UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
|_| Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period to
Commission File Number 333-46114
----------------------
CHINA FINANCE, INC.
(Exact name of small business issuer as specified in its charter)
Utah 87-0650976
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 Pavonia Avenue, Suite 615
Jersey City, New Jersey 07310
(Address of principal executive offices)
(201) 216-0880
(Issuer's telephone number, including area code)
Check whether the issuer (1) 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 issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days
Yes |X| No |_|
There were 57,671,744 shares of the Company's common stock outstanding as
of May 4, 2005.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
TABLE OF CONTENTS
Page
----
ACCOUNTANTS' REVIEW REPORT.....................................................1
PART I - FINANCIAL INFORMATION.................................................2
Item 1. Condensed Financial Statements and Notes thereto.............2
Item 2. Management's Discussion and Analysis or Plan
of Operation.................................................8
Item 3. Controls and Procedures.....................................12
PART II - OTHER INFORMATION...................................................12
Item 1. Legal Proceedings...........................................12
Item 2. Changes in Securities and Use of Proceeds...................12
Item 3. Defaults Upon Senior Securities.............................12
Item 4. Submission of Matters To a Vote of Security
Holders.....................................................12
Item 5. Other Information...........................................12
Item 6. Exhibits ...................................................12
i
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of China Finance, Inc.:
We have reviewed the consolidated balance sheet of China Finance, Inc. and
subsidiaries as of March 31, 2005, the related consolidated statements of
operations and comprehensive (loss) income, changes in stockholders' equity and
cash flows for the three month period ended March 31, 2005. These consolidated
interim financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with the standards of the Public Company Accounting Oversight Board, the
objective of which is the expression of an opinion regarding the consolidated
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the balance sheet of the
Company as of December 31, 2004 (presented herein), and the related statements
of operations, changes in stockholders' equity, and cash flows from the
inception (June 24, 2004) through December 31, 2004 (presented herein); and in
our report dated February 23, 2005, we expressed an unqualified opinion on those
financial statements.
Rochester, N.Y. /S/ Rotenberg & Co., LLC
April 27, 2005 ----------------------------
Rotenberg & Co., LLC.
Certified Public Accountants
1
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements and Notes thereto
China Finance, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2005 (Unaudited) and December 31, 2004 (Audited)
March 31, December 31,
2005 2004
(Unaudited) (Audited)
US$ US$
--------------------------
ASSETS
Current assets
Cash and cash equivalents 11,362,888 11,512,987
Loan Receivable 242,000 241,645
Marketable Securities 2,159,757 3,648,243
Prepaid expenses 938 1,601
Deferred Compensation -- 125,000
--------------------------
Total Current Assets 13,765,583 15,529,476
--------------------------
Property, plant and equipment, net 18,383 19,888
--------------------------
==========================
TOTAL ASSETS 13,783,966 15,549,364
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payable 1,815 1,815
Accrued expenses 20,513 28,397
Deferred revenue 3,227 6,708
--------------------------
Total Current Liabilities 25,555 36,920
--------------------------
Stockholders' Equity
Common stock 57,672 57,672
Additional paid-in capital 13,078,373 13,078,373
Retained earnings 3,240,254 3,505,801
Accumulated Other Comprehensive Income (Loss) (2,617,888) (1,129,402)
--------------------------
Total Stockholders' Equity 13,758,411 15,512,444
--------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 13,783,966 15,549,364
==========================
The accompanying notes are an integral part of these
condensed financial statements.
2
China Finance, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
For the Three Months Ended March 31, 2005 (Unaudited) and
For the Period from Inception (June 24, 2004),
Through December 31, 2004 (Audited)
For the Period
from Inception
(June 24,
For the three 2004),
months ended Through
March 31, December 31,
2005 2004
(Unaudited) (Audited)
US$ US$
---------------------------
Revenue 26,161 4,822,976
Operating expenses:
General and administrative 165,349 435,175
Professional fees 125,000 882,000
Bank commission charge 637 --
Currency translated 722 --
---------------------------
Total operating expenses 291,708 1,317,175
---------------------------
Net income before income tax (265,547) 3,505,801
Provision for income taxes -- --
---------------------------
Net Income (Loss) (265,547) 3,505,801
Other Comprehensive Income (Loss)
Unrealized Loss on Marketable Securities (1,488,486) (1,129,402)
---------------------------
Other Comprehensive Income (Loss) (1,754,033) 2,376,399
===========================
Earnings Per Share
Basic and Diluted (.03) .05
===========================
Weighted Average Number of Shares
Basic and Diluted 57,671,744 51,712,456
===========================
The accompanying notes are an integral part of these
condensed financial statements.
3
China Finance, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders' Equity (Deficit)
For the Period from Inception (June 24, 2004), Through March 31, 2005
Accumulated Total
Common Stock Additional Other stockholders'
Number of Par paid-in Retained Comprehensive equity
shares value capital Earnings Income (Loss) (deficit)
--------------------------------------------------------------------------------------------
Balances June 24, 2004 -- $ -- $ -- $ -- $ -- $ --
Issuance of common
stock in connection
with recapitalization
of Value Global 46,990,000(1) 46,990 12,035,066 -- -- 12,082,056
Issuance of shares in
connection with
acquisition of Public 10,681,744 10,682 1,043,307 -- -- 1,053,989
Shell
Net Income for the
Period -- -- -- 3,505,801 -- 3,505,801
Unrealized Loss on
Marketable Securities -- -- -- -- (1,129,402) (1,129,402)
--------------------------------------------------------------------------------------------
As of December 31, 2004 57,671,744 57,672 13,078,373 3,505,801 (1,129,402) 15,512,444
Net Loss for the Period -- -- -- (265,547) -- (265,547)
Unrealized Loss on
Marketable Securities -- -- -- -- (1,488,486) (1,488,486)
--------------------------------------------------------------------------------------------
As of March 31, 2005 57,671,744 $ 57,672 $ 13,078,373 $ 3,240,254 $ (2,617,888) $ 13,758,411
============================================================================================
(1) Reflects the shares issued to Value Global by China Finance in connection
with the recapitalization.
The accompanying notes are an integral part of these
condensed financial statements.
4
China Finance, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March, 2005 (Unaudited) and
For the Period from Inception (June 24, 2004),
Through December 31, 2004 (Audited)
For the Period from
For the three Inception (June 24,
months ended 2004), Through
March, 2005 December 31, 2004
(Unaudited) (Audited)
US$ US$
--------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) (265,547) 3,505,801
Non-cash expenses:
Receipt of marketable securities for services rendered -- (4,777,645)
Expenses paid in connection with acquisition of public shell -- (3,211)
Capital contribution of services and facilities by stockholder -- 507,000
Depreciation 1,505 2,457
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in loan receivable (355) (241,645)
(Increase) decrease in deferred compensation 125,000 (125,000)
Increase (Decrease) in deferred revenue (3,481) 6,708
(Increase) decrease in prepaid expenses 663 (1,601)
Increase (decrease) in accrued expense (7,884) 28,397
Increase (decrease) in accounts payable -- 1,815
--------------------------------
Net cash used in operating activities (150,099) (1,096,924)
--------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office equipment -- (9,415)
Leasehold improvements -- (12,930)
--------------------------------
Net cash used in investing activities -- (22,345)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock for cash -- 12,632,256
--------------------------------
Net cash provided by financing activities -- 12,632,256
--------------------------------
Net change in cash and cash equivalents (150,099) 11,512,987
Cash and cash equivalents at beginning of period 11,512,987 --
--------------------------------
Cash and cash equivalents at end of period 11,362,888 11,512,987
================================
The accompanying notes are an integral part of these
condensed financialstatements.
5
China Finance, Inc. and Subsidiaries
Notes to Condensed Financial Statements (Unaudited)
For the three months ended March 31, 2005
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Finance, Inc., incorporated on March 28, 2000 in the State of Utah
(the "Company"), with its principal executive offices in Jersey City, New
Jersey. The Company was incorporated under the name of Kubla Khan, Inc.
From 2001 to 2003, upon completion of a public offering of its common
stock, the Company began doing business as an overstock and overrun
specialist whereby it purchased excess production of clothing and other
personal items from manufacturers or jobbers. In 2003, the Company
abandoned its overrun stock business.
On April 21, 2004, the Company's board of directors approved, among other
things, an amendment to the Company's Articles of Incorporation to
increase the number of shares of common stock, par value $.001 per share
(the "Common Stock"), authorized from 50,000,000 to 100,000,000. As of the
same date, shareholders of the Company holding 89% of the then total
issued and outstanding shares of Common Stock eligible to vote at a
meeting of shareholders executed a written consent which approved, among
other things, an amendment to the Company's Articles of Incorporation to
increase the number of shares of Common Stock authorized from 50,000,000
to 100,000,000. In connection with such written consent, on May 11, 2004,
the Company filed a Schedule 14C with the SEC (the "Information
Statement"). The Information Statement was amended and re-filed with the
SEC on June 7, 2004.
On August 9, 2004, the Company amended its Articles of Incorporation to
change its name from Kubla Khan, Inc. to China Finance, Inc.
On October 8, 2004, the Company completed the acquisition (the
"Acquisition") of all of the issued and outstanding equity securities of
Value Global International Limited, a British Virgin Islands company
("Value Global") and its wholly-owned subsidiary, Shenzhen Shiji Ruicheng
Guaranty and Investment Co., Ltd. ("Shiji Ruicheng"). Shiji Ruicheng
principally provides corporate financial guarantees, including business
loan guarantees and surety guarantees to China-based businesses looking to
expand into the United States, and consumer loan guarantees and
professional services to aid individuals in obtaining loans for their
homes and personal assets. Upon completion of the Acquisition, Value
Global became a wholly-owned subsidiary of the Company.
The Company acquired all of the outstanding shares of Value Global and in
exchange issued shares of its common stock to each of the shareholders of
Value Global. Based on mutually-agreed upon valuations for each of Value
Global and the Company, the shareholders of Value Global received
46,990,000 restricted shares (the "Shares") of the Company's common stock,
representing approximately 81.5% of the outstanding common stock of the
Company as of October 8, 2004, for their holdings in Value Global. On
August 5, 2004, the Company entered into an agreement for the sale and
purchase of shares (the "Sale Agreement") with Value Global, JuXiang Ruan,
Top Interest International Limited, ZuHong Xu and ZaoZhen Fang, each as
shareholders of Value Global, and Qian Fan and Huan Ya Tong Investment
Development Co., Limited, which agreement set forth the terms of the
Acquisition.
For accounting purposes, the acquisition of Value Global has been treated
as a recapitalization of Value Global with Value global as the accounting
acquirer. The financial statements have been restated to present the
operations of Value Global from the date operations first occurred which
coincides with the commencement of the business of Shiji Ruicheng.
In connection with the Acquisition, the Company entered into a
Registration Rights and Lock-Up Agreement (the "Registration Rights
Agreement") with the four shareholders of Value Global. Pursuant to the
Registration Rights Agreement, Value Global's shareholders have agreed to
a "lock up" provision whereby they will not sell or otherwise dispose of
the Shares until after either one year (with respect to 25% of the Shares)
or two years (with respect to 60% of the Shares) from October 8, 2004.
Under the Registration Rights Agreement, the Company also granted Value
Global's shareholders certain registration rights with respect to the
Shares.
6
The Company's principal business is, through its wholly-owned subsidiary
Shenzhen Shiji Ruicheng Guaranty and Investment Co., Ltd., providing
guarantees to China's privately owned small and medium enterprises (SMEs)
when they seek access to capital or to be acquired by a United States
reporting company in a merger.
2. BASIS OF PRESENTATION
The condensed consolidated financial statements of China Finance, Inc. and
subsidiaries included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in
conjunction with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial
statements should be read in conjunction with the annual audited financial
statements and the notes thereto included in the Company's annual report
on Form 10-KSB, and other reports filed with the SEC.
The accompanying unaudited interim financial statements reflect all
adjustments of a normal and recurring nature which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows of the Company for the interim periods
presented. The results of operations for these periods are not necessarily
comparable to, or indicative of, results of any other interim period or
for the fiscal year taken as a whole.
3. RECENT PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 151, "Inventory
Costs - an amendment of ARB No. 43, Chapter 4" ("SFAS 151"). This
statement amends the guidance in ARB No. 43, Chapter 4, "Inventory
Pricing," to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). SFAS 151
requires that those items be recognized as current-period charges. In
addition, this Statement requires that allocation of fixed production
overheads to costs of conversion be based upon the normal capacity of the
production facilities. The provisions of SFAS 151 are effective for fiscal
years beginning after June 15, 2005. As such, the Company is required to
adopt these provisions at the beginning of the fiscal year ended September
30, 2006. The Company does not believe this standard will have a material
impact on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real
Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66
and 67" ("SFAS 152"). This statement amends FASB Statement No. 66
"Accounting for Sales of Real Estate" to reference the financial
accounting and reporting guidance for real estate time-sharing
transactions that is provided in AICPA Statement of Position 04-2,
"Accounting for Real Estate Time-Sharing Transactions" ("SOP 04-2"). SFAS
152 also amends FASB Statement No. 67 "Accounting for Costs and Initial
Rental operations of Real Estate Projects" to state that the guidance for
incidental operations and costs incurred to sell real estate projects does
not apply to real estate time-sharing transactions, with the accounting
for those operations and costs being subject to the guidance in SOP 04-2.
The provisions of SFAS 152 are effective in fiscal years beginning after
June 15, 2005. As such, the Company is required to adopt these provisions
at the beginning of the fiscal year ended September 30, 2006. The Company
is currently evaluating the impact of SFAS 152 on its consolidated
financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153
replaces the exception from fair value measurement in APB Opinion No. 29
for nonmonetary exchanges of similar productive assets with a general
exception from fair value measurement for exchanges of nonmonetary assets
that do not have commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. SFAS 153 is effective
for all interim periods beginning after June 15, 2005. As such, the
Company is required to adopt these provisions at the beginning of the
fiscal quarter ended September 30, 2005. The Company does not believe this
standard will have a material impact on its consolidated financial
statements.
7
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
("SFAS 123R"). SFAS 123R revises FASB Statement No. 123 "Accounting for
Stock-Based Compensation" and supersedes APB Opinion No. 25 "Accounting
for Stock Issued to Employees". SFAS 123R requires all public and
non-public companies to measure and recognize compensation expense for all
stock-based payments for services received at the grant-date fair value,
with the cost recognized over the vesting period (or the requisite service
period). SFAS 123R is effective for non-small business issuers for all
interim periods beginning after June 15, 2005. SFAS 123R is effective for
small business issuers for all interim periods beginning after December
15, 2005. As such, the Company is required to adopt these provisions at
the beginning of the fiscal quarter ended September 30, 2005. Retroactive
application of the provisions of SFAS 123R to the beginning of the fiscal
year that includes the effective date is permitted, but not required. The
Company is currently evaluating the impact of SFAS 123R on its
consolidated financial statements.
4. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The company faces a number of risks and challenges since its operations
are in the People's Republic of China ("PRC"). The Company's operations in
the PRC are subject to special considerations and significant risks not
typically associated with companies in North America and Western Europe.
The Company's results may be adversely affected by changes in the
political and social conditions in the PRC, and by changes in governmental
policies with respect to laws and regulations, anti-inflationary measures,
currency conversion and remittance abroad, and rates and methods of
taxation, among other things.
Item 2. Management's Discussion and Analysis or Plan of Operation
Forward Looking Statements
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve risks and uncertainties, including statements
regarding our capital needs, business strategy and expectations. Any statements
contained herein that are not statements of historical facts may be deemed to be
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may", "will", "should", "expect", "plan",
"intend", "anticipate", "believe", estimate", "predict", "potential" or
"continue", the negative of such terms or other comparable terminology. Actual
events or results may differ materially. We disclaim any obligation to publicly
update these statements, or disclose any difference between its actual results
and those reflected in these statements. The information constitutes forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995.
Business Overview
In June, 2004, our board of directors decided to enter into the surety
guarantee business. Specifically, we decided to focus on providing surety
guarantees to companies based in the People's Republic of China ("PRC" or
"China") that were seeking to expand operations into the United States. On
October 8, 2004, we completed the acquisition of all of the issued and
outstanding equity securities of Value Global International Limited, a British
Virgin Islands company ("Value Global") and its wholly-owned subsidiary,
Shenzhen Shiji Ruicheng Guaranty and Investment Co., Ltd. ("Shiji Ruicheng").
Though Shiji Ruicheng, we provide guarantees to China's privately owned
small and medium-sized enterprises ("SMEs") when they seek access to capital or
to be acquired by a United States reporting company in a merger. We operate two
business segments:
8
Surety Guarantee. We provide surety guarantees to Chinese SMEs seeking to
be acquired by a United States reporting company in a "reverse merger" or other
merger and acquisition ("M&A") transaction. The surety guarantee business
generates revenues through fees, which typically are based on a percentage of
the transaction. We provide contractual guarantees which help to facilitate the
completion of a reverse merger or other merger and acquisition transaction
entered into by Chinese companies desiring to become a publicly-traded company
in United States. Since we typically get compensation in the form of stock from
our client companies, we have a risk control department that frequently monitors
the performance of our client companies and their stock to decide the right time
to sell or hold the stocks and to minimize the impacts of their stock price
fluctuations to our cash flows.
Loan Guarantee. We also provide guarantees to SMEs and individuals
obtaining loans from a Chinese bank for their business operations and/or
personal use. The corporate loan guarantee and the consumer loan guarantee
businesses require that the borrower pay us a certain percentage of the loan
amount as the upfront fee. Loan maturities are short, ranging from one to five
years, and are guaranteed through a wide range of collateral of the borrower. We
get a security interest on collateral such as fixed assets, receivables, and
inventory from our corporate clients and personal properties from our individual
clients. If the clients failed to fulfill their obligations, we have the right
to liquidate that collateral. In addition, our risk control department also
frequently monitors the current value of the collateral that we get from our
clients to make sure there is no material impairment to the collateral.
Results of Operations for the Three-Month Period Ended March 31, 2005 and
for the Period from Inception (June 24, 2004) through December 31, 2004
Revenues
Revenues for the three months ended March 31, 2005 were $26,161 and for
the year ended December 31, 2004 were $4,822,976. The revenue for the three
months ended March 31, 2005 was from our loan guarantee business. The revenue
for the year ended December 31, 2004 was derived primarily from our first surety
guarantee transaction.
Net Income
Net income for the three months ended March 31, 2005 was $(265,547) and
for the year ended December 31, 2004 was $3,505,801.
Selling, general and administrative expenses
Selling, general and administrative expenses for the three months ended
March 31, 2005 was $291,708 and for the year ended December 31, 2004 were
$1,317,175. We incurred these selling, general and administrative expenses in
connection with executing our new business plan. We are subject to all of the
risks, expenses, delays, problems and difficulties frequently encountered in the
establishment of a new business.
Income taxes
Taxes on profits earned by its wholly owned subsidiary Shiji Ruicheng are
calculated in accordance with taxation principles currently effective in the
PRC. We account for income taxes using the liability method. Taxes on profits
earned by our wholly owned subsidiary Value Global are calculated in accordance
with taxation principles currently effective in the British Virgin Island. Value
Global is an International Business Company (IBC) registered in the British
Virgin Islands that is exempt from all taxes and withholding taxes in the
British Virgin Islands and pays only registration fees and annual license fees
which amount to US$300 per annum unless authorized capital is higher than
US$50,000, in which case the fee would rise to US$1,000.
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes," for taxes on U.S. taxable income using the asset and
liability approach, which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of such assets and liabilities. This
method utilizes enacted statutory tax rates in effect for the year in which the
temporary differences are expected to reverse and gives immediate effect to
changes in income tax rates upon enactment. Deferred tax assets are recognized,
net of any valuation allowance, for temporary differences and net operating loss
and tax credit carryforwards. Deferred income tax expense represents the change
in net deferred assets and liability balances.
9
Liquidity and Capital Resources
As of March 31, 2005, we had cash and cash equivalents of $11,362,888 and
as of December 31, 2004, we had cash and cash equivalents of $11,512,987. Cash
flows from operating activities were ($150,099) for the three months ended March
31, 2005 and were ($1,096,924) for the year ended December 31, 2004. We expect
that our cash and cash equivalents will be sufficient to satisfy our cash
requirements for the next twelve months. On a long-term basis, our liquidity is
dependent on our successfully executing our new business plan, receipt of
revenues, and additional infusions of capital through equity and debt financing.
Any funds raised from an offering of our equity or debt will be used to continue
to develop and execute our new business plan. However, there can be no assurance
that we will be able to obtain additional equity or debt financing on terms
acceptable to us, if at all.
We do not currently own any plant or significant equipment, and during
2005, we do not anticipate purchasing any plant or significant equipment, except
as may be required if we cannot or choose not to register as an investment
company under the 1940 Act. For more information, see "About the Investment
Company Act of 1940." We do not anticipate incurring significant changes in the
number of our employees.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations in this report are based upon our consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles in the United States. The preparation of financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expense and disclosures at the
date of the financial statements. On an on-going basis, we evaluate our
estimates, including, but not limited to, those related to revenue recognition,
accounts receivables, inventories, impairment of property and equipment and of
intangibles. We use authoritative pronouncements, historical experience and
other assumptions as the basis for making estimates. Actual results could differ
from those estimates.
The recently announced Securities and Exchange Commission (the "SEC")
Release No.33-8098 require us to identify accounting estimates we make in
applying the accounting policies and the initial adoption by us of an accounting
policy that has a material impact on our financial presentation. Under the first
part of the proposals, we would have to identify the accounting estimates
reflected in its financial statements that required us to make assumptions about
matters that were highly uncertain at the time of estimation. Disclosure about
those estimates would then be required if different estimates that we reasonably
could have used in the current period, or changes in the accounting estimate
that are reasonably likely to occur from period to period, would have a material
impact on the presentation of the company's financial condition, changes in
financial condition or results of operations. Our disclosure about these
critical accounting estimates would include a discussion of: the methodology and
assumptions underlying them; the effect the accounting estimates have on our
financial presentation; and the effect of changes in the estimates. Under the
second part of the proposals, if we initially adopted an accounting policy with
a material impact, we would have to disclose information that includes: what
gave rise to the initial adoption; the impact of the adoption; the accounting
principle adopted and method of applying it; and the choices it had among
accounting principles.
In June 1977, the FASB issued Statement No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings" ("FAS 15"). FAS 15 establishes
standards of financial accounting and reporting by the debtor and by the
creditor for a troubled debt restructuring. This Statement requires adjustments
in payment terms from a troubled debt restructuring generally to be considered
adjustments of the yield (effective interest rate) of the loan. So long as the
aggregate payments (both principal and interest) to be received by the creditor
are not less than the creditor's carrying amount of the loan, the creditor
recognizes no loss, only a lower yield over the term of the restructured debt.
Similarly, the debtor recognizes no gain unless the aggregate future payments
(including amounts contingently payable) are less than the debtor's recorded
liability.
10
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the Company must recognize an initial liability of the fair
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. The
initial recognition and measurement provisions of FIN 45 apply on a prospective
basis to guarantees issued or modified after December 31, 2002.
For a discussion of our critical accounting policies, please see Note 3 to
our consolidated financial statements contained elsewhere in this report.
Off-Balance Sheet Arrangements
In the ordinary course of business, we enter into arrangements to
facilitate our business purpose of providing surety and loan guarantees to SMEs.
We structure transactions to meet the financial needs of our clients, manage
credit, market or liquidity risks or to optimize our capital.
We may enter into these transactions which, under generally accepted
accounting principles, may not be recorded on our balance sheet or which may be
recorded in amounts different from the full contract or notional amount of the
transaction. Our primary off-balance sheet arrangements would result from our
providing surety and loan guaranties in which we would provide contractual
assurance of the completion of a transaction or guaranty the timely repayment of
principal and interest of our client to a third party, all in exchange for a
guaranty fee. In these transactions, we would have both a non-contingent
obligation related to the compensation received for assuming the credit risk and
a contingent obligation related to the guaranty of payment in the event the
underlying loan to the borrower goes into default, or in the event that the
parties fail to perform under the surety guarantee contract.
Transactions described above would require accounting treatment under FASB
Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
Under that standard, we would be required to recognize the fair value of
guarantees issued or modified after December 31, 2002 for non-contingent
guaranty obligations, and also a liability for contingent guaranty obligations
based on the probability that the guaranteed party will not perform under the
contractual terms of the guaranty agreement.
We did not have any non-contingent or contingent guaranty obligations at
March 31, 2005 requiring recognition or disclosure under FIN 45. At March 31,
2005, we have guaranteed the timely re-payment of principal and interest of one
party to a bank in exchange for a fee, whereby we have placed cash on deposit
with the bank equal to the full amount of the loan outstanding to the borrower.
The maximum amount of exposure to us is recorded on our balance sheet as "Loans
Receivable" in the accompanying financial statements.
About the Investment Company Act of 1940
We acquired Value Global and its subsidiary, Shiji Ruicheng, on October 8,
2004. Shiji Ruicheng closed its first surety guarantee transaction whereby Value
Global received as its fee certain shares of the common stock of China Digital
Communication Group, which had completed its acquisition of Billion Electronics.
As both Value Global and Shiji Ruicheng are our wholly owned subsidiaries, we
inadvertently fell under the definition of an "investment company" pursuant to
Section 3(a)(1) of the Investment Company Act of 1940, as amended (the "1940
Act"). Because in excess of 40% of our total assets (excluding cash) are held in
securities of another entity (China Digital Communication Group), we remain
under this definition as of March 31, 2005. We intend to continue to pursue our
primary business of issuing surety guarantees and, in reliance upon Rule 3a-2 of
the 1940 Act (the "Transient Investment Companies Rule"), we have one year from
October 8, 2004 to resolve this matter and demonstrate our intention to be in a
business other than that of investing, reinvesting, owning, holding or trading
in securities of another company.
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We are currently reviewing alternatives available to us, including
commencing or acquiring other lines of business, acquiring other assets such as
real property, restructuring the components of our current assets by disposing
of the common stock held by us, and requiring prospective clients to pay a
portion of their fees in cash and not exclusively in common stock. We may also
consider requesting an order for exemptive relief from the SEC to exclude us
from the 1940 Act definition of an "investment company," in order to avoid the
requirements, rules and regulations of the 1940 Act, including registration as
an investment company. We are not permitted to rely on the Transient Investment
Companies Rule more frequently than once during any three-year period. In the
event that we are unsuccessful in identifying a viable alternative, we may not
be able to avoid regulation under the 1940 Act unless we significantly
restructure our business plan, which may have a significant impact on our
ability to conduct business operations as currently contemplated, and on our
results of operations and financial condition.
Item 3. Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. The evaluation was undertaken in consultation with our accounting
personnel. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, given our limited operations, our disclosure
controls and procedures are currently effective to ensure that information
required to be disclosed by us in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. As we develop new business or if we engage in an extraordinary
transaction we will review our disclosure controls and procedures and make sure
that they are adequate.
We made no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation of those controls by the Chief Executive and Chief Financial
officers. We have also undertaken to periodically review our disclosure controls
and procedures and internal controls for adequacy and effectiveness.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not presently involved in litigation that we expect individually or
in the aggregate to have a material adverse effect on our financial condition,
results of operation or liquidity.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable.
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.
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Item 6. Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHINA FINANCE, INC.
(Registrant)
Date: May 9, 2005 By:/s/ Zhiyong Xu
-------------------------------
Name: Zhiyong Xu
Title: Chief Executive Officer and
Chairman of the Board
Date: May 9, 2005 By:/s/ Liang Liao
-------------------------------
Name: Liang Liao
Title: Chief Financial Officer
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