Filed
Pursuant to Rule 424(b)(3)
File
Number 333-146851
PROSPECTUS
SUPPLEMENT NO. 5
to
Prospectus dated February 7, 2008
(Registration
No. 333-146851)
CHINA
ARCHITECTURAL ENGINEERING, INC.
This
Prospectus Supplement No. 5 supplements our Prospectus dated February 7,
2008
and Prospectus Supplements Nos. 1, 2, 3, and 4 (collectively referred to
as the
“Prospectus Supplements”) dated March 18, 2008, April 14, 2008, April 28, 2008,
and May 2, 2008, respectively. The securities that are the subject of the
Prospectus have been registered to permit their resale to the public by the
selling security holders named in the Prospectus. We are not selling any
securities in this offering and therefore will not receive any proceeds from
this offering. You should read this Prospectus Supplement No. 5 together
with
the Prospectus and the Prospectus Supplements.
This
Prospectus Supplement No. 5 includes the attached report, as set forth below,
as
filed by us with the Securities and Exchange Commission (the “SEC”): Quarterly
Report on Form 10-Q filed with the SEC on May 14, 2008.
Our
common stock is traded on the American Stock Exchange under the symbol “RCH.”
NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION
HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A
CRIMINAL OFFENSE.
The
date
of this Prospectus Supplement No. 5 is May 22, 2008.
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2008
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number
001-33709
CHINA
ARCHITECTURAL ENGINEERING, INC.
(Exact
name of small business issuer as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation
or
organization)
|
|
51-05021250
(I.R.S.
Employer Identification
No.)
|
|
|
|
105
Baishi Road, Jiuzhou West Avenue,
Zhuhai,
People’s Republic of China
(Address
of principal executive offices)
|
|
519070
(Zip
Code)
|
0086-756-8538908
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
ý
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
Non-accelerated filer
ý
|
|
Smaller reporting company
o
|
|
|
|
|
(Do
not check if a smaller
reporting
company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
ý
There
were 51,783,416 shares outstanding of registrant’s common stock, par value
$0.001 per share, as of April 30, 2008.
CHINA
ARCHITECTURAL ENGINEERING, INC.
FORM
10-Q QUARTERLY REPORT
TABLE
OF CONTENTS
|
Page
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
1
|
|
|
|
|
Consolidated
Balance Sheet as of March 31, 2008 (unaudited) and December 31,
2007
|
2
|
|
|
|
|
Consolidated
Statements of Income for the three months ended March 31, 2008 and
2007
(unaudited)
|
4
|
|
|
|
|
Consolidated
Statements of Cash Flows for the three months ended March 31, 2008
and
2007 (unaudited)
|
5
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity for the three months ended March 31,
2008 and 2007 (unaudited)
|
6
|
|
|
|
|
Notes
to the Consolidated Financial Statements (unaudited)
|
7
|
|
|
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
|
25
|
|
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
30
|
|
|
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
30
|
|
|
|
PART
II - OTHER INFORMATION
|
31
|
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
31
|
|
|
|
ITEM
1A.
|
RISK
FACTORS
|
31
|
|
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
31
|
|
|
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
31
|
|
|
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
31
|
|
|
|
ITEM
5.
|
OTHER
INFORMATION
|
31
|
|
|
|
ITEM
6.
|
EXHIBITS
|
31
|
|
|
|
SIGNATURES
|
|
32
|
PART
I - FINANCIAL INFORMATION
ITEM
1.
FINANCIAL
STATEMENTS
The
accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The accompanying unaudited financial statements reflect all adjustments that,
in
the opinion of management, are considered necessary for a fair presentation
of
the financial position, results of operations, and cash flows for the periods
presented. The results of operations for such periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. The accompanying unaudited financial statements should be read in
conjunction with the audited financial statements of China Architectural
Engineering, Inc. as contained in its Annual Report for the fiscal year ended
December 31, 2007 on Form 10-K and Form 10-K/A, as filed with the Securities
and
Exchange Commission on March 31, 2008 and April 29, 2008,
respectively.
CHINA
ARCHITECTURAL ENGINEERING, INC.
|
|
CONSOLIDATED
BALANCE SHEETS
|
AS
OF MARCH 31, 2008 AND DECEMBER 31, 2007
|
(STATED
IN US DOLLARS)
|
|
|
|
|
|
|
|
|
March
31,
2008
|
|
December
31,
2007
|
|
ASSETS
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,950,336
|
|
$
|
4,040,168
|
|
Restricted
cash
|
|
|
661,340
|
|
|
595,016
|
|
Contract
receivables, net
|
|
|
31,867,941
|
|
|
13,047,559
|
|
Costs
and earnings in excess of billings
|
|
|
49,507,336
|
|
|
57,488,693
|
|
Job
disbursements advances
|
|
|
2,218,256
|
|
|
2,454,106
|
|
Tender
and other site deposits
|
|
|
341,950
|
|
|
83,046
|
|
Other
receivables
|
|
|
7,850,316
|
|
|
6,640,865
|
|
Inventories
|
|
|
342,088
|
|
|
528,743
|
|
Other
current assets
|
|
|
-
|
|
|
109,533
|
|
Total
current assets
|
|
|
98,739,563
|
|
|
84,987,729
|
|
|
|
|
|
|
|
|
|
Non-current
assets
|
|
|
|
|
|
|
|
Plant
and equipment, net
|
|
|
2,859,357
|
|
|
2,582,554
|
|
Intangible
Assets
|
|
|
54,231
|
|
|
70,386
|
|
Organization
cost
|
|
|
-
|
|
|
92,741
|
|
Goodwill
|
|
|
7,995,896
|
|
|
7,995,896
|
|
Other
non-current asset
|
|
|
7,527
|
|
|
7,505
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
109,656,574
|
|
$
|
95,736,811
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
Current
liabilities
|
|
|
|
|
|
|
|
Short-term
bank loans
|
|
$
|
2,327,595
|
|
$
|
2,578,550
|
|
Accounts
payable
|
|
|
22,841,062
|
|
|
18,737,771
|
|
Amount
due to shareholder
|
|
|
1,953,804
|
|
|
1,334,856
|
|
Other
payables
|
|
|
10,633,862
|
|
|
9,193,186
|
|
Income
tax payable
|
|
|
2,639,710
|
|
|
2,673,643
|
|
Business
and other taxes payable
|
|
|
3,503,438
|
|
|
3,538,336
|
|
Customers’
deposits
|
|
|
67,110
|
|
|
757,079
|
|
Other
Accrual
|
|
|
360,270
|
|
|
499,684
|
|
Total
current liabilities
|
|
|
44,326,851
|
|
|
39,313,105
|
|
The
accompanying notes are an integral part of these financial
statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
|
|
CONSOLIDATED
BALANCE SHEETS (Continued)
|
AS
OF MARCH 31, 2008 AND DECEMBER 31, 2007
|
(STATED
IN US DOLLARS)
|
|
|
March
31,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Non-current
liabilities
|
|
|
|
|
|
Long
term bank loans
|
|
$
|
1,977,700
|
|
$
|
443,881
|
|
Convertible
bond payable, net
|
|
|
5,871,428
|
|
|
3,465,741
|
|
Minority
interest
|
|
|
37,264
|
|
|
49,482
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
$
|
52,213,243
|
|
$
|
43,272,209
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 10,000,000 shares authorized, 0 shares issued
and
outstanding at March 31, 2008 and December 31, 2007; Common stock,
$0.001
par value, 100,000,000 shares authorized, 51,783,416 shares issued
and
outstanding at March 31, 2008 and December 31, 2007,
respectively
|
|
$
|
51,784
|
|
$
|
51,784
|
|
Additional
paid in capital
|
|
|
21,594,712
|
|
|
23,665,558
|
|
Statutory
reserves
|
|
|
3,040,595
|
|
|
3,040,595
|
|
Accumulated
other comprehensive income
|
|
|
3,768,686
|
|
|
1,892,829
|
|
Retained
earnings
|
|
|
28,987,554
|
|
|
23,813,836
|
|
|
|
|
57,443,331
|
|
|
52,464,602
|
|
TOTAL
LIABILITIES AND
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
$
|
109,656,574
|
|
$
|
95,736,811
|
|
The
accompanying notes are an integral part of these financial
statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2008 AND
2007
|
(STATED
IN US DOLLARS)
|
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
revenues earned
|
|
$
|
25,349,306
|
|
$
|
14,430,092
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenues earned
|
|
|
(16,903,754
|
)
|
|
(11,532,607
|
)
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
8,445,552
|
|
$
|
2,897,485
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
(3,000,425
|
)
|
|
(874,375
|
)
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
$
|
5,445,127
|
|
$
|
2,023,110
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
6,963
|
|
|
3,637
|
|
Interest
expense
|
|
|
(334,137
|
)
|
|
(4,080
|
)
|
Other
income
|
|
|
111,162
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Income
before taxation
|
|
$
|
5,229,115
|
|
$
|
2,022,667
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
(47,367
|
)
|
|
(327,048
|
)
|
Equity
loss and minority interests
|
|
|
(8,030
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,173,718
|
|
$
|
1,695,619
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.09
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
51,783,416
|
|
|
50,000,000
|
|
Diluted
|
|
|
55,489,023
|
|
|
50,000,000
|
|
The
accompanying notes are an integral part of these financial
statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
FOR
THE THREE-MONTH PERIODS ENDED MARCH 31, 2008 AND
2007
|
(STATED
IN US DOLLARS)
|
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
income
|
|
$
|
5,173,718
|
|
$
|
1,695,619
|
|
Minority
interest
|
|
|
8,030
|
|
|
-
|
|
Depreciation
expense
|
|
|
150,407
|
|
|
47,599
|
|
Amortization
expense on intangible assets
|
|
|
20,792
|
|
|
-
|
|
Amortization
expense on warrants
|
|
|
71,154
|
|
|
-
|
|
Amortization
expense on convertible bond
|
|
|
183,173
|
|
|
-
|
|
Decrease
/ (increase) in restricted cash
|
|
|
(66,324
|
)
|
|
426,771
|
|
Decrease
in security deposit
|
|
|
-
|
|
|
364,901
|
|
(Increase)/decrease
in inventories
|
|
|
186,655
|
|
|
(182,583
|
)
|
Increase
in receivables
|
|
|
(12,071,529
|
)
|
|
(15,497,969
|
)
|
Decrease
in other assets
|
|
|
109,511
|
|
|
-
|
|
Increase
in payables
|
|
|
4,794,121
|
|
|
12,919,558
|
|
Net
cash used in operating activities
|
|
$
|
(1,440,292
|
)
|
$
|
(226,104
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchases
of plant and equipment
|
|
|
(427,210
|
)
|
|
(272,968
|
)
|
Net
cash used in investing activities
|
|
$
|
(427,210
|
)
|
$
|
(272,968
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
from short-term loans
|
|
$
|
158,198
|
|
$
|
-
|
|
Proceeds
from long-term loans
|
|
|
1,124,667
|
|
|
191,192
|
|
Repayments
of long-term loans
|
|
|
-
|
|
|
(5,496
|
)
|
Proceeds
from amount due to shareholder
|
|
|
618,948
|
|
|
715,104
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
$
|
1,901,813
|
|
$
|
900,800
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
$
|
34,311
|
|
$
|
401,728
|
|
Effect
of foreign currency translation on cash and cash
equivalents
|
|
|
1,875,857
|
|
|
50,695
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - beginning of period
|
|
|
4,040,168
|
|
|
2,115,966
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
5,950,336
|
|
$
|
2,568,389
|
|
|
|
|
|
|
|
|
|
Other
supplementary information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
151,668
|
|
$
|
4,080
|
|
Income
tax paid
|
|
$
|
82,265
|
|
$
|
251,564
|
|
The
accompanying notes are an integral part of these financial
statements.
|
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
|
FOR
THE PERIOD FROM JANUARY 1, 2007 TO MARCH 31,
2008
|
(
STATED
IN US DOLLARS)
|
|
|
Total
Number
of shares
|
|
Common
stock
|
|
Additional
paid in capital
|
|
Statutory
reserves
|
|
Accumulated
other comprehensive income
|
|
Retained
earnings
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
|
50,000,000
|
|
|
50,000
|
|
|
7,074,701
|
|
|
1,437,223
|
|
|
469,964
|
|
|
11,480,816
|
|
|
20,512,704
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,032,328
|
|
|
12,032,328
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422,865
|
|
|
|
|
|
1,422,865
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,455,193
|
|
Proceed
from issuance of common stock
|
|
|
1,783,416
|
|
|
1,784
|
|
|
9,163,264
|
|
|
|
|
|
|
|
|
|
|
|
9,165,048
|
|
Less:
Cost of stock issuance
|
|
|
|
|
|
|
|
|
(951,434
|
)
|
|
|
|
|
|
|
|
|
|
|
(951,434
|
)
|
Adjustment
of Zhuhai KGE Co Ltd retained earnings to eliminate dividend
paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,844,897
|
|
|
3,844,897
|
|
Adjustment
of Zhuhai Career Training School pre-acquisition deficits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,429
|
|
|
14,429
|
|
Adjustment
of CAEI retained deficits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,955,262
|
)
|
|
(1,955,262
|
)
|
Additional
paid-in capital from warrants and beneficial conversion
feature
|
|
|
|
|
|
|
|
|
8,379,027
|
|
|
|
|
|
|
|
|
|
|
|
8,379,027
|
|
Appropriations
to statutory revenue reserves
|
|
|
|
|
|
|
|
|
|
|
|
1,603,372
|
|
|
|
|
|
(1,603,372
|
)
|
|
-
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,422,865
|
|
|
|
|
|
1,422,865
|
|
Balance,
December 31, 2007
|
|
|
51,783,416
|
|
|
51,784
|
|
|
23,665,558
|
|
|
3,040,595
|
|
|
1,892,829
|
|
|
23,813,836
|
|
|
52,464,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
|
51,783,416
|
|
|
51,784
|
|
|
23,665,558
|
|
|
3,040,595
|
|
|
1,892,829
|
|
|
23,813,836
|
|
|
52,464,602
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,173,718
|
|
|
5,173,718
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,875,857
|
|
|
|
|
|
1,875,857
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,049,575
|
|
Adjustment
of additional Paid-in Capital from warrants and beneficial conversion
feature
|
|
|
|
|
|
|
|
|
(2,070,846
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,070,846
|
)
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,875,857
|
|
|
|
|
|
1,875,857
|
|
Balance,
March 31, 2008
|
|
|
51,783,416
|
|
|
51,784
|
|
|
21,594,712
|
|
|
3,040,595
|
|
|
3,768,686
|
|
|
28,987,554
|
|
|
57,443,311
|
|
The
accompanying notes are an integral part of these financial
statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
1.
ORGANIZATION
AND
PRINCIPAL
ACTIVITIES
China
Architectural Engineering, Inc. (the “Company”) formerly SKRP 1, Inc., was
incorporated in the State of Delaware, United State on March 16, 2004. The
Company’s common stock was listed for trading on the American Stock Exchange on
September 28, 2007.
On
October 17, 2006, the Company underwent a reverse-merger with Full Art
International Ltd. (a Hong Kong company) and its four wholly-owned subsidiaries
as detailed in Note 2.
(b)
Consolidation
below,
involving an exchange of shares whereby the Company issued an aggregate of
43,304,125 shares of common stock in exchange for all of the issued and
outstanding shares of Full Art. The Company was the accounting acquiree. For
financial reporting purposes, this transaction is classified as a
recapitalization of China Architectural Engineering, Inc. and the historical
financial statements of Full Art.
The
Company through its subsidiaries conducts its principal activity as building
envelope systems contractors, specializing in the design, engineering,
fabrication and installation of curtain wall systems, roofing systems, steel
construction systems and eco-energy saving building conservation systems,
throughout China, Australia, Southeast Asia, the Middle East, and the United
States.
The
Company's work is performed under cost-plus-fee contracts, fixed-price
contracts, and fixed-price contracts modified by incentive and penalty
provisions. These contracts are undertaken by the Company or its wholly owned
subsidiary. The length of the Company's contracts varies but is typically about
one to two years.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
The
Company maintains its general ledger and journals with the accrual method
accounting for financial reporting purposes. The consolidated financial
statements and notes are representations of management. Accounting policies
adopted by the Company conform to generally accepted accounting principles
in
the United States of America and have been consistently applied in the
presentation of consolidated financial statements, which are compiled on the
accrual basis of accounting.
The
consolidated financial statements include the accounts of the Company and its
eleven subsidiaries. Significant inter-company transactions have been eliminated
in consolidation. The consolidated financial statements include 100% of the
assets and liabilities of these majority-owned subsidiaries, and the ownership
interests of minority investors are recorded as minority interests.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
The
Company owned the subsidiaries since its reverse-merger on October 17, 2006.
As
of March 31, 2008, detailed identities of the consolidating subsidiaries are
as
follows: -
Name
of Company
|
|
Place
of Incorporation
|
|
Attributable
Equity interest %
|
|
|
|
|
|
Full
Art International Limited
|
|
Hong
Kong
|
|
100
|
Zhuhai
King Glass Engineering Co., Limited
|
|
PRC
|
|
100
|
Zhuhai
King General Glass Engineering Technology Co., Limited
|
|
PRC
|
|
100
|
King
General Engineering (HK) Limited
|
|
Hong
Kong
|
|
100
|
KGE
Building System Limited
|
|
Hong
Kong
|
|
100
|
KGE
Australia Pty Limited
|
|
Australia
|
|
55
|
Zhuhai
City, Xiangzhou District Career Training School
|
|
PRC
|
|
72
|
Techwell
Engineering Limited
|
|
Hong
Kong
|
|
100
|
Techwell
International Limited
|
|
Macau
|
|
100
|
Techwell
Building System (Shenzhen) Co., Limited
|
|
PRC
|
|
100
|
CAE
Building Systems, Inc.
|
|
USA
|
|
100
|
The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods.
Management makes these estimates using the best information available at the
time the estimates are made; however, actual results could differ materially
from those estimates.
Plant
and
equipment are carried at cost less accumulated depreciation. Depreciation is
provided over their estimated useful lives, using the straight-line method.
Estimated useful lives of the plant and equipment are as follows: -
Building
|
|
|
20
years
|
|
Machinery
and equipment
|
|
|
5
- 10 years
|
|
Furniture
and office equipment
|
|
|
5
years
|
|
Motor
vehicle
|
|
|
5
years
|
|
The
cost
and related accumulated depreciation of assets sold or otherwise retired are
eliminated from the accounts and any gain or loss is included in the statement
of income. The cost of maintenance and repairs is charged to income as incurred,
whereas significant renewals and betterments are capitalized.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
(e)
|
Accounting
for the impairment of long-lived
assets
|
The
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
assets may not be recoverable. It is reasonably possible that these assets
could
become impaired as a result of technology or other industry changes.
Determination of recoverability of assets to be held and used is by comparing
the carrying amount of an asset to future net undiscounted cash flows to be
generated by the assets.
If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
During
the reporting periods, there was no impairment loss.
(f)
|
Goodwill
and Intangible Assets
|
In
accordance with Statement of Financial Accounting Standard 142 (“FAS 142”),
“Goodwill and Other Intangible Assets.” the Company does not amortize goodwill
or intangible assets with indefinite lives.
For
goodwill and other intangible assets, impairment tests are performed annually
and more frequently whenever events or changes in circumstances indicate
goodwill carrying values exceed estimated reporting unit fair values. Upon
indication that the carrying values of such assets may not be recoverable,
the
Company recognizes an impairment loss as a charge against current operations
during the reporting periods, there was no impairment loss.
Inventories
are raw materials, which are stated at the lower of weighted average cost or
market value.
Contracts
receivable from performing construction of industrial and commercial buildings
are based on contracted prices. The company provides an allowance for doubtful
debts, which is based upon a review of outstanding receivables, historical
collection information, and existing economic conditions.
(i)
|
Cash
and cash equivalents
|
The
Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Restricted
cash represents time deposit accounts to secure notes payable and bank
loans.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
The
Company computes earnings per share (“EPS’) in accordance with Statement of
Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”),
and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128
requires companies with complex capital structures to present basic and diluted
EPS. Basic EPS is measured as the income or loss available to common
shareholders divided by the weighted average common shares outstanding for
the
period. Diluted EPS is similar to basic EPS but presents the dilutive effect
on
a per share basis of potential common shares (e.g., convertible securities,
options, and warrants) as if they had been converted at the beginning of the
periods presented, or issuance date, if later. Potential common shares that
have
an anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from the calculation of diluted EPS.
The
calculation of diluted weighted average common shares outstanding for the
periods ended March 31, 2008 and 2007 is based on the estimate fair value of
the
Company’s common stock during such periods applied to warrants and options using
the treasury stock method to determine if they are dilutive. The Convertible
Bond is included on an “as converted “basis when these shares are
dilutive.
Components
of basic and diluted earnings per share were as follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Net
Income
|
|
$
|
5,173,718
|
|
$
|
1,695,619
|
|
|
|
|
|
|
|
|
|
Basic
Weighted Average Shares Outstanding
|
|
|
51,783,416
|
|
|
50,000,000
|
|
Dilutive
Shares:
|
|
|
|
|
|
|
|
-
Addition
to Common Stock from Conversion of Bonds
|
|
|
2,857,143
|
|
|
-
|
|
-
Addition
to Common Stock from Exercise of Warrants
|
|
|
848,464
|
|
|
-
|
|
Diluted
Weighted Average Outstanding Shares:
|
|
|
55,489,023
|
|
|
50,000,000
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share
|
|
|
|
|
|
|
|
-
Basic
|
|
$
|
0.100
|
|
$
|
0.034
|
|
-
Diluted
|
|
$
|
0.093
|
|
$
|
0.034
|
|
(l)
|
Revenue
and cost recognition
|
Revenues
from fixed-price and modified fixed-price construction contracts are recognized
on the percentage-of-completion method, measured by the percentage of time
cost
incurred to date to estimated total cost for each contract.
Contract
costs include all direct material and labor costs and those indirect costs
related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
Selling,
general, and administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period in which
such losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs
and
income and are recognized in the period in which the revisions are determined.
Profit incentives are included in revenues when their realization is reasonably
assured. An amount equal to contract costs attributable to claims is included
in
revenues when realization is probable and the amount can be reliably
estimated.
Total
estimated gross profit on a contract, being the difference between total
estimated contract revenue and total estimated contract cost, is determined
before the amount earned on the contract for a period can be determined.
The
measurement of the extent of progress toward completion is used to determine
the
amount of gross profit earned to date and that the earned revenue to date is
the
sum of the total cost incurred on the contract and the amount of gross profit
earned.
Earned
revenue, cost of earned revenue, and gross profit are determined as follows:
-
a.
|
Earned
Revenue is the amount of gross profit earned on a contract for a
period
plus the costs incurred on the contract during the
period.
|
b.
|
Cost
of Earned Revenue is the cost incurred during the period, excluding
the
cost of materials not unique to a contract that have not been used
for the
contract.
|
c.
|
Gross
Profit earned on a contract is computed by multiplying the total
estimated
gross profit on the contract by the percentage of completion. The
excess
of that amount over the amount of gross profit reported in prior
periods
is the earned gross profit that should be recognized in the income
statement for the current period.
|
Change
orders are common for the changes in specifications or design while claims
are
uncommon. Contract revenue and costs are adjusted to reflect change orders
approved by the customer and the contractor regarding both scope and price.
Recognition of amounts of additional contract revenue relating to claims is
appropriate only if it is probable that the claim will result in additional
contract revenue and if the amount can be reliably estimated.
The
Company uses the accrual method of accounting to determine and report its
taxable reduction of income taxes for the year in which they are available.
The
Company has implemented
Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
The
Company also adopted
FIN
48, Accounting for Uncertainty in Tax Positions.
Income
tax liabilities computed according to the United States, People’s Republic of
China (PRC), Hong Kong SAR, Macau SAR and
Australia tax laws are provided for the tax effects of transactions reported
in
the financial statements and consists of taxes currently due plus deferred
taxes
related primarily to differences between the basis of fixed assets and
intangible assets for financial and tax reporting. The deferred tax assets
and
liabilities represent the future tax return consequences of those differences,
which will be either taxable or deductible when the assets and liabilities
are
recovered or settled. Deferred taxes also are recognized for operating losses
that are available to offset future income taxes. A valuation allowance is
created to evaluate deferred tax assets if it is more likely than not that
these
items will either expire before the Company is able to realize that tax benefit,
or that future realization is uncertain.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
In
respect of the Company’s subsidiaries domiciled and operated in China and Hong
Kong, the taxation of these entities can be summarized as follows:
·
|
Zhuhai
King Glass Engineering Co., Limited (“Zhuhai KGE”) and Zhuhai King General
Glass Engineering Technology Co., Limited (“Zhuhai KGGET”) are located in
Zhuhai and was subject to the PRC corporation income tax rate of
33% prior
to January 1, 2008. However, in accordance with the relevant tax
laws and
regulations of PRC, the Zhuhai local corporation income tax rate
was 15%
prior to January 1, 2008. Zhuhai KGGET is presently dormant, and
from the
time that it has its first profitable tax year, it is exempt from
corporate income tax for its first two years and is then entitled
to a 50%
tax reduction for the succeeding three years. Zhuhai KGGET has enjoyed
this tax incentive in the previous years. On March 16, 2007, the
National
People’s Congress of China enacted a new PRC Enterprise Income Tax Law,
under which foreign invested enterprises and domestic companies will
be
subject to enterprise income tax at a uniform rate of 25%. The new
law
will become effective on January 1, 2008. During the transition period
for
enterprises established before March 16, the tax rate will be gradually
increased starting in 2008 and be equal to the new tax rate in 2012.
Zhuhai KGE is subject to 18% tax rate during the first quarter of
2008 and
anticipates that as a result of the new EIT law, its income tax provision
will increase, which could adversely affect Zhuhai KGE’s financial
condition and results of
operations.
|
·
|
Full
Art International Limited, King General Engineering (HK) Limited,
and KGE
Building System Limited are subject to Hong Kong profits tax rate
of
17.5%. Currently, Full Art has around US$370,000 tax losses carried
forward. KGE Building System has around US$33,000 tax losses carried
forward. King General Engineering (HK) does not have any material
tax
losses carried forward.
|
·
|
Techwell
Engineering Limited is subject to Hong Kong tax rate of 17.5%. Techwell
International Limited is a Macau registered company and therefore
is
subject to Macau profit tax rate of 12%. Techwell Building System
(Shenzhen) Co. Limited Is located in Shenzhen and is subject to PRC
corporate income tax rate of 33%. No tax was provisioned as the Company
acquired Techwell on November 6,
2007.
|
·
|
KGE Australia Pty Limited is subject to corporate
income
tax rate of 30%.
|
·
|
The
Company is subject to United States Tax according to Internal Revenue
Code
Sections 951 and 957.
|
·
|
The
Company, after a reverse-merger on October 17, 2006, revived to be
an
active business enterprise because of the operations with subsidiaries
in
China and Hong Kong. Based on the consolidated net income for the
year
ended December 31, 2007, the Company shall be taxed at the 35% tax
rate.
|
·
|
Techwell
Engineering Limited has established a branch in Dubai, which has
zero
corporate income tax rate.
|
The
Company expensed all advertising costs as incurred. Advertising expenses
included in selling expenses were $25,477 and zero for the periods ended March
31, 2008 and 2007, respectively.
(o)
|
Research
and development
|
All
research and development costs are expensed as incurred. Research and
development costs included in general and administrative expenses were $328,331
and zero for the periods ended March 31, 2008 and 2007, respectively
.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
Retirement
benefits in the form of contributions under defined contribution retirement
plans to the relevant authorities are charged to the statements of income as
incurred.
(q)
|
Foreign
currency translation
|
The
accompanying consolidated financial statements are presented in United States
Dollars (USD). The functional currencies of the Company are Renminbi (RMB),
Hong
Kong Dollar (HKD), Macau Pacata (MOP), Australia Dollar (AUD), United Arab
Emirate Dirham (AED) and USD. The consolidated financial statements are
translated into USD from RMB, HKD, MOP, AUD and AED at March 31, 2008 exchange
rates as to assets and liabilities and average exchange rates as to revenues
and
expenses. Capital accounts are translated at their historical exchange rates
when the capital transactions occurred.
|
|
March
31,
2008
|
|
December
31,
2007
|
|
March
31,
2007
|
|
Period
end RMB : US$ exchange rate
|
|
|
7.0222
|
|
|
7.3141
|
|
|
7.7409
|
|
Average
quarterly RMB : US$ exchange rate
|
|
|
7.1757
|
|
|
7.6172
|
|
|
7.7714
|
|
|
|
March
31,
2008
|
|
December
31,
2007
|
|
March
31,
2007
|
|
Period
end HKD : US$ exchange rate
|
|
|
7.7827
|
|
|
7.8049
|
|
|
7.8140
|
|
Average
quarterly HKD : US$ exchange rate
|
|
|
7.7954
|
|
|
7.8026
|
|
|
7.8085
|
|
|
|
March
31,
2008
|
|
December
31,
2007
|
|
March
31,
2007
|
|
Period
end MOP : US$ exchange rate
|
|
|
8.1748
|
|
|
-
|
|
|
-
|
|
Average
quarterly MOP : US$ exchange rate
|
|
|
8.1650
|
|
|
-
|
|
|
-
|
|
|
|
March
31,
2008
|
|
December
31,
2007
|
|
March
31,
2007
|
|
Period
end AUD : US$ exchange rate
|
|
|
1.0908
|
|
|
-
|
|
|
-
|
|
Average
quarterly AUD : US$ exchange rate
|
|
|
1.1063
|
|
|
-
|
|
|
-
|
|
|
|
March
31,
2008
|
|
December
31,
2007
|
|
March
31,
2007
|
|
Period
end AED : US$ exchange rate
|
|
|
3.6737
|
|
|
-
|
|
|
-
|
|
Average
quarterly AED : US$ exchange rate
|
|
|
3.6733
|
|
|
-
|
|
|
-
|
|
The
RMB
is not freely convertible into foreign currency and all foreign exchange
transactions must take place through authorized institutions. No representation
is made that the RMB amounts could have been, or could be, converted into US$
at
the rates used in translation.
Statutory
reserves for foreign investment enterprises are referring to the amount
appropriated from the net income in accordance with laws or regulations, which
can be used to recover losses and increase capital, as approved, and are to
be
used to expand production or operations.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
all
items that are required to be recognized under current accounting standards
as
components of comprehensive income are required to be reported in a financial
statement that is presented with the same prominence as other consolidated
financial statements. The Company’s current components of other comprehensive
income are the foreign currency translation adjustment.
(t)
|
Recent
accounting pronouncements
|
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of SFAS 115” (SFAS
159), which allows for the option to measure financial instruments and certain
other items at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. The objective
of
SFAS 159 is to provide opportunities to mitigate volatility in reported earnings
caused by measuring related assets and liabilities differently without having
to
apply hedge accounting provisions. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007.
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations,
(‘‘SFAS 141(R)’’). SFAS 141(R) retains the fundamental requirements of the
original pronouncement requiring that the purchase method be used for all
business combinations, but also provides revised guidance for recognizing and
measuring identifiable assets and goodwill acquired and liabilities assumed
arising from contingencies, the capitalization of in-process research and
development at fair value, and the expensing of acquisition-related costs as
incurred. SFAS 141(R) is effective for fiscal years beginning after December
15,
2008. The Company will evaluate how the new requirements could impact the
accounting for any acquisitions completed beginning in fiscal 2009 and beyond,
and the potential impact on the Company’s consolidated financial statements.
In
December 2007, the FASB issued SFAS 160,
Noncontrolling
Interests in Consolidated Financial Statements − an amendment of ARB No.
51
.
SFAS
160 requires that ownership interests in subsidiaries held by parties other
than
the parent (previously referred to as minority interests), and the amount of
consolidated net income, be clearly identified, labeled and presented in the
consolidated financial statements. It also requires once a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary be initially measured at fair value. Sufficient disclosures are
required to clearly identify and distinguish between the interests of the parent
and the interests of the noncontrolling owners as components of equity. It
is
effective for fiscal years beginning after December 15, 2008, and requires
retroactive adoption of the presentation and disclosure requirements for
existing minority interests. All other requirements are applied prospectively.
The
Company is currently evaluating the impact of SFAS 160 on the Company’s
consolidated financial statements.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
3.
CONTRACT
RECEIVABLES
|
|
March
31,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Contract
receivables
|
|
$
|
32,083,642
|
|
$
|
13,263,260
|
|
Less
:
Allowance for doubtful accounts
|
|
|
(215,701
|
)
|
|
(215,701
|
)
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
31,867,941
|
|
$
|
13,047,559
|
|
Allowance
for Doubtful Accounts
|
|
March
31,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
215,701
|
|
$
|
417,648
|
|
Add:
Allowance created
|
|
|
|
|
|
|
|
Less
:
Bad debt charged against allowance
|
|
|
-
|
|
|
(201,947
|
)
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
215,701
|
|
$
|
215,701
|
|
4.
INVENTORIES
|
|
March
31,
2008
|
|
December
31,
2007
|
|
Raw
materials at sites
|
|
$
|
342,088
|
|
$
|
528,743
|
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
5.
PLANT
AND EQUIPMENT
Plant
and
equipment consist of the following as of: -
|
|
March
31,
2008
|
|
December
31,
2007
|
|
At
cost
|
|
|
|
|
|
Motor
vehicle
|
|
$
|
1,752,700
|
|
$
|
1,223,692
|
|
Machinery
and equipment
|
|
|
3,225,509
|
|
|
3,383,123
|
|
Furniture,
software and office equipment
|
|
|
738,325
|
|
|
625,102
|
|
Building
|
|
|
302,734
|
|
|
290,652
|
|
Leasehold
improvement
|
|
|
207,103
|
|
|
189,403
|
|
|
|
$
|
6,226,371
|
|
$
|
5,711,972
|
|
|
|
|
|
|
|
|
|
Less
:
Accumulated depreciation
|
|
|
|
|
|
|
|
Motor
vehicle
|
|
$
|
617,150
|
|
$
|
593,141
|
|
Machinery
and equipment
|
|
|
2,449,513
|
|
|
2,227,231
|
|
Furniture,
software and office equipment
|
|
|
246,661
|
|
|
269,695
|
|
Building
|
|
|
13,623
|
|
|
9,810
|
|
Leasehold
improvement
|
|
|
40,067
|
|
|
29,541
|
|
|
|
$
|
3,367,014
|
|
$
|
3,129,418
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,859,357
|
|
$
|
2,582,554
|
|
Depreciation
expenses included in the selling and administrative expenses for periods ended
March 31 2008 and 2007 were $150,407 and $47,599, respectively.
6.
INTANGIBLE
ASSETS
|
|
March
31,
2008
|
|
December
31,
2007
|
|
At
cost
|
|
|
|
|
|
Intangible
Assets
|
|
$
|
104,204
|
|
$
|
99,567
|
|
Less
:
Accumulated amortization
|
|
|
49,973
|
|
|
29,181
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,231
|
|
$
|
70,386
|
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
7.
LOANS
|
|
March
31,
2008
|
|
December
31,
2007
|
|
Bank
of East Asia Ltd., line of credit, at 5.508% per annum, subject to
variation every 6 months, due October 25, 2011
|
|
$
|
569,622
|
|
$
|
546,889
|
|
|
|
|
|
|
|
|
|
Dah
Sing Bank, 5.0% per annum, line of credit, due November 28,
2008
|
|
|
476,859
|
|
|
257,926
|
|
|
|
|
|
|
|
|
|
Dah
Sing Bank, 5.5% per annum, trust receipts, due November 25,
2008
|
|
|
1,281,114
|
|
|
1,773,735
|
|
|
|
$
|
2,327,595
|
|
$
|
2,578,550
|
|
In
October 25, 2006, the Company opened a line of credit facility with the Zhuhai
branch of Bank of East Asia for a maximum of RMB20,000,000. The credit facility
does not require renewal until October 2011. In order to facilitate the
extension of the credit facility, the Company agreed to deposit the same amount
on fixed deposit terms into the Hong Kong branch of Bank of East Asia.
|
|
March
31,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Bank
of East Asia Ltd., line of credit, at 5.832% per annum, subject to
variation ever 6 months, due October 25, 2011
|
|
$
|
167,062
|
|
$
|
169,518
|
|
|
|
|
|
|
|
|
|
Auto
capital lease obligations (hire purchase) due November 12,
2009
|
|
|
320,152
|
|
|
274,363
|
|
|
|
|
|
|
|
|
|
Installment
loan from Dah Sing Bank at an interest rate at 3.5% due July
28,2015
|
|
|
285,677
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Installment
loan from Dah Sing Bank at an interest rate at 4.0% due October 25,
2025.
|
|
|
1,204,809
|
|
|
-
|
|
|
|
$
|
1,977,700
|
|
$
|
443,881
|
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
Zhuhai
King Glass Engineering Co., Limited borrowed from Bank of East Asia with a
condominium as collateral.
Full
Art
International Limited borrowed a hire purchase (car) loan from DBS
Bank.
8.
CONVERTIBLE BONDS AND BOND WARRANTS
On
April
12, 2007, the Company completed a financing transaction with ABN AMRO Bank
N.V.
(the “Subscriber”) issuing (i) $10,000,000 Variable Rate Convertible Bonds due
in 2012 (the “Bonds”) and (ii) 800,000 warrants to purchase an aggregate of
800,000 shares of our common stock, subject to adjustments for stock splits
or
reorganizations as set forth in the warrant, that expire in 2010 (the
“Warrants”).
The
Bonds
were subscribed at a price equal to 97% of their principal amount, which is
the
issue price of 100% less a 3% commission to the Subscriber. The Bonds were
issued pursuant to, and are subject to the terms and conditions of, a trust
deed
dated April 12, 2007, as amended, between us and The Bank of New York, London
Branch (the “Amended and Restated Trust Deed”). The Bonds are also subject to a
paying and conversion agency agreement dated April 12, 2007 between us, The
Bank
of New York, and The Bank of New York, London Branch. The terms and conditions
of the Bonds, as set forth in the Amended and Restated Trust Deed include,
among
other thing, the following terms:
·
|
Interest
Rate.
The Bonds bear interest from April 12, 2007 at the rate of 6% per
annum
for the first year after April 12, 2007 and 3% per annum thereafter,
of
the principal amount of the Bonds.
|
·
|
Conversion.
Each Bond is convertible at the option of the holder at any time
after
April 12, 2008 up to March 28, 2012, into shares of our common
stock at an
initial conversion price equal to the price per share at which
shares are
sold in our initial public offering of common stock on the American
Stock
Exchange (“AMEX”) with minimum gross proceeds of $2,000,000. If no initial
public offering occurs prior to conversion, the conversion price
per share
will be $2.00, subject to adjustment in accordance with the terms
and
conditions of the Bonds. Based on the initial public offering
completed on
October 3, 2007 the initial conversion is now set at $3.50 per
share
resulting initial conversion shares of 2,857,143. The conversion
price is
subject to adjustment in certain events, including our issuance
of
additional shares of common stock or rights to purchase common
stock at a
per share or per share exercise or conversion price, respectively,
at less
than the applicable per share conversion price of the Bonds.
If for the
period of 20 consecutive trading days immediately prior to April
12, 2009
or February 18, 2012, the conversion price for the Bonds is higher
than
the average closing price for the shares, then the conversion
price will
be reset to such average closing price; provided that, the conversion
price will not be reset lower than 70% of the then existing conversion
price. In addition, the Amended and Restated Trust Deed provides
that the
conversion price of the Bonds cannot be adjusted to lower than
$0.25 per
share of common stock (as adjusted for stock splits, stock dividends,
spin-offs, rights offerings, recapitalizations and similar
events).
|
·
|
Mandatory
Redemptions.
If
on or before April 12, 2008, either (i) our common stock (including
the
shares of common stock issuable upon conversion of the Bonds and
exercise
of the Warrants) are not listed on AMEX or (ii) the Bonds, Warrants,
and
shares underlying the Bonds and Warrants are not registered with
the
Securities and Exchange Commission (the “SEC”), then holders of the Bonds
can require us to redeem the Bonds at 106.09% of the principal amount.
In
addition, at any time after April 12, 2010, holders of the Bonds
can
require us to redeem the Bonds at 126.51% of the principal amount.
The
Company is required to redeem any outstanding Bonds at 150.87% of
its
principal amount on April 4, 2012.
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
On
April
12, 2007, the Company entered into a warrant instrument with the Subscriber
pursuant to which the Subscriber purchased the Warrants from us (the “Warrant
Instrument”). The Warrants, which are represented by a global certificate, are
also subject to a warrant agency agreement by and among us, The Bank of New
York
and The Bank of New York, London Branch dated April 12, 2007 (the “Warrant
Agency Agreement”). Pursuant to the terms and conditions of the Warrant
Instrument and the Warrant Agency Agreement, the Warrants vested on April 12,
2007 and will terminate on April 12, 2010. The Bond Warrants are exercisable
at
a per share exercise price of $0.01. The Company has agreed to list the Warrants
on AMEX, or any alternative stock exchange by April 12, 2008.
On
April
12, 2007, the Company also entered into a registration rights agreement with
the
Subscriber pursuant to which the Company agreed to include the Bonds, the
Warrants, and the shares of common stock underlying the Bonds and Warrants
in a
pre-effective amendment to a registration statement that the Company have on
file with the SEC. Subsequently, the Company verbally agreed with the Subscriber
not to include the Subscriber’s securities in the pre-effective amendment to the
registration statement and to register them in a separate registration statement
to be filed promptly after the effective date of the previously filed
registration statement. The Company registered resale of the Bonds, the
Warrants, and the shares of common stock underlying the Bonds and Warrants
in a
registration statement that was declared effective by the SEC on February 7,
2008.
On
April
12, 2007, the date of issuance, the Company determined the fair value of the
Bonds to be $9,700,000. The warrants and the beneficial conversion feature
were
$3,207,790 and $3,507,791 respectively, which were determined under the
Black-Scholes valuation method. They are included under stockholders’ equity as
additional paid in capital - stock warrants and additional paid in capital
-
beneficial conversion feature respectively in accordance with guidance of APB
14
and EITF No. 98-5. Accordingly, the interest discount on the warrants and
beneficial conversion feature were recorded, and are being amortized by the
interest method of 5 years.
As
addressed in an earlier paragraph under Mandatory Redemptions, the Company
will
redeem each bond at 150.87% of its principal amount on April 4, 2012 (the
maturity date). On the basis of this commitment, the Company has determined
the
total redemption premium to be $5,087,100, which is an addition to the original
face value of the Bonds of $10,000,000. This redemption premium is to be
amortized to interest expense over the term of the Bonds by the interest method.
Because
of the fact that the $10,000,000 Variable Rate Convertible Bonds contain three
separate securities and yet merged into one package, the bond security must
identify its constituents and establish the individual value as determined
by
the Issuer as follows: -
(1)
|
Bond
Discount
|
300,000
|
(2)
|
Warrants
|
3,004,090
|
(3)
|
Beneficial
Conversion Feature
|
3,304,091
|
The
above
items (1), (2), and (3) are to be amortized to interest expense over the term
of
the bonds by the effective interest method as disclosed in the table
below.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
The
Convertible Bonds Payable, net consists of the following: -
|
|
March
31,
2008
|
|
December
31,
2007
|
|
|
|
|
|
|
|
Convertible
Bonds Payable
|
|
$
|
10,000,000
|
|
$
|
10,000,000
|
|
Less:
Interest discount - Warrants
|
|
|
(3,004,090
|
)
|
|
(4,036,170
|
)
|
Less:
Interest discount - Beneficial conversion feature
|
|
|
(3,304,091
|
)
|
|
(4,342,857
|
)
|
Less:
Bond discount
|
|
|
(300,000
|
)
|
|
(300,000
|
)
|
Accretion
of interest discount - Warrant
|
|
|
590,804
|
|
|
589,729
|
|
Accretion
of interest discount - Beneficial conversion feature
|
|
|
649,805
|
|
|
634,540
|
|
Amortization
of bond discount to interest expense
|
|
|
59,002
|
|
|
43,835
|
|
6%
Interest Payable
|
|
|
589,999
|
|
|
438,332
|
|
Accretion
of redemption premium
|
|
|
589,999
|
|
|
438,332
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
5,871,428
|
|
$
|
3,465,741
|
|
9.
CONTRACT
REVENUES EARNED
The
contract revenues earned for the periods ended March 31, 2008 and 2007 consist
of the following:
|
|
March
31,
2008
|
|
March
31,
2007
|
|
Billed
|
|
$
|
6,794,149
|
|
$
|
2,874,165
|
|
Unbilled
|
|
|
18,555,157
|
|
|
11,555,927
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,349,306
|
|
$
|
14,430,092
|
|
The
unbilled contract revenue earned represents those revenue that should be
recognized according to the percentage of completion method for accounting
for
construction contract because the Company is entitled to receive payment from
the customers for the amount of work that has been rendered to and completed
for
that customer according to the terms and progress being made as stipulated
under
that contract between the Company and that customer. As an industrial practice,
there are certain procedures that need to be performed, such as project account
finalization, by both the customer and the Company before the final billing
is
issued; however this does not affect the Company’s recognition of revenue and
respective cost according to the terms of the contract with the consistent
application of the percentage-of-completion method.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
10.
INCOME
TAXES
The
following table accounts for the differences between the actual tax provision
and the amounts obtained by applying the relevant applicable corporation income
tax rate to income before tax for the periods ended March 31, 2008 and 2007:
|
|
March
31,
|
|
|
|
2008
|
|
2007
|
|
Tax
at the PRC, HK, Macau and Australia income tax rates
|
|
$
|
65,787
|
|
$
|
667,480
|
|
Effect
of PRC government grants
|
|
|
(18,420
|
)
|
|
(340,432
|
)
|
Current
income tax expense
|
|
$
|
47,367
|
|
$
|
327,048
|
|
Effective
January 1, 2008, the PRC government implemented a new 25% tax rate across the
board for all enterprises regardless of whether domestic or foreign enterprise
without any tax preferences which is defined as "two-year exemption followed
by
three-year half exemption" enjoyed by tax payers. As a result of the new tax
law, a standard 15% tax preference terminated as of December 31, 2007. The
PRC
government has established a set of transition rules to allow enterprises using
tax preferences before January 1, 2008 to continue using the tax preferences
on
a transitional basis until being the new tax rates are fully implemented over
a
five-year period. The Company is now subject to PRC tax rate of 18% starting
from January 1, 2008.
11.
COMMITMENTS
The
Company leases certain administrative and production facilities from third
parties. Accordingly, for the periods ended March 31, 2008 and 2007, the Company
incurred rental expenses of $294,114 and $96,562 respectively.
The
Company has commitments with respect to non-cancelable operating leases for
these offices, as follows: -
For
the period ended March 31,
|
|
|
|
2009
|
|
|
556,267
|
|
2010
|
|
|
96,062
|
|
|
|
$
|
652,329
|
|
12.
RELATED
PARTIES TRANSACTIONS
The
amount due to shareholder at March 31, 2008 was $1,953,804 and the amount due
to
the shareholder at December 31, 2007 was $1,334,856. The transactions with
related parties during the periods were carried out in the ordinary course
of
business and on normal commercial terms.
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
13.
OTHER
EVENTS
On
October 3, 2007, the Company issued 847,550 shares of common stock at $3.50
per
share upon the closing of an initial public offering. The Company’s sale of
common stock, which was sold indirectly by the Company to the public at a price
of $3.50 per share, resulted in net proceeds of approximately $2.0 million.
These proceeds were net of underwriting discounts and commissions, fees for
legal and auditing services, and other offering costs. Upon the closing of
the
initial public offering, the Company sold to WestPark Capital, Inc., as
underwriter, warrants to purchase up to 73,700 shares of its common stock.
The
warrants are exercisable at a per share price of $4.20 and will expire if
unexercised after five years from the date of issuance. On October 31, 2007,
the
Company also issued 50,000 warrants to Investor Relation International at
exercisable at a per share price $3.50 for a period of four years from the
date
of issuance.
As
of
March 31, 2008, both of WestPark Capital, Inc. and Investor Relation
International have not exercised these warrants. The Company recognized the
cost
of these warrants as determined by the Black-Scholes Model at a value of $39,461
and $31,693 for the 73,700 and 50,000 warrants, respectively, at March 31,
2008.
These expenses have been recorded and included in the accompanying Statements
of
Income for the quarter ended March 31, 2008.
In
October 2007, a holder of warrants to purchase 232,088 shares of our common
stock at a per share exercise price of $1.60 exercised the warrants. As a result
of the exercise, we received gross exercise proceeds of $371,341 and issued
232,088 shares of common stock to the holder.
On
November 6, 2007, the Company, through Full Art, acquired all of the issued
and
outstanding shares (the “Techwell Shares”) in the capital of Techwell
Engineering Limited (which has two subsidiaries), a limited liability company
incorporated in Hong Kong (“Techwell”) pursuant to a Stock Purchase Agreement
(the “Agreement”) dated November 6, 2007, entered into by and among Mr. Ng, Chi
Sum and Miss Yam, Mei Ling (the “Shareholders”), the Company and Full Art (the
“Techwell Acquisition”), to consummate the acquisition transaction. Pursuant to
the terms of the Stock Purchase Agreement, the Shareholders agreed to sell
and
transfer all of the Techwell Shares to Full Art for a purchase consideration
of
US$11,654,566 payable in cash and shares of the Company (in equal portion).
Thirty percent of the stock consideration paid to the Shareholders will be
held
in a third-party escrow account for up to two years to cover potential
indemnification obligations of the Shareholders. Techwell is engaged in the
business of manufacturing and constructing external building facades, including
roofing systems for buildings and curtain wall systems and accessories. This
transaction resulted in goodwill of $7,995,896 for the year ended December
31,
2007.
14.
SUBSEQUENT
EVENTS
A.
|
$12,000,000
bonding facility granted by ABN AMRO Bank
N.V.
|
On
February 19, 2008, the Company and Techwell Engineering Limited were granted
a
bonding facility by the Hong Kong Branch of ABN AMRO Bank N.V. The facility
amount is $10,000,000, at a tenor of up to 1 year with 2% flat interest rate
on
the issued amount of performance bond. ABN AMRO requires guarantees as follows:
·
|
Irrevocable
and unconditional guarantee executed by Zhuhai KGGET
and
|
·
|
Share
charge over the shares of the Company for a minimum value of US $5,000,000
or equivalent, executed by KGE Group
Limited.
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
The
facility can be used to issue bonds such as bank guarantees, performance bonds,
advanced payment bonds and standby letters of credit.
On
May 2,
2008, the facility was increased to $12,000,000 with additional cash collateral
of $2,000,000. This facility is now fully utilized.
B.
|
$20,000,000 12% convertible bonds
and 300,000
warrants issued to ABN AMRO Bank N.V. and CITIC Allco Investment
Ltd.
|
On
April
15, 2008, the Company completed a financing transaction with ABN AMRO Bank
N.V.,
London Branch (“ABN AMRO”), CITIC Allco Investments Limited (together with ABN
AMRO, the “Subscribers,” and each a “Subscriber”), and CITIC Capital Finance
Limited issuing (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”)
and (ii) 300,000 warrants to purchase an aggregate of 300,000 shares of the
Company’s common stock, subject to certain adjustments as set forth in the
warrant instrument, that expire in 2013 (the “Bond Warrants”). The transaction
was completed in accordance with a subscription agreement entered into by the
Company, Subscribers, and CITIC Capital Finance Limited, dated April 2, 2008
(the “Subscription Agreement”).
The
Bonds
were subscribed at a price equal to 100% of their principal amount. The Company
agreed to pay to the Subscribers an aggregate commission of 2.5% of the
principal amount of the Bonds and of the aggregate warrant issue price for
the
Bond Warrants. The Bonds were issued pursuant to, and are subject to the terms
and conditions of, a trust deed dated April 15, 2008 between the Company and
The
Bank of New York, London Branch (the “Trust Deed”). The Bonds are also subject
to a paying and conversion agency agreement dated April 15, 2008 between the
Company, The Bank of New York, and The Bank of New York, London Branch. The
terms and conditions of the Bonds, as set forth in the Trust Deed include,
among
other things, the following terms:
·
|
Interest
Rate.
The Bonds bear cash interest from April 15, 2008 at the rate of 12%
per
annum of the principal amount of the
Bonds.
|
·
|
Conversion
.
Each Bond is convertible at the option of the holder at any time
during
the period (i) beginning on the earlier of (a) the date that a
registration statement for the shares to be issued upon conversion
of the
Bonds is first declared effective by the United States Securities
and
Exchange Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending
at the close of business on April 8, 2011, subject to certain exceptions,
into shares of the Company’s common stock at an initial conversion price
equal to $6.35 per share, which is the product of 1.1 and the average
closing price per share of the Company’s common stock for the period of 20
consecutive trading days immediately prior to April 15, 2008. The
conversion price is subject to adjustment in certain events, including
the
Company’s issuance of additional shares of common stock or rights to
purchase common stock at a per share or per share exercise or conversion
price, respectively, at less than the applicable per share conversion
price of the Bonds.
|
·
|
Mandatory
Redemptions
.
Interest is payable semi-annually in arrears on April 15 and October
15 of
each year (each an “Interest Payment Date”) commencing October 15, 2008.
On any Interest Payment Date on or after April 15, 2010, the holders
of
the Bonds can require the Company to redeem the Bonds at 116.61%
of the
principal amount of the Bonds redeemed, plus all accrued but unpaid
interest. The Company is required to redeem any outstanding Bonds
at
116.61% of its principal amount on April 15,
2011.
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 2008 AND 2007
(Stated
in US Dollars)
On
April
15, 2008, the Company entered into a warrant instrument with the Subscribers
pursuant to which the Subscribers purchased the Bond Warrants from the Company
(the “Warrant Instrument”). The Bond Warrants, which are represented by a global
certificate, are also subject to a warrant agency agreement by and among the
Company, The Bank of New York and The Bank of New York, London Branch dated
April 15, 2008 (the “Warrant Agency Agreement”). Pursuant to the terms and
conditions of the Warrant Instrument and the Warrant Agency Agreement, the
Bond
Warrants became exercisable on April 15, 2008 and terminate on April 15, 2013.
The Bond Warrants have an initial exercise price per share of $6.35, subject
to
adjustment in certain events.
The
Company agreed to list the shares of common stock underlying the Bonds and
the
Bond Warrants on AMEX, or any alternative stock exchange by the earlier of
October 15, 2008 and the date on which a registration statement registering
the
shares of common stock underlying the Bonds and the Bond Warrants is first
declared effective by the SEC. In addition, the Company agreed to register
the
shares of common stock underlying the Bonds and the Bond Warrants with the
SEC
on or prior to October 15, 2008 and will keep the registration effective until
30 days after the Bond Warrants terminate.
On
April,
15, 2008, the Company also entered into a registration rights agreement with
the
Subscribers pursuant to which it agreed to register the Bonds, the Bond
Warrants, and the shares of common stock underlying the Bonds and Bond Warrants
(the “Registrable Securities”). The Company agreed to prepare and file with the
SEC, no later than 30 days after April 15, 2008, a registration statement on
Form S-1, of which this prospectus is a part, to register the Registrable
Securities (the “Registration Statement”) and, as promptly as possible, cause
that Registration Statement, as amended, to become effective and in any event
within six months after April 15, 2008. In addition, the Company agreed to
list
all the Registrable Securities covered by the Registration Statement on each
securities exchange on which similar securities issued by the Company are then
listed.
Pursuant
to the terms of the Subscription Agreement, the Company was required as a
condition to the closing to appoint a director designated by CITIC Capital
Finance Limited to the Company’s Board of Directors. The closing condition was
waived by the parties to the financing transaction and the Company agreed to
appoint such a director within three months from closing.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Forward-Looking
Statements
The
following discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this quarterly
report. This quarterly report contains forward-looking statements. The words
“anticipated,” “believe,” “expect, “plan,” “intend,” “seek,” “estimate,”
“project,” “could,” “may,” and similar expressions are intended to identify
forward-looking statements. These statements include, among others, information
regarding future operations, future capital expenditures, and future net cash
flow. Such statements reflect our management’s current views with respect to
future events and financial performance and involve risks and uncertainties,
including, without limitation, general economic and business conditions, changes
in foreign, political, social, and economic conditions, regulatory initiatives
and compliance with governmental regulations, the ability to achieve further
market penetration and additional customers, and various other matters, many
of
which are beyond our control. Should one or more of these risks or uncertainties
occur, or should underlying assumptions prove to be incorrect, actual results
may vary materially and adversely from those anticipated, believed, estimated
or
otherwise indicated. Consequently, all of the forward-looking statements made
in
this report are qualified by these cautionary statements and there can be no
assurance of the actual results or developments.
Overview
We
specialize in high-end curtain wall systems (including glass, stone and metal
curtain walls), roofing systems, steel construction systems, eco-energy saving
building conservation systems and related products, for public works and
commercial real estate projects. We have completed over one hundred projects
throughout China, Hong Kong, Macau, Australia and Southeast Asia, including
the
National Grand Theater in Beijing, the Meridian Gate Exhibition Hall of the
Palace Museum in Beijing’s Forbidden City (winner of the 2005 UNESCO Jury
Commendation for Innovation of Asia Pacific Heritage Award), the Beijing
Botanical Garden Conservatory (winner of the Zhan Tian You award in 2003),
the
Shenzhen Airport Terminal Building, the Shanghai South Railway Station and
the
Vietnam National Conference Center.
Recent
Events
April
2008 Issuance of Bonds and Bond Warrants
On
April
15, 2008, we completed a financing transaction with ABN AMRO Bank N.V., London
Branch (“ABN AMRO”), CITIC Allco Investments Limited (together with ABN AMRO,
the “Subscribers,” and each a “Subscriber”), and CITIC Capital Finance Limited
issuing (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”) and (ii)
300,000 warrants to purchase an aggregate of 300,000 shares of our common stock,
subject to certain adjustments as set forth in the warrant instrument, that
expire in 2013 (the “Bond Warrants”). The transaction was completed in
accordance with a subscription agreement entered into by us, the Subscribers,
and CITIC Capital Finance Limited, dated April 2, 2008 (the “Subscription
Agreement”).
The
Bonds
were subscribed at a price equal to 100% of their principal amount. We agreed
to
pay to the Subscribers an aggregate commission of 2.5% of the principal amount
of the Bonds and of the aggregate warrant issue price for the Bond Warrants.
The
Bonds
were issued pursuant to, and are subject to the terms and conditions of, a
trust
deed dated April 15, 2008 between us and The Bank of New York, London Branch
(the “Trust Deed”). The Bonds are also subject to a paying and conversion agency
agreement dated April 15, 2008 between us, The Bank of New York, and The Bank
of
New York, London Branch. T
he
terms
and conditions of the Bonds, as set forth in the Trust Deed include, among
other
things, the following terms:
·
|
Interest
Rate.
The
Bonds bear cash interest from April 15, 2008 at the rate of 12% per
annum
of the principal amount of the
Bonds.
|
·
|
Conversion.
Each Bond is convertible at the option of the holder at any time
during
the period (i) beginning on the earlier of (a) the date that a
registration statement for the shares to be issued upon conversion
of the
Bonds is first declared effective by the United States Securities
and
Exchange Commission (the “SEC”) and (b) October 15, 2008 and (ii) ending
at the close of business on April 8, 2011, subject to certain exceptions,
into shares of our common stock at an initial conversion price equal
to
$6.35 per share, which is the product of (i) 1.1 and (ii) the average
closing price per share of our common stock for the period of 20
consecutive trading days immediately prior to April 15, 2008. The
conversion price is subject to adjustment in certain events, including
our
issuance of additional shares of common stock or rights to purchase
common
stock at a per share or per share exercise or conversion price,
respectively, at less than the applicable per share conversion price
of
the Bonds.
|
·
|
Mandatory
Redemptions.
Interest is payable semi-annually in arrears on April 15 and October
15 of
each year (each an “Interest Payment Date”) commencing October 15, 2008.
On any Interest Payment Date on or after April 15, 2010, the holders
of
the Bonds can require us to redeem the Bonds at 116.61% of the principal
amount of the Bonds redeemed, plus all accrued but unpaid interest.
We are
required to redeem any outstanding Bonds at 116.61% of its principal
amount on April 15, 2011.
|
On
April
15, 2008, we entered into a warrant instrument with
the
Subscribers
pursuant
to which
the
Subscribers
purchased the Bond Warrants from us (the “Warrant Instrument”). The Bond
Warrants, which are represented by a global certificate, are also subject to
a
warrant agency agreement by and among us, The Bank of New York and The Bank
of
New York, London Branch dated April 15, 2008 (the “Warrant Agency Agreement”).
Pursuant to the terms and conditions of the Warrant Instrument and the Warrant
Agency Agreement, the Bond Warrants become exercisable on April 15, 2008 and
terminate on April 15, 2013. The Bond Warrants have an initial exercise price
per share of $6.35, subject to adjustment in certain events.
We
have
agreed to list the shares of common stock underlying the Bonds and the Bond
Warrants on AMEX, or any alternative stock exchange by the earlier of October
15, 2008 and the date on which a registration statement registering the shares
of common stock underlying the Bond Warrants is first declared effective by
the
SEC. In addition, we have agreed to register the shares of common stock
underlying the Bonds and the Bond Warrants with the SEC on or prior to October
15, 2008 and will keep the registration effective until 30 days after the Bond
Warrants terminate.
On
April,
15, 2008, we also entered into a registration rights agreement with the
Subscribers pursuant to which we agreed to register the Bonds, the Bond
Warrants, and the shares of common stock underlying the Bonds and Bond Warrants
(the “Registrable Securities”). We agreed to prepare and file with the SEC, no
later than 30 days after April 15, 2008, a registration statement on Form S-1
to
register the Registrable Securities (the “Registration Statement”) and, as
promptly as possible, cause that Registration Statement, as amended, to become
effective and in any event within six months after April 15, 2008. In addition,
we agreed to list all the Registrable Securities covered by the Registration
Statement on each securities exchange on which similar securities issued by
us
are then listed.
Pursuant
to the terms of the Subscription Agreement, we were required as a condition
to
the closing to appoint a director designated by CITIC Capital Finance Limited
to
our Board of Directors. The closing condition was waived by the parties to
the
financing transaction and we agreed to appoint such a director within three
months from closing.
Results
of Operations
The
following table sets forth our statements of operations for the three months
ended March 31, 2008 and 2007 in U.S. dollars (unaudited):
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands, except share and per share
amounts)
|
|
|
|
|
|
|
|
|
|
Contract
revenues earned
|
|
$
|
25,349
|
|
$
|
14,430
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenues earned
|
|
|
(16,904
|
)
|
|
(11,533
|
)
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
$
|
8,445
|
|
$
|
2,897
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
(3,000
|
)
|
|
(874
|
)
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
$
|
5,445
|
|
$
|
2,023
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
7
|
|
|
4
|
|
|
|
|
|
|
|
|
|
Interest
expenses
|
|
|
(334
|
)
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
111
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Income
before taxes
|
|
$
|
5,229
|
|
$
|
2,023
|
|
|
|
|
|
|
|
|
|
Income
tax
|
|
|
(47
|
)
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
Equity
loss and minority interests
|
|
|
(8
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,174
|
|
$
|
1,696
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.10
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.09
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
51,783,416
|
|
|
50,000,000
|
|
Diluted
|
|
|
55,489,023
|
|
|
50,000,000
|
|
Three
Months Ended March 31, 2008 and 2007
Contract
revenues earned for the three months ended March 31, 2008 were $25.3 million,
an
increase of $10.9 million, or 76%, from the contract revenues earned of $14.4
million for the comparable period in 2007. The primary reason for the increase
in contract revenues earned was due to new large overseas projects outside
of
China for the three months ended March 31, 2008.
Cost
of
contract revenues earned for the three months ended March 31, 2008 was $16.9
million, an increase of $5.4 million, or 47%, from $11.5 million for the
comparable period in 2007. Cost of contract revenues earned consists of the
raw
materials, labor and other operating costs related to manufacturing. The
increase in costs of contract revenues earned was primarily due to the increase
in contract revenue and increase in the cost of raw materials and other costs
for the three months ended March 31, 2008.
Gross
profit for the three months ended March 31, 2008 was $8.4 million, an increase
of $5.5 million, or 190%, from $2.9 million for the comparable period of 2007.
Our gross margin for the three months ended March 31, 2008 was 33.3% as compared
with 20.1% for the three months ended March 31, 2007. The increase in gross
margin was primarily a result of higher gross margins obtained from new overseas
projects.
Selling,
general and administrative expenses were approximately $3.0 million for the
three months ended March 31, 2008, an increase of approximately $2.1 million,
or
243%, from $0.9 million for the comparable period in 2007. The increase was
due
to the growth in staff, office rental and other start-up costs associated with
the expansion of our overseas operations during the three months ended March
31,
2008.
Interest
expenses were approximately $334,000 for the three months ended March 31, 2008,
an increase of approximately $330,000, from approximately $4,000 for the
comparable period in 2007. The increase was mainly due to cash interest expense
and non-cash amortization expense associated with the $10 million bonds and
warrants that we issued in April 2007.
Income
tax was approximately $47,000 for the three months ended March 31, 2008 at
an
effective tax rate of 0.9%, compared with $327,000 taxes for the same period
of
2007 at an effective tax rate of 16.2%. The primary reason for the decrease
was
due to zero corporate income tax rate associated with revenues from the Dubai
project, our largest ongoing project during the first quarter of
2008.
Net
income for the three months ended March 31, 2008 was $5.2 million, an increase
of $3.5 million, or 205%, from $1.7 million for the comparable period in
2007.
Liquidity
and Capital Resources
At
March
31, 2008, we had cash and cash equivalents of $5.95 million. Prior to October
17, 2006, we have historically financed our business operations through
short-term bank loans, cash provided by operations, and credit provided by
suppliers. More recently, we have raised capital through debt and equity
offerings.
On
April
15, 2008, we completed a financing transaction pursuant to which we issued
the
2008 Bonds in the principal amount of $20.0 million. The 2008 Bonds bear cash
interest at the rate of 12% per annum. Interest is payable semi-annually in
arrears on April 15 and October 15 of each year (each an “Interest Payment
Date”) commencing October 15, 2008. On any Interest Payment Date on or after
April 15, 2010, the holders of the Bonds can require us to redeem the Bonds
at
116.61% of the principal amount. We are required to redeem any outstanding
Bonds
at 116.61% of its principal amount on April 15, 2011. If we are required to
repurchase all or a portion of the Bonds and do not have sufficient cash to
make
the repurchase, we may be required to obtain third party financing to do so,
and
there can be no assurances that we will be able to secure financing in a timely
manner and on favorable terms, which could have a material adverse effect on
our
financial performance, results of operations and stock price. We also issued
300,000 warrants in connection with the 2008 Bonds on April 15, 2008 to purchase
an aggregate of 300,000 shares of our common stock, subject to adjustments
for
stock splits or reorganizations as set forth in the warrant
instrument.
In
October 2006, we opened a line of credit facility with the Zhuhai branch of
Bank
of East Asia for up to a maximum of RMB20,000,000. The credit facility does
not
require renewal until October 2011. In order to facilitate the extension of
the
credit facility, we agreed to deposit the equivalent amount in HKD on fixed
deposit terms into the Hong Kong branch of Bank of East Asia. This facility
is
subject to a current interest rate of 5.508% and interest rate adjusts every
6
months. The amount outstanding as of March 31, 2008 was $569,622.
Our
subsidiary, Zhuhai King Glass Engineering Co., Limited, borrowed from Bank
of
East Asia with a condominium as collateral. This facility, which is due October
25, 2011, is subject to a current interest rate of 5.832% and interest rate
adjusts every 6 months. The amount outstanding as of March 31, 2008 was
$167,062.
Full
Art
International Limited incurred an automobile capital lease obligations due
November 12, 2009 that had an outstanding amount of $320,152 as of March 31,
2008.
We
also
opened a line of credit and a trust receipts line with the Hong Kong Branch
of
Dah Sing Bank. The credit facilities are set to expire on November 28 and
November 25, 2008, respectively, which had approximately $476,859 and
$1,281,114, respectively, outstanding as of March 31, 2008.
On
February 19, 2008, we and Techwell Engineering Limited were granted a bonding
facility by the Hong Kong Branch of ABN AMRO Bank N.V. The facility amount
was
$10,000,000, at a tenor of up to one year with 2% flat interest rate on the
issued amount of bonds such as bank guarantees, performance bonds, advanced
payment bonds and standby letters of credit. ABN AMRO required guarantees as
follows: (i) an irrevocable and unconditional guarantee executed by Zhuhai
King
Glass Engineering Co. Limited and (ii) share charge over the shares of us for
a
minimum value of $5,000,000 or equivalent, executed by KGE Group Limited. On
May
2, 2008, the facility was increased to $12,000,000 with additional cash
collateral of $2,000,000. This facility is now fully
utilized.
We
also
lease certain administrative and production facilities from third parties.
Accordingly, for the three months ended March 31, 2008 and 2007, we incurred
rental expenses of $294,114 and $96,562, respectively.
Net
cash
used in operating activities for the three months ended March 31, 2008 was
approximately $1.44 million, as compared to $0.23 million used in the same
period in 2007. The change is primarily the result of growth in net income,
add-back of non-cash warrant expense and non-cash amortization expense on the
$10,000,000 April 2007 convertible bonds, an increase in receivables due to
a
relatively long collection period typical of the architecture industry in China,
and an increase in payables for the three months ended March 31,
2008.
Net
cash
used by investing activities was approximately $0.4 million for the three months
ended March 31, 2008 compared to approximately $0.3 million used for the three
months ended March 31, 2007. The change was mainly a result of an increase
of
fixed assets purchased during the three months ended March 31,
2008.
Net
cash
provided by financing activities was $1.9 million for the three months ended
March 31, 2008 compared to $0.9 million provided for the three months ended
March 31, 2007. The increase was primarily due to short-term bank borrowing,
long-term bank borrowing and shareholder loans.
At
March
31, 2008, we had no material commitments for capital expenditures other than
for
those expenditures incurred in the ordinary course of business. We intend to
expend a significant amount of capital to purchase materials and serve as
deposits for performance bonds for new projects that we have obtained.
Additional capital for this objective may be required that is in excess of
our
liquidity, requiring us to raise additional capital through an equity offering
or secured or unsecured debt financing. The availability of additional capital
resources will depend on prevailing market conditions, interest rates, and
our
existing financial position and results of operations.
Contractual
Obligations
The
following table describes our contractual commitments and obligations as of
March 31, 2008:
|
|
Payments
due by period
|
|
|
|
Total
|
|
Less than
1
year
|
|
1-3 years
|
|
3-5 years
|
|
More
than 5
years
|
|
Operating
Lease Obligations
|
|
$
|
652,329
|
|
$
|
556,267
|
|
$
|
96,062
|
|
$
|
—
|
|
$
|
—
|
|
Contingent
Liabilities (1)
|
|
$
|
8,485,288
|
|
$
|
6,363,966
|
|
$
|
2,121,322
|
|
$
|
—
|
|
$
|
—
|
|
Long-term
debt (2)
|
|
$
|
17,064,700
|
|
$
|
—
|
|
$
|
320,152
|
|
$
|
16,744,548
|
|
$
|
—
|
|
(1)
|
Includes
the $2,121,322 performance bond expired April 11, 2009 and $6,363.966
advanced payment bond expired March 28, 2009, both were issued by
ABN AMRO
Bank N.V.
|
(2)
|
Includes
the $10 million convertible bond which is required to be redeemed
at
150.87% at maturity at April 12, 2012, which may be converted into
our
common stocks after September 28, 2008, accordingly we may re-classify
upon conversion.
|
Off-Balance
Sheet Arrangements
None.
Critical
Accounting Policies and Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, disclosure of contingent assets and liabilities at
the
date of the consolidated financial statements and the reported amounts of
revenues, expenses and allocated charges during the reporting period. Actual
results could differ from those estimates.
We
describe our significant accounting policies in Note 2, Summary of Significant
Accounting Policies, of the Notes to Consolidated Financial Statements included
in our Annual Report on Form 10-K as of and for the year ended December 31,
2007. We discuss our critical accounting policies and estimates in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in
our
Annual Report on Form 10-K as of and for the year ended December 31, 2007.
Other
than as indicated in this quarterly report, there have been no material
revisions to the critical accounting policies as filed in our Annual Report
for
the fiscal year ended December 31, 2007 on Form 10-K and Form 10-K/A, as filed
with the SEC on March 31, 2008 and April 29, 2008, respectively.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
There
have been no material changes in market risk from the information provided
in
Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in
our Annual Report for the fiscal year ended December 31, 2007 on Form 10-K
and
Form 10-K/A, as filed with the SEC on March 31, 2008 and April 29, 2008,
respectively.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed
to
ensure that information required to be disclosed by us in the reports that
we
file or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file under the Exchange
Act is accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely decisions
regarding required disclosure.
As
of the
end of the period covered by this Quarterly Report, we conducted an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, of our disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms and
which also are effective in ensuring that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act
is
accumulated and communicated to the Company’s management, including the
Company’s Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
Changes
in internal control over financial reporting
Based
on
the evaluation of our management as required by paragraph (d) of Rule 13a-15
or
15d-15 of the Exchange Act, we believe that there were no changes in our
internal control over financial reporting that occurred during the first quarter
of 2008 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART
II-OTHER INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
Not
applicable.
ITEM
1A.
RISK
FACTORS
There
have been no material changes from the risk factors disclosed in the “Risk
Factors” section of our annual report on Form 10-K for the year ended December
31, 2007.
ITEM
2.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On
April
15, 2008, we completed a financing transaction with the Subscribers under
Regulation S of the Securities Act of 1933, as amended (the “Securities Act”)
and issued (i) $20,000,000 12% Convertible Bonds due in 2011 (the “Bonds”) and
(ii) 300,000 warrants to purchase an aggregate of 300,000 shares of our common
stock, subject to adjustments for stock splits or reorganizations as set forth
in the warrant instrument, that expire in 2013 (the “Bond Warrants”). The Bonds
and the Bond Warrants were offered and sold to the Subscribers in reliance
upon
exemption from registration pursuant to Regulation S of the Securities Act.
We
complied with the conditions of Rule 903 as promulgated under the Securities
Act
including, but not limited to, the following: (i) each of the Subscribers is
a
non-U.S. resident and has not offered or sold their shares in accordance with
the provisions of Regulation S; (ii) an appropriate legend was affixed to the
securities issued in accordance with Regulation S; (iii) each of the Subscribers
has represented that it was not acquiring the securities for the account or
benefit of a U.S. person; and (iv) each of the Subscribers agreed to resell
the
securities only in accordance with the provisions of Regulation S, pursuant
to a
registration statement under the Securities Act, or pursuant to an available
exemption from registration. We will refuse to register any transfer of the
shares not made in accordance with Regulation S, after registration, or under
an
exemption.
ITEM
3.
DEFAULTS
UPON SENIOR SECURITIES
Not
applicable.
ITEM
4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
ITEM
5.
OTHER
INFORMATION
Not
applicable.
ITEM
6.
EXHIBITS
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.*
|
*
This exhibit shall not be deemed “filed” for purposes of Section 18 of the
Securities Exchange Act of 1934 or otherwise subject to the liabilities of
that
section, nor shall it be deemed incorporated by reference in any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934, whether
made
before or after the date hereof and irrespective of any general incorporation
language in any filings.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly
authorized.
|
|
|
|
CHINA
ARCHITECTURAL ENGINEERING, INC.
(Registrant)
|
|
|
|
May
14, 2008
|
By:
|
/s/ Luo
Ken Yi
|
|
Luo
Ken Yi
|
|
Chief
Executive Officer, Chief Operating Officer and Chairman of the
Board
|
China Architectural Engineering, (AMEX:RCH)
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