February 21, 2007
By facsimile to (310) 552-5001 and U.S. Mail
Mr. Luo Ken Yi
China Architectural Engineering, Inc.
105 Baishi Road
Jiuzhou West Avenue
Zhuhai, People`s Republic of China
Re: China Architectural Engineering, Inc.
Amendment No. 1 to Registration Statement on Form S-1
Filed February 5, 2007
File No. 333-138603
Annual Report on Form 10-KSB for the fiscal year ended December
31,
2005 and
Subsequent Exchange Act Reports
File No. 333-114622
Dear Mr. Luo:
We reviewed the filings and have the comments below.
Where indicated, we think that you should revise the
documents
in response to the comments. If you disagree, we will consider
your
explanation why a comment is inapplicable or a revision is
unnecessary. Be as detailed as necessary in your explanation. To
understand better your disclosure, we may ask you in some comments
to
provide us supplemental information. We may raise additional
comments after reviewing this information.
We welcome any questions that you may have about comments or
any other aspect of our review. You may call us at the telephone
numbers listed at the end of this letter.
S-1/A
1. We note your response to prior comment 7 regarding non-430A
information. Since you have indicated a price range, it seems
that
substantially all of the missing information can now be provided,
including, for example, in the Dilution section. Please revise to
include this information, and note that we may need additional
time
to review it.
2. Please remove specific references to the Division of
Corporation
Finance and the Securities and Exchange Commission from your
discussions in the risk factor entitled "Shares Eligible for
Future
Sale . . ." and in the later section of the same name. Such
references may lead investors to believe that we have approved
your
transaction or your disclosure.
3. We assume that your next amendment will include audited
financial
statements for the year ended December 31, 2006. Refer to Article
3-
12 of Regulation S-X.
Principal Terms of the Share Agreement, page 3
4. We note your response to prior comment 9. Please help us to
understand whether there are any financial penalties associated
with
the registration rights agreement for the IR Securities, which we
note are included in your current Form S-1. If so, please tell us
the terms of these penalties, including how the penalty is
calculated, whether the current Form S-1 must be declared
effective
by a specified date, and whether the current Form S-1 must
maintain
effectiveness for a specified period. Also tell us what
consideration you have given to the guidance in EITF 05-4, and
disclose in your footnotes which of the three views in this EITF`s
Issue Summary No. 1 you have adopted. We remind you that the
probability of using your best efforts to file a registration
statement and have it declared effective does not address the
accounting treatment of the registration rights agreement
containing
financial penalties.
Capitalization, page 22
5. It appears that the dollar amounts you are presenting for
common
stock par value should be truncated since the amounts you show are
"in thousands." Please advise or revise.
6. We note your response to prior comment 15. If you continue to
present September 30, 2006 numbers, given the reasons indicated in
our related comments below regarding your consolidated statements
of
income and consolidated statements of stockholders` equity, please
revise your share information so that the actual shares presented
agrees to the historical equity statement of Full Art at September
30, 2006, with the number of shares restated for the
recapitalization
in a manner similar to a stock split. We assume that you will
reflect 43,304,125 shares issued and outstanding at September 30,
2006, and that you will adjust the dollar amounts of common stock
par
value and retained earnings accordingly.
7. We note your actual total capitalization at September 30, 2006.
If your total capitalization differs from your total stockholders`
equity, please provide a reconciliation between the two numbers.
Dilution, page 23
8. We note that you have estimated your post-public offering
equity
on page 22. Please use a similar estimate to complete your
dilution
table.
Selected Consolidated Financial Data, page 24
9. Please revise your selected financial data to include earnings
per
share and cash dividends per share as required by Item 301 of
Regulation S-K. Also tell us what consideration you gave to
disclosing the long-term payables seen on your September 30, 2006
balance sheet as long-term obligations under Item 301 of
Regulation
S-K.
Results of Operations, page 30
10. Any pro forma earnings per share information should only be
provided for the periods for which a pro forma income statement is
allowable under Article 11-02(c) of Regulation S-X. Please
revise.
If you continue to present pro forma earnings per share
information,
please also revise to explain the transactions that are included
in
these pro forma amounts. Refer to Article 11-02(b)(2) of
Regulation
S-X.
11. It appears that your unaudited pro forma per share data and
weighted average shares outstanding are inverted. If you continue
to
present this pro forma information, please revise your
registration
statement to show the correct amounts with the appropriate line
items.
12. We note your narrative analysis of income tax expense for each
period presented. Please consider revising your analysis to
discuss
your effective tax rate rather than the dollar amount of your tax
expense, as we believe that this is more useful information for
your
investors. In this regard, it appears that the effective tax rate
decreased slightly from September 30, 2005 to September 30, 2006,
and
it appears that your effective tax rate also decreased from
December
31, 2004 to December 31, 2005.
Liquidity and Capital Resources, page 32
13. We note your analysis of operating cash flows. It is unclear
to
us why your analysis of net cash used in operating activities for
the
nine months ended September 30, 2006 and 2005 does not address the
significant increase in your accounts receivable in 2006, since it
appears from your statement of cash flows that this was the single
biggest change in your operating cash flows. Please revise.
14. For all of your cash flow analyses, please revise to provide a
better discussion of the reasons for the changes in your cash
flows.
In this regard, please ensure that you discuss all significant
changes from the prior year period. Please also ensure that you
address the underlying reasons behind the changes seen on the face
of
your statement of cash flows. Mere recitation of the numbers seen
on
the face of your cash flow statement is not adequate. Please
refer
to Item 303 of Regulation S-K and our Release 33-8350, available
on
our website at www.sec.gov/rules/interp/33-8350.htm.
15. Please ensure that the balances disclosed in your analysis of
cash flows agree to the balances seen on the face of your
financial
statements.
16. We note your discussion of the increase in contracts
receivable,
and we read that the collection period typically runs from three
months to one year before you receive full payment. Since your
contracts receivable represent the majority of your assets, please
revise to provide your investors with more insight into the
expected
collection period. For example, if most of your receivables are
due
within six months, you should disclose that. You should also
separately address your cost and earnings in excess of billings,
since you have not yet billed for these items, and provide more
information about when you expect to bill for the items in your
current balance and what the payment terms of such billings will
be.
Description of Business, page 36
17. Please revise to include the backlog disclosures required by
Item
101(c)(1)(viii) of Regulation S-K. You may also wish to discuss
backlog as part of your analysis of results of operations to
support
the increase seen in your contract revenues and receivables and to
provide an indication to your investors of whether and for how
long
such increases will continue.
Executive Compensation, page 48
18. As you have now completed your most recent fiscal year, please
provide executive compensation disclosure for 2006. Note our
transitional guidance regarding the information and periods that
must
be included. This guidance is available on our website at
www.sec.gov under the "Compliance and Disclosure Interpretations"
link in the Corporation Finance section of the website. See Item
402
of Regulation S-K - Executive Compensation - Executive
Compensation
and Related Person Transaction Disclosure Transition Questions and
Answers for more information.
Financial Statements for the Period Ended September 30, 2006
Consolidated Balance Sheet, page F-2
19. If you continue to present an interim balance sheet, please
comply with the following comments. In this regard, we assume
that
these comments will no longer be applicable once you update to
audited December 31, 2006 financial statements that comply with
Article 5-02 of Regulation S-X.
* We note that your balance sheet no longer separately presents
restricted cash. If you have combined restricted cash with
another
line item on your balance sheet, please revise your balance sheet
line items to clarify this. You should also revise your cash flow
statement line items to indicate where restricted cash is
included.
* We note that your balance sheet no longer separately presents
cost
and earnings in excess of billings. If cost and earnings in
excess
of billings is greater than 10% of your total assets, it should be
presented as a separate line item. Refer to Article 10-01(a)(2)
of
Regulation S-X. You should also revise your cash flow statement
line
items to indicate where cost and earnings in excess of billings is
included.
Consolidated Statement of Stockholders` Equity, page F-5
20. We note that the net income reflected on your equity statement
does not agree to the net income reflected on your income
statement.
Please revise.
Note 3 - Contract Receivables, page F-14
21. We read on page 33 that you are currently involved in three
lawsuits in which you are suing other parties for an aggregate
amount
of $1,292,520 of overdue payments. It appears from this footnote
that you did not have an allowance for doubtful accounts related
to
your contracts receivable at September 30, 2006. It appears
from
Note 3 to your December 31, 2005 financial statements that you
only
had an allowance for doubtful accounts of $403,595 at December 31,
2005. Please tell us what consideration you gave to reserving
these
contested amounts in your allowance for doubtful accounts, and
revise
the footnotes to your 2006 financial statements to clarify this
matter.
Note 10 - Subsequent Events, page F-16
22. We note your discussion of the additional shares of common
stock
and cash penalties that may be due if you fail to register certain
shares in a timely manner. Please revise to provide more
information
about the triggers for these penalties and the amounts of stock
and
cash that would be payable. We believe that understanding this
contingent liability is important to your investors.
Financial Statements for the Year Ended December 31, 2005
Consolidated Statements of Income, page F-20
23. It is unclear to us why you have included interest expense in
the
subtotal "income from operations." We consider interest expense
and
interest income to be non-operating items, and their inclusion in
operating income is not appropriate. Please refer to Article 5-03
of
Regulation S-X.
24. We note the detail of your "other income" in Note 12. Please
explain to us in more detail what is represented by "sales of
goods,"
and tell us how you determined that this was non-operating income.
In this regard, we believe that only those items defined in
Article
5-03(b)(7) of Regulation S-X should be classified as non-operating
income. Also tell us why you did not classify your 2004 tax
refund
as part of your net income tax expense.
25. We note your response to prior comment 26. However, your
earnings per share information should be retroactively restated to
present the effects of the recapitalization since the transaction
is
essentially a stock split occurring after the date of your latest
balance sheet but before the effective date of your registration
statement. In this regard, please revise your historical
statements
of income to present restated earnings per share. Please refer to
SAB Topic 4C and paragraph 54 of SFAS 128, Earnings Per Share, for
guidance. In addition, please revise the notes to your
consolidated
financial statements to include the disclosures required by
paragraph
40 of SFAS 128.
Consolidated Statements of Stockholders` Equity, page F-21
26. We note your response to prior comment 28. However, given the
reasons indicated in our related comment above, please be advised
that all share and per share disclosures throughout the filing
should
be retroactively restated for the October 2006 recapitalization in
a
manner similar to a stock split. In this regard, we believe that
the
equity of Full Art prior to the merger date should be restated
such
that the number of shares outstanding immediately prior to the
merger
equals the 43,304,125 shares received by Full Art in the merger.
When you update to financial statements that include the merger
date,
we believe that the 2,275,000 shares held by CAEI immediately
prior
to the merger should be reflected on a separate line item titled
"Shares effectively issued to former CAEI shareholders as part of
the
October 17, 2006 recapitalization," presented as though this were
an
issuance of stock on October 17, 2006. Similarly, the shares
issued
for services on the merger date and the private placement on the
merger date should be reflected as separate line items and
presented
as issuances of stock on October 17, 2006. Refer to SAB Topic 4C
and
paragraph 54 of SFAS 128.
Consolidated Statements of Cash Flows, page F-22
27. We note that you have classified changes in restricted cash as
cash flows from financing activities. We read on page F-25 that
this
restricted cash represents time deposit accounts to secure notes
payable and bank loans. It is unclear to us how you determined
that
classification as a financing activity was appropriate under SFAS
95.
In this regard, if the restricted cash is being invested in debt
instruments, it appears that it would be more appropriately
classified as investing activities. Alternatively, if the
restricted
cash is merely placed in a separate bank account, it is unclear
that
this would qualify as a cash transaction. Please advise and
revise
as necessary.
Note 2(m) - Revenue and Cost Recognition, page F-26
28. Given your response to prior comment 29, please revise your
footnote disclosure to remove the revenue recognition policy
related
to managing, supervising, or coordinating the construction
activity
of others.
Exhibits
29. We note that several exhibits, including the underwriting
agreement and legality opinion remain to be filed. Please note
that
we will need additional time to review these items and related
disclosure, and may have additional comments.
Closing
File an amendment to the S-1 in response to the comments. To
expedite our review, CAEI may wish to provide us three marked
courtesy copies of the amendments. Include with the filing any
supplemental information requested and a cover letter tagged as
correspondence that keys the responses to the comments. If CAEI
thinks that compliance with any of the comments is inappropriate,
provide the basis in the letter. We may have additional comments
after review of the amendments, the responses to the comments, and
any supplemental information.
We urge all persons responsible for the accuracy and adequacy
of
the disclosure in the registration statement reviewed by us to
ensure
that they have provided all information investors require for an
informed decision. Since CAEI and its management are in
possession
of all facts relating to the disclosure in the registration
statement, they are responsible for the adequacy and accuracy of
the
disclosures that they have made.
If CAEI requests acceleration of the registration
statement`s
effectiveness, CAEI should furnish a letter at the time of the
request, acknowledging that:
* Should the Commission or the staff acting by delegated authority
declare the registration statement effective, it does not
foreclose
the Commission from taking any action on the filing.
* The action of the Commission or the staff acting by delegated
authority in declaring the registration statement effective does
not
relieve CAEI from its full responsibility for the adequacy and
accuracy of the registration statement`s disclosures.
* CAEI may not assert our comments or the declaration of the
registration statement`s effectiveness as a defense in any
proceedings initiated by the Commission or any person under the
United States` federal securities laws.
The Commission`s Division of Enforcement has access to all
information that CAEI provides us in our review of the
registration
statement or in response to our comments on the registration
statement.
We will consider a written request for acceleration of the
registration statement`s effectiveness under Rule 461 of
Regulation C
under the Securities Act as confirmation that those requesting
acceleration are aware of their responsibilities under the
Securities
Act and the Exchange Act as they relate to the proposed public
offering of the securities specified in the registration
statement.
We will act on the request and by delegated authority grant
acceleration of the registration statement`s effectiveness.
You may direct questions on accounting comments to Dale
Welcome,
Staff Accountant, at (202) 551-3865 or Jennifer K. Thompson, Staff
Accountant, at (202) 551-3737. You may direct questions on other
comments and disclosure issues to Edward M. Kelly, Senior Counsel,
at
(202) 551- 3728 or me at (202) 551-3760.
Very truly yours,
Pamela A. Long
Assistant Director
cc: Thomas J. Poletti, Esq.
Anh Q. Tran, Esq.
Kirkpatrick & Lockhart Nicholson Graham LLP
10100 Santa Monica Boulevard, 7th Floor
Los Angeles, CA 90067
Joseph V. Stubbs, Esq.
Scott Galer, Esq.
Stubbs Alderton & Markiles, LLP
15260 Ventura Boulevard, 20th Floor
Sherman Oaks, CA 91403
Mr. Luo Ken Yi
February 21, 2007
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-7010
DIVISION OF
CORPORATION FINANCE