition of the Bonds, the Bond Warrants or our common stock will not be
subject to U.S. federal income tax unless:
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the
gain is effectively connected with your conduct of a trade or business
in
the United States or
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we
are or have been a “United States real property holding corporation,” or a
“USRPHC,” for U.S. federal income tax purposes and, provided that our
common stock is “regularly traded on an established securities market,”
you held directly or indirectly at any time during the five-year
period
ending on the date of disposition or such shorter period more than
five
percent of our common stock.
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We
believe that we are not currently and will not become a USRPHC. However, because
the determination of whether we are a USRPHC depends on the fair market value
of
our U.S. real property interests relative to the fair market value of our other
business assets, there can be no assurance that we will not become a USRPHC
in
the future.
If
you
are engaged in a trade or business in the United States, and if gain realized
on
a sale, exchange redemption, repurchase or other taxable disposition of Bonds,
the Bond Warrants or common stock is effectively connected with the conduct
of
this trade or business, you will be taxed in the same manner as a U.S. holder
(see “—Consequences to U.S. Holders—Sale, Exchange, Redemption, Repurchase or
Other Taxable Disposition of Bonds” above). These holders are urged to consult
their own tax advisors with respect to other tax consequences of the ownership
and disposition of Bonds or common stock including the possible imposition
of
branch profits tax at a rate of 30% (or lower treaty rate).
Information
Reporting and Backup Withholding
Information
Reporting
The
payment of interest and dividends to a non-U.S. holder is not subject to
information reporting on IRS Form 1099 if applicable certification requirements
(for example, by delivering a properly executed IRS Form W-8BEN) are satisfied.
The payment of proceeds from the sale or other disposition of the Bonds, the
Bond Warrants or common stock by a broker to a non-U.S. holder is not subject
to
information reporting if:
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the
beneficial owner of the Bonds or common stock certifies the owner’s
non-U.S. status under penalties of perjury (
i.e.
,
by providing a properly executed IRS Form W-8BEN), or otherwise
establishes an exemption; or
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the
sale or other disposition of the Bonds or common stock is effected
outside
the United States by a foreign office, unless the broker
is:
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a
foreign person that derives 50% or more of its gross income for certain
periods;
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a
controlled foreign corporation for U.S. federal income tax purposes;
or
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a
foreign partnership more than 50% of the capital or profits of which
is
owned by one or more U.S. persons or which engages in a U.S. trade
or
business.
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In
addition to the foregoing, we must report annually to the IRS and to each
non-U.S. holder on IRS Form 1042-S the entire amount of interest or dividends
paid to you. This information may also be made available to the tax authorities
in the country in which you reside under the provisions of an applicable income
tax treaty or other agreement.
Backup
Withholding
Backup
withholding (currently at a rate of 28%) is required only on payments that
are
subject to the information reporting requirements, discussed above, and only
if
other requirements are satisfied. Even if the payment of proceeds from the
sale
or other disposition of Bonds or common stock is subject to the information
reporting requirements, the payment of proceeds from a sale or other disposition
outside the United States will not be subject to backup withholding unless
the
payor has actual knowledge that the payee is a U.S. person. Backup withholding
does not apply when any other provision of the Code requires withholding. For
example, if interest payments are subject to the withholding tax described
above
under “—Consequences to Non-U.S. Holders—Payments of Interest” backup
withholding will not also be imposed. Thus, backup withholding may be required
on payments subject to information reporting, but not otherwise subject to
withholding.
Backup
withholding is not an additional tax. Any amount withheld from a payment to
a
non-U.S. holder under these rules will be allowed as a credit against such
holder’s U.S. federal income tax liability and may entitle such holder to a
refund, provided that the required information is furnished timely to the IRS.
SHARES
ELIGIBLE FOR FUTURE SALE
As
of the
date of this prospectus, we had 51,783,416 shares of common stock outstanding.
All of the shares registered in this offering will be freely tradable without
restriction or further registration under the Securities Act. If shares are
purchased by our “affiliates” as that term is defined in Rule 144 under the
Securities Act, their sales of shares would be governed by the limitations
and
restrictions that are described below.
Rule
144
In
general, under Rule 144 a person, or persons whose shares are aggregated, who
is
not deemed to have been one of our affiliates at any time during the 90 days
preceding a sale and who has beneficially owned shares of our common stock
for
at least six months, including the holding period of any prior owner, except
if
the prior owner was one of our affiliates, would be entitled to sell all of
their shares, provided the availability of current public information about
our
company.
Sales
under Rule 144 may also subject to manner of sale provisions and notice
requirements and to the availability of current public information about our
company.
Sales
under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about our
company. Any substantial sale of common stock pursuant to any resale
registration statement or Rule 144 may have an adverse effect on the market
price of our Common Stock by creating an excessive supply.
Lock-Up
Agreements
The
investors in our private offering that closed on October 17, 2006, in which
we
sold 2,320,875 shares of common stock, entered into a lock-up agreement pursuant
to which they agreed not to sell their shares until our common stock
was
listed on the American Stock Exchange, after which their shares are
automatically released from the lock up on a monthly basis pro rata over a
nine
month period beginning with the date that is 30 days from the date of listing
on
the American Stock Exchange, which occurred on September 28, 2007.
We
have
agreed with WestPark Capital, Inc. that we will not, without the prior written
consent of WestPark Capital, directly or indirectly sell, offer, contract or
grant any option to sell, pledge, transfer, or otherwise dispose of or enter
into any transaction which may result in the disposition of any shares of our
common stock or securities convertible into, exchangeable or exercisable for
any
shares of our common stock (excluding the exercise of certain warrants and/or
options currently outstanding and exercisable) for a period of 12 months after
the date of our listing on AMEX on September 28, 2007.
In
addition, each of our executive officers and directors, in addition to
significant shareholders holding an aggregate of 7,567,673 shares of common
stock, have agreed with WestPark Capital not to directly or indirectly sell,
offer, contract or grant any option to sell, pledge, transfer (excluding
intra-family transfers, transfers to a trust for estate planning purposes or
to
beneficiaries of officers, directors and shareholders upon their death), or
otherwise dispose of or enter into any transaction which may result in the
disposition of any shares of our common stock or securities convertible into,
exchangeable or exercisable for any shares of our common stock, without the
prior written consent of WestPark Capital, for a period of 12 months after
the
date of our listing on AMEX on September 28, 2007.
Notwithstanding
the lock up agreement, WestPark Capital and KGE Group agreed to (i) permit
KGE
Group to gift transfer up to 9.3 million shares if all donees entered into
a
lock up agreement with the same terms that was entered into by KGE Group and
(ii) sell up to one million shares if KGE Group and WestPark Capital agree
upon
the timing and amount of any sale and agree that such sale or sales will not
have a detrimental effect on the trading price of our common stock. Other than
the foregoing, we have been advised by WestPark Capital that it has no present
intention and there are no agreements or understandings, explicit or tacit,
relating to the early release of any locked-up shares.
WestPark
Capital may, however, consent to an early release f
rom
the
lock-up period if, in its opinion, the market for the common stock would not
be
adversely impacted by sales.
The
release
of
any
lock up would be considered on a case-by-case basis. Factors that WestPark
Capital may consider in deciding whether to release shares from the lock up
restriction include the length of time before the lock-up expires, the number
of
shares involved, the reason for the requested release, market conditions, the
trading
price
of
our securities, historical trading volumes of our securities and whether the
person seeking the release is an officer, director or affiliate of
us.
Registration
In
September 2007, we completed a public offering and sale of 847,550 shares of
common stock, all of which are currently freely tradable. In addition, pursuant
to the terms of the Share Exchange, we filed a registration statement with
the
Securities and Exchange Commission to register a total of 2,320,875 shares
of
common stock issued in a Private Placement that was conducted in conjunction
with the Share Exchange in October 2006. The registration statement was declared
effective by the Securities and Exchange Commission in September 2007. We also
registered 1,512,675 shares of common stock held by certain of our shareholders
immediately prior to the Share Exchange.
We
also
registered the 2007 Bonds, the 2007 Bond Warrants, the shares of common stock
underlying the 2007 Bonds and the 2007 Bond Warrants and
2,962,325
shares of our common stock held by other selling security holders.
In
addition, we entered into a registration rights agreement with
ABN
AMRO
and CITIC Allco Investments Limited
pursuant
to which we agreed to register the Bonds, the Bond Warrants, and the shares
of
common stock underlying the Bonds and the Bond Warrants. A total of
3,149,606
shares
may be issued upon conversion of the Bonds, subject to adjustment, and 300,000
shares may be issued upon exercise of the Bond Warrants, subject to adjustment.
The Bonds are convertible during the period (i) beginning on the earlier of
(a)
the date that a registration statement for the shares to be issued upon
conversion of the Bonds is first declared effective by the United States
Securities and Exchange Commission (the “SEC”) and (b) October 15, 2008 and (ii)
ending at the close of business on April 8, 2011,
subject
to certain exceptions,
and the
Bond Warrants became exercisable on April 15, 2008. We are registering the
Bonds, the Bond Warrants and the shares that may be issued upon conversion
of
the Bonds and upon exercise of the Bond Warrants under this prospectus. For
additional information of registration obligations, see above under
“Prospectus
Summary - Recent Events - April 2008 Issuance of Bonds and Bond
Warrants.”
PLAN
OF DISTRIBUTION
We
are
registering (i) $20,000,000 in aggregate principal amount of 12% Convertible
Bonds due in 2011 (the “Bonds”), (ii) 300,000 Bond Warrants to purchase an
aggregate of 300,000 shares of our common stock, and (iii) 3,449,606 shares
of
our common stock issuable pursuant to conversion of the Bonds or exercise of
the
Bond Warrants. We will not receive any of the proceeds from the sale by the
selling security holders of the Bonds, the Bond Warrants, or shares of common
stock issuable pursuant to conversion of the Bonds or exercise of the Bond
Warrants. We will bear all fees and expenses incident to our obligation to
register the Bonds, the Bond Warrants, and any shares of common stock issuable
upon the conversion of the Bonds or exercise of the Bond Warrants, except that
the selling security holders will pay all applicable underwriting discounts
and
selling commissions, if any.
The
selling security holders may sell all or a portion of the Bonds, the Bond
Warrants, or common stock underlying the Bonds and the Bond Warrants owned
by
them and offered hereby from time to time directly or through one or more
underwriters, broker-dealers or agents. If the Bonds, the Bond Warrants, or
common stock underlying the Bonds and the Bond Warrants are sold through
underwriters or broker-dealers, then the selling security holders will be
responsible for underwriting discounts or commissions or agent’s commissions.
The securities may be sold in one or more transactions at fixed prices, at
prevailing market prices at the time of the sale, at varying prices determined
at the time of sale, or at negotiated prices.
The
securities may be sold by one or more of, or a combination of, the
following:
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ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
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block
trades in which the broker-dealer will attempt to sell the Bonds,
the Bond
Warrants, or common stock underlying the Bonds and the Bond Warrants
as
agent but may position and resell a portion of the block as principal
to
facilitate the transaction;
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purchases
by a broker-dealer as principal and resale by the broker-dealer
for its
account;
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an
exchange distribution in accordance with the rules of the applicable
exchange;
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privately
negotiated transactions;
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settlement
of short sales entered into after the date of this
prospectus;
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broker-dealers
may agree with any selling security holder to sell a specified amount
of
such securities at a stipulated price per
security;
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through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or otherwise;
or
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a
combination of any such methods of sale;
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any
other method permitted pursuant to applicable law.
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The
selling security holders may also sell the securities under Rule 144 under
the
Securities Act of 1933, as amended (the “Securities Act”), under Registration S
under the Securities Act, or pursuant to any other transaction exempt from
registration requirements of the Securities Act or the Securities Exchange
Act
of 1934, as amended, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling security holders may arrange for other brokers-dealers
to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling security holders (or, if any broker-dealer acts as agent for the
purchaser of the Bonds, the Bond Warrants, or common stock underlying the Bonds
and the Bond Warrants, from the purchaser) in amounts to be negotiated. The
selling security holders do not expect these commissions and discounts relating
to its sales of securities to exceed what is customary in the types of
transactions involved. The maximum commission or discount to be received by
any FINRA member or independent broker-dealer, however, will not be greater
than eight (8) percent for the sale of any securities being registered hereunder
pursuant to Rule 415 of the Securities Act.
In
connection with the sale of our common stock or interests therein, the selling
security holders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. They may also
sell the Bonds, the Bond Warrants, or common stock underlying the Bonds and
the
Bond Warrants short and deliver these securities to close out their short
positions, or loan or pledge the securities to broker-dealers that in turn
may
sell these securities. The selling security holders may also enter into option
or other transactions with broker-dealers or other financial institutions or
the
creation of one or more derivative securities which require the delivery to
such
broker-dealer or other financial institution of securities offered by this
prospectus, which securities such broker-dealer or other financial institution
may resell pursuant to this prospectus (as supplemented or amended to reflect
such transaction).
The
selling security holders and any broker-dealers or agents that are involved
in
selling the Bonds, the Bond Warrants, or the common stock underlying the Bonds
and the Bond Warrants may be deemed to be “underwriters” within the meaning of
the Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
securities purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. ABN AMRO has informed us that it is an
affiliate of a broker-dealer and it acquired these securities in the ordinary
course of business and that at the time of the acquisition of these securities,
it had no agreements or understandings, directly or indirectly, with any person
to distribute these securities.
We
are
required to pay certain fees and expenses incurred by us incident to the
registration of the Bonds, the Bond Warrants, or common stock underlying the
Bonds and the Bond Warrants. We have agreed to indemnify the selling security
holders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
Because
the selling security holders may be deemed to be “underwriters” within the
meaning of the Securities Act, and such selling security holder so deemed may
be
subject to the prospectus delivery requirements of the Securities Act. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather
than under this prospectus. The selling security holders have advised us that
they have not entered into any agreements, understandings or arrangements with
any underwriter or broker-dealer regarding the sale of the resale securities.
There is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale securities by the selling security
holders.
The
resale securities will be sold only through registered or licensed brokers
or
dealers if required under applicable state securities laws. In addition, in
certain states, the resale securities may not be sold unless they have been
registered or qualified for sale in the applicable state or an exemption from
the registration or qualification requirement is available and is complied
with.
Under
applicable rules and regulations under the Exchange Act, any person engaged
in
the distribution of the resale securities may not simultaneously engage in
market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, the
selling security holders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including Regulation
M,
which may limit the timing of purchases and sales of the Bonds, the Bond
Warrants, or the common stock underlying the Bonds and the Bond Warrants by
the
selling security holders or any other person. We will make copies of this
prospectus available to the selling security holders and have informed them
of
the need to deliver a copy of this prospectus to each purchaser at or prior
to
the time of the sale.
LEGAL
MATTERS
The
validity of the shares of common stock offered by this prospectus will be passed
upon for us by Kirkpatrick & Lockhart Preston Gates Ellis LLP, Los Angeles,
California. The legality of the Bonds and Bond Warrants offered by this
prospectus will be passed upon for us by Kirkpatrick & Lockhart Preston
Gates Ellis LLP, London, United Kingdom.
EXPERTS
Our
consolidated financial statements as of December 31, 2007 and 2006 and for
the
years ended December 31, 2007, 2006, and 2005 appearing in this prospectus
and
the registration statement have been audited by Samuel H. Wong & Co., LLP,
Certified Public Accountants, an independent registered public accounting firm,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
ADDITIONAL
INFORMATION
We
filed
with the Securities and Exchange Commission a registration statement under
the
Securities Act of 1933 for the shares of common stock in this offering. This
prospectus does not contain all of the information in the registration statement
and the exhibits and schedule that were filed with the registration statement.
For further information with respect to us and our common stock, we refer you
to
the registration statement and the exhibits and schedule that were filed with
the registration statement. Statements contained in this prospectus about the
contents of any contract or any other document that is filed as an exhibit
to
the registration statement are not necessarily complete, and we refer you to
the
full text of the contract or other document filed as an exhibit to the
registration statement. A copy of the registration statement and the exhibits
and schedules that were filed with the registration statement may be inspected
without charge at the Public Reference Room maintained by the Securities and
Exchange Commission at 100 F Street, N.E. Washington, DC 20549, and copies
of
all or any part of the registration statement may be obtained from the
Securities and Exchange Commission upon payment of the prescribed fee.
Information regarding the operation of the Public Reference Room may be obtained
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a web site that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the SEC. The address of the website is
www.sec.gov.
We
file
periodic reports under the Securities Exchange Act of 1934, including annual,
quarterly and special reports, and other information with the Securities and
Exchange Commission. These periodic reports, and other information are available
for inspection and copying at the regional offices, public reference facilities
and website of the Securities and Exchange Commission referred to
above.
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
|
|
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.
CHINA
ARCHITECTURAL ENGINEERING, INC.
CONSOLIDATED
STATEMENT 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
STATEMENT OF STOCKHOLDERS’ EQUITY (Continued)
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)
|
(k) Earnings
per share
The
Company computes earnings per share (“EPS’) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128
requires companies with complex capital structures to present basic and diluted
EPS. Basic EPS is measured as the income or loss available to common
shareholders divided by the weighted average common shares outstanding for
the
period. Diluted EPS is similar to basic EPS but presents the dilutive effect
on
a per share basis of potential common shares (e.g., convertible securities,
options, and warrants) as if they had been converted at the beginning of the
periods presented, or issuance date, if later. Potential common shares that
have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS. Approximately
2,857,143 dilutive shares on an “as converted” basis for the Convertible Bond
were excluded from the calculation of diluted EPS for the 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 KGGET anticipates that as a result of the
new EIT
law, its income tax provision will increase, which could adversely
affect
Zhuhai KGGET financial 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, 2006
|
|
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
|
|
|
-
|
|
Lease
hold 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 “Amended and Restated 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 Amended and Restated 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 Amended and Restated 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
ecember 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)
Bond
Facility
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.
|
April
2008 Issuance of Bonds and Bond Warrants
On
April
15, 2008, the Company completed a financing transaction with ABN AMRO Bank
N.V.,
London Branch (“ABN AMRO”), CITIC Allco Investments Limited (together with ABN
AMRO, the “Subscribers,” and each a “Subscriber”), and CITIC Capital Finance
Limited issuing (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”)
and (ii) 300,000 warrants to purchase an aggregate of 300,000 shares of the
Company’s common stock, subject to certain adjustments as set forth in the
warrant instrument, that expire in 2013 (the “Bond Warrants”). The transaction
was completed in accordance with a subscription agreement entered into by the
Company, Subscribers, and CITIC Capital Finance Limited, dated April 2, 2008
(the “Subscription Agreement”).
The
Bonds
were subscribed at a price equal to 100% of their principal amount. The Company
agreed to pay to the Subscribers an aggregate commission of 2.5% of the
principal amount of the Bonds and of the aggregate warrant issue price for
the
Bond Warrants.
The
Bonds
were issued pursuant to, and are subject to the terms and conditions of, a
trust
deed dated April 15, 2008 between the Company 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 15, 2008 between the Company, 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
things, the following terms:
·
|
Interest
Rate.
The
Bonds bear cash interest from April 15, 2008 at the rate of 12% per
annum
of the principal amount of the
Bonds.
|
·
|
Conversion.
Each Bond is convertible at the option of the holder at any time
during
the period (i) beginning on the earlier of (a) the date that a
registration statement for the shares to be issued upon conversion
of the
Bonds is first declared effective by the United States Securities
and
Exchange Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending
at the close of business on April 8, 2011, subject to certain exceptions,
into shares of the Company’s common stock at an initial conversion price
equal to $6.35 per share, which is the product of 1.1 and the average
closing price per share of the Company’s common stock for the period of 20
consecutive trading days immediately prior to April 15, 2008. The
conversion price is subject to adjustment in certain events, including
the
Company’s 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.
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
(Stated
in US Dollars)
14.
|
SUBSEQUENT
EVENTS (CONTINUED)
|
·
|
Mandatory
Redemptions.
Interest is payable semi-annually in arrears on April 15 and October
15 of
each year (each an “Interest Payment Date”) commencing October 15, 2008.
On any Interest Payment Date on or after April 15, 2010, the holders
of
the Bonds can require the Company to redeem the Bonds at 116.61%
of the
principal amount of the Bonds redeemed, plus all accrued but unpaid
interest. The Company is required to redeem any outstanding Bonds
at
116.61% of its principal amount on April 15,
2011.
|
On
April
15, 2008, the Company entered into a warrant instrument with
the
Subscribers
pursuant
to which
the
Subscribers
purchased the Bond Warrants from the Company (the “Warrant Instrument”). The
Bond Warrants, which are represented by a global certificate, are also subject
to a warrant agency agreement by and among the Company, The Bank of New York
and
The Bank of New York, London Branch dated April 15, 2008 (the “Warrant Agency
Agreement”). Pursuant to the terms and conditions of the Warrant Instrument and
the Warrant Agency Agreement, the Bond Warrants became exercisable on April
15,
2008 and terminate on April 15, 2013. The Bond Warrants have an initial exercise
price per share of $6.35, subject to adjustment in certain events.
The
Company agreed to list the shares of common stock underlying the Bonds and
the
Bond Warrants on AMEX, or any alternative stock exchange by the earlier of
October 15, 2008 and the date on which a registration statement registering
the
shares of common stock underlying the Bonds and the Bond Warrants is first
declared effective by the SEC. In addition, the Company agreed to register
the
shares of common stock underlying the Bonds and the Bond Warrants with the
SEC
on or prior to October 15, 2008 and will keep the registration effective until
30 days after the Bond Warrants terminate.
On
April,
15, 2008, the Company also entered into a registration rights agreement with
the
Subscribers pursuant to which it agreed to register the Bonds, the Bond
Warrants, and the shares of common stock underlying the Bonds and Bond Warrants
(the “Registrable Securities”). The Company agreed to prepare and file with the
SEC, no later than 30 days after April 15, 2008, a registration statement on
Form S-1, of which this prospectus is a part, to register the Registrable
Securities (the “Registration Statement”) and, as promptly as possible, cause
that Registration Statement, as amended, to become effective and in any event
within six months after April 15, 2008. In addition, the Company agreed to
list
all the Registrable Securities covered by the Registration Statement on each
securities exchange on which similar securities issued by the Company are then
listed.
Pursuant
to the terms of the Subscription Agreement, the Company was required as a
condition to the closing to appoint a director designated by CITIC Capital
Finance Limited to the Company’s Board of Directors. The closing condition was
waived by the parties to the financing transaction and the Company agreed to
appoint such a director within three months from closing.
Above:
Shanghai Railway Station, one of the Company’s projects.
Above:
Hangzhou Grand Theater, one of the Company’s projects.
PART
II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
Item
13. Indemnification of directors and officers
Under
Section 145 of the General Corporation Law of the State of Delaware, the Company
can indemnify its directors and officers against liabilities they may incur
in
such capacities, including liabilities under the Securities Act of 1933, as
amended (the “Securities Act”). The Company’s certificate of incorporation
provides that, pursuant to Delaware law, its directors shall not be liable
for
monetary damages for breach of the directors’ fiduciary duty of care to the
Company and its stockholders. This provision in the certificate of incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director’s duty of loyalty to the Company
or its stockholders, for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of the law, for actions leading
to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are unlawful under Delaware
law. The provision also does not affect a director’s responsibilities under any
other law, such as the federal securities laws or state or federal environmental
laws.
The
Company’s bylaws provide for the indemnification of its directors to the fullest
extent permitted by the Delaware General Corporation Law. The Company’s bylaws
further provide that its Board of Directors has discretion to indemnify its
officers and other employees. The Company is required to advance, prior to
the
final disposition of any proceeding, promptly on request, all expenses incurred
by any director or executive officer in connection with that proceeding on
receipt of an undertaking by or on behalf of that director or executive officer
to repay those amounts if it should be determined ultimately that he or she
is
not entitled to be indemnified under the Company’s bylaws or otherwise. The
Company is not, however, required to advance any expenses in connection with
any
proceeding if a determination is reasonably and promptly made by its Board
of
Directors by a majority vote of a quorum of disinterested Board members that
(a)
the party seeking an advance acted in bad faith or deliberately breached his
or
her duty to the Company or its stockholders and (b) as a result of such actions
by the party seeking an advance, it is more likely than not that it will
ultimately be determined that such party is not entitled to indemnification
pursuant to the applicable sections of its bylaws.
The
Company has been advised that in the opinion of the Securities and Exchange
Commission, insofar as indemnification for liabilities arising under the
Securities Act may be permitted to the Company’s directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, such
indemnification is against public policy as expressed in the Securities Act
and
is therefore unenforceable. In the event a claim for indemnification against
such liabilities (other than the Company’s payment of expenses incurred or paid
by its director, officer or controlling person in the successful defense of
any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by the Company is against public policy as expressed in
the
Securities Act and will be governed by the final adjudication of such
issue.
The
Company will enter into indemnification agreements with each of its directors
and officers that are, in some cases, broader than the specific indemnification
provisions permitted by Delaware law, and that may provide additional procedural
protection. The indemnification agreements require the Company, among other
things, to:
•
indemnify
officers and directors against certain liabilities that may arise because of
their status as officers or directors;
•
advance
expenses, as incurred, to officers and directors in connection with a legal
proceeding, subject to limited exceptions; or
•
obtain
directors’ and officers’ insurance.
At
present, there is no pending litigation or proceeding involving any of the
Company’s directors, officers or employees in which indemnification is sought,
nor is the Company aware of any threatened litigation that may result in claims
for indemnification.
Item
14. Other expenses of issuance and distribution
The
following table sets forth the costs and expenses payable by the Registrant
relating to the sale of securities being registered. All amounts are estimates
except the SEC registration fee.
Securities
and Exchange Commission registration fee
|
|
$
|
851
|
|
Transfer
Agent Fees
|
|
|
1,000
|
|
Accounting
fees and expenses
|
|
|
30,000
|
|
Legal
fees and expenses
|
|
|
50,000
|
|
Miscellaneous
|
|
|
18,149
|
|
Total
|
|
$
|
100,000
|
|
Item
15. Recent sales of unregistered securities
On
April
15, 2008, we completed a financing transaction with the Subscribers under
Regulation S of the Securities Act of 1933, as amended (the “Securities Act”)
and issued (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”) and
(ii) 300,000 warrants to purchase an aggregate of 300,000 shares of our common
stock, subject to adjustments for stock splits or reorganizations as set forth
in the warrant instrument, that expire in 2013 (the “Bond Warrants”). The Bonds
and the Bond Warrants were offered and sold to the Subscribers 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) each of the Subscribers 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) each of the Subscribers
has represented that it was not acquiring the securities for the account or
benefit of a U.S. person; and (iv) each of the Subscribers 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.
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 “2007 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 “2007 Bond Warrants”). The 2007 Bonds
and the 2007 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.
On
October 17, 2006, pursuant to the terms of the Exchange Agreement entered into
by and between the Company, Full Art and the sole shareholder of Full Art,
the
Company issued 45,304,125 shares of common stock to the shareholder, which
is
KGE Group, Limited, and its designees in exchange for all of the issued and
outstanding securities of Full Art. The securities were offered and issued
to
KGE Group and its designees in reliance upon exemptions from registration
pursuant to Section 4(2) under the Securities Act of 1933, as amended, and
Rule
506 promulgated thereunder. Each of KGE Group and its designees qualified as
an
accredited investor (as defined by Rule 501 under the Securities Act of 1933,
as
amended).
On
October 17, 2006, immediately following the closing of the Share Exchange,
the
Company received gross proceeds of $3,713,400 in a private placement transaction
(the “Private Placement”). Pursuant to subscription agreements entered into with
the investors, the Company sold an aggregate of 2,320,875 shares of its common
stock at a price of $1.60 per share. The Company agreed to file a registration
statement covering the common stock sold in the private placement within 30
days
of the closing of the Share Exchange pursuant to the subscription agreement
with
each investor. The securities were offered and sold to investors in reliance
upon exemptions from registration pursuant to Section 4(2) under the Securities
Act of 1933, as amended, and Rule 506 promulgated thereunder. Each of the
persons and/or entities receiving the Company’s securities qualified as an
accredited investor (as defined by Rule 501 under the Securities Act of 1933,
as
amended).
On
October 17, 2006, at the closing of the Share Exchange, the Company issued
to an
investor relations firm 100,000 shares of its common stock and a five-year
warrant to purchase 232,088 shares of the Company’s common stock at a per share
exercise price of $1.60 for investor relations services (the “IR Securities”).
The warrants were fully exercised on October 10, 2007. The securities were
offered and sold to investor relations firm in reliance upon exemptions from
registration pursuant to Section 4(2) under the Securities Act of 1933, as
amended, and Rule 506 promulgated thereunder. The investor relations firm
qualified as an accredited investor (as defined by Rule 501 under the Securities
Act of 1933, as amended).
Item
16. Exhibits
Exhibit
No.
|
|
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 the 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 the 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 the 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 to
the Form S-1/A filed with the Securities and Exchange Commission
on
September 21, 2007).
|
|
|
|
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).
|
|
|
|
4.7
|
|
Trust
Deed, dated April 15, 2008,
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, 2008).
|
|
|
|
4.8
|
|
Paying
and Conversion Agency Agreement, dated April 15, 2008, 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, 2008).
|
|
|
|
4.9
|
|
Warrant
Instrument, dated April 15, 2008, by and among the Registrant, ABN
AMRO
Bank N.V., London Branch and CITIC Allco Investments Limited
(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, 2008).
|
|
|
|
4.10
|
|
Warrant
Agency Agreement, dated April 15, 2008, by and among the Registrant,
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, 2008).
|
4.11
|
|
Registration
Rights Agreement, dated April 15, 2008, by and among the Registrant,
ABN
AMRO Bank N.V., London Branch and CITIC Allco Investments Limited
(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, 2008).
|
|
|
|
5.1*
|
|
Opinion
of Kirkpatrick & Lockhart Preston Gates Ellis LLP regarding validity
of common stock.
|
|
|
|
5.2*
|
|
Opinion
of Kirkpatrick & Lockhart Preston Gates Ellis LLP regarding bonds and
warrants.
|
|
|
|
8.1*
|
|
Opinion
of Kirkpatrick & Lockhart Preston Gates Ellis LLP.
|
|
|
|
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).
|
|
|
|
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
|
|
Employment
Agreement dated March 12, 2008 by and between the Registrant and
Xin Yue
Jasmine Geffner (translated to English) (incorporated by reference
to
Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 14, 2008).
|
|
|
|
10.12
|
|
Employment
Agreement dated March 12, 2008 by and between the Registrant and
Charles
John Anderson (incorporated by reference to Exhibit 10.2 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
March 14, 2008).
|
10.13
|
|
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).
|
|
|
|
10.14
|
|
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).
|
|
|
|
10.15
|
|
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).
|
|
|
|
10.16
|
|
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).
|
|
|
|
10.17
|
|
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).
|
|
|
|
10.18
|
|
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).
|
|
|
|
10.18(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).
|
|
|
|
10.18(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).
|
|
|
|
10.19
|
|
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).
|
|
|
|
10.20
|
|
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).
|
|
|
|
10.21
|
|
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).
|
|
|
|
10.22
|
|
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).
|
|
|
|
10.23
|
|
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).
|
|
|
|
10.24
|
|
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).
|
10.25
|
|
Subscription
Agreement, dated April 2, 2008, by and among the Registrant, ABN
AMRO Bank
N.V., London Branch, CITIC Allco Investments Limited, and CITIC Capital
Finance Limited (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, 2008).
|
|
|
|
12.1
|
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
|
|
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).
|
|
|
|
23.1
|
|
Consent
of Samuel H. Wong & Co., LLP, Certified Public
Accountants.
|
|
|
|
23.2*
|
|
Consent
of Kirkpatrick & Lockhart Preston Gates Ellis LLP (contained in
Exhibits 5.1 and 5.2).
|
|
|
|
24.1
|
|
Power
of Attorney (included on signature
page).
|
______
*
To be
filed by amendment.
Item
17. Undertakings
The
undersigned registrant hereby undertakes:
(1)
To
file,
during any period in which offers or sales are being made, a post-effective
amendment to this registration statement:
(i)
To
include any prospectus required by Section 10(a)(3) of the Securities
Act;
(ii)
To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the SEC
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate offering price
set
forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2)
That,
for
the purpose of determining any liability under the Securities Act of 1933,
each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To
remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the
offering.
(4)
That,
for
the purpose of determining liability of the registrant under the Securities
Act
to any purchaser in the initial distribution of the securities:
The
undersigned registrant undertakes that in a primary offering of securities
of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if
the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i)
any preliminary prospectus or prospectus of the undersigned registrant relating
to the offering required to be filed pursuant to Rule 424;
(ii)
any free writing prospectus relating to the offering prepared by or on behalf
of
the undersigned registrant or used or referred to by the undersigned
registrant;
(iii)
the
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv)
any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
(5)
That,
for
purposes of determining liability under the Securities Act to any purchaser:
(A)
Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be
deemed to be part of the registration statement as of the date the filed
prospectus was deemed part of and included in the registration statement;
and
(B)
Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or
(b)(7) as part of a registration statement in reliance on Rule 430B relating
to
an offering made pursuant to Rule 415(a)(1)(i), (vii) or (x) for the purpose
of
providing the information required by section 10(a) of the Securities Act shall
be deemed to be part of and included in the registration statement as of the
earlier of the date such form of prospectus is first used after effectiveness
or
the date of the first contract of sale of securities in the offering described
in the prospectus. As provided in Rule 430B, for liability purposes of the
issuer and any person that is at that date an underwriter, such date shall
be
deemed to be a new effective date of the registration statement relating to
the
securities in the registration statement to which that prospectus relates,
and
the offering of such securities at that time shall be deemed to be the initial
bona
fide
offering
thereof.
Provided,
however,
that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of
the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made
in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective
date.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Zhuhai, People’s Republic of China, on the 9th
day of May, 2008.
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
|
|
|
|
|
By:
|
/s/
Luo Ken Yi
|
|
Name
|
Luo
Ken Yi
|
|
Title:
|
Chief Executive Officer, Chief Operating Officer and Chairman
of
the Board
|
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Luo Ken Yi, as his true and lawful attorney-in-fact
and
agent, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
to this Form S-1, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
and any other regulatory authority, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed by the following persons in the capacities and on
the
dates indicated:
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/
Luo Ken Yi
|
|
Chief Executive Officer, Chief Operating Officer and
Chairman of
the Board (Principal Executive Officer)
|
|
May
9, 2008
|
Luo
Ken Yi
|
|
|
|
|
|
|
|
|
|
/s/ Xinyue Jasmine Geffner
|
|
Chief
Financial Officer (Principal Financial and
Accounting
Officer)
|
|
May
9, 2008
|
Xinyue
Jasmine Geffner
|
|
|
|
|
|
|
|
|
|
/s/
Tang Nianzhong
|
|
Vice
President, China Operations and Director
|
|
May
9, 2008
|
Tang
Nianzhong
|
|
|
|
|
|
|
|
|
|
/s/
Ye Ning
|
|
Vice
President and Director
|
|
May
9, 2008
|
Ye
Ning
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
Zheng
Jinfeng
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
Zhao
Bao Jiang
|
|
|
|
|
|
|
|
|
|
/s/
Kelly Wang
|
|
Director
|
|
May
9, 2008
|
Kelly
Wang
|
|
|
|
|
EXHIBIT
INDEX
Exhibit
No.
|
|
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 the 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 the 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 the 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 to
the Form S-1/A filed with the Securities and Exchange Commission
on
September 21, 2007).
|
|
|
|
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).
|
Exhibit
No.
|
|
Description
|
|
|
|
4.7
|
|
Trust
Deed, dated April 15, 2008,
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, 2008).
|
|
|
|
4.8
|
|
Paying
and Conversion Agency Agreement, dated April 15, 2008, 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, 2008).
|
|
|
|
4.9
|
|
Warrant
Instrument, dated April 15, 2008, by and among the Registrant,
ABN AMRO
Bank N.V., London Branch and CITIC Allco Investments Limited
(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, 2008).
|
|
|
|
4.10
|
|
Warrant
Agency Agreement, dated April 15, 2008, by and among the Registrant,
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, 2008).
|
|
|
|
4.11
|
|
Registration
Rights Agreement, dated April 15, 2008, by and among the Registrant,
ABN
AMRO Bank N.V., London Branch and CITIC Allco Investments Limited
(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, 2008).
|
|
|
|
5.1*
|
|
Opinion
of Kirkpatrick & Lockhart Preston Gates Ellis LLP regarding validity
of common stock.
|
|
|
|
5.2*
|
|
Opinion
of Kirkpatrick & Lockhart Preston Gates Ellis LLP regarding bonds and
warrants.
|
|
|
|
8.1*
|
|
Opinion
of Kirkpatrick & Lockhart Preston Gates Ellis LLP.
|
|
|
|
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).
|
|
|
|
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).
|
Exhibit
No.
|
|
Description
|
|
|
|
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
|
|
Employment
Agreement dated March 12, 2008 by and between the Registrant and
Xin Yue
Jasmine Geffner (translated to English) (incorporated by reference
to
Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 14, 2008).
|
|
|
|
10.12
|
|
Employment
Agreement dated March 12, 2008 by and between the Registrant and
Charles
John Anderson (incorporated by reference to Exhibit 10.2 to the
Current
Report on Form 8-K filed with the Securities and Exchange Commission
on
March 14, 2008).
|
|
|
|
10.13
|
|
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).
|
|
|
|
10.14
|
|
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).
|
|
|
|
10.15
|
|
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).
|
|
|
|
10.16
|
|
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).
|
|
|
|
10.17
|
|
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).
|
|
|
|
10.18
|
|
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).
|
|
|
|
10.18(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).
|
|
|
|
10.18(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).
|
|
|
|
10.19
|
|
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).
|
Exhibit
No.
|
|
Description
|
|
|
|
10.20
|
|
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).
|
|
|
|
10.21
|
|
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).
|
|
|
|
10.22
|
|
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).
|
|
|
|
10.23
|
|
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).
|
|
|
|
10.24
|
|
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).
|
|
|
|
10.25
|
|
Subscription
Agreement, dated April 2, 2008, by and among the Registrant, ABN
AMRO Bank
N.V., London Branch, CITIC Allco Investments Limited, and CITIC
Capital
Finance Limited (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, 2008).
|
|
|
|
12.1
|
|
Computation
of Ratio of Earnings to Fixed Charges.
|
|
|
|
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).
|
|
|
|
23.1
|
|
Consent
of Samuel H. Wong & Co., LLP, Certified Public
Accountants.
|
|
|
|
23.2*
|
|
Consent
of Kirkpatrick & Lockhart Preston Gates Ellis LLP (contained in
Exhibits 5.1 and 5.2).
|
|
|
|
24.1
|
|
Power
of Attorney (included on signature
page).
|
*
To be
filed by amendment.
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