Item 1. Business.
Introduction
China Properties Developments, Inc. (“we”, “us”, “our”, the “Company” or “CPD”) was incorporated in the State of Colorado on June 15, 2001 under the name Bangla Property Management, Inc. (“Bangla”). In October 2005, and pursuant to an Amended and Restated Agreement and Plan of Merger dated August 17, 2005, Bangla acquired Wollaston Industrial Limited (“Wollaston”), the owner of 90.28% equity interests of Xi’an Jiahui Real Estate Co., Ltd (“Jiahui”), by the issuance of 10 million shares of common stock to Wollaston’s shareholders. Bangla’s name was subsequently changed to China Properties Developments, Inc. to better reflect the business nature of the Company.
Prior to the acquisition of Wollaston, the principal business of the Company was real estate property management. Contemporaneously with acquisition of Wollaston, the Company transferred all of the common stock of Bangla Properties Inc., the Company’s then subsidiary which held all of the Company’s assets prior to the acquisition of Wollaston, to Shawn Erickson, the Company’s then President. As a result of the Wollaston acquisition, we are now primarily engaged in the business of real estate development, including sale and lease of real estate in Xi’an City, Shanxi Province, People’s Republic of China (“PRC”). Our primary business objective has been to pursue the practice of dividing our completed development projects into discrete units and selling them to third party buyers to generate development income. In addition, we have and will retain portions of our completed projects to earn recurring leasing income.
Wollaston was incorporated on April 21, 2004 in the British Virgin Islands. As mentioned above, Wollaston owns 90.28% of its subsidiary, Jiahui, formed under the Company Law of the People’s Republic of China. Jiahui is a sino-foreign joint venture company formed on December 17, 1996 by Xi’an Xiangrui Real Estate Co. Ltd (Xiangrui) and American JHL Industrial Limited (JHL) in Xi’an, China. Since Jiahui is approximately 90% owned by a foreign entity, it is considered as a foreign joint venture company in PRC.
On June 23, 2008, and through Jiahui, our 90.28% owned subsidiary, we entered into a series of agreements effective as of June 1, 2008 with Shaanxi Xinyuan Real Estate Co. Ltd., a corporation organized under the laws of the PRC (“Shaanxi”), which we believe gives us effective control over its business. Shaanxi's results of operations are included in the consolidated statement of operations of the Company.
Our Current Projects
Through our ownership interest in Jiahui, we currently hold a majority interest in following two buildings:
Jiahui Office Building
The Jiahui Office Building (the “Jiahui Building”) is a 15-story commercial office building. Construction commenced in 1998. The majority of construction was concluded in December 1999 with finished tenant improvements. This property has been available for occupancy since June 30, 2000. The first to fourth floors are leased to a related party, the Hantang Bookstore. The 5th floor, west section of the 14th floor, the 15th floor, and the underground parking garage in the Jiahui Building are held for rental activities. All of these spaces are recorded as fixed assets, and depreciation has been provided since July 1, 2000. The remaining space in the Jiahui Building has been sold or placed in service as rental property.
Yangming International Tower
The Yangming International Tower (“Yangming”) is a multi-functional 27-story building with mostly commercial usage. The Company occupied the top two floors (26th and 27th floors) as its administrative offices. The 25th floor is under contract with an affiliate, Yangming Soho Commercial Flat. Commencing as of January 1, 2008, the Company has added the 24th floor to the space operating commercial flat. The 24th through 27th floor has been classified as fixed assets and depreciation have been provided according to the time they became fixed assets. The second and third floors are leased to a related party, the Hantang Bookstore. The remaining space in Yangming is for sale to the public.
The Yangming is a high-end building covering 516,668 sq. ft. We commenced the construction of Yangming in May 2002 and ceased major construction in October 2005 at which time the building was ready for occupancy. Unlike other ordinary office/apartment buildings in Xi’an, the Yangming International Tower is protected by a full range of hi-tech security and electronic networking system. Residents, tenants, or clients of this building have access to a multi-function club located on the fifth floor. The facilities in this club include a large conference room, greenhouse, pool room, fitness room, entertainment center, and a game room.
Shaanxi Xinyuan Real Estate Co. Ltd.
On June 23, 2008, through our 90.28% owned subsidiary, Jiahui, we entered into a series of agreements effective as of June 1, 2008 with Shaanxi Xinyuan Real Estate Co. Ltd. (“Shaanxi”), a corporation organized under the laws of the People’s Republic of China (“PRC”), which we believe gives us effective control over the business of Shaanxi. Shaanxi is 84.0% owned by Shaanxi Jiahui Group which is majority owned by by Ping’an Wu and his family, and 16.0% owned by Shuzhen Yang. Ping’an Wu is the Company’s Chairman, Chief Executive Officer, President and a director.
Contemporaneously with the execution of the series of agreements with Shaanxi, the Company also entered into a Termination Agreement with Shaanxi pursuant to which the parties agreed to terminate and abandon the Securities Subscription Agreement entered into on June 13, 2007 pursuant to which the Company had agreed to subscribe for and purchase new treasury shares of Shaanxi for RMB 230,000,000 (which was estimated to be approximately US$30 million at the current currency exchange rate which was subject to change), and Shaanxi had agreed to issue the shares to the Company, such that the Company would own 90% of the issued and outstanding share capital of Shaanxi after the purchase had been completed.
Our relationship with Shaanxi and its stockholders are now governed by a series of contractual arrangements entered into on June 23, 2008 between Jiahui and Shaanxi. The parties have agreed that each of the agreements shall be deemed effective as of June 1, 2008. Through these contractual arrangements, we will, among other things, provide Shaanxi consulting and other general business operation services and we will have the ability to substantially influence Shaanxi’s daily operations and financial affairs, appoint their senior executives and approve all matters requiring stockholder approval. As a result of these contractual arrangements, which enable us to control Shaanxi, we will be considered the primary beneficiary of Shaanxi. Accordingly, we expect to consolidate the results, assets and liabilities of Shaanxi in our financial statements. We believe each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC. Such contractual arrangements which we entered into are as follows:
Exclusive Consulting Services Agreement
Pursuant to the exclusive Consulting Services Agreement, Jiahui will provide consulting services to Shaanxi in relation to its current and proposed operations including, but not limited to, services with respect to Shaanxi’s general business operation, human resources and business development. Shaanxi shall not accept any similar services from any third party without the consent of Jiahui. In consideration of the services provided, Jiahui shall receive a consulting services fee each quarter equal to all of Shaanxi’s net after tax income for such quarter. In addition, Jiahui shall be the sole and exclusive owner of all rights, title, interests and intellectual property rights arising from the performance of the exclusive consulting agreement.
Business Operations Agreement
Pursuant to the Business Operations Agreement, Jiahui has the right to recommend director candidates and appoint the senior executives of Shaanxi, and approve any transactions that may materially affect the assets, business, employment, obligations, rights or the operations of Shaanxi.
Option Agreement
Pursuant to the Option Agreement, Jiahui was granted an exclusive option to purchase from the shareholders of Shaanxi all of their equity interests in Shaanxi at the lowest price permitted by PRC laws applicable at the time of exercise of such option right. Jiahui was granted the option right immediately after the execution of the Option Agreement, and such option right cannot be revoked or amended during the term of the Agreement. Jiahui may exercise part or full option anytime during the term of the Option Agreement. The Option Agreement has a term of 10 years.
Share Pledge Agreement
Pursuant to the Share Pledge Agreement, the shareholders of Shaanxi pledged 100% of their equity interest in Shaanxi to Juahui to ensure that Shaanxi will perform its obligations under the Consulting Services Agreement and the various other related agreements by and between Juahui and Shaanxi, and in order to provide an additional mechanism for Juahui to enforce its rights to collect the consulting services fees from Shaanxi
Proxy Agreement
Pursuant to the Proxy Agreement, the shareholders of Shaanxi have granted to Jiahui a proxy to vote all of shares in Shaanxi for the maximum period of time permitted by law.
Shaanxi is the developer of the Yan-Ta Shopping Mall project in Xi’an, China. Comprising a large urban park, a high-end shopping mall and entertainment facilities, The Yan-Ta Shopping Mall is listed as one of The City of Xi’an’s Key Projects for 2005/06. The park, already under way, will occupy 12 acres. Below ground, a three-story shopping mall will provide 1,291,670 square feet of retail and commercial space plus 2,000 parking spaces. Designed to complement the unique characteristics of Xi’an’s historic and geographic features, the park will provide space for walking, exercising and large-scale gatherings. The northern part of the park will have an open performance platform; a large fountain will dominate the middle of the expanse; and the southern section will be plant and flower gardens. Fountains and waterfalls with displays operated with advanced technology will be scattered throughout. Well designed lighting will keep the city night alive. This square is expected to be a landmark in Xi’an’s southern area and will be known to as a luxurious place for shopping, work and leisure. Phase I construction of this project has been completed. The entire project is planned to be carried out in four phases. Approximately 23% of the phase one mall space has been sold. The units sold are under contract with the Company to manage the rental of these spaces. The rest of the space has been rented or is available for rent as of December 2008.
The Yan-Ta Shopping Mall project is expected to draw tourists visiting Xi’an and residents from primarily three southern districts -- Yan-Ta, Qu-Jiang, and Xi Gao Xin. There are a total of 9 districts that constitute Xi’an. The total population of these three districts is estimated to be in the vicinity of 3 million. As home to numerous institutions of higher learning such as the prestigious Xi’an Jiaotong University, Northwest University of Political Science and Law, Xi’an Music Institute, and Xi’an Arts Institute, Yan-Ta District is known nationally as a cultural and academic center. There are over 200,000 college students and nearly 10,000 educators who live in or commute into the area. In 2004 Yan-Ta led all nine districts in attracting foreign investments.
Phase I of Shopping Mall
Construction under Phase I commenced in 2004 and was completed in 2007. Occupancy began in October 2007. Total construction area is approximately 32,945 square meters. The intended use will be a mix of (i) leisure, entertainment, and dining and food services (50%), (ii) movie cinema (20%), (iii) book and electronic retailers (20%), and (iv) clothing and accessories retailers (10%).
Phase II of Shopping Mall
With planned construction area of 75,765 square meters (815,528 sq ft), Phase II will be significantly greater than Phase I in scope and investment amount. Development of Phase II is now scheduled to commence during 2009 with occupancy scheduled for completion in 2011.
Shaanxi controls the land for the project through a 50-year lease granted by the government. The total costs of the land acquisition are $35,176,125.
Management believes that the foregoing transaction with Shaanxi is on terms at least as favorable as could have been obtained from an unrelated third party.
Our Business Strategies
Our business strategies include the following aspects:
Concentrate on a Few Carefully Selected Geographic Markets - The Company’s current market focus includes Xi’an and the surrounding areas where the Company is one of the leading owners and developers. CPD selects markets and sub-markets where tenants have demonstrated a preference for high-quality office buildings, retail centers and residential communities and other facilities.
Concentrate on Activities Where High Barriers to Entry/Exist - The Company focuses its development expertise on those markets where the lack of available sites and the difficulty of receiving the necessary government approvals for development and the necessary financing constitute high barriers to the creation of new supply, and where skill, financial strength and diligence are required to successfully develop, finance and manage high-quality properties.
Leverage the Skills of our Management Team - CPD takes on complex, technically challenging projects, leveraging the skills of its management team to successfully develop, acquire or reposition properties which other organizations may not have the capacity or resources to pursue.
Become the Landlord of Choice - CPD concentrates on high-quality real estate designed to meet the demands of today’s tenants who require sophisticated telecommunications and related infrastructure and support services, and to manage those facilities so as to become the landlord of choice for both existing and prospective clients.
Opportunistically Acquire Assets - The Company will seek to acquire assets which increase the Company’s penetration in the markets where it has chosen to concentrate and which exhibit an opportunity to improve or sustain returns through property development.
Future Projects
We are actively and aggressively pursuing other real estate opportunities within Xi’an and its surrounding areas. Currently there are three specific projects that are in various stages of negotiations and planning, in addition to the Yan-Ta Project.
The Great Tang Hibiscus Garden
The Great Tang Hibiscus Garden (the “Garden”) is a 164-acre amusement and cultural park that uses the Tang Dynasty for its theme. The Garden is located in Yan-Ta District that was constructed by the district for an investment cost of $149 million (RMB 1.19 billion). The park has eight attractions (total construction area of over 600,000 square feet) including a hotel and a banquet hall. The theme park was opened in 2005 and has experienced very strong park attendance. The Garden expects to generate net income of US$19 million in its first year of operation. CPD is currently under discussions with the district government to acquire the theme park and the surrounding land of approximately 160 acres for a purchase price of US$250 million.
Garden Villa
The Company has secured an option from the Yan-Ta district government to acquire a site to develop the Garden Villa property for a projected total cost of $17.5 million (RMB 140 million). Garden Villa lies within the Yan-Ta District and is a short walk from Yan-Ta Shopping Plaza. The project covers 10 acres with a planned 538,196 square feet of living space. A 18-floor apartment tower will have over 350 two and three bedroom residential units, with the first two floors of the tower designed for retail and commercial use. Subject of funding, development is anticipated to commence in early 2007 with occupancy scheduled for mid 2009.
Bali Village
With a total anticipated investment cost of $43.75 million (RMB 350 million), Bali Village is a project that the Company intends to develop on a land site over which it has a purchase option with the district government. Bali Village encompasses both sides of Chang’an Road and is situated directly south of the Yan-Ta. The Bali Village project covers 4.7 acres for residential development with over 1.2 million sq ft of constructed space. The
1,100 unit project will be developed in three phases: each phase will have two freestanding towers with 18 stories. Each tower has two floors of retail space and one floor of underground parking with a capacity for 500 cars.
The City of Xi’an
Xi’an has a land area of 9,983 square kilometers. The city’s population has grown rapidly since the beginning of the decade, increasing from 6.9 million in 2000 to 7.4 million by 2005. Xi’an ranks Xi’an’s regional economy produced US$15.9 billion worth of gross domestic product in 2005 as compared to slightly over US$8 billion in 2000 (15% compounded annual growth rate). Per capita disposable income has grown in parallel with economic production. Urban resident per capita disposable income grew from slightly less than US$ 800 in 2000 to over US$1,200.
Xi’an is located at the jointing area of the middle and western areas of China and the transportation hub linking southwest, middle and eastern China. It is also the largest central city along the Euro-Asian Land transportation network - Longhai-Lanxin section, and plays an important strategic role in the economic layout of the country. This strategic location has made Xi’an the largest distribution centre in the northwest China.
Compared with other urban centers in China, Xi’an has competitive advantages in five sectors: (i) high technologies due to the unusually large number of private and public universities, behind only Beijing and Shanghai, (ii) equipment manufacturing, (iii) service, (iv) cultural and (v) tourism.
In recent years, Xi’an has witnessed significant growth in activities in supply and demand in its real estate sector. In 2004, over 161 million sq ft (11.4% year on year increase) were constructed of which 22.5 million sq ft (9.8% increase) were in commercial spaces.
Xi’an is known for its historical and cultural importance. It served as the capital city for thirteen dynasties -- Xizhou, Qin, Xihan, Xin, Donghan, Xijin, Qianzhao, Qianqin, Houqin, Xiwei, Beizhou, Sui and Tang. From the 11th century BC to 9th century AD, Xi’an was the political, economic and cultural centre of China. Because of its rich, ancient history, Xi’an has become one of the nation’s most important tourist destinations (over 21 million visitors in 2004). Perhaps the most famous tourist attraction in Xi’an is the nearby tomb of Emperor Qin Shi Huang, who in 221 BC united China under a single kingdom. Near his tomb, archaeologists discovered burial pits with tens of thousands of clay statutes of soldiers and horses (Terra-Cotta Army). Since the discovery in early ‘90s, the site has become a world-famous attraction visited by thousands of visitors each year.
After the establishment of the People’s Republic of China, Xi’an rapidly became an important city for national defense industries, scientific research and higher education. Xi’an has been the capital city of Shaanxi Province since 1954 and is now categorized as a sub-provincial city under which there are nine districts including Yanta, Xi Gao Xin, and QuJiang Districts.
The Real Estate Industry in China
China Index Research Institute said that with the recent macroeconomic adjustments and controls made by the government, the annual growth rate of the country’s real estate industry will be no less than 10 percent over the next 15 years. According to the Institute, China’s real estate industry will pass through three stages of development before 2020: the first phase (1993-2000) saw the industry growing at an annual rate of 13 percent; the second phase (2000-2010) is experiencing an annual growth rate of 14 percent; and the third phase (2010-2020) should see an annual growth rate of about 10 percent.
The average price of residential land in major cities in 2004 was 1,166 Yuan per square meter, an increase of 8.94 percent as compared to 2003, 6.08 percent higher than that of land for multi-purpose use, and 6.67 percent higher than that of land for commercial use. It is estimated that the price of residential land will continue to rise until 2010. It is estimated that by 2010, the average land area allocated for residential construction will reach 28 square meters per capita, and total residential demand will be as high as 535 million to 927 million square meters, which equates to an enormous development potential for the industry.
At present, foreign capital accounts for 12 percent to 15 percent of all investment in the Chinese real estate industry. Right through to 2010,foreign investment in real estate will continue to increase, dividing market share among foreign investors, state-owned enterprises and established domestic developers, leaving less room for medium-sized and small non-governmental interests.
If Beijing is the political heart of China, Xi’an is its historical center. The capital of 13 dynasties, the city holds an unparalleled place in the nation’s history and culture. World-famous as the home of the life-sized terra cotta warriors unearthed from the tomb of the first Qin emperor, today Xi’an is a modern metropolis bustling with commerce, trade, tourism, science, technology, manufacturing and education.
PRC Real Estate Laws and Regulations
Real estate developers may secure land from the city government by obtaining exploitation and utilization rights over land through public tendering. The maximum term for such leasehold interest ranges from 40 to 70 years depending on the purpose of use. Leasehold interests obtained legally may be transferred, leased, and mortgaged during the leasehold period. Joint venture companies such as Jiahui and Shananxi (post-acquisition) may participate in auctions to obtain land for development purposes.
Similar to real estate purchasers in western countries, Chinese buyers obtain financing from local lending institutions with mortgage instruments. Lenders’ security interests are perfected by a recording with the relevant authorities. The deed to the title is held by the lender. Foreclosures are implemented through judicial foreclosure.
Foreign Exchange Regulations
Under China’s existing foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade, may be made in foreign currencies without government approval, except for certain procedural requirements. The Chinese government may, however, at its discretion, restrict access in the future to foreign currencies for current account transactions and prohibit the Company from converting its RMB revenue into foreign currencies. In addition, conversion of RMB for most capital account items, including direct investments, is subject to government approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items.
Competition
We face significant competition from other owners, operators and developers of residential and office properties. Our properties face competition from similar properties in the same markets. Such competition may affect our ability to attract and retain tenants or buyers and reduce the rates and rents we are able to charge or the purchase prices for individual apartments. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to lower rates or rent space at lower rental rates than us or in their owners providing greater tenant improvement allowances or other leasing concessions. This combination of circumstances could reduce our revenues. In addition, the real estate business in China is highly competitive. We compete with a large number of companies and individuals, and many of them have significantly greater financial and other resources than we have which may make it difficult for us to successfully compete.
Employees
We currently employ 20 individuals on a full-time basis. We believe that relations with our employees are good.
Available Information
We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Exchange Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statement and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports, proxy and information statements and other information filed electronically by us with the SEC which are available on the SEC’s website at http://www.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.
Item 1A.
Item 1A. Risk Factors.
In addition to other information and financial data set forth elsewhere in this report, the following risk factors should be considered carefully in evaluating the Company.
Business and Financial Risks
IF WE ARE UNABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS OR OTHER SOURCES, WE MAY FIND IT NECESSARY TO CURTAIL OUR DEVELOPMENT ACTIVITIES. Significant capital resources will be required to fund our development expenditures. Our performance continues to be dependent on future cash flows from real estate sales and rental income, and there can be no assurance that we will generate sufficient cash flow or otherwise obtain sufficient funds from other sources to meet the expected development plans for our properties.
WE ARE VULNERABLE TO CONCENTRATION RISKS BECAUSE OUR OPERATIONS ARE CURRENTLY ALMOST EXCLUSIVE TO THE XI’AN, PRC MARKET. Our real estate activities are almost entirely located in Xi’an, China. Because of our geographic concentration and limited number of projects, our operations are more vulnerable to local economic downturns and adverse project-specific risks than those of larger, more diversified companies.
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION ARE GREATLY AFFECTED BY THE PERFORMANCE OF THE REAL ESTATE INDUSTRY. Our real estate activities are subject to numerous factors beyond our control, including local real estate market conditions (both where our properties are located and in areas where our potential customers reside), substantial existing and potential competition, general national, regional and local economic conditions, fluctuations in interest rates and mortgage availability and changes in demographic conditions. Real estate markets have historically been subject to strong periodic cycles driven by numerous factors beyond the control of market participants.
Real estate investments often cannot easily be converted into cash and market values may be adversely affected by these economic circumstances, market fundamentals, competition and demographic conditions. Because of the effect these factors have on real estate values, it is difficult to predict with certainty the level of future sales or sales prices that will be realized for individual assets.
Our real estate operations are also dependent upon the availability and cost of mortgage financing for potential customers, to the extent they finance their purchases, and for buyers of the potential customers’ existing residences.
UNFAVORABLE CHANGES IN MARKET AND ECONOMIC CONDITIONS COULD HURT OCCUPANCY OR RENTAL RATES. Market and economic conditions may significantly affect rental rates. Occupancy and rental rates in our market, in turn, may significantly affect our profitability and our ability to satisfy our financial obligations. The risks that may affect conditions in our market include the following:
- the economic climate, which may be adversely impacted by industry slowdowns and other factors;
- local conditions, such as oversupply of office and residential space and the demand for officeand residential space;
- the inability or unwillingness of tenants to pay their current rent or rent increases; and
- competition from other available office and residential buildings and changes in market rentalrates.
OUR OPERATIONS ARE SUBJECT TO NATURAL RISKS. Our performance may be adversely affected by weather conditions that delay development or damage property.
DEPENDENCE ON NATURAL RESOURCES AND CONSTRUCTION MATERIALS IN CHINA. The major materials of the real estate industry are land and construction materials. Land supply is strictly controlled by the Chinese government. The continuing land consumption by the real estate industry in China will make it continually difficult for real estate developers to obtain land which may possibly lead to substantial increase of land price, which will in turn increase the development costs. In addition, although the costs of some construction materials have declined in recent years, the price of new materials due to the implementation of environmental laws may still increase. The dependence on land and construction materials makes our operating results unpredictable.
DEPENDENCE ON KEY EMPLOYEES. Our operations have been to date, and will continue to be, substantially dependent on the continued services of our executive officers and other key personnel, who generally
have extensive experience in the real estate industry and have been employed by us for substantial periods of time. The loss of the services of our executive officers and other any key employees, or the failure to attract and retain other qualified and experienced personnel on acceptable terms, could have an adverse effect on our business and results of operations.
THE PEOPLE’S REPUBLIC OF CHINA’S ECONOMIC POLICIES COULD AFFECT OUR BUSINESS. Substantially all of our assets are located in the People’s Republic of China and substantially all of our revenue is derived from our operations in The People’s Republic of China. Accordingly, our results of operations and prospects are subject, to a significant extent, to the economic, political and legal developments in the People’s Republic of China.
While the People’s Republic of China’s economy has experienced significant growth in the past twenty years, such 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 the People’s Republic of China, but they may also have a negative effect on us. For example, operating results and financial condition may be adversely affected by the government control over capital investments or changes in tax regulations.
The economy of the People’s Republic of China has been changing from a planned economy to a more market-oriented economy. In recent years the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform and the reduction of state ownership of productive assets, and the establishment of corporate governance in business enterprises; however, a substantial portion of productive assets in the People’s Republic of China are still owned by the Chinese government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. It also exercises significant control over the People’s Republic of China’s economic growth through the allocation of resources, the control of payment of foreign currency- denominated obligations, the setting of monetary policy and the provision of preferential treatment to particular industries or companies.
PRODUCT STRUCTURE RISK. Our current products are quality residential and office buildings located mainly in the central district of Xi’an. The target clients are high income city dwellers. Due to the change of the real property market structure in the city, the client group is gradually shifting from high income class to medium income white-collar workers. As a result, requirements of clients may change and they may be more sensitive to price. This may force us to adjust our development strategy and our future success may depend to a large extent on the successful implementation of new strategies.
BECAUSE REAL ESTATE INVESTMENTS ARE ILLIQUID, WE MAY NOT BE ABLE TO SELL OUR PROPERTY WHEN DESIRED. Real estate investments such as our properties generally cannot be sold quickly. We may not be able to sell our property when we desire in response to economic or other conditions.
LAND AGREEMENTS MAY CONSTRAIN US FROM BEING ABLE TO SELL OUR PROPERTIES AT A TIME WHEN IT WOULD BE IN THE BEST INTEREST OF SHAREHOLDERS TO DO SO. As is the case throughout China, we do not own the land upon which our properties are located. Rather, the land is subject to various land use permits granted by the Chinese government. Any sale of our property would require prior consent of the government, which may make it difficult or impossible to sell our property at the time we want to do so.
A DECLINE IN ECONOMIC ACTIVITY IN XI’AN, IN CHINA, OR IN THE FAR EAST IN GENERAL COULD REDUCE OUR REVENUES. If there is a decline in economic activity in Xi’an, in China, or in the Far East in general, our residential and office building occupancy or rental rates could be reduced, which would reduce our revenues.
OUR PROPERTIES FACE SIGNIFICANT COMPETITION WHICH COULD REDUCE OUR REVENUES; MANY COMPETITORS ARE LARGER AND FINANCIALLY STRONGER THAN US. We face significant competition from other owners, operators and developers of residential and office properties. Our properties face competition from similar properties in the same markets. Such competition may affect our ability to attract and retain tenants or buyers and reduce the rates and rents we are able to charge or the purchase prices for individual apartments. These competing properties may have vacancy rates higher than our properties, which may result in their owners being willing to lower rates or rent space at lower rental rates than us or in their owners providing greater tenant improvement allowances or other leasing concessions. This combination of circumstances could reduce our revenues. In addition, the real estate business in China is highly competitive. We compete with a large number of companies and individuals, and many of them have significantly greater financial and other resources than we have which may make it difficult for us to successfully compete.
TENANT DELINQUENCIES, BANKRUPTCIES OR INSOLVENCIES COULD REDUCE OUR REVENUES. The bankruptcy or insolvency or other failure to pay of our tenants is likely to adversely affect the income produced by our properties. If a tenant defaults, we may experience delays and incur substantial costs in enforcing our rights as landlord. It is highly unlikely that a bankrupt or insolvent tenant would pay in full amounts it owes us under a lease. Without regard to the manner in which the lease termination occurs, we are likely to incur additional costs in the form of tenant improvements and leasing commissions in our efforts to lease the space to a new tenant. In these cases, our revenues may be reduced.
PRODUCT LIABILITY RISKS. Liability could arise from claims by residents in the buildings developed by us if there is any defect in the buildings or accidents. To date, we have not experienced any problems associated with claims by residents and purchasers. Although we carry the conventional insurance coverage for liabilities, no assurance can be given that it will be adequate to protect us or that the insurance coverage will continue to be available to us on reasonable terms.
A TERRORIST ACT COULD REDUCE OUR REVENUES. Depending upon its magnitude, a terrorist act could severely damage our properties or otherwise cause a loss of tenants or other economic downturn in the Xi’an area, which could reduce our revenues. We do not maintain terrorism insurance for our properties or the resulting business interruption.
IF RELATIONS BETWEEN THE UNITED STATES AND CHINA WORSEN, INVESTORS MAY BE UNWILLING TO HOLD OR BUY OUR STOCK AND OUR STOCK PRICE MAY DECREASE. At various times during recent years, the United States and China have had significant disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China, whether or not directly related to our business, could reduce the price of our common stock.
A LACK OF ADEQUATE REMEDIES AND IMPARTIALITY UNDER THE CHINESE LEGAL SYSTEM MAY MAKE IT IMPOSSIBLE TO ENFORCE THE AGREEMENTS TO WHICH WE ARE A PARTY AND THUS REDUCE OUR REVENUES. We periodically enter into agreements governed by Chinese law. Our revenues could be reduced if these agreements are not respected. In the event of a dispute, enforcement of these agreements in China could be extremely difficult. Unlike the United States, China has a civil law system based on written statutes in which judicial decisions have little precedential value. The Chinese government has enacted some laws and regulations dealing with matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the government’s experience in implementing, interpreting and enforcing these recently enacted laws and regulations is limited, and our ability to enforce commercial claims or to resolve commercial disputes is uncertain. Furthermore, enforcement of the laws and regulations may be subject to the exercise of considerable discretion by agencies of the Chinese government, and forces unrelated to the legal merits of a particular matter or dispute may influence their determination. These uncertainties could limit the protections that are available to us and reduce our revenues.
IT WILL BE EXTREMELY DIFFICULT TO ACQUIRE JURISDICTION AND ENFORCE LIABILITIES AGAINST OUR OFFICERS, DIRECTORS AND ASSETS BASED IN THE PEOPLE’S REPUBLIC OF CHINA. Because the Company’s executive officers and directors are Chinese citizens it may be difficult, if not impossible, to acquire jurisdiction over these persons in the event a lawsuit is initiated against us and/or its officers and directors by a stockholder or group of stockholders in the United States. Also, because our assets are located in the People’s Republic of China it would also be extremely difficult to access those assets to satisfy an award entered against it in a United States court.
Risks Related To Our Common Stock
WE DO NOT INTEND TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE. We have never declared or paid a dividend on our common stock. We intend to retain earnings, if any, for use in the operation and expansion of our business and, therefore, do not anticipate paying any dividends in the foreseeable future.
THE TRADING PRICE OF OUR COMMON STOCK MAY BE VOLATILE. The trading price of our shares has, from time to time, fluctuated widely and in the future may be subject to similar fluctuations. The trading price may be affected by a number of factors including the risk factors set forth in this report as well as our operating results, financial condition, announcements of innovations or new products by us or our competitors, general conditions in the market place, and other events or factors. Although there are certain registered broker dealers currently make a market in our common stock, we cannot assure you that any of these firms will continue to
serve as market makers or have the financial capability to stabilize or support our common stock. A reduction in the number of market makers or the financial capability of any of these market makers could also result in a decrease in the trading volume of and price of our shares. In recent years, broad stock market indices, in general, and the securities of technology companies, in particular, have experienced substantial price fluctuations. Such broad market fluctuations may adversely affect the future trading price of our common stock.
OUR STOCK PRICE MAY EXPERIENCE VOLATILITY. The market price of the common stock, which currently is listed in the OTC Bulletin Board, has, in the past, fluctuated over time and may in the future be volatile. The Company believes that there are a small number of market makers that make a market in the Company’s common stock. The actions of any of these market makers could substantially impact the volatility of the Company’s common stock.
POTENTIAL FUTURE SALES PURSUANT TO RULE 144. Many of the shares of Common Stock presently held by management and others are “restricted securities” as that term is defined in Rule 144, promulgated under the Securities Act. Under Rule 144, a person (or persons whose shares are aggregated) who has satisfied a certain holding period, may, under certain circumstances sell such shares or a portion of such shares. Effective as of February 15, 2008, the holding period for the resale of restricted securities of reporting companies was shortened from one year to six months. Additionally, the SEC substantially simplified Rule 144 compliance for non-affiliates by allowing non-affiliates of reporting companies to freely resell restricted securities after satisfying a six-month holding period (subject only to the Rule 144(c) public information requirement until the securities have been held for one year) and by allowing non-affiliates of non-reporting companies to freely resell restricted securities after satisfying a 12-month holding period. Such holding periods have already been satisfied in many instances. Therefore, actual sales or the prospect of sales of such shares under Rule 144 in the future may depress the prices of the Company’s securities.
OUR COMMON STOCK IS A PENNY STOCK. Our Common Stock is classified as a penny stock, which is traded on the OTCBB. As a result, an investor may find it more difficult to dispose of or obtain accurate quotations as to the price of the shares of the Common Stock. In addition, the “penny stock” rules adopted by the Securities and Exchange Commission subject the sale of the shares of the Common Stock to certain regulations which impose sales practice requirements on broker-dealers. For example, broker-dealers selling such securities must, prior to effecting the transaction, provide their customers with a document that discloses the risks of investing in such securities. Furthermore, if the person purchasing the securities is someone other than an accredited investor or an established customer of the broker-dealer, the broker-dealer must also approve the potential customer’s account by obtaining information concerning the customer’s financial situation, investment experience and investment objectives. The broker-dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the Commission’s rules may result in the limitation of the number of potential purchasers of the shares of the Common Stock. In addition, the additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market of the Company’s Common Stock.
LIMITATIONS OF THE OTCBB CAN HINDER COMPLETION OF TRADES. Trades and quotations on the OTCBB involve a manual process that may delay order processing. Price fluctuations during a delay can result in the failure of a limit order to execute or cause execution of a market order at a price significantly different from the price prevailing when an order was entered. Consequently, one may be unable to trade in the Company’s Common Stock at optimum prices.
THE OTCBB IS VULNERABLE TO MARKET FRAUD. OTCBB securities are frequent targets of fraud or market manipulation, both because of their generally low prices and because OTCBB reporting requirements are less stringent than those of the stock exchanges or NASDAQ.
INCREASED DEALER COMPENSATION COULD ADVERSELY AFFECT STOCK PRICE. OTCBB dealers’ spreads (the difference between the bid and ask prices) may be large, causing higher purchase prices and less sale proceeds for investors.
Except as required by the Federal Securities Law, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-KSB or for any other reason.
Item 1B.
Item 1B. Unresolved Staff Comments.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 2.
Item 2. Properties.
Since November 2005, we have maintained our executive offices on the top two floors (26th and 27th floors) of the Yangming International Tower (Yangming), which is owned by Jiahui, our 90.28% subsidiary. The building is located at 89 Chang’an Middle Road, Xi’an, China. Management believes that the current space is adequate for our needs for the foreseeable future.
Item 3.
Item 3. Legal Proceedings.
There are no material pending legal proceedings to which the Company is a party or to which any of its property is subject.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The Company’s Common Stock is presently being traded in the over-the-counter market under the symbol “CPDV” and is listed on the OTC Bulletin Board. For the periods indicated, the following table sets forth the high and low sales prices per share of our common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
Holders
As of March 31, 2009, there were approximately 390 stockholders of record of the Company’s Common Stock. This does not reflect persons or entities that hold their stock in nominee or “street name”.
Dividends
We have not declared any dividends to date. We have no present intention of paying any cash dividends on our common stock in the foreseeable future, as we intend to use earnings, if any, to generate growth. The payment by us of dividends, if any, in the future, rests within the discretion of our Board of Directors and will depend, among other things, upon our earnings, our capital requirements and our financial condition, as well as other relevant factors. There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends.
Recent Sales of Unregistered Securities
We sold the following equity securities during the fiscal year ended December 31, 2008 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”): None.
Item 6.
Item 6. Selected Financial Data.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto appearing elsewhere in this report and is qualified in its entirety by the foregoing.
Executive Overview
China Properties Developments, Inc. (“we”, “us”, “our” or the “Company”) was incorporated in the State of Colorado on September 15, 2001 under the name Bangla Property Management, Inc. (“Bangla”). In October 2005, and pursuant to an Amended and Restated Agreement and Plan of Merger dated August 17, 2005, Bangla acquired Wollaston Industrial Limited (“Wollaston”), the owner of 90.28% equity interests of Xi’an Jiahui Real Estate Co., Ltd (“Jiahui”), by the issuance of 10 million shares of common stock to Wollaston’s shareholders. Bangla’s name was subsequently changed to China Properties Developments, Inc. to better reflect the business nature of the Company.
Prior to the acquisition of Wollaston, the principal business of the Company was real estate property management. Contemporaneously with acquisition of Wollaston, the Company transferred all of the common stock of Bangla Properties Inc., the Company’s then subsidiary which held all of the Company’s assets prior to the acquisition of Wollaston, to Shawn Erickson, the Company’s then President. As a result of the Wollaston acquisition, we are now primarily engaged in the business of real estate development, including sale and lease of real estate in Xi’an City, Shaanxi Province, People’s Republic of China (“PRC”). Our primary business objective has been to pursue the practice of dividing our completed development projects into discrete units and selling them to third party buyers to generate development income. In addition, we have and will retain portions of our completed projects to earn recurring leasing income.
Wollaston was incorporated on April 21, 2004 in the British Virgin Islands. As mentioned above, Wollaston owns 90.28% of its subsidiary, Jiahui, formed under the Company Law of the People’s Republic of China. Jiahui is a sino-foreign joint venture company formed on December 17, 1996 by Xi’an Xiangrui Real Estate Co. Ltd (Xiangrui) and American JHL Industrial Limited (JHL) in Xi’an, China. Since Jiahui is approximately 90% owned by a foreign entity, it is considered as a foreign joint venture company in PRC.
On June 23, 2008, and through Jiahui, our 90.28% owned subsidiary, we entered into a series of agreements effective as of June 1, 2008 with Shaanxi Xinyuan Real Estate Co. Ltd., a corporation organized under the laws of the PRC (“Shaanxi”), which we believe gives us effective control over its business. Shaanxi's results of operations are included in the consolidated statement of operations of the Company.
Results of Operations
Revenues were $29,308,000 for the year ended December 31, 2008 compared to revenues of $2,408,000 for the year ended December 31, 2007. The increase in revenues is
primarily due to Shaanxi’s revenues being included in our results of operations for the year ended December 31, 2008, resulting from the series of agreements entered into with Shaanxi in June 2008. With the completion in October 2007 of Phase I of Shaanxi’s Yan-Ta shoping mall (see “Operations Outlook” below), delivery of pre-sold spaces was able to take effect and revenues were recognized in the year ended December 31, 2008.
Gross profit, defined as sales less cost of sales, was $18,442,000 for the year ended December 31, 2008 compared to $722,000 for the year ended December 31, 2007. Cost of sales consists of costs such as construction and labor costs. Cost of sales were $10,866,000 for the year ended December 31, 2008 compared to $1,686,000 for the year ended December 31, 2007 which change was primarily due to Shaanxi’s results being included in the statements of the Company for the year ended December 31, 2008. We also achieved rental income of $3,327,000 for the year ended December 31, 2008 compared to rental income of $375,000 for the year ended December 31, 2007.
Our operating expenses were $3,707,000 for the year ended December 31, 2008 compared to $944,000 for the year ended December 31, 2007. Operating expenses increased primarily as a result of an increase in general and administrative expenses which were $1,152,000 for the year ended December 31, 2008 compared to $302,000 for the year ended December 31, 2007, as well as an increase in sales taxes which were $1,859,000 for the year ended December 31, 2008 which increased primarily due to a substantial increase in sales of condominium units and office space, compared to sales taxes of $339,000 for the year ended December 31, 2007. Legal and professional fees decreased by $102,000 for the year ended December 31, 2008 compared to the prior year. Selling expenses increased by $264,000 for the year ended December 31, 2008 compared to the year ended December 31, 2007. Depreciation expense charged to operations was $387,000 for 2008 compared to $236,000 for 2007.
Operating income was $15,412,000 for the year ended December 31, 2008 compared to operating income of $153,000 for the year ended December 31, 2007. Such change was primarily due to the increase achieved in revenues from the sale of building space.
Investment and interest income totaled $44,000 for the year ended December 31, 2008 compared to $42,000 in interest income for 2007. There was no investment income in 2007. For the year ended December 31, 2008, such investment and interest income was offset by interest expenses of $2,614,000 and late delivery penalties of $105,000. Interest expenses were $298,000 and late delivery penalties were $39,000 in the prior year.
We achieved comprehensive income of $9,716,000 for the year ended December 31, 2008 compared to a comprehensive loss of $35,000 for the year ended December 31, 2007. The increase in comprehensive income for 2008 is primarily due to an increase in revenues from the sale of building space offset by an increases in cost of sales and operating expenses.
Operations Outlook
During the next twelve months, we intend to continue to make efforts to sell and lease the remaining spaces of Yangming International Tower. In addition, and as mentioned above, on June 23, 2008, we entered into a series of agreements effective as of June 1, 2008 with Shaanxi Xinyuan Real Estate Co. Ltd. (“Shaanxi”), a corporation organized under the laws of the PRC, which we believe gives us effective control over the business of Shaanxi. Shaanxi is 84.0% owned by Shaanxi Jiahui Group which is majority owned by by Ping’an Wu and his family, and 16.0% owned by Shuzhen Yang. Ping’an Wu is the Company’s Chairman, Chief Executive Officer, President and a director.
Contemporaneously with the execution of the series of agreements with Shaanxi, the Company also entered into a Termination Agreement with Shaanxi pursuant to which the parties agreed to terminate and abandon the Securities Subscription Agreement entered into on June 13, 2007 pursuant to which the Company had agreed to subscribe for and purchase new treasury shares of Shaanxi for RMB 230,000,000 (which was estimated to be approximately US$30 million at the current currency exchange rate which was subject to change), and Shaanxi had agreed to issue the shares to the Company, such that the Company would own 90% of the issued and outstanding share capital of Shaanxi after the purchase had been completed.
Our relationship with Shaanxi and its stockholders are now governed by a series of contractual arrangements entered into on June 23, 2008 between Jiahui and Shaanxi. The parties have agreed that each of the agreements shall be deemed effective as of June 1, 2008. Through these contractual arrangements, we will, among other things, provide Shaanxi consulting and other general business operation services and we will have the ability to substantially influence Shaanxi’s daily operations and financial affairs, appoint their senior executives and
approve all matters requiring stockholder approval. As a result of these contractual arrangements, which enable us to control Shaanxi, we will be considered the primary beneficiary of Shaanxi. We believe each of the contractual arrangements and the rights and obligations of the parties thereto are enforceable and valid in accordance with the laws of the PRC.
Shaanxi is the developer of the Yan-Ta Shopping Mall project in Xi’an, China. Comprising a large urban park, a high-end shopping mall and entertainment facilities, The Yan-Ta Shopping Mall is listed as one of The City of Xi’an’s Key Projects for 2005/06. The park, already under way, will occupy 12 acres. Below ground, a three-story shopping mall will provide 1,291,670 square feet of retail and commercial space plus 2,000 parking spaces. Designed to complement the unique characteristics of Xi’an’s historic and geographic features, the park will provide space for walking, exercising and large-scale gatherings. The northern part of the park will have an open performance platform; a large fountain will dominate the middle of the expanse; and the southern section will be plant and flower gardens. Fountains and waterfalls with displays operated with advanced technology will be scattered throughout. Well designed lighting will keep the city night alive. This square is expected to be a landmark in Xi’an’s southern area and will be known to as a luxurious place for shopping, work and leisure. Development of Phase I of Yan-Ta Shopping Mall commenced in 2004 and occupancy began upon completion in October 2007. Development of Phase II is now scheduled to commence during 2009 with occupancy scheduled for completion in 2011.
We believe that the foregoing transaction with Shaanxi is on terms at least as favorable as could have been obtained from an unrelated third party.
We are also actively and aggressively pursuing other real estate opportunities within Xi’an and its surrounding areas. Currently there are three specific projects that are in various stages of negotiations and planning, in addition to the Yan-Ta Project being undertaken by Shaanxi.
We cannot predict with certainty what revenues we can expect during the next twelve months, although we believe that we probably will have enough revenue, when added to our cash on hand, to pay our operating expenses, including our debt service, for the next twelve months. In addition, there can be no assurance that any of our current or future projects will be a commercial success. However, significant capital resources will be required to fund our development expenditures. Since our performance continues to be dependent on future cash flows from real estate sales and rental income, there can be no assurance that we will generate sufficient cash flow or otherwise obtain sufficient funds from other sources to meet the expected development plans for our properties. We anticipate that we will seek to raise additional capital to expand our operations, although we cannot guarantee that we will be able to raise that capital on terms acceptable to us or at all.
Liquidity and Capital Resources
On December 31, 2008, we had working capital of $3,865,000 and stockholders’ equity of $19,168,000. Also, at December 31, 2008, we had cash of $582,000, total assets of $65,541,000 and total liabilities of $46,373,000. On December 31, 2007, we had a working capital deficit of $5,531,000 and stockholders’ equity of $830,000. Also, at December 31, 2007, we had cash of $476,000, total assets of $24,801,000 and total liabilities of $23,971,000.
A substantial portion of our total liabilities consists of short-term and long-term bank loans and mortgages, and other amounts due to related parties. At December 31, 2008, we had short-term bank loans of $15,567,000 and amounts due to related parties of $13,139,000, mortgages payable of $1,723,000 and notes payable of $4,669,000. At December 31, 2007, we had short-term bank loans of $4,980,000 and amounts due to related parties of $9,768,000, and mortgages payable of $2,425,000 and no long-term notes payable.
Net cash used by operating activities was $4,070,000 for the year ended December 31, 2008, which was primarily the result of net income of $9,553,000, decreases in prepaid expense of $1,575,000, decrease in inventory of $5,424,000, increase in other current liabilities of $3,265,000, offset by a decrease in deferred revenue of $24,000,000. Net cash used by operating activities was $1,715,000 for the year ended December 31, 2007, which was primarily the result of a net loss of $143,000, together with a decrease in prepaid expenses of $145,000, decreases in accounts payable of $1,229,000, and a decrease in deferred revenue of $203,000.
For the years ended December 31, 2008, there was net cash used by investing activities of $4,565,000 compared to net cash from investing activities of $3,483,000 for the year ended December 31, 2007. For the year ended December 31, 2008, net cash provided by financing activities was $7,507,000 compared to net cash used by financing activities of $962,000 for the year ended December 31, 2007.
As mentioned above, we believe that we have sufficient revenue, when added to our cash on hand, to pay our operating expenses for the next twelve months. However, significant capital resources will be required to fund our development expenditures. We anticipate that we will seek to raise additional capital to expand our operations, although we cannot guarantee that we will be able to raise that capital on terms acceptable to us or at all.
Other Information - Certain Relationships and Related Transactions
To date, several related party transactions have taken place, in addition to the transactions described above with Shaanxi. We believe that any transactions between us and our officers, directors, principal stockholders, affiliates or advisors have been or will be on terms no less favorable to us than those reasonably obtainable from third parties. As of December 31, 2008, there were advances to officers and employees outstanding of $1,085,000, and loans due from other related parties of $13,478,000. As of December 31, 2008, there was $13,139,000 due to related parties. As of December 31, 2007, there were advances to officers and employees outstanding of $188,000, and loans due from other related parties of $1,951,000. As of December 31, 2007, there was $9,768,000 due to related parties. Loans from and to related parties represent temporally short-term loans from/to affiliates, which are majority owned and controlled by directors of the Company. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.
We lease office and retail space to an affiliate, Shaanxi Jiahui Hantang Book Publishing Co., Ltd., which is majority owned and controlled by directors of the Company. The lease period is from January 1, 2003 to December 31, 2012. The rent is $209,000 (based upon the average exchange rate of the RMB for 2008) per year and the rent is payable semi-annually.
We lease the 24th and 25th floor of the Yangming Building to a related party, Yangming Soho Commercial Flat, which is majority owned and controlled by directors of the Company. There is no lease and no rental income has been collected from this related party. The Company estimates that annual rent, using current rental values, would be approximately $62,000 (based upon the average exchange rate of the RMB for 2008).
Recent Accounting Pronouncements
The following is disclosure regarding recent accounting pronouncements and their effect or potential effect on the Company’s financial statements.
In May 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 154 “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3”. This statement replaces APB Opinion No. 20 “Accounting Changes” and FASB Statement No. 3 “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. It applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement which does not include specific transition provisions. FASB No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.
When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this statements requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date applicable. We adopted this Statement and retrospectively restated our results of operation, financial position, and statement of cash flows in 2005.
In December 2006, the FASB issued SFAS No. 123R “Share-Based Payment.” This Standard addresses the accounting for transactions in which a company receives employee services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. This Standard eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and requires that such transactions be accounted for using a
fair-value-based method. The Standard is effective for periods beginning after June 15, 2006. The adoption of the statement had no impact on the Company's results of operation or financial position.
Off-Balance Sheet Arrangements
We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See the Financial Statements annexed to this report.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A(T).
Item 9A(T). Controls and Procedures.
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2008, these disclosure controls and procedures were effective to ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rule and forms; and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no material changes in internal control over financial reporting that occurred during the fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our evaluation of internal control over financial reporting includes using the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and control objectives related to the evaluation of our control environment.
Based on our evaluation under the frameworks described above, our management has concluded that our internal control over financial reporting was effective as of December 31, 2008.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
Item 9B.
Item 9B. Other Information.
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act.
Set forth below are our present directors and executive officers. Note that there are no other persons who have been nominated or chosen to become directors nor are there any other persons who have been chosen to become executive officers. There are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer. Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and have qualified. Officers serve at the discretion of the Board of Directors.
PING’AN WU was born in January, 1958 in Shaanxi Province of China. He is United States permanent resident. He was a manager at Chunlin No.5 Brick Factory in Xi’an from 1984-1987. He was the founder of Xi’an Qi An Advanced Ceramic Ornament Materials Co., Ltd., a ceramic factory and served as the CEO from 1987-1990. He founded Xi’an Qi An Group Company and serviced as the CEO from 1990-1997. He founded Shaanxi Jiahui Group in 1997 and has been the Chairman of China Properties Developments Inc. through present. Mr. Wu is a Certified Economist in China. Mr. Wu and his family have a home in Washington State and his children attend the University of Washington.
SHUO (STEVEN) LOU was born in October, 1961 in Hangzhou, China, and is currently a citizen of the United States of America. He received an MBA in Management Information System from North Carolina State University, North Carolina, USA and an MA in Economics and Statistics from Xiamen University, Xiamen, China. He also received a BSc in Mathematics from Zhejiang Normal University. He worked as a financial analyst at the Bank of China’s Hangzhou Branch from 1983-1984. He then worked as a financial analyst at the Central Bank of China’s Hangzhou Branch from 1984-1985. He taught business classes at Hangzhou University, School of Business and Economics from 1988-1990. He was an executive at Shuka Industrial, Inc. in New Jersey from 1994-1996. He worked at Wachovia Securities, Inc. (f.k.a. Prudential Securities, Inc.) in Seattle, Washington, as a financial advisor & quantum portfolio manager from 1997-2004. He has been a Director and the Chief Financial Officer of China Properties Developments Inc. from 2004 through present.
YINGMING WANG was born in July, 1963 in Gansu Province, China. He received an LL.B from Northwest University, School of Politics Science and Law in Xi’an, China. He then worked at the same university as an instructor in law from 1987 to 1993. He worked with Shaanxi Province Legal Department as a legal counsel from
1993 to 1997. He has been the Chief Operating Officer of China Properties Developments Inc. from November 1997. He has been a Director of China Properties Developments Inc. from 2004 through present.
XINGGUO WANG was born in February 1965 in Shandong Province, China and he is currently a US citizen. He received an MA in International Economics from Nan Kai University, Tianjing, China. He worked at Zhejiang Securities Co., Ltd as a deputy general manager of the investment banking department from 1992-1994. He worked with Ameda C. G Inc as a vice-president from 1994-1996. He was the president of Great Ocean International Ltd from 1996 to 2000. He was the Vice President of Waitex International Ltd from 2000-2002. He was the Vice President of Bright Orient (Holding) Ltd. July 2003 to present. He has been a Director of China Properties Developments Inc. from 2004 through present.
MINGCHUAN REN is currently Honorary Professor at both Norwegian School of Management (BI) (since 2006) and at the School of Business, HongKong Unversity (since July 2001). Mr. Ren is also currently Associate Professor with the Department of Accounting and Finance, at Fudan University, Shainghai, China. Mr. Ren has held this position since Octover 2000. Previously Mr. Ren, from March 2004 to May 2004, was International Faculty Fellow at Sloan School, Massachusetts Institute of Technology (MIT, US) and from January 2002 to June 2002, he was International Faculty Fellow. From November 1992 to December 1993, Mr. Ren was Visiting Scholar, Dept. of Accounting and Finance, Hull University (Sponsored by a scholarship from Zhejiang University). From August 1988 to September 1992, Mr. Ren was a lecturer and course leader for the Accounting, Dept. of Management, Zhejiang University of Technology and from August 1982 to August 1985, he was assistant lecturer. Mr. Ren, who resides in Shanghai, China, was a participant in the August 2006 Program in Case Method and Participant-Centered Learning, at Harvard Business School, Harvard University (US). Mr. Ren earned his Ph.D in accounting, Dept. of Accounting and Finance, from Hull University (UK) in December 1994. Mr. Ren’s Ph.D was sponsored by the British award for overseas research students; Edward scholarship of Leeds University; and the departmental scholarship of Hull University. From September 1985 to July 1988, Mr. Ren attended Xiamen University and completed his MA in accounting, Dept. of Accountancy. In July 1982 Mr. Ren received his BA in accounting from the Dept. of Accounting and Finance, Anhui Institute of Finance & Trade.
QIANFEI YUAN is currently (since April 2003) Manager of Corporation Administration, at the Shenzhen Airport Industry Corporation Co., Ltd., Shenzhen, Guangdong. From August 2001 to April 2003, Mr. Yuan was President of Shanghai Chengfei Aerospace Equipment Co., Ltd., Shanghai. From May 2001 to August 2001, Mr. Yuan was Manager of Statistics at China Petrol Airport Co., Ltd. Shenzhen Branch Shenzhen, Guangdong. From June 2000 to April 2001, Mr. Yuan was Manager of Assets Management at Shenzhen Airport Industry Corporation Co., Ltd., Shenzhen, Guangdong. From June 1999 to May 2000 Mr. Yuan was Manager of Accounting Department at Shenzhen Chengxiang Industrial Co. Ltd., Shenzhen, Guangdong. Mr Yuan was employed as Deputy Manager of Accounting Department, from January 1997 to May 1999 at Shenzhen Airport Industry Corporation Co., Ltd. Shenzhen, Guangdong. Mr. Yuan was Deputy Manager of Auditing Department from October 1996 to January 1997 at Shenzhen Airport Industry Corporation Co., Ltd., Shenzhen, Guangdong. Previously, Mr. Yuan was Lecturer of Management Department, from July 1988 to October 1996 at Zhejiang University, Business Administration College, Hangzhou, Zhejiang. Mr. Yuan resides in Shenzhen, Guangdong, China. He received his MA in Statistics, Economics from the Xiamen University, Xiamen, Fujian Province in 1988. In 1985, Mr. Yuan received his BSc in Mechanics from the Nanchang University, Nanchang, Jiangxi Province.
SHOUGUO ZHAO holds several positions with Northwest University in Xi’an. He is Deputy Dean, School of Economics and Management, Professor, Economy Department; Doctoral Supervisor; Director of the Institute of Enterprise Development; and, Vice President of Academic Degree Evaluation Committee in Economics. Dr. Zhao’s research fields include: financial investment; modern corporate system and development strategy; and, regional economic development strategy. Dr Zhao has published more than 100 academic papers in publications such as World of Management , and three works including Study on Enterprise Property Right System. He has won five provincial and ministerial scientific research achievements awards. Dr. Zhao earned his Ph.D. from Northwest University in Xi’an. Mr. Zhao is a member of the Shaanxi Decision-making Consultation Committee; is an executive member of the Ninth Executive Committee of Federation of Industry and Commerce; and, is the adjunct professor, Law School, Northwest University. Dr. Zhao is also an independent director of the following organizations: Shaanxi Qin Mountain Cement (Group) Co., Ltd.; Xi’an Minsheng Group Co., Ltd.; and, Xi’an Tourism (Group) Co., Ltd.. Dr. Zhao is a consultant for Shaanxi Listed Companies Association.
None of the directors and officers is related to any other director or officer of the Company.
To the knowledge of the Company, none of the officers or directors has been personally involved in any bankruptcy or insolvency proceedings. To the knowledge of the Company, none of the directors or officers have been convicted in any criminal proceedings (excluding traffic violations and other minor offenses) or are the subject
of a criminal proceeding which is presently pending, nor have such persons been the subject of any order, judgment, or decree of any court of competent jurisdiction, permanently or temporarily enjoining them from acting as an investment advisor, underwriter, broker or dealer in securities, or as an affiliated person, director or insurance company, or from engaging in or continuing in any conduct or practice in connection with any such activity or in connection with the purchase or sale of any security, nor were any of such persons the subject of a federal or state authority barring or suspending, for more than 60 days, the right of such person to be engaged in any such activity, which order has not been reversed or suspended.
Board Advisor
HOWARD LI is the founder, Chairman & CEO of Waitex International Co., Ltd., Prime Time International, Inc. and Fortune USA, Inc., which began operations in 1981 in New York City. Mr. Li also is the founder and sole owner of a conglomerate of multinational companies involving logistics, information technology, real estate development, global trading and retail stores. “Crain’s” magazine has ranked Waitex Group of Companies as one of the top 200 privately held companies in years 2002-2005 in the greater New York Area.Mr. Li is very dedicated to the Asian American business community, and his deep rooted knowledge of both Chinese and American business methods make him a highly sought after advisor on Asian / Western economy. In 2005, Howard Li was the first Asian American in twenty-three years to Chair the National Minority Enterprise Development (MED) Week 2005 Conference Steering Committee, supported by the Minority Business Development Agency at the US Department of Commerce and also served as Co-Chairman from 2002 to 2004. In addition, he is director of the United Way of New York City, one of the largest volunteer-directed organizations, and is chairman of the US-Chinese Chamber of Commerce. He has been a Board Advisor of China Properties Developments Inc. from 2004 through present. And in January 2006, President George W. Bush appointed Howard H. Li to serve as a member of the President’s Advisory Commission on Asian Americans and Pacific Islanders.
Audit Committee Financial Expert
We do not have an audit committee financial expert, as such term is defined in Item 401(e) of Regulation S-B, serving on our audit committee because we have no audit committee and are not required to have an audit committee because we are not a listed security.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than ten percent of the Company’s Common Stock, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes of ownership of Common Stock of the Company. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on the Company’s review of such forms received by it, or written representations from certain of such persons, the Company believes that, with respect to the year ended December 31, 2008, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10% beneficial owners were complied with except Shouguo Zhao has failed to file his initial statement of beneficial ownership.
Code of Ethics
We have adopted a Code of Ethics and Business Conduct that applies to our Chief Executive Officer and Chief Financial Officer, which was filed as Exhibit 14.1 to our annual report on Form 10-KSB for the fiscal year ended December 31, 2005. Upon request, we will provide to any person without charge a copy of our Code of Ethics. Any such request should be made to Attn: Secretary, China Properties Developments, Inc., 89 Chang’an Middle Road, Yangming International Tower, Flrs. 26/27, Xi’an, China.
Item 11.
Item 11. Executive Compensation.
The following summary compensation tables set forth information concerning the annual and long-term compensation for services in all capacities to the Company for the years ended December 31, 2008 and December 31, 2007, of those persons who were, at December 31, 2008 (i) the chief executive officer and (ii) the other most highly compensated executive officers of the Company, whose annual base salary and bonus compensation was in excess of $100,000 (the named executive officers):
Summary Compensation Table
Outstanding Equity Awards at Fiscal Year-End
Our named executive officers in the Summary Compensation Table have not been granted any stock options or other stock awards to date.
Compensation of Directors
At the present time, directors receive no cash compensation for serving on the Board of Directors. Directors are reimbursed for their reasonable out-of-pocket expenses incurred in connection with their duties.
Employment Agreements
None of our officers and key employees are presently bound by employment agreements. We do not have any termination or change in control arrangements with any of our named executive officers.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth, as of March 31, 2009, certain information with regard to the record and beneficial ownership of the Company’s Common Stock by (i) each stockholder owning of record or beneficially 5% or more of the Company’s Common Stock, (ii) each director of the Company, (iii) the Company’s Chief Executive Officer and other executive officers named in the Summary Compensation Table under “Executive Compensation”, and (iv) all officers and directors of the Company as a group:
*
The address for each is 89 Chang’an Middle Road, Yangming International Tower, 26 and 27th floors, Xi’an, China.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
To date, several related party transactions have taken place, in addition to the transactions described above with Shaanxi. We believe that any transactions between us and our officers, directors, principal stockholders, affiliates or advisors have been or will be on terms no less favorable to us than those reasonably obtainable from third parties. As of December 31, 2008, there were advances to officers and employees outstanding of $1,085,000, and loans due from other related parties of $13,478,000. As of December 31, 2008, there was $13,139,000 due to related parties. As of December 31, 2007, there were advances to officers and employees outstanding of $188,000, and loans due from other related parties of $1,951,000. As of December 31, 2007, there was $9,768,000 due to related parties. Such advances to officers and advance to employees are advances to officers and employees who are working on projects on behalf of the Company. After the work is finished, they will submit expense reports with supporting documents to the accounting department. Then, the expenses are debited into the relevant accounts and the advances are credited out. Loans from and to related parties represent temporally short-term loans from/to affiliates, which are majority owned and controlled by directors of the Company. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. Amounts due to officers are temporally short-term loans from our officers to finance the Company’s operation due to lack of cash resources.
We lease office and retail space to an affiliate, Shaanxi Jiahui Hantang Book Publishing Co., Ltd., which is majority owned and controlled by directors of the Company. The lease period is from January 1, 2003 to December 31, 2012. The rent is $209,000 (based upon the average exchange rate of the RMB for 2008) per year and the rent is payable semi-annually.
We lease the 24th and 25th floor of the Yangming Building to a related party, Yangming Soho Commercial Flat, which is majority owned and controlled by directors of the Company. There is no lease and no rental income has been collected from this related party. The Company estimates that annual rent, using current rental values, would be approximately $62,000 (based upon the average exchange rate of the RMB for 2008).
Director Independence
Our board of directors currently consists of six members. They are Ping’an Wu (our Chairman and Chief Executive Officer), Shuo (Steven) Lou (our Chief Financial Officer and Executive Vice President), Yingming Wang (our Chief Operating Officer and Vice President), Xingguo Wang, Mingchuan Ren, Qianfei Yuan and Shouguo Zhao. We have determined that Xingguo Wang, Mingchuan Ren, Qianfei Yuan and Shouguo Zhao are independent directors using the definition of independence set forth in in Nasdaq Marketplace Rule 4200(a)(15).
Item 14.
Item 14. Principal Accountant Fees and Services.
The following is a summary of the fees billed to us by the principal accountants to the Company for professional services rendered for the fiscal years ended December 31, 2008 and December 31, 2007:
Audit Fees. Consists of fees billed for professional services rendered for the audit of our financial statements and review of interim consolidated financial statements included in quarterly reports and services that are normally provided by the principal accountants in connection with statutory and regulatory filings or engagements.
Audit Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees”.
Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include preparation of federal and state income tax returns.
All Other Fees. Consists of fees for product and services other than the services reported above.
Pre-Approval Policies and Procedures
Prior to engaging its accountants to perform a particular service, the Company’s Board of Directors obtains an estimate for the service to be performed. All of the services described above were approved by the Board of Directors in accordance with its procedures.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this report:
(1) Financial Statements
Financial Statements are annexed to this report.
(2) Financial Statement Schedules
No financial statement schedules are included because such schedules are not applicable, are not required, or because required information is included in the financial statements or notes thereto.
(3) Exhibits
____________________
* Filed herewith.
(1)
Filed as an exhibit to the Company’s Registration Statement on Form SB-2, filed February 13, 2003, and incorporated by reference herein.
(2)
Filed as an exhibit to the Company’s Current Report on Form 8-K/A filed on August 30, 2005, and incorporated by reference herein.
(3)
Filed as an exhibit to the Company’s Schedule 14A filed on September 23, 2005, and incorporated by reference herein.
(4)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on February 21, 2006, and incorporated by reference herein.
(5)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on March 15, 2006, and incorporated by reference herein.
(6)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on June 19, 2007, and incorporated by reference herein.
(7)
Filed as an exhibit to the Company’s Current Report on Form 8-K filed on June 25, 2008, and incorporated by reference herein.
(8)
Filed as an exhibit to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005, and incorporated by reference herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, and in the capacities and on the dates indicated:
Certified Public Accountants
Valuation Analysts
INDEPENDENT AUDIT'S REPORT
Board of Directors
China Properties Developments, Inc.
Xian, China
We have audited the accompanying balance sheets of China Properties Developments, Inc. as of December 31, 2008 and 2007 and the related statements of operations, Change in stockholders' equity and cash flows for each of the years then ended. These financial statements are the responsible of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of China Properties Developments, Inc. as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the year then ended in conformity with accounting principles generally accepted in the United States of America.
Hanlin Moss, P.S.
Certified Public Accountants
Seattle, Washington
April 13,
Fourth Avenue, Suite 410 Seattle, Washington 98101 (206) 623-3200 fax (206) 623-3222
www.hanlinmoss.com
F -
See accountant's audit report
F -
See accountant's audit report
F -
See accountant's audit report
F -
See accountant's audit report
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
Note 1 - Organization and Operations
China Properties Developments, Inc. (the "Company") was incorporated in the State of Colorado on June 15, 2001. The Company presently engages in the business of real estate development, including sale and lease of real estate in Xi'an City, Shaanxi Province, People's Republic of China ("PRC").
At December 31, 2008, the Company’s operations include the consolidated operations of Wollaston Industrial Limited, Xian Jiahui Real Estate Co., Ltd., and Xin Yuan Real Estate Co., Ltd.
Wollaston was incorporated on April 21, 2005 in British Virgin Islands (“BVI”) under the International Business Companies Act, as a limited liability corporation. Wollaston owns 90.28% of Jiahui, which was established in Xi’an City, Shaanxi Province, PRC on December 17, 1996 under the Company Law of the PRC. Jiahui engages in the business of real estate development, including sale and lease of real estate.
In addition, the accounts and operations in these financial statements include those of Xin Yuan Real Estate Co., Ltd, as required by FIN 46R and as issued by the Financial Accounting Standards Board.
On June 28, 2008, the Company, through its 90.28% owned subsidiary, Xi’an Jiahui Real Estate Co., Ltd (“Jiahui”), entered into a series of agreements with Shaanxi Xin Yuan Real Estate Co. Ltd. (“Xin Yuan”), a corporation organized under the laws of the People’s Republic of China, which renders the Company effective control over the business of Xin Yuan. The agreements were effective on June 1, 2008. Therefore, Xin Yuan’s results of operations are included in the consolidated statement of operations of the Company.
At December 31, 2007, the financial statements do not include the accounts of Xin Yuan Real Estate Co., Ltd.
Note 2 - Significant Accounting Policies
A.
Economic and Political Risks
The Company faces a number of risks and challenges since its assets are located in Xi'an City, PRC, and its revenues are derived from its operations therein. The PRC is a developing country
F -
CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
with an early stage market economic system, overshadowed by the state. Its political and economic systems are very different from the more developed countries and are in a state of change. The PRC also faces many social, economic and political challenges that may produce major shocks and instabilities and even crises, in both its domestic arena and in its relationships with other countries, including the United States. Such shocks, instabilities and crises may in turn significantly and negatively affect the Company's performance.
B.
Basis of Presentation
The accompanying financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). This basis of accounting differs from that used in the statutory accounts of the Company, which are prepared in accordance with the "Accounting Principles of China” ("PRC GAAP"). Certain accounting principles, which are required by US GAAP, are not applicable in the PRC GAAP. The difference between PRC GAAP accounts of the Company and its US GAAP financial statements is immaterial.
The Company maintains its books and records in PRC currency "Renminbi" ("RMB"), which is determined as the functional currency. Assets and liabilities of the Company are translated at the prevailing exchange rate at each year end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income statement accounts are translated at the average rate of exchange at the end of each calendar quarter during the year. Translation adjustments arising from the use of different exchange rates from period to period are included in the accumulated other comprehensive income account shown in shareholders' equity. Gains and losses resulting from foreign currency transactions are included in operations.
C.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results when ultimately realized could differ from those estimates.
D.
Cash and Cash Equivalents
For purpose of the statements of cash flows, cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments with original maturities of three months or less.
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
E.
Fair Value of Financial Instruments
The carrying value of financial instruments including cash and cash equivalents, receivables, accounts payable and accrued expenses, approximates their fair value at December 31, 2008 due to the relatively short-term nature of these instruments.
F.
Valuation of Long-Lived Assets
The Company periodically analyzes its long-lived assets for potential impairment, assessing the appropriateness of lives and recoverability of unamortized balances through measurement of undiscounted operating cash flows on a basis consistent with accounting principles generally accepted in the United States of America.
G.
Real Estate Projects
The Company currently holds a majority interest in the following two building projects:
Jiahui Office Building
Jiahui Office Building (“Jiahui Building”) is a 15-story commercial office building. Construction commenced in 1998. The majority of construction was concluded in December 1999 with finished tenant improvements. This property has been available for occupancy since June 30, 2000.
The first to fourth floors are leased to a related party, the Hantang Bookstore. The 5th floor, west section of the 14th floor, the 15th floor, and the underground parking garage in the Jiahui Building are held for rental activities. All of these spaces are recorded as fixed assets, and depreciation has been provided since July 1, 2000.
The remaining space in the Jiahui Building has been sold or placed in service as rental property.
Yangming International Tower
Yangming International Tower (“Yangming”) is a multi-functional 27-story building with mostly commercial usage.
The Company occupied the top two floors (26th and 27th floors) as its administrative offices. The 25th floor is under contract with an affiliate, Yangming Soho Commercial Flat. Beginning from January 1, 2008, the Company has added the 24th floor to the space
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
operating commercial flat. The 24th through 27th floor has been classified as fixed assets and depreciation have been provided according to the time they became fixed assets.
The second and third floors are leased to a related party, the Hantang Bookstore.
The remaining space in Yangming is for sale to the public.
Xin Tian Di Mall
Xin Tian Di Mall is a three level multifunctional shopping center. The Company has finished phase one construction of this project. The entire project is planned to be carried out in four phases. Approximately twenty-three percent of the phase one mall space has been sold. The units sold are under contract with the Company to manage the rental of these spaces. The rest of the space has been rented or is available for rent as of December 2008.
H.
Real Estate Project Costs
Costs directly identifiable with real estate projects and incurred before and during construction is capitalized into “project costs,” These project costs consist of the cost of land-usage-right, preconstruction costs, construction costs, and capitalized interest costs. Costs subsequent to the completions of construction are usually of minor amounts and are expensed as incurred. Capitalized costs are allocated to such portions of the project the Company uses for its operations, rental activities, as well as the portions held for sale. Allocation of costs is based on a cost-per-square-meter method.
Costs allocated to operations and rental activities are recorded as fixed assets; depreciation commences when projects change from non-operating to operating.
Costs associated with portions which are held for sale remain in project costs inventory until relevant spaces are sold.
·
Land Usage Right
All land belongs to the State in the PRC. Enterprises and individuals can pay the State a fee to obtain a right to use a piece of land for commercial or residential purposes for a period of 50 years or 70 years, respectively. The right of land usage can be sold, purchased, and exchange in the market. The Company obtained the right to use the piece of land at which Jiahui Building is located for a period of 50 years, from 1999 to 2045, and the piece of land on which Yangming is located for a period of 70 years from 2003 to 2073. The right of
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
land usage period for the mall is 50 years from 2005 to 2054. The cost of any land usage rights are added to the cost of each real estate project, which is then amortized over 40 years, using the straight-line method.
·
Capitalized Interest Costs
Interest cost incurred are capitalized during the term of real estate projects, which normally begins when payments are made for land usage rights, and ends when the real estate project is substantially completed and held available for occupation.
Subsequent to completion of a real estate project, interest expenses are charged to Statement of Operations.
I.
Revenue Recognition
The Company derives its revenue from rental and sales of spaces. Revenue from sales of condominium units and office spaces are recognized when relevant units and spaces are available for occupancy and delivered to buyers with appropriate title documents. The Company rents unit spaces under various arrangements with related and unrelated parties. Expiration of such rents varied from 2 to 20 years. The Company is required to pay property taxes and maintenance. Rental revenues are recognized in accordance with provisions of the various leases.
Revenue Recognition: Sale of Space
In China, the company is allowed to promote and sell the space when the construction permits are granted by the government. Therefore, pre-selling of the spaces started simultaneously with the construction. The funds from pre-selling are recorded by the company as deferred revenue.
In the meanwhile, the company secured financing from banks to carry out the construction. The interest expenses during the construction years were capitalized as the cost of construction.
Revenue is recognized when:
a)
the construction has been completed, and
b) the unit is in good condition outlined in the sales contract, and
c) the title has been transferred to the owner evidenced by the change of official title on the space from the company to the buyer
Revenue Recognition: Rental Income
In 2007 and prior, the rental income was from the leased space in Xi’an Jia Hui building and Yangming Building. The corresponding expenses (sales taxes, depreciation and any administrative expenses) were not separately stated on the income statement.
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
In 2008, the rental income consists of:
J.
Deferred Revenue
Deposits and advance proceeds from pre-sales of condominium units and office spaces are recorded as deferred revenue until such time when such units and/or spaces are available for occupation and delivered to buyers.
K.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in the US and the PRC, which are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company calculates its current and deferred tax provision based estimates and assumptions that could differ from the actual results reflected in the income tax returns filed in subsequent years. Adjustments based on filed returns are records when identified.
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
L.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized.
When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. The depreciable life of each asset category applied is:
M.
Intangible Assets
The Company (Xin Yuan Real Estate Co., Ltd.) incurred start-up costs which have been capitalized. These costs are being amortized over 60 months, beginning from October 2007.
N.
Employee Benefits
Mandatory contributions are made to the Government's health, retirement benefit and unemployment schemes at the statutory rates in force during the period, based on gross salary payments. The cost of these payments is charged to the statement of income in the same period as the related salary cost.
O.
Earnings (Loss) Per Share
The Company reports earnings per share in accordance with the provisions of SFAS No. 128, “Earnings Per Share.” SFAS No. 128 requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings (loss) per share are computed by dividing income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. There are no potentially dilutive securities for the twelve months ending December 31, 2008 and 2007.
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
The earnings per share for the public company (excluding Xin Yuan) is
Note 3 - Related Party Transaction
A.
Advances to Officers and Employees
“Advance to officers” and “Advance to employee” are advances to officers and employees who are working on projects on behalf of the Company. After the work is finished, they will submit expense reports with supporting documents to the accounting department. Then, the expenses are debited into the relevant expense accounts and the advances are credited out. Cash flows from these activities are classified into operating activities. The total advance to officers was $1,046K and $184K, as of December 31, 2008 and 2007, respectively. The total advance to employees was $39K and $4K as of December 31, 2008 and 2007, respectively.
B.
Loans to Related Parties
“Loans to related parties” and “Due to related parties” represent temporary short-term loans from/to affiliates, which are majority owned and controlled by directors of the Company. These loans are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand. The total loans to related parties were $13,478K and $1,951K as of December 31, 2008 and 2007, respectively. The total borrowing from related parties was $13,139K and $9,768K as of December 31, 2008 and 2007, respectively.
C.
Due To Officers
“Due to officers” are temporary short-term loans from our officers to finance the Company’s operation due to lack of cash resources. Cash flows from these activities are classified as cash flows from financing activates. The total borrowing from officers was $1K and $449K as of December 31, 2008 and 2007, respectively.
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
D.
Leases
·
The Company leases office and retail space to an affiliate, Shaanxi Jiahui Hantang Book Publishing Co., Ltd., which is majority owned and controlled by directors of the Company. The lease period is from January 1, 2003 to December 31, 2012. The rent is $209K (based upon the average exchange rate of the RMB for 2008) per year and the rent is payable semi-annually.
·
At December 31, 2008, the Company leases the 24th and 25th floor of the Yangming Building to a related party, Yangming Soho Commercial Flat, which is majority owned and controlled by directors of the Company. There is no lease and no rental income has been collected from this related party. The Company estimates that annual rent, using current rental values, would be approximately $62K (based upon the average exchange rate of the RMB for 2008).
Note 4 - Inventoried Real Estate Project Costs
The Company is carrying prepaid real estate project costs, which consist of the costs of the unsold portion of the real estate project described above. In 2008, no interest expense has been capitalized.
Note 5 - Property and Equipment
Property, plant and equipment consist of the following as of December 31:
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
Note 6 - Intangibles
Capitalized intangible assets include start-up costs for Xin Yuan. Total amortization expense was $9K in 2008.
Note 7 - Long-Term Investment
Long-term investments include:
Note 8 - Short-Term Debt
Short-term debt at December 31, 2008 consisted of two bank loans:
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
As of December 31, 2008, management is engaged in negotiation with the banks to renew the loans. Management is attempting to obtain better interest terms with the renewal. Overdue interest payable was $ 675K at December 31, 2008. Management indicates that it expects to successfully complete a renewal of the loans at an interest rate not to exceed the prior terms.
Note 9 - Long-Term Debt
Long-term debt consisted of the Mortgages Payable and Notes Payable as of December 31:
Mortgages Payable
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
Notes Payable
Note 10 - Foreign Currency Translation
The functional currency of the Company is the Chinese Renminbi (“RMB”). Transactions denominated in currencies other than RMB are translated into United States dollars using 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 transaction occurred. Net gains and losses resulting from foreign currency exchange translations are included in the statements of operations and stockholder’s equity as accumulated other comprehensive income.
Prior to July 21, 2006, translation of amounts from RMB into United States dollars ("US$") has been made at the single rate of exchange of US$1.00:RMB8.277. No representation is made that RMB amounts could have been or could be, converted into US dollars at that rate. On January 1, 1994, the PRC government introduced a single rate of exchange, quoted daily by the People's Bank of China (the "Unified Exchange Rate"). The quotation of the exchange rates does not imply free convertibility of RMB to other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. Approval of foreign currency payments by the Bank of China or other institutions requires submission of a payment application form together with supplier's invoices, shipping documents and signed contracts.
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
On July 21, 2006, the People's Bank of China, China's central bank, announced that, beginning on July 21, 2006, China implemented a regulated, managed floating exchange rate system based on market supply and demand and with reference to a package of currencies. RMB will no longer be pegged to the US dollar and the RMB exchange rate structure will be subject to some fluctuation.
The People's Bank of China announces the closing price of a foreign currency, such as the US dollar against the RMB, in the inter-bank foreign exchange market after the closing of the market on each working day, and will make it the central parity for the trading against the RMB on the following working day. The exchange rate of the US dollar against the RMB was adjusted to 8.11 RMB per US dollar on July 21, 2005.
The daily trading price of the US dollar against the RMB in the inter-bank foreign exchange market will be allowed to float within a band of 0.3 percent around the central parity published by the People's Bank of China, while the trading prices of the non-US dollar currencies against the RMB will be allowed to move within a certain band announced by the People's Bank of China.
The People's Bank of China makes adjustment of the RMB exchange rate band when necessary, according to market developments as well as economic and financial situations. The People's Bank of China is responsible for stabilizing and adapting the RMB exchange rate.
Translation adjustments resulting from the “managed floating exchange” process are included in the accumulated comprehensive income (loss) account in the consolidated statement of shareholders’ equity and amounted to $895K and $(50K) as of December 31, 2008 and 2007, respectively. The balance sheet amounts with the exception of equity at December 31,2008 were translated at 6.8542 RMB to $1.00 USD as compared to 7.2946 RMB at December 31, 2007. The equity accounts were stated at their historical rate. The average translation rate of 6.85322 RMB for the twelve months ended December 31,2008 was applied to income statement accounts as compared to 7.6058 RMB for the year ended December 31, 2007.
Note 11 - Recent Accounting Pronouncements
In May 2006, the Financial Accounting Standards Board ("FASB") issued FASB Statement No. 154 “Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3". This statement replaces APB Opinion No. 20 "Accounting Changes" and FASB Statement No. 3 "Reporting Accounting Changes in Interim Financial Statements", and changes the requirements for the accounting for and reporting of a change in accounting principle. It applies to all voluntary changes in accounting principle and to changes required by an accounting pronouncement which does not include specific transition provisions. FASB No. 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this statements requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date applicable. We adopted this Statement and retrospectively restate our results of operation, financial position, and statement of cash flows in 2005.
In December 2006, the FASB issued SFAS No. 123R "Share-Based Payment." This Standard addresses the accounting for transactions in which a company receives employee services in exchange for (a) equity instruments of the company or (b) liabilities that are based on the fair value of the company's equity instruments or that may be settled by the issuance of such equity instruments. This Standard eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and requires that such transactions be accounted for using a fair-value-based method. The Standard is effective for periods beginning after June 15, 2006. The adoption of the statement had no impact on the Company's results of operation or financial position.
Note 12 - Business Combination
On June 23, 2008, China Properties Developments, Inc. (“CPD”), through its 90.28% owned subsidiary, Xi’an Jiahui Real Estate Co., Ltd (“Jiahui”) entered into a series of agreements affective June 1, 2008 with Shaanxi XinYuan Real Estate Co., Ltd (“Xin Yuan”, which gives effective control over the business of Xin Yuan. The agreements between Jiahui and Xin Yuan provide for:
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CHINA PROPERTIES DEVELOPMENTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 2008 and 2007
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The consulting services for development, sales, lease and operations of the remaining portions of the Xin Tian Di Shopping Mall. This is to include assistance with all personnel recruiting and management issues, business development. The consulting agreement gives Jiahui ownership of any developed intellectual property, and Xin Yuan pledges its equity interests to secure all consulting fees. In addition, Xin Yuan agrees not to issue or redeem any equity or debt securities, or to pay any dividends or any other form of return of capital to Xin Yuan shareholders. Xin Yuan may not make any capital improvements to its property without the approval of Jiahui. Jiahui’s fees for the consulting services shall be the net income of Xin Yuan.
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The business operations of Xin Yuan have been turned over to directors recommended by Jiahui, and Jiahui has agreed to provide lending guarantees to Xin Yuan as needed.
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Xin Yuan’s shareholders have pledged personally that their interests in Xin Yuan shall be subordinated to the agreement for consulting services, and to individually guarantee the Xin Yuan shall pay any and all consulting fees earned by Jiahui under the consulting contract.
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Granting of voting rights of the shareholders of Xin Yuan to Jiahui.
The agreements do not merge the entities. All stock ownership that existed prior to the agreements continues without change. For this reason, the business combination is not accounted for as a Business Combination as contemplated under SFAS 141.
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