LOYAL BEST PROPERTY DEVELOPMENT LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Real Estate Capitalization and Cost Allocation
Real estate held for development or sale consists of residential and commercial units under construction and units completed. Construction in progress includes costs associated in development and construction of the Olympic Center project.
Real estate held for development or sale is stated at cost or estimated net realizable value, whichever is lower. Costs include land and land improvements, direct construction costs and development costs, including predevelopment costs, interest on indebtedness, real estate taxes, insurance, construction overhead and indirect project costs. Selling and advertising costs are expensed as incurred. Total estimated costs of multi-unit developments are allocated to individual units based upon specific identification methods.
If the real estate is determined to be impaired, it will be written down to its fair market value. Real estate held for development or sale costs include the cost of land use rights, land development and home construction costs, engineering costs, insurance costs, wages, real estate taxes, and interest related to development and construction. All costs are accumulated by specific projects and allocated to residential and commercial units within the respective projects. The Company leases the land for the residential unit sites under land use rights with various terms from the government of the PRC. The Company evaluates the carrying value for impairment based on the undiscounted future cash flows of the assets. Write-downs of inventory deemed impaired would be recorded as adjustments to the cost basis.
No depreciation is provided for construction in progress.
Capitalization of Interest
In accordance with SFAS 34, interest incurred during construction is capitalized to construction in progress. All other interest is expensed as incurred. During the year ended December 31, 2007, the Company did not have any construction therefore no interest was capitalized.
Foreign currencies- The Company’s principal country of operations is in PRC. The financial position and results of operations of the Company are determined using the local currency (“Renminbi” or “Yuan”) as the functional currency. The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period.
Assets and liabilities of the Company have been translated at year- end exchange rates, while revenues and expenses have been translated at average exchange rates in effect during the year. Resulting cumulative translation adjustments have been recorded as other comprehensive income (loss) as a separate component of stockholders' equity.
Equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency (“US Dollars”) are dealt with as an exchange fluctuation reserve in shareholders’ equity.
Earnings Per Share– Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and dilutive potential common shares outstanding during the period.
As of June 30, 2007, there were no outstanding securities or other contracts to issue common stock, such as options, warrants or conversion rights, which would have a dilutive effect on earnings per share as the effect of options outstanding at that time was anti- dilutive.
Use of estimates– The preparation of financial statements in accordance with generally accepted accounting principles require management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
F-7
LOYAL BEST PROPERTY DEVELOPMENT LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent accounting pronouncements– In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The management is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)’ This Statement improves financial reporting by requiring an employer to recognize the over funded or under funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after June 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before June 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements:
a. A brief description of the provisions of this Statement
b. The date that adoption is required
c. The date the employer plans to adopt the recognition provisions of this Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The management is currently evaluating the effect of this pronouncement on financial statements.
In February 2007, FASB issued FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new Statement. Therefore, calendar-year companies may be able to adopt FAS 159 for their first quarter 2007 financial statements.
The new Statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. The management is currently evaluating the effect of this pronouncement on financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for the Company’s fiscal year beginning October 1, 2009. Management is currently evaluating the effect of this pronouncement on financial statements.
F-8
LOYAL BEST PROPERTY DEVELOPMENT LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. Management is currently evaluating the effect of this pronouncement on financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”. This Statement replaces SFAS No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement also establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) will apply prospectively to business combinations for which the acquisition date is on or after Company’s fiscal year beginning October 1, 2009. While the Company has not yet evaluated this statement for the impact, if any, that SFAS No. 141(R) will have on its consolidated financial statements, the Company will be required to expense costs related to any acquisitions after September 30, 2009. The management is currently evaluating the effect of this pronouncement on financial statements.
Shenyang Loyal Best was the successful bidder of the auction of four parcels of land No. D40/D41/D45/D46 located at the center area of Hunnan New Zone in the city of Shenyang (the “Project”) dated on Jan.26, 2007. Shenyang Loyal Best signed the Confirmation Letter of Auction with Shenyang Municipal Planning and Land Resources Bureau Hunnan New Zone Branch after the bid. As of June 30, 2007, Shenyang Loyal Best paid $20,242,739 as deposit of purchasing the lands.
The total purchase price of the lands are $82,572,553 (RMB624,131,164) per the confirmation letter, including two installment payments: 50% of the land cost should be paid within 30 days on the date of the confirmation letter and the rest portion should be made before June 30, 2007. If the payments could not be made on time, the successful bidder may be disqualified as the purchaser.. Shenyang Loyal Best did not fully pay the purchase amount of the land costs and the Company is in default as of June 30, 2007 per the payment term of the confirmation letter.
The Company entered into a definitive agreement with Silverstrand International Holdings Limited (“Silverstrand”) dated June 28, 2007, pursuant to which Silverstrand agreed to purchase all of the outstanding shares of Loyal Best for US$4,010,000. Silverstrand is the wholly owned subsidiary of Great China International Holding, Inc. (“Great China”), a public company in the United States. The acquisition was consummated on August 6, 2007. Shenyang Loyal Best paid additional amount of $19,797,769 for land cost and $1,907,903 for taxes. In November 2007, Silverstrand disposed the Company and its subsidiary to an unrelated party on November 2007.
In October 2007, Shenyang Loyal Best obtained permits of construction lands for the four parcels of the land and obtained official certificates of land use right for the lands No. D40/D41on December 2007.
| |
|---|
| 4. | Loan from related parties |
| |
| |
The loan from related parties at June 30, 2007 was compromised as follow:
F-9
LOYAL BEST PROPERTY DEVELOPMENT LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| June 30, 2007 | | |
|---|
| | | |
| | | Unsecured, 12% annum |
| Loans from related parties | 20,197,503 | | and due on demand |
| | | Non-interest bearing, |
| Interest payable to related parties | 140,579 | | unsecured and due on |
| | | demand |
| Total | $ 20,338,082 | | |
The Company is registered in Hong Kong and has operations in primarily the tax jurisdictions of the People’s Republic of China (PRC) and Hong Kong. For operation in Hong Kong, the Company has incurred net accumulated operating losses for income tax purposes The Company believes that it is more likely than not that these net accumulated operating losses will not be utilized in the future. Therefore, the Company has provided full valuation allowance for the deferred tax assets arising from the losses at these locations as of June 30, 2007. Accordingly, the Company has no net deferred tax assets.
The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Operations:
| | 2007 | |
| Tax expense (credit) - HK | 17.5% | |
| Valuable allowance | (17.5)% | |
| Tax expense (credit) - PRC | 33% | |
| Valuable allowance | (33)% | |
| Tax expense at actual rate | 0% | |
Hong Kong
As of June 30, 2007, the Company in the Hong Kong had approximately $136,846 in net operating loss carry forwards available to offset future taxable income. The deferred tax assets for the Hong Kong entities at June 30, 2007 consists mainly of net operating loss carry forwards and were fully reserved as the management believes it is more likely than not that these assets will not be realized in the future.
The following table sets forth the significant components of the net deferred tax assets for operation in Hong Kong as of June 30, 2007.
| | 6-30-2007 | |
| Net operation loss carry forward | $ 136,846 | |
| Total deferred tax assets | 23,948 | |
| Less: valuation allowance | (23,948) | |
| Net deferred tax assets | $ -- | |
PRC
As of June 30, 2007, the Company in the PRC had approximately $69,097 in net operating loss carry forwards available to offset future taxable income. Federal net operating losses can generally be carried forward 5 years. The deferred tax assets for the PRC entities at June 30, 2007 consists mainly of net operating loss carry forwards and were fully reserved as the management believes it is more likely than not that these assets will not be realized in the future.
F-10
LOYAL BEST PROPERTY DEVELOPMENT LIMITED AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the significant components of the net deferred tax assets for operation in the PRC as of June 30, 2007.
| | 6-30-2007 | |
| Net operation loss carry forward | $ 69,097 | |
| Total deferred tax assets | 22,802 | |
| Less: valuation allowance | (22,802) | |
| Net deferred tax assets | $ -- | |
Aggregate net deferred tax assets
The following table sets forth the significant components of the aggregate net deferred tax assets of the Company as of June 30, 2007:
| | 6-30-2007 | |
| Aggregate: | | |
| Total deferred tax assets | $ 46,750 | |
| Less: valuation allowance | (46,750) | |
| Net deferred tax assets | $ -- | |
| |
|---|
| 6. | Other comprehensive income |
| |
| |
Balances of related after-tax components comprising accumulated other comprehensive income (loss), included in stockholders’ equity, at June 30, 2007 are as follows:
| | June 30, 2007 | |
| Balance at January 01, 2007 | -- | |
| Change in 2007 | $ 272,595 | |
| Balance at June 30, 2007 | 272,595 | |
The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the company as a going concern. However, the Company has an accumulated deficit of $205,943 as of June 30, 2007 and the Company's operations do not generate sufficient cash to cover its operating costs. In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and succeed in its future operations, The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management has taken certain restructuring steps to provide the necessary capital to continue its operations. These steps included: 1) Seeking out a potential buyer of the operation, and 2) Entered into discussions with Great China International Holdings to acquire the organization.
F-11
GREAT CHINA INTERNATIONAL HOLDINGS AND SUBSIDIARIES
CONSOLIDATED PRO-FORMA STATEMENT OF FINANCIAL CONDITIONS
AS OF JUNE 30, 2007
| GCIH
| | Loyal
Best
| | Pro
forma
adjustment
| | Pro Forma
Combined
|
|---|
| (Unaudited) | | (Audited) | | | | |
|---|
| Assets | | | | | | | | | | | | | | | | | |
| Current assets | | |
| Cash and equivalents | | | $ | 2,866,409 | | | $ | 87,499 | | | | | | | | 2,953,908 | |
| Accounts receivable, net of allowance of | | | | | | | | | | | | | | | | | |
| $770,798 and $1,443,476 respectively | | | | 739,227 | | | | 17,315 | | | | | | | | 756,542 | |
| Advances to suppliers | | | | 4,868,122 | | | | -- | | | | | | | | 4,868,122 | |
| Advances to employees | | | | 14,273 | | | | -- | | | | | | | | 14,273 | |
| Deposits | | | | 3,274,629 | | | | 20,242,739 | | | | | | | | 23,517,368 | |
| Properties held for resale | | | | 9,545,386 | | | | -- | | | | | | | | 9,545,386 | |
| Assets held for sale, net of impairment of | | | | | | | | | | | | | | | | | |
| $199,542 at June 30, 2007 | | | | 6,816,875 | | | | -- | | | | | | | | 6,816,875 | |
| Prepaid expenses | | | | 14,658 | | | | -- | | | | | | | | 14,658 | |
| | | | | | | |
| Total Current Assets | | | | 28,139,579 | | | | 20,347,553 | | | | | | | | 48,487,132 | |
| |
| Property & Equipment - net | | | | 48,135,933 | | | | -- | | | | | | | | 48,135,933 | |
| Construction in progress | | | | -- | | | | 61,019 | | | | | | | | 61,019 | |
| Goodwill | | | | | | | | | | | | 3,942,066 1) | | | | 3,942,066 | |
| | | | | | | |
| Total Assets | | | $ | 76,275,512 | | | $ | 20,408,572 | | | | | | | | 100,626,150 | |
| | | | | | | |
| |
| Liabilities & Stockholders' Equity | | |
| Current Liabilities | | |
| Accounts payable and accrued expenses | | | $ | 9,475,556 | | | $ | 2,556 | | | | 4,010,000 1) | | | | 13,488,112 | |
| Deposits held | | | | 705,078 | | | | -- | | | | | | | | 705,078 | |
| Advances from buyers | | | | 2,181,506 | | | | -- | | | | | | | | 2,181,506 | |
| Amounts due to related companies | | | | 6,118 | | | | -- | | | | | | | | 6,118 | |
| Loan from related parties | | | | -- | | | | 20,338,082 | | | | | | | | 20,338,082 | |
| Taxes payable | | | | 3,354,441 | | | | -- | | | | | | | | 3,354,441 | |
| Short-term loans | | | | 48,707,349 | | | | -- | | | | | | | | 48,707,349 | |
| Current portion of long-term debt | | | | 664,574 | | | | -- | | | | | | | | 664,574 | |
| | | | | | | |
| Total Current Liabilities | | | | 65,094,622 | | | | 20,340,638 | | | | | | | | 89,445,260 | |
| | | | | |
| Long term debt, net of current portion shown above | | | | 9,017,317 | | | | -- | | | | | | | | 9,017,317 | |
| | | | | |
| Stockholders' Equity | | |
| Common stock, $.001 par value 50,000,000 | | | | | | | | | | | | | | | | | |
| shares authorized, 11,782,036 issued and out- | | | | | | | | | | | | | | | | | |
| standing at June 30, 2007 and December 31, 2006 | | | | 11,783 | | | | 1,282 | | | | (1,282) 1) | | | | 11,783 | |
| Additional paid in capital | | | | 4,542,308 | | | | -- | | | | | | | | 4,542,308 | |
| Retained deficit | | | | (3,088,582 | ) | | | (205,943 | ) | | | 205,943 1) | | | | (3,088,582 | ) |
| | | | |
| Accumulated other comprehensive income | | | | 698,064 | | | | 272,595 | | | | (272,595) 1) | | | | 698,064 | |
| | | | | | | |
| Total Stockholders' Equity | | | | 2,163,573 | | | | 67,934 | | | | | | | | 2,163,573 | |
| | | | | | | |
| |
| Total Liabilities and Stockholders' Equity | | | $ | 76,275,512 | | | $ | 20,408,572 | | | | | | | | 100,626,150 | |
| | | | | | | |
NOTES:
| |
|---|
| 1. | Elimination of equity section of Loyal Best before the acquisition and to record the purchase of Loyal Best by Great China International Holdings, Inc. |
| |
| | |
|---|
| | |
| Purchase price allocation | |
| Total purchase price | | 4,010,000 |
| Net assets of Loyal Best | | 67,934 |
| Goodwill | | 3,942,066 |
PF-1
GREAT CHINA INTERNATIONAL HOLDINGS AND SUBSIDIARIES
CONSOLIDATED PRO-FORMA STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2007
| GCIH
| | Loyal Best
| | Pro forma
adjustment
| | Pro Forma
Combined
|
|---|
| (Unaudited) | | (Audited) | | | | |
|---|
| Revenue | | | | | | | | | | | | | | | | | |
| Sales | | | $ | 1,624,800 | | | $ | -- | | | | | | | $ | 1,624,800 | |
| Rental and management fee income | | | | 2,862,234 | | | | -- | | | | | | | | 2,862,234 | |
| | | | | | | |
| Total revenue | | | | 4,487,034 | | | | -- | | | | | | | | 4,487,034 | |
| | | | | | |
| Expenses | | | | | |
| Cost of properties sold | | | | 1,690,952 | | | | -- | | | | | | | | 1,690,952 | |
| Building management expenses | | | | 1,540,908 | | | | -- | | | | | | | | 1,540,908 | |
| Operating and selling expenses | | | | 73,721 | | | | -- | | | | | | | | 73,721 | |
| Administrative expenses | | | | 2,194,338 | | | | 74,338 | | | | | | | | 2,268,676 | |
| Depreciation and amortization | | | | 1,115,243 | | | | -- | | | | | | | | 1,115,243 | |
| | | | | | | | |
| Total expenses | | | | 6,615,162 | | | | 74,338 | | | | | | | | 6,689,500 | |
| | | | | | | | |
| Loss from operations | | | | (2,128,128 | ) | | | (74,338 | ) | | | | | | | (2,202,466 | ) |
| | | | | | |
| Other income (expense) | | | | | | | | | | | | | | | | | |
| Other income | | | | 6,484,101 | | | | 9,279 | | | | | | | | 6,484,101 | |
| Impairment loss | | | | (199,542 | ) | | | -- | | | | | | | | (199,542 | ) |
| Interest and finance costs | | | | (1,295,259 | ) | | | (140,884 | ) | | | | | | | (1,295,259 | ) |
| | | | | | | | |
| Total other income (expense) | | | | 4,989,300 | | | | (131,605 | ) | | | | | | | 4,989,300 | |
| | | | | | | | |
| Income (loss) before income taxes | | | | 2,861,172 | | | | (205,943 | ) | | | | | | | 2,786,834 | |
| | | | | | |
| Provision for income taxes | | | | 1,015,645 | | | | -- | | | | | | | | 1,015,645 | |
| | | | | | | | |
| Net income (loss) | | | | 1,845,527 | | | | (205,943 | ) | | | | | | | 1,771,189 | |
| | | | | | |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation adjustment | | | | 229,720 | | | | 272,595 | | | | | | | | 229,720 | |
| | | | | | | | |
| Total comprehensive income | | | $ | 2,075,247 | | | $ | 66,652 | | | | | | | $ | 2,000,909 | |
| | | | | | | | |
| Basic and diluted net income (loss) per share | | | $ | 0.16 | | | $ | (21 | ) | | | | | | $ | 0.15 | |
| | | | | | | | |
| | | | | |
| Weighted average basic and diluted shares outstanding | | | | 11,782,036 | | | | 10,000 | | | | | | | | 11,782,036 | |
| | | | | | | | |
PF-2
