SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
October 18, 2005
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Date of Report
(Date of earliest event reported)
Xerion EcoSolutions Group Inc.
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(Exact name of registrant as specified in its charter)
Suite 905, 102-4369 Main Sreet
Whistler, BC Canada V0N 1B4
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(Address of principal executive offices)
604.902.0178
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(Registrant's telephone number, including area code)
N/A
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(Former name and former address, if changed since last report)
Colorado 0-27351 84-1286065
- ---------------------------- --------------- --------------------
(State or other jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of registrant under any of the
following provisions:
|_| Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12(b) under the Exchange Act (17
CFR 240.14a-12(b))
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995
Information included in this Form 8-K may contain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). This
information may involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Xerion
EcoSolutions Group Inc. ("Xerion") and Town House Land Limited ("Town House") to
be materially different from the future results, performance or achievements
expressed or implied by any forward-looking statements. Forward-looking
statements, which involve assumptions and describe Xerion's and Town House's
future plans, strategies and expectations, are generally identifiable by use of
the words "may," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative of these words or other variations on
these words or comparable terminology. Forward-looking statements are based on
assumptions that may be incorrect, and there can be no assurance that any
projections or other expectations included in any forward-looking statements
will come to pass. Xerion's and Town House's actual results could differ
materially from those expressed or implied by the forward-looking statements as
a result of various factors. Except as required by applicable laws, Xerion
undertakes no obligation to update publicly any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
Section 1 - Registrant's Business and Operations
Item 1.01 Entry into a Material Definitive Agreement.
General. Xerion EcoSolutions Group Inc. ("Xerion") entered into a definitive
Stock Exchange Agreement (the "Agreement") under which Town House Land Limited
("Town House") will be acquired by Xerion in consideration of the issuance of
common stock of Xerion representing ninety-seven percent (97%) ownership
interest of Xerion to the owners of Town House.
The closing of the Agreement is conditioned upon, among other things, customary
closing conditions, including the satisfaction of both Xerion and Town House
with their due diligence investigations of the other party. If the closing under
the Agreement occurs, it is expected to occur on or about October 31, 2005.
No assurances can be given that the Agreement will close or, if the closing
occurs, as to the final terms of the Agreement. A copy of the Agreement is
attached to this Form 8-K current report as Exhibit 2.1 and is incorporated
herein by reference as though fully set forth herein. The foregoing summary
description of the Agreement and the transactions contemplated thereby is not
intended to be complete and is qualified in its entirety by the complete text of
the Agreement.
BUSINESS
The principal business operations of Town House is real estate
development. Its operations are conducted by and through its subsidiaries, (i)
Wuhan Pacific Real Estate Development Company Limited ("Wuhan Pacific") located
in Hong Kong, in The People's Republic of China (the "PRC"), (ii) Town House
(Miami) Corporation, a Florida corporation, and (iii) Town House Land (USA)
Inc., a California corporation.
The principal executive offices of Town House in the PRC is at 128
Gloucester Road, Wanchai, Hong Kong, the People's Republic of China; telephone
011-852-2517-783. The principal executive offices of Town House in the United
States is
The corporate organization of Town House is as follows:
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Town House
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|
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| | |
- --------------------- --------------------- ---------------------
Town House (Miami) Wuhan Pacific Real Town House Land
Corporation Estate Development (USA) Corporation
- --------------------- Company Limited ---------------------
---------------------
Town House is a limited liability company organized in 2003 in the Hong
Kong Special Administrative Region in the PRC, as a holding company.
Town House owns 97% of Wuhan Pacific which was organized in Hubei
Province in the PRC as a limited liability company in 1995. Substantially all of
the assets and operations of Town House in the PRC are conducted through Wuhan
Pacific.
Town House Miami Corporation is a Florida corporation organized on
_______, 2005.
Wuhan Pacific Real Estate Development Company Limited
Wuhan Pacific is one of the first privately owned property developers in
Wuhan City in the PRC and is one of the largest property developers in Wuhan
City, based on a list of top 100 property development enterprises in Wuhan City
in terms of gross floor area ("GFA"), published by the Wuhan Statistics Bureau
and the Development Research Center. It had engaged principally in the
development and sale of high quality commercial and private residential
properties catering to the middle-class residential property market in Wuhan
City and in Yi Chang.
Wuhan Pacific's portfolio of properties under development are currently
all located in Wuhan City and Yi Chang, and target different segments within the
mass residential property market, including young white color employees, middle
to senior managers in enterprises, entrepreneurs and families with young
children. These upwardly mobile people represent the emerging middle class in
Wuhan City and are a growing source of demand in the mass residential property
market.
As of June 30, 2005, Wuhan Pacific reports that it has equity interests
in six property development projects in Wuhan City, with an approximate GFA of
200,000 square meters and an aggregate site area of approximately 100,566 square
meters. Wuhan Pacific has obtained land use rights certificates in respect of
each of these six property development projects. In addition, Wuhan Pacific has
not yet obtained land use rights certificates in respect of, but has interest in
and plans to develop a further five projects in Wuhan City with an approximate
GFA of 252,000 square meters and an aggregate site area of approximately 70,000
square meters. Since the relevant land use rights certificates have not yet been
issued or obtained, no commercial value has been assigned to any of these five
additional projects or in the calculation of their adjusted net tangible asset
value.
Wuhan Pacific aims to further solidify its position in Wuhan City, and
also plans to expand its focus on property business to Yi Chang. Wuhan Pacific
also indicates that it will pursue quality business opportunities in other fast
growing cities in China, if market conditions are appropriate.
Wuhan Pacific was organized as a limited liability company in The
People's Republic of China ("PRC") on December 18, 1995. The primary purpose of
Wuhan Pacific was real estate development including apartments, retail and
commercial facilities, and mixed use buildings. The principal executive office
of Wuhan Pacific is located at No. 250 Jianghan Road, 32 Diamond Mansion,
Jiang'an District, Wuhan City, Hubei Province in the PRC.
Property Development
Wuhan Pacific is principally engaged in the design and construction of
luxury apartment buildings and mixed use buildings in the City of Wuhan and the
City of Yi Chang in the PRC. The apartments are primarily held for sale to
middle income to upper level income customers. Certain properties developed by
Wuhan Pacific are mixed-use properties that also include retail and commercial
floors on the lower levels of the buildings.
Information Concerning Wuhan City
Wuhan City, located in inland China, has played an important role of
connecting the east with the west, the south with the north in the PRC. Wuhan
City, with an urban population of approximately 8 million, ranks as the sixth
city among the top 25 cities in the PRC with favorable development potential. In
2001, the GDP of the city reached 134.8 billion Yuan (US$0.12 per one Yuan), or
12% higher than 2000; and the annual income of citizens of Wuhan City was 7,304
Yuan, or an increase of 8% over 2000.
Located at the middle reaches of the Yangtze River, Wuhan is a
thoroughfare to nine provinces in the PRC. The Beijing-Guangzhou Railway and the
Yangtze River intersect in Wuhan City. The Beijing-Kowloon Railway and
Wuhan-Guangzhou Railway also connect in the city. The Beijing-Zhuhai and
Shanghai-Chengdu super highway also cross at Wuhan City. In addition, a
high-speed railway along the Yangtze River is in the process of being
constructed. This high-speed road, railway and river transportation methods make
Wuhan a transportation hub.
Wuhan is the largest logistics and commercial center in inland China.
Commodities can easily be transported to 5 provinces around Wuhan, such as
Hunan, Jiangxi, Anhui, Henan and Sichuan, which have a combined population of
nearly 400 million. There are presently more than 10,000 commercial
organizations, 105,000 business branches, and 8 department stores in Wuhan City.
As an important industrial base in China, Wuhan City has a very solid
foundation in either high-tech industry or traditional manufacturing. Along the
88 kilometer ring of the city, a series of industrial zones have been
established, such as China Optical Valley, Sino-Citroen Automobile City, Taiwan
Business Zone and Yangluo Development Zone. With 33 different sectors and more
than 30,000 industrial enterprises, Wuhan City has businesses encompassing all
industries, including iron and steel, automobile, machinery, petrochemical,
optical telecom, Chinese and western medicine, biology engineering, textile,
garment, food industry, etc.
Wuhan City is a technology research and education center, with its
research and education capacity ranked third in the country, behind Beijing and
Shanghai. There are 35 universities in the city, serving approximately 300,000
students. There are 736 science research institutes and 10 national labs in
Wuhan City.
In resent years, Wuhan Municipal Government has focused on policies
favoring an open business environment and environmental renovation, and the
investment environment of Wuhan City has been continuously improved. A series of
important infrastructure projects have been finished, such as Wuhan
International Airport, Airport Super Highway, No. 1 Yangtze River Bridge, No. 3
Yangtze River Bridge, an extensive telephone system, a water plant, a power
plant and a waist water treatment plant.
Market
The principal market of Town House for its real estate development
activities has been in the City of Wuhan and Yi Chang in the PRC.
The City of Wuhan is an ancient city and is the capital of Hubei
Province in central China. Wuhan is the sixth largest city in the PRC with a
population of approximately 8,000,000. Wuhan is an important transportation
center on the Jianhan Plain, sitting at the confluence of the Yangtze River, the
Hanjiang River, and its longest branch - the Hansui River. The City of Wuhan is
comprised of three cities: Hanyang, Wuchang and Hankou.
Because of the significant economic growth and development of central
China, the City of Wuhan has experienced increasing demand for luxury
residential properties and for retail and commercial space. The concept of mixed
use buildings with retail and commercial space on the street level and the
lowest floors with luxury apartment units on the higher floors has become
increasingly popular in the PRC. As a result, recent building activity of Town
House has been designed with the mixed use concept as principal objective.
Town House is in competition with other real estate development
companies in the City of Wuhan, some of which are larger and have greater
financial resources than Town House.
Government Regulation
Wuhan Pacific's projects are subject to various laws and governmental
regulations, such as zoning regulations, relating to its business operations and
project developments. It must obtain and keep current various licenses, permits
and regulatory approvals for its development projects. Wuhan Pacific believes
that it is in compliance with all laws, rules and regulations applicable to its
projects and that such laws, rules and regulations do not currently have a
material impact on its operations. Due to the increasing levels of development
in the areas of China where it currently operates, it is possible that new laws,
rules and/or regulations may be adopted that could affect Wuhan Pacific's
projects or proposed projects. The enactment of such laws, rules or regulations
in the future could have a negative impact on its projected growth or
profitability, which could decrease its projected revenues or increase its costs
of doing business.
Employees
As of June 30, 2005, Town House had approximately 150 employees. No
employee group is covered under a collective bargaining agreement. Town House
and Wuhan Pacific believe their relationship with their employees is good.
Legal Proceedings
Town House and its subsidiaries are not a party to, nor are any of our
respective properties the subject of, any material pending legal or arbitration
proceedings.
Management of Town House
Directors and Officers. The following table sets forth certain
information regarding the executive officers and directors of Town House. All
officers serve at the pleasure of the Board of Directors. Directors serve until
the election and qualification of their successors.
Name Age Position
- ---- --- --------
Fang Zhong 39 Chairman, Director, Chief Executive
Officer and President
Lou Yun Fang 46 Director, Executive Vice President-Chief
Financial Officer and Treasurer
Fang Wei Feng 33 Director
Fang Wei Jun 37 Director
Hu Min 24 Director
The following is information of the business experience of each director
and officer.
Mr. Fang Zhong is the founder and has been the Chairman of the Board,
Chief Executive Officer and President of Town House since its organization in
2003. From 1995 to the present, he has been the Chief Executive Officer and a
director of Wuhan Pacific which is the principal operating subsidiary of Town
House. Mr. Fang Zhong received Bachelor of Science degree in industrial and
domestic architecture from the Wuhan Institute of Urban Construction. He also
participated in the MBA program at Northern Jiaotong University. He has received
various awards, including "Young Entrepreneur in Central-south Area" of the PRC,
and "One of Ten Excellent Young Entrepreneurs Leading Private Enterprises in
Wuhan". He also holds various significant positions such as the Standing
Director Hubei Physical Culture Foundation, Deputy to Jiang'an District People's
Congress, a Standing Member to Jiang'an District Political Consultative
Conference, and the Vice Chairman of Jiang'an District Young People Association,
etc.
Mr. Luo Yun Fang became a director, the Executive Vice President-Chief
Financial Officer and Treasurer of Town House in 2003. He has been the general
manager of Wuhan Pacific since 1998. He has more than 20 years of experience in
financial and administration management. He received a Bachelor of Science
degree in 1980 from the Hunan Financial University, and received an MBA degree
from Northern Jiaotong University in 2001. Mr. Luo Yun Fang also holds other
positions, such as an editor of the Financial Periodical in the PRC; Consultant
and Standing Director of Chinese Finance and Tax website; member of standing
committee and member of executive committee of Wuhan Industrial and Commercial
Association and Wuhan General Commerce Association.
Mr. Fang Wei Feng has been employed as the manager of the materials
department and construction operations responsible for construction material
purchases and distribution, since 1996. He became a director and Vice
President-Construction Operations of Town House in 2003.
Mr. Fan Wei Jun has been employed as the manager of the engineering
department of Wuhan Pacific, since 2000. He has been an employee of Wuhan
Pacific for over ten (10) years. He became the General Manager of Operations of
Town House in 2003. He attended Zhengzhou College and graduated in 1985.
Ms. Hu Min has been employed as the Human Resources Manager of Wuhan
Pacific since 2000. She graduated from Wuhan University in 2001.
Mr. Fang Zhong is married to Ms. Hu Min. Fang Zhong, Fang Wei Feng, and
Fang Wei Jun are siblings. Luo Yun Fang is a cousin to all of these siblings.
Item 7.01 Regulation FD Disclosure.
A press release dated October 24, 2005, discussing the Agreement is furnished
herewith as Exhibit 99.10 and is incorporated herein by reference. The
information contained in this Item 7.01, including the accompanying exhibit, is
being furnished and shall not be deemed "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), or otherwise
subject to the liability of that section. The information contained in this Item
7.01, including the accompanying exhibit, shall not be incorporated by reference
into any filing under the Securities Act of 1933, as amended, or the Exchange
Act, whether made before or after the date hereof, except as shall be expressly
set forth by specific reference in such filing.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of business acquired:
The following financial statements are provided with this Form
8-K current report:
1. The audited consolidated financial statements of Town House
Land Limited for its fiscal year ended December 31, 2004; and
2. The unaudited consolidated financial statements of Town House
Land Limited for the six months ended June 30, 2005.
TOWN HOUSE LAND LIMITED
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
TOWN HOUSE LAND LIMITED AND SUBSIDIARY
TABLE OF CONTENTS
PAGE
Independent Auditors' Report.............................. 1
Consolidated Balance Sheets,
December 31, 2004 and 2003............................. 2
Consolidated Statements of Operations,
For the Years Ended December 31, 2004 and 2003......... 3
Consolidated Statements of Members' Equity
For the Years Ended December 31, 2004 and 2003......... 4
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2004 and 2003......... 5 to 6
Notes to the Consolidated Financial Statements............7 to 21
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND MEMBERS OF
TOWN HOUSE LAND COMPANY LIMITED
(Incorporated in Hong Kong with limited liability)
We have audited the accompanying consolidated balance sheets of Town House Land
Limited and subsidiaries (the "Company") as of December 31, 2004 and 2003 and
the related consolidated statements of operations, statements of members' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Town House Land
Limited and subsidiaries as of December 31, 2004 and 2003 and the results of
their operations and cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Oklahoma City, Oklahoma
May 11, 2005
1
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
(Expressed in US dollars)
2004 2003
----------- -----------
ASSETS
Current Assets:
Cash and equivalents $ 4,251,678 $ 1,159,310
Restricted cash -- 203,659
Accounts receivable, net 1,013,244 3,251,307
Properties held for resale 4,293,627 8,342,484
Advances to suppliers 38,142 407,189
Deferred offering costs -- 280,891
Construction-in-progress - current 6,161,736 2,311,819
----------- -----------
Total current assets 15,758,427 15,956,659
----------- -----------
Property and Equipment - net of accumulated depreciation 2,950,831 1,057,200
----------- -----------
Construction-in-Progress - non-current 931,433 931,433
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$19,640,691 $17,945,292
=========== ===========
LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,753,935 $ 419,656
Advances from buyers 1,230,058 728,391
Amounts due to directors 2,077,849 2,709,075
Enterprise taxes payable 1,843,334 1,006,201
Other tax payables 1,342,573 400,441
Short-term loans -- 791,063
Current portion of long-term debt 66,033 2,253,201
----------- -----------
Total current liabilities 8,313,782 8,308,028
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Long-Term Debt - net of current portion shown 816,509 906,686
----------- -----------
Minority Interest 383,057 308,695
----------- -----------
Members' Equity:
Share capital 62,180 62,180
Additional paid-in capital 5,857,936 5,857,936
Capital reserve 1,316,042 997,928
Retained profit 2,891,185 1,503,839
----------- -----------
Total members' equity 10,127,343 8,421,883
----------- -----------
$19,640,691 $17,945,292
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
2
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Expressed in US dollars)
2004 2003
------------ ------------
Sales Revenues $ 17,346,745 $ 9,080,701
Cost of Properties Sold 11,315,090 5,319,978
------------ ------------
Gross Profit 6,031,655 3,760,723
------------ ------------
Selling General and Administrative Expenses:
Selling expenses 1,381,007 439,006
Depreciation expense 80,709 69,664
General and administrative expenses 1,701,640 101,308
------------ ------------
3,163,356 609,978
------------ ------------
Income from Operations 2,868,299 3,150,745
------------ ------------
Other Income (expense)
Other revenues 42,909 14,065
Interest and finance costs (272,721) (326,849)
------------ ------------
(229,812) (312,784)
------------ ------------
Net Income before Income Taxes and Minority Interest 2,638,487 2,837,961
Provision for Income Taxes (858,665) (179,798)
------------ ------------
Net Income before Minority Interest 1,779,822 2,658,163
Minority Interest in Earnings (74,362) (80,325)
------------ ------------
Net Income $ 1,705,460 $ 2,577,838
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Expressed in US dollars)
Total
members'
Additional equity and
Share Paid-in Capital Retained Minority Minority
capital Capital Reserve Profit/(Loss) Interest Interest
--------- ------------ ------------ -------------- ------------- -------------
Balance at December 31, 2002 $ 62,180 $ 5,795,308 $ 519,260 $ 1,007,233 $ 228,370 $ 7,612,351
Net income for the year
ended December 31, 2003 -- -- -- 2,577,838 80,325 2,658,163
Distribution to members 62,628 (1,602,564) (1,539,936)
Transfer to capital reserve -- -- 478,668 (478,668) -
--------- ------------ ------------ -------------- ------------- -------------
62,180 997,928 1,503,839 308,695 8,730,578
Balance at December 31, 2003 5,857,936
Net income for the year
ended December 31, 2004 -- -- -- 1,705,460 74,362 1,779,822
Transfer to capital reserve -- -- 318,114 (318,114) -- --
--------- ------------ ------------ -------------- ------------- -------------
Balance at December 31, 2004 $ 62,180 $ 5,857,936 $ 1,316,042 $ 2,891,185 $ 383,057 $ 10,510,400
========= ============ ============ ============== ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
(Expressed in US dollars)
2004 2003
----------- -----------
Cash flows from operating activities
Net income $ 1,705,460 $ 2,577,838
Adjustments to reconcile net profit to net cash provided
by operating activities
Depreciation 80,709 69,664
Minority interest in earnings 74,362 80,325
Changes in:
Restricted cash 203,659 (201,617)
Accounts receivable, net and other receivables 2,238,063 (2,798,591)
Properties held for resale 4,048,857 4,331,189
Advances to suppliers 369,047 (407,189)
Construction-in-progress (3,849,917) (678,556)
Deferred offering cost 280,891 (280,891)
Accounts payable and other payables 1,334,279 303,955
Amounts due to directors (631,226) 1,288,042
Advances from buyers 501,667 (1,116,625)
Deferred tax expenses 837,133 179,798
Other tax payables 942,132 253,058
----------- -----------
Net cash provided by operating activities 8,135,116 3,600,400
----------- -----------
Cash flows from investing activities
Purchases of fixed assets (1,974,340) (9,331)
----------- -----------
Net cash (used in) investing activities (1,974,340) (9,331)
----------- -----------
Cash flows from financing activities
Loan proceeds 20,415 1,292,271
Principal loans repayments (3,088,823) (2,484,096)
Member capital contributions -- 62,628
Distribution to members -- (1,602,564)
----------- -----------
Net cash (used in) financing activities (3,068,408) (2,731,761)
----------- -----------
Net increase in cash 3,092,368 859,308
Cash at beginning of year 1,159,310 300,002
----------- -----------
Cash at end of year $ 4,251,678 $ 1,159,310
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
Supplemental Disclosure of Consolidated Statement of Cash Flows
Year ended December 31, 2004
(Expressed in US dollars)
2004 2003
-------- --------
Supplemental Disclosure of Cash Flow information
Interest paid $246,107 $395,134
======== ========
Enterprise income taxes paid $ 21,522 $633,656
======== ========
Supplemental disclosure of non-cash investing and financing activities:
During the year ended December 31, 2004, the Company transferred car park spaces
in Diamond Mansion Phase 2, at cost of $1,420,080 from construction-in-progress
to fixed assets.
During the year ended December 31, 2003, the Company transferred two floors of
the commercial complex in Diamond Mansion Phase 1, at a net book value of
$1,929,295 from property and equipment to properties held for resale.
During 2003, the Members of 97% of the registered capital of Wuhan transferred
their interests to Town House Land Limited ("Town House") in a transaction
treated as a recapitalization of Wuhan. In connection with that acquisition, the
former Wuhan members, who became members in Town House, were to receive cash of
$1,602,564, $62,628 of which was used to repay balances due from directors by
Town House prior to the acquisition and the balance was treated as an increase
in payables to directors at December 31, 2003.
The accompanying notes are an integral part of these
consolidated financial statements.
6
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
1. DESCRIPTION OF BUSINESS
Organizational Structure
Wuhan Town House Land Limited ("Wuhan Town House") (formerly: Wuhan
Pacific Real Estate Development Company Limited) was registered as a
formal third level property Company in Hubei Province, in the People's
Republic of China as a limited liability company (in which investors'
potential losses are limited to their capital contributions) on December
18, 1995 with a registered capital of $1,207,729 (Rmb.10,000,000) and a
defined period of existence of 14 years to December 18, 2009. To meet the
qualifications of third level property company, the company must (1) have
registered capital of Rmb.10,000,000, (2) have engineering and staff of
not less that 12 people, (3) should have completed at lease 50,000 square
meters of accumulated development area, and (4) have a 100% passing rate
in construction quality and 10% ranked as excellent.
Subsequent recapitalizations during 2000 increased Wuhan Town House's
registered capital to $6,038,647 and changed is classification to a second
level property company. To meet the qualifications of a second level
property company, the company must (1) have registered capital of
Rmb.40,000,000, (2) have engineering and management staff of not less than
24 people, (3) should have completed 150,000 square meters of accumulated
areas completed within three years, (4) 100% pass rate in construction
quality with 10% ranked as excellent, and (5) at least three years
experience in property development. On August 15, 2003, Wuhan Town House
entered into a reverse merger agreement with Town House Land Limited
("Town House Land").
At December 31, 2004 Town House Land held 97% of the registered capital of
Wuhan Town House, directly held 100% of the equity in Town House Land
(Miami) Corporation and indirectly 97% of the equity in Town House Land
(USA) Inc. Collectively hereinafter, Town House Land, Wuhan Town House,
Town House Land (Miami) Corporation and Town House Land (USA), Inc., are
referred to as "the Company".
Town House Land (formerly: Hong Kong Window of the World Apparel Co.,
Limited) was incorporated in Hong Kong, as a private limited liability
company on August 13, 2001 with an authorized capital of $64,103
(HK$500,000) divided into 500,000 ordinary shares of par value $0.12
(HK$1.00) each. Town House Land Limited ("Town House Land") changed to its
present name on August 13, 2003. On August 15, 2003, Town House Land
acquired 97% of the outstanding registered capital of Wuhan Town House
Land. Terms of the transaction call for Town House Land to pay $1,602,564
in cash plus the contribution of an additional $5,857,488 in share capital
in Town House Land as consideration for the acquisition of the 97%
interest in Wuhan Town House's registered capital. For financial reporting
purposes, Wuhan Town House was considered to be the acquiring entity and
the additional cash consideration paid was treated as a distribution to
members. Town House Land had no operations prior to this reverse
acquisition and there was substantially no change in ownership from that
of Wuhan Town House as a result of this transaction.
On October 10, 2003 Wuhan City Foreign Investment Bureau approved the
registration of Wuhan Town House Land as a Sino Foreign Joint Investment
Enterprise with a defined period of existence of 20 years to October 27,
2023.
7
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
1. DESCRIPTION OF BUSINESS - Continued
Pursuant to the approval of Wuhan City Industrial and Commercial
Administrative Bureau on February 20, 2004 Wuhan Pacific Real Estate
Development Company Limited changed its name to Wuhan Town House Land
Limited.
The Company's principal activity is the development and sale of commercial
and residential real estate. The Company's principal country of operations
is The People's Republic of China ("PRC").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
Consolidation Policy - The consolidated financial statements include the
accounts of Town House and Wuhan Town House from August 15, 2003 forward
and Town House Land (Miami) Corporation and Town House Land (USA) Inc.,
since their incorporation. Prior to August 15, 2003, the financial
statements reflect the activity of Wuhan Town House as adjusted for the
effects of the recapitalization of August 15, 2003.
All significant inter-company transactions and balances within the Company
are eliminated on consolidation.
Cash and Equivalents - The Company considers all highly liquid debt
instruments purchased with maturity period of three months or less to be
cash equivalents. The carrying amounts reported in the accompanying
consolidated balance sheet for cash and cash equivalents approximate their
fair value. The Company has restricted cash in accordance with the loan
covenants.
Accounts Receivable - The Company provides an allowance for doubtful
accounts equal to the estimated uncollectible amounts. The Company's
estimate is based on historical collection experience and a review of the
current status of trade accounts receivable. Accounts receivable in the
balance sheet is stated net of such provision.
Properties Held for Sale - Properties held for sale are comprised of
properties held for sale and repossessed properties held for resale and
are stated at the lower of cost or net realizable value. Cost includes
acquisition costs of land use rights, development expenditure, interests
and any overhead costs incurred in bringing the developed properties to
their present location and condition.
Net realizable value is determined by reference to management estimates
based on prevailing market conditions.
Capital Reserve - Capital reserve represents that amount of reserve
appropriated from the net distributable profit after income tax in each
year when a net profit after operations is generated. In accordance with
the provisions of the Company's Memorandum and Articles of Association,
the Company is required to appropriate 15% of the net distributable profit
after enterprises income tax to capital reserve.
One-half of the capital reserve may be used for staff welfare payments and
the balance one-half may be transferred back to the statement of
operations to mitigate the losses from operations. The Company shall not
be required to appropriate any amount to capital reserve when the balance
standing in capital reserve is equal to or exceeds 50% of the registered
capital.
8
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Property and Equipment - Property and equipment are recorded at cost and
are being depreciated over the estimated useful lives of the related
assets. Depreciation is computed on the straight-line basis for both
financial and income tax reporting purposes over useful lives as follows:
Building and land rights 40 years
Equipment 5 years
Motor vehicles 5-8 years
Office furniture and fixtures 5 years
Repairs and maintenance costs are normally charged to the statement of
operations in the year in which they are incurred. In situations where it
can be clearly demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be obtained from the
use of the asset, the expenditure is capitalized as an additional cost of
the asset.
Property and equipment are evaluated annually for any impairment in value.
Where the recoverable amount of any property and equipment is determined
to have declined below its carrying amount, the carrying amount is reduced
to reflect the decline in value. There were no property and equipment
impairments recognized during the years ended December 31, 2004 and 2003.
Construction-In-Progress - Properties currently under development are
accounted for as construction-in-progress. Construction-in-progress is
recorded at acquisition cost, including land rights cost, development
expenditure, professional fees and during the course of construction for
the purpose of financing the project. Upon completion and readiness for
use of the project, the cost of construction-in-progress is to be
transferred to properties held for sale. As of December 31, 2004, one
construction project is reflected as long-term as further development has
ceased until such time as new access roads are completed by the Wuhan City
Government. Management anticipates these roads will be completed in the
second half of 2005 at which time construction should resume on this
project.
Related Companies - A related company is a company in which the director
has beneficial interests in and in which the company has significant
influence.
Income Recognition - Revenue from the sale of properties is recognized
when the following four criteria are met: (1) a sale is consummated, (2)
the buyers initial and continuing investments are adequate to demonstrate
a commitment to pay for the property, (3) the seller's receivable is not
subject to future subordination, and (4) the seller has transferred to the
buyer the usual risks and rewards of ownership in a transaction that is in
substance a sale and does not have a substantial continuing involvement
with the property.
Interest income is recognized when earned, taking into account the average
principal amounts outstanding and the interest rates applicable.
Cost of Properties Sold - The cost of goods sold includes the carrying
amount of the properties being sold and the business taxes paid by the
Company in connection with the sales. Business taxes included in cost of
sales were $1,128,870 and $403,922 for the years ended December 31, 2004
and 2003, respectively.
9
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Foreign Currencies - These financial statements have been prepared in U.S.
dollars. The functional currencies for Town House and Wuhan Pacific are
the "Hong Kong dollar" and "Renminbi" or "Yuan", respectively. Nonmonetary
assets and liabilities are translated at historical rates, monetary assets
and liabilities are translated at the exchange rates in effect at the end
of the year, and income statement accounts are translated at average
exchange rates. There were no material translation gains or losses during
the years ended December 31, 2004 and 2003 as the Renminbi was tied to the
U.S. Dollar during the time period covered in these financial statements.
Taxation - Taxation on overseas profits has been calculated on the
estimated assessable profits for the year at the rates of taxation
prevailing in the countries in which the Company operates.
Provision for The People's Republic of China enterprise income tax is
calculated at the prevailing rate based on the estimated assessable
profits less available tax relief for losses brought forward.
Enterprise income tax
Under the Provisional Regulations of The People's Republic of China
Concerning Income Tax on Enterprises promulgated by the State Council and
which came into effect on January 1, 1994, income tax is payable by
enterprises at a rate of 33% of their taxable income. Preferential tax
treatment may, however, be granted pursuant to any law or regulations from
time to time promulgated by the State Council. For the year ended December
31, 2004, the Company has been granted the privilege of computing the
gross profit margins on real estate development sales at 15% of sales and
computed the enterprise income tax at 33% on only 15% of sales.
Enterprise income tax ("EIT") is provided on the basis of the statutory
profit for financial reporting purposes, adjusted for income and expense
items, which are not assessable or deductible for income tax purposes.
Retirement Benefit Costs - According to The People's Republic of China
regulations on pension, the Company contributes to a defined contribution
retirement plan organized by municipal government in the province in which
the Company was registered and all qualified employees are eligible to
participate in the plan. Contributions to the plan are calculated at 20%
or 26% of the employees' salaries above a fixed threshold amount and the
employees contribute 6% while the Company contributes the balance
contribution of 14% or 20%. The Company has no other material obligation
for the payment of retirement benefits beyond the annual contributions
under this plan.
For the years ended December 31, 2004 and 2003, the Company's pension cost
charged to the statements of operations under the plan amounted to $5,974
and $1,814, respectively.
Fair Value of Financial Instruments - The carrying amounts of certain
financial instruments, including cash, accounts receivable, commercial
notes receivable, other receivables, accounts payable, commercial notes
payable, accrued expenses, and other payables approximate their fair
values as of December 31, 2004 because of the relatively short-term
maturity of these instruments.
10
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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. The most significant estimates related to allowance for
uncollectible accounts receivable, depreciation, costs to complete
construction in progress, taxes, and contingencies. Estimates may be
adjusted as more current information becomes available, and any adjustment
could be significant.
Recent Accounting Pronouncements - In April 2003, the Financial Accounting
Standards Board issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies financial accounting and reporting for derivative instruments
and for hedging actives under FASB No. 133, Accounting for Derivative
Instruments and Hedging Activities. As of December 31, 2004, the Company
had no derivative or hedging activity.
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150
Accounting for Certain Financial Instruments with Characteristics of both
Liability and Equity. This standard establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. As of December 31, 2004,
the Company had no financial instruments with these characteristics.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs - an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 requires that certain
abnormal costs associated with the manufacturing, freight, and handling
costs associated with inventory be charged to current operations in the
period in which they are incurred. The adoption of SFAS 151 had no impact
on the Company's financial position, results of operations, or cash flows.
In December 2004, the FASB issued a revision of SFAS No. 123, Share-Based
Payment. The statement establishes standards for the accounting for
transactions in which an entity exchanges its equity investments for goods
and services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. The statement does not change the
accounting guidance for share-based payments with parties other than
employees.
The statement requires a public entity to measure the cost of employee
service received in exchange for an award of equity instruments based on
the grant-date fair value of the award (with limited exception). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award (usually the vesting period). A
public entity will initially measure the cost of employee services
received in exchange for an award of liability instrument based on its
current fair value; the fair value of that award will be remeasured
subsequently at each reporting date through the settlement date. Changes
in fair value during the requisite service period will be recognized as
compensation over that period.
The grant-date for fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of these instruments.
11
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
The statement is effective for the quarter beginning January 1, 2006.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets-amendment of APB Opinion No. 29. SFAS No. 153 eliminates the
exception to fair value for exchanges of similar productive assets and
replaces it with a general exception for exchange transactions that do not
have commercial substance, defined as transactions that are not expected
to result in significant changes in the cash flows of the reporting
entity. This statement is effective for exchanges of nonmonetary assets
occurring after June 15, 2005.
Management believes adoption of these new statements will not have any
significant effect on the Company's financial condition or results of
operations.
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
Substantially all of the Company's bank accounts are in banks located in
the People's Republic of China ("PRC") and are not covered by any type of
protection similar to that provided by the FDIC on funds held in U.S
banks.
Substantially all of the Company's operations are in the PRC.
The Company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and clients and
maintains allowances for doubtful accounts based on factors surrounding
the credit risk of specific customers and clients, historical trends, and
other information. Accounts receivable totaling $1,064,981 and $2,054,320
as of December 31, 2004 and 2003, respectively, were collateralized by
real estate.
4. CASH AND EQUIVALENTS
As of December 31, 2004 and 2003, the Company had the following cash and
cash equivalents:
December 31,
--------------------------
2004 2003
---------- ----------
Restricted cash:
Pledged deposits $ -- $ 203,659
========== ==========
Cash and equivalents:
Cash on hand $ 44,492 $ 2,922
Banks deposits 4,207,186 1,156,388
---------- ----------
$4,251,678 $1,159,310
========== ==========
The pledged bank deposits, which were restricted, carried interest ranging
from 0.6% to 0.825% per month and in accordance with the terms and
conditions of the banking facilities agreed with a bank to provide
mortgage loan facilities to buyers of properties developed by the
subsidiary, Wuhan Pacific, which agreed to place guarantee fund deposits
of not less than 18% of the total outstanding mortgage loans extended to
properties buyers and to guarantee the repayments of the mortgage loans.
12
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
4. CASH AND CASH EQUIVALENTS, Continued
The guarantee fund shall be restricted while the mortgage loans extended
to properties buyers shall remain outstanding
5. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
Accounts receivable and other receivables consist of the following as of
December 31, 2004 and 2003:
December 31,
-----------------------
2004 2003
---------- ----------
Accounts receivable $1,180,573 $3,195,074
Less: Provision for doubtful debts 455,593 --
---------- ----------
Accounts receivable net of provision for doubtful debts 724,980 3,195,074
---------- ----------
Other receivables:
Staff advances 48,066 4,590
Utilities and other deposits 159,729 15,097
Others 80,469 36,546
---------- ----------
Other receivables 288,264 56,233
---------- ----------
$1,013,244 $3,251,307
========== ==========
6. PROPERTIES HELD FOR RESALE
As of December 31, 2004 and 2003, the Company had the following properties
held for resale:
December 31,
-----------------------
2004 2003
---------- ----------
Properties held for resale $4,293,626 $8,205,945
Repossessed properties held for resale -- 136,539
---------- ----------
$4,293,626 $8,342,484
========== ==========
A break down of properties held for resale by project is as follows:
December 31,
-----------------------
2004 2003
---------- ----------
General Garden $ 13,006 $1,959,277
Garden of Eden -- 183,395
Diamond Mansion Phase I Residential 27,708 1,124,313
Diamond Mansion Phase I Commercial 3,592,628 4,466,830
Diamond Mansion Phase 2 445,246 --
Gutian Apartments 215,039 608,669
---------- ----------
Total $4,293,627 $8,342,484
========== ==========
13
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
6. PROPERTIES HELD FOR RESALE, Continued
As of December 31, 2004 and 2003, the carrying values of inventories of $0
and $2,775,494, respectively, have been pledged as securities for the
Company's long-term bank loans.
7. PROPERTIES AND EQUIPMENT
Properties and equipment, stated at cost less accumulated depreciation and
amortization, consist of:
December 31,
--------------------------
2004 2003
----------- -----------
Land use rights and buildings $ 2,495,038 $ 1,074,957
Plant and machineries 29,590 1,981
Motor vehicles 535,116 94,769
Office equipment 172,068 87,695
----------- -----------
3,231,812 1,259,402
Less: Accumulated depreciation and amortization (280,981) (202,202)
----------- -----------
$ 2,950,831 $ 1,057,200
=========== ===========
During 2004 and 2003, properties totaling $1,420,080 and $0, respectively,
were transferred from construction-in-progress to property and equipment.
During the years ended December 31, 2004 and 2003, properties totaling $0
and $1,929,295, net of accumulated depreciation of $0 and $94,149,
respectively, were transferred from property and equipment to properties
held for resale.
8. CONSTRUCTION-IN-PROGRESS
Construction-in-progress represents two combined residential and
commercial project. Construction-in-progress represents the cost of the
land use rights, capitalized interest expenses, related pre-approval
capital expenditures and government approval fees. A breakdown on these
costs by project is as follows:
December 31,
-----------------------
2004 2003
---------- ----------
Current
Diamond Mansion Phase II Commercial Project $ -- $2,311,819
Diamond Mansion Phase II - Additional floors 24,123 --
Sanyang Apartments 2,953,576 --
YiChang Town House Plaza 3,184,037 --
---------- ----------
6,161,736 2,311,819
---------- ----------
Non-Current
Jing Qi Project 931,433 931,433
---------- ----------
$7,093,169 $3,243,251
========== ==========
14
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
8. CONSTRUCTION-IN-PROGRESS, Continued
Official approval for the construction of Diamond Mansion Phase II was
received in 2003 and the construction was completed in September 2004,
while the construction of the Jing Qi Project was strategically
temporarily suspended until the completion of the construction of a main
road near the site of the project by the Wuhan City Government. As at
December 16, 2004, construction to the road is still incomplete and the
Jing Qi Project has been further postponed.
The Company had already completed one half of the construction works of
Town House Plaza (formerly Sanyang Apartments) and expected the
construction will be completed by the end of 2005. The Company had also
already started the foundation work of Yi Chang Project. The capital
expenditures in respect of the Yi Chang Project comprised land use rights
of $1,660,628 and purchases of construction materials and other
expenditures totaling $92,219 as of December 31, 2004. Several approvals
for construction works are still pending from relevant government
departments and the processes usually take time.
9. ADVANCES FROM BUYERS
Advances from buyers represented deposits from residential property buyers
and which procedures for the transfer of ownership of the property
purchased have not been completed as at the balance sheets date. The
deposits from such property buyers for residential properties to be
transferred in the subsequent years are carried forward as deferred
revenue.
10. TRANSACTIONS WITH RELATED PARTIES
Amounts due from/(to) directors at December 31, 2004 and 2003 are as
follows:
December 31
Name ---------------------------- Maximum Outstanding Security
2004 2003 Balance During Year Held
------------- ------------ ------------------- --------
Fang Zhong (Director) $ (2,022,604) $(2,399,320) $(2,399,321) none
Hu Min (Director) 5,970 (41,667) 5,970 none
Luo Yun Fang (Director) 17,409 (46,108) 17,409 none
Fang Wei Jun (Director) (440) (48,077) (48,077) none
Fang Hui (Deceased) (440) (48,077) (48,077) none
Fang Wei Feng (Director) (77,744) (125,826) (125,826) none
------------- ------------
$ (2,077,849) $ (2,709,075)
============= =============
The amounts due are unsecured, interest free and have no fixed repayment
terms.
15
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
11. OTHER TAXES PAYABLE
Other tax payables consist of the following:
December 31,
-------------------------
2004 2003
---------- ----------
City construction tax $ 79,012 $ 17,748
Business tax 1,137,910 336,985
Food price balancing tax 22,609 9,666
Education surcharge 33,552 7,296
Flood control tax 21,751 4,990
Education development tax 21,225 9,766
Other taxes 26,514 13,990
---------- ----------
$1,342,573 $ 400,441
========== ==========
12. SHORT-TERM LOANS
The Company had the following short-term loans at December 31, 2004 and
2003:
December 31,
--------------------------
2004 2003
-------- --------
Secured $ -- $428,744
Unsecured -- 362,319
-------- --------
$ -- $791,063
======== ========
Other short-term loan of $428,744 was secured by the Yi Chang project and
was fully paid as of December 31, 2004.
Other short-term loan was unsecured, carried interest at 5.04% per annum
and was repayable within three months if the lender was not appointed as
the main contractor to the Yi Chang Project. As a pre-condition for the
unsecured short-term loan of $362,319, at December 31, 2003, a subsidiary
company, Wuhan Town House, had agreed to appoint the lender as main
contractor to Yi Chang construction project and should the subsidiary
company fails to appoint the lender as main contractor, the subsidiary
company had agreed to make a penalty payment of $36,232 to the lender. The
lender was appointed as the main contractor to the Yi Chang Project.
16
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
13. LONG-TERM DEBT
The Company had the following long-term debt at December 31, 2004 and
2003:
December 31, 2004 December 31, 2003
------------------------ ------------------------
Current Long-term Current Long-term
------- --------- ------- ---------
6.534% note payable to a bank,
interest payable quarterly with
principal due September 2004, secured
by Diamond Mansion Phase I $ -- $ -- $ 1,207,729 $ --
6.534% note payable to a bank,
interest payable quarterly with
principal due December 2004, secured
by Diamond Mansion Phase I -- -- 966,184 --
6.03% notes payable to a bank, monthly
installments of principal and
interest, due on various dates through
2007, secured by property 2,304 3,992 2,083 6,377
7.2% notes payable to a bank, monthly
installments of principal and
interest, due on various dates through
2007, secured by property 3,432 4,683 5,133 8,322
7.2% notes payable to a bank, monthly
installments of principal and
interest, due on various dates through
2014, secured by property 1,335 15,070 1,578 16,247
5.58% note payable to a bank, monthly
installments of principal and
interest, due on various dates through
2007, secured by property 1,658 2,066 1,510 3,851
17
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
13. LONG-TERM DEBT, Continued
December 31, 2004 December 31, 2003
------------------------ ------------------------
Current Long-term Current Long-term
------- --------- ------- ---------
5.58% note payable to a bank, monthly
installments of principal and
interest, due on various dates through
2010, secured by property 2,149 6,093 2,838 12,301
5.58% note payable to a bank, monthly
installments of principal and
interest, due on various dates through
2010, secured by property 933 5,265 795 6,283
5.58% note payable to a bank, monthly
installments of principal and
interest, due on various dates through
2011, secured by property 916 6,553 990 7,353
5.58% note payable to a bank, monthly
installments of principal and
interest, due on various dates through
2012, secured by property -- -- 3,417 24,842
5.58% note payable to a bank, monthly
installments of principal and
interest, due on various dates through
2015, secured by property 1,497 19,166 1,645 20,469
5.58% note payable to a bank, monthly
installments of principal and
interest, due on various dates through
2016, secured by property 1,625 22,668 2,013 23,816
5.58% notes payable to a bank, monthly
installments of principal and
interest, due on various dates through
2020, secured by property 2,565 58,609 3,599 60,104
5.58% note payable to a bank, monthly
installments of principal and
interest, due on various dates through
2025, secured by property 903 33,375 1,498 33,675
18
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
13. LONG-TERM DEBT, Continued
December 31, 2004 December 31, 2003
------------------------- -----------------------
Current Long-term Current Long-term
------- --------- ------- ---------
5.58% note payable to a bank, monthly
installments of principal and
interest, due on various dates
through 2030, secured by property -- -- 523 14,225
4.65% note payable to a bank, monthly
installments of principal and
interest, due on various dates
through 2026, secured by property 1,189 40,240 1,836 40,668
5.04% note payable to a bank, monthly
installments of principal and
interest, due on various dates
through 2012, secured by property 3,517 27,520 7,488 47,271
5.04% note payable to a bank, monthly
installments of principal and
interest, due on various dates
through 2013, secured by property 8,922 76,441 10,266 83,545
5.04% note payable to a bank, monthly
installments of principal and
interest, due on various dates
through 2018, secured by property 15,339 264,482 18,368 274,007
5.04% note payable to a bank, monthly
installments of principal and
interest, due on various dates
through 2022, secured by property 5,047 134,083 7,609 136,453
5.04% note payable to a bank, monthly
installments of principal and
interest, due on various dates
through 2023, secured by property 3,006 82,098 4,589 83,374
19
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
13. LONG-TERM DEBT, Continued
December 31, 2004 December 31, 2003
------------------------------ ------------------------------
Current Long-term Current Long-term
------------ -------------- -------------- ------------
7.65% note payable to a bank, monthly
installments of principal and
interest, due on various dates
through 2006, secured by property 1,845 1,541 1,510 3,502
Hire purchase 7,851 12,564 - -
------------ -------------- -------------- ------------
$ 66,033 $ 816,509 $ 2,253,201 $ 906,686
============ ============== ============== ============
As of December 31, 2004 and 2003, bank loans are secured by a legal charge
over the Wuhan Town House's land use rights and buildings totaling
$509,401 and $522,463, respectively, and stock of properties held for
resale of $0 and $2,775,494, respectively. According to the land use right
certificates, the security was discharged / released on November 20, 2003.
During the year ended December 31, 2003, the 2nd and 3rd Floors of Diamond
Mansion Phase I were pledged in respect of a short-term bank loan of
$2,415,459 (Rmb.20,000,000), and which loan was repaid before the year
then ended. According to the land use right certificates, the security was
discharged / released on February 4, 2004.
Maturities of the long-term debts for each of the next five years and
thereafter are as follows:
Amount
--------
2005 $ 66,033
2006 14,105
2007 10,741
2008 6,093
2009 --
Thereafter 785,570
--------
$882,542
========
14. CAPITAL
December 31,
--------------------
2004 2003
-------- --------
Authorized, issued and outstanding:
500,000 ordinary share at HK$1.00 each $ 64,103 $ 64,103
Less minority interest (1,923) (1,923)
-------- --------
$ 62,180 $ 62,180
======== ========
Town House Land Limited (formerly Hong Kong Window of the World Apparel
Co., Limited) (the "Company") was registered as in Hong Kong, as a limited
liability company on August 13, 2001 with a registered capital of $64,103
(HK $500,000).
20
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US dollars)
14. CAPITAL, Continued
Based on the Certificate of Incorporation on Change of Name dated August
3, 2003, the Company changed its name from `Hong Kong Window of the World
Apparel Co., Limited' to `Town House Land Limited'.
15. INCOME TAX
Provision for the People's Republic of China enterprise income tax ("EIT")
is calculated at the prevailing rate based on the estimated assessable
profits less available tax relief for losses carried forward.
For the year ended December 31, 2004 and 2003, the Company has been
granted the privilege of computing the gross profit margins on real estate
development sales at 15% of sales and computed the enterprise income tax
at 33% on only 15% of sales.
EIT is provided on the basis of the statutory profit for financial
reporting purposes, adjusted for income and expense items, which are not
assessable or deductible for income tax purposes.
A reconciliation of EIT tax at the statutory rate to the Company's
effective rate is as follows:
December 31,
-----------------------
2004 2003
---------- ----------
Computed at the statutory rate $1,119,877 $ 936,527
Tax effect of special tax rate granted during 2004 156,445 (756,729)
---------- ----------
Tax at effective rate $ 963,432 $ 179,798
========== ==========
16. COMMITMENTS
As of December 31, 2004 and 2003, the Company had contractual commitments
of the construction projects totaling $3,588,183 and $1,660,721,
respectively, and commitments for rental, capital expenditures for land
use rights, plant and machineries totaling $3,943 and $0, respectively.
During the year ended December 31, 2004, the Company is leasing office
space was set up for salesmen to meet customers in Shanghai and Wenzhou.
The Company had commitments to make payments for leasing of this office
totaling $38,275 through December 31, 2005.
21
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2005
(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents $ 5,105,515
Accounts receivable, net 1,289,932
Properties held for sale 5,837,017
Prepaid and other assets 695,399
Construction-in-progress - current 107,285
-----------
Total current assets 13,035,148
Land held for development 4,767,303
Property and equipment-net of accumulated depreciation of $355,696 2,912,585
Construction-in-progress - non-current 5,188,061
-----------
Total assets $25,903,097
===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,303,525
Advances from buyers 872,257
Amounts due to directors, net 1,726,316
Enterprise taxes payable 1,068,215
Other taxes payable 1,450,368
Short-term loans 3,822,345
Current portion of long-term debt 7,851
-----------
Total current liabilities 11,250,877
-----------
Long term debt, net of current portion shown 3,389,894
-----------
Minority interest 476,896
-----------
Stockholders' equity:
Share capital 64,103
Additional paid-in capital 5,857,936
Capital reserve 1,316,042
Retained earnings 3,547,349
-----------
Total members' equity 10,785,430
-----------
Total liabilities and members' equity $25,903,097
===========
See accompanying notes to financial statements.
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
Six Months Ended
June 30,
--------------------------
2005 2004
----------- -----------
Sales Revenues $ 5,193,341 $ 4,157,687
Cost of Properties Sold 4,134,499 1,999,155
----------- -----------
Gross profit 1,058,842 2,158,532
----------- -----------
Selling, General and Administrative Expenses:
Selling expenses 348,989 298,147
General and administrative expenses 567,800 317,006
Depreciation 74,714 28,201
----------- -----------
Total expenses 991,503 643,354
----------- -----------
Income from operations 67,339 1,515,178
----------- -----------
Other income (expense)
Other revenues 33,987 (5,614)
Interest and finance costs (116,348) (18,275)
----------- -----------
Total other income (expense) (82,361) (23,889)
----------- -----------
Net Income (Loss) before Income Taxes and Minority Interest (15,022) 1,491,289
(Provision for) Benefit from Income Taxes 697,046 (208,087)
----------- -----------
Net Income before Minority Interest 682,024 1,283,202
Minority Interest in Earnings (25,861) (39,861)
----------- -----------
Net Income $ 656,163 $ 1,243,341
=========== ===========
Weighted average basic and diluted shares outstanding 500,000 500,000
=========== ===========
Basic and diluted net income per common share $ 1.31 $ 2.49
=========== ===========
See accompanying notes to financial statements.
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
Six Months Ended
June 30,
--------------------------
2005 2004
----------- -----------
Cash flows from operating activities:
Net income $ 656,163 $ 1,243,341
Adjustments to reconcile net income to cash flows provided
by operating activities
Depreciation 74,714 30,003
Minority interest in earnings 25,861 39,861
Changes in assets and liabilites:
(Increase) decrease in -
Restricted cash -- (403,041)
Accounts receivable, net and other receivables (436,417) 997,296
Properties held for resale (1,543,391) 1,591,033
Prepaid and other assets (497,526) (650)
Construction-in-progress 1,797,823 (3,395,769)
Accounts payable and other payables 549,590 (129,343)
Advances from buyers (357,801) 2,425,880
Deferred tax expenses (775,119) 220,329
Other taxes payable 107,795 64,534
----------- -----------
Net cash provided by (used in) operating activities (398,308) 2,683,474
----------- -----------
Cash flows from investing activities:
Purchase of land held for development (4,767,303) --
Purchase/(transfer) of fixed assets (36,468) (233,324)
----------- -----------
Net cash provided by (used in) investing activities (4,803,771) (233,324)
----------- -----------
Cash flows from financing activities:
Minority interest in capital contributions 69,901 --
Amounts due to directors (351,533) (775,525)
Loan proceeds 6,427,793 --
Principle loan repayments (90,245) (615,887)
----------- -----------
Net cash provided by (used in) financing activities 6,055,916 (1,391,412)
----------- -----------
Net increase (decrease) in cash and cash equivalents 853,837 1,058,738
Cash and cash equivalents, beginning of period 4,251,678 1,159,310
----------- -----------
Cash and cash equivalents, end of period $ 5,105,515 $ 2,218,048
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid, net of capitalized amounts $ 395,134 $ 151,125
=========== ===========
Enterprise income taxes paid $ -- $ --
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
During the six months ended June 30, 2005, the Company exchanged two
residential units of Diamond Mansion for advertising valued at $122,322.
During the six months ended June 30, 2005, the Company transferred
$4,210,681 of construction expenditures for the YiChang Project from
current construction-in-progress to noncurrent construction-in-progress.
See accompanying notes to financial statements.
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Expressed in US dollars)
1. DESCRIPTION OF BUSINESS
Organizational Structure
Wuhan Town House Land Limited ("Wuhan Town House") (formerly: Wuhan
Pacific Real Estate Development Company Limited) was registered as a
formal third level property Company in Hubei Province, in the People's
Republic of China as a limited liability company (in which investors'
potential losses are limited to their capital contributions) on December
18, 1995 with a registered capital of $1,207,729 (Rmb.10,000,000) and a
defined period of existence of 14 years to December 18, 2009. To meet the
qualifications of third level property company, the company must (1) have
registered capital of Rmb.10,000,000, (2) have engineering and staff of
not less than 12 people, (3) should have completed at least 50,000 square
meters of accumulated development area, and (4) have a 100% passing rate
in construction quality and 10% ranked as excellent.
Subsequent recapitalizations during 2000 increased Wuhan Town House's
registered capital to $6,038,647 and changed its classification to a
second level property company. To meet the qualifications of a second
level property company, the company must (1) have registered capital of
Rmb.40,000,000, (2) have engineering and management staff of not less than
24 people, (3) should have completed 150,000 square meters of accumulated
areas completed within three years, (4) 100% pass rate in construction
quality with 10% ranked as excellent, and (5) at least three years
experience in property development. On August 15, 2003, Wuhan Town House
entered into a reverse merger agreement with Town House Land Limited
("Town House Land").
At December 31, 2004 and June 30, 2005, Town House Land held 97% of the
registered capital of Wuhan Town House, directly held 100% of the equity
in Town House Land (Miami) Corporation and indirectly 97% of the equity in
Town House Land (USA) Inc. Collectively hereinafter, Town House Land,
Wuhan Town House, Town House Land (Miami) Corporation and Town House Land
(USA), Inc., are referred to as "the Company".
Town House Land (formerly: Hong Kong Window of the World Apparel Co.,
Limited) was incorporated in Hong Kong, as a private limited liability
company on August 13, 2001 with an authorized capital of $64,103
(HK$500,000) divided into 500,000 ordinary shares of par value $0.12
(HK$1.00) each. Town House Land Limited ("Town House Land") changed to its
present name on August 13, 2003. On August 15, 2003, Town House Land
acquired 97% of the outstanding registered capital of Wuhan Town House
Land. Terms of the transaction call for Town House Land to pay $1,602,564
in cash plus the contribution of an additional $5,857,488 in share capital
in Town House Land as consideration for the acquisition of the 97%
interest in Wuhan Town House's registered capital. For financial reporting
purposes, Wuhan Town House was considered to be the acquiring entity and
the additional cash consideration paid was treated as a distribution to
members. Town House Land had no operations prior to this reverse
acquisition and there was substantially no change in ownership from that
of Wuhan Town House as a result of this transaction.
The Company's principal activity is the development and sale of commercial
and residential real estate.
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
Consolidation Policy - The consolidated financial statements include the
accounts of Town House and Wuhan Town House from August 15, 2003 forward
and Town House Land (Miami) Corporation and Town House Land (USA) Inc.,
since their incorporation. Prior to August 15, 2003, the financial
statements reflect the activity of Wuhan Town House as adjusted for the
effects of the recapitalization of August 15, 2003.
All significant inter-company transactions and balances within the Company
are eliminated on consolidation.
Cash and Equivalents - The Company considers all highly liquid debt
instruments purchased with a maturity period of three months or less to be
cash equivalents. The carrying amounts reported in the accompanying
consolidated balance sheet for cash and cash equivalents approximate their
fair value. The Company has restricted cash in accordance with the loan
covenants.
Accounts Receivable - The Company provides an allowance for doubtful
accounts equal to the estimated uncollectible amounts. The Company's
estimate is based on historical collection experience and a review of the
current status of trade accounts receivable. Accounts receivable in the
balance sheet is stated net of such provision.
Properties Held for Sale - Properties held for sale are comprised of
properties held for sale and repossessed properties held for resale and
are stated at the lower of cost or net realizable value. Cost includes
acquisition costs of land use rights, development expenditure, interests
and any overhead costs incurred in bringing the developed properties to
their present location and condition.
Net realizable value is determined by reference to management estimates
based on prevailing market conditions.
Capital Reserve - Capital reserve represents that amount of reserve
appropriated from the net distributable profit after income tax in each
year when a net profit after operations is generated. In accordance with
the provisions of the Company's Memorandum and Articles of Association,
the Company is required to appropriate a portion of the net distributable
profit after enterprises income tax to capital reserve. The amount
appropriated is determined on an annual basis by the Board of Directors.
One-half of the capital reserve may be used for staff welfare payments and
the balance one-half may be transferred back to the statement of
operations to mitigate the losses from operations. The Company shall not
be required to appropriate any amount to capital reserve when the balance
standing in capital reserve is equal to or exceeds 50% of the registered
capital.
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Property and Equipment - Property and equipment are recorded at cost and
are being depreciated over the estimated useful lives of the related
assets. Depreciation is computed on the straight-line basis for both
financial and income tax reporting purposes over useful lives as follows:
Building and land rights 40 years
Equipment 5 years
Motor vehicles 5-8 years
Office furniture and fixtures 5 years
Repairs and maintenance costs are normally charged to the statement of
operations in the year in which they are incurred. In situations where it
can be clearly demonstrated that the expenditure has resulted in an
increase in the future economic benefits expected to be obtained from the
use of the asset, the expenditure is capitalized as an additional cost of
the asset.
Property and equipment are evaluated annually for any impairment in value.
Where the recoverable amount of any property and equipment is determined
to have declined below its carrying amount, the carrying amount is reduced
to reflect the decline in value. There were no property and equipment
impairments recognized during the years ended December 31, 2004 and 2003,
or the six months ended June 30, 2005.
Construction-In-Progress - Properties currently under development are
accounted for as construction-in-progress. Construction-in-progress is
recorded at acquisition cost, including land rights cost, development
expenditure, professional fees and during the course of construction for
the purpose of financing the project. Upon completion and readiness for
use of the project, the cost of construction-in-progress is to be
transferred to properties held for sale. As of June 30, 2005, two
construction projects are reflected as long-term as construction on both
projects has been delayed.
Related Companies - A related company is a company in which the director
has beneficial interests in and in which the company has significant
influence.
Revenue Recognition - Revenue from the sale of properties is recognized
when the following four criteria are met: (1) a sale is consummated, (2)
the buyers initial and continuing investments are adequate to demonstrate
a commitment to pay for the property, (3) the seller's receivable is not
subject to future subordination, and (4) the seller has transferred to the
buyer the usual risks and rewards of ownership in a transaction that is in
substance a sale and does not have a substantial continuing involvement
with the property.
Interest income is recognized when earned, taking into account the average
principal amounts outstanding and the interest rates applicable.
Cost of Properties Sold - The cost of goods sold includes the carrying
amount of the properties being sold and the business taxes paid by the
Company in connection with the sales. Business taxes included in cost of
sales were $296,663 and $210,189 for the six months ended June 30, 2005
and 2004, respectively.
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Foreign Currencies - These financial statements have been prepared in U.S.
dollars. The functional currencies for Town House and Wuhan Pacific are
the "Hong Kong dollar" and "Renminbi" or "Yuan", respectively. Nonmonetary
assets and liabilities are translated at historical rates, monetary assets
and liabilities are translated at the exchange rates in effect at the end
of the year, and income statement accounts are translated at average
exchange rates. There were no material translation gains or losses during
the years ended June 30, 2005 and 2004 as the Renminbi was tied to the
U.S. Dollar during the time period covered in these financial statements.
Taxation - Taxation on overseas profits has been calculated on the
estimated assessable profits for the year at the rates of taxation
prevailing in the countries in which the Company operates.
Provision for The People's Republic of China enterprise income tax is
calculated at the prevailing rate based on the estimated assessable
profits less available tax relief for losses brought forward.
Enterprise Income Tax - Under the Provisional Regulations of The People's
Republic of China Concerning Income Tax on Enterprises promulgated by the
State Council and which came into effect on January 1, 1994, income tax is
payable by enterprises at a rate of 33% of their taxable income.
Preferential tax treatment may, however, be granted pursuant to any law or
regulations from time to time promulgated by the State Council. For the
year ended December 31, 2004, the Company has been granted the privilege
of computing the gross profit margins on real estate development sales at
15% of sales and computed the enterprise income tax at 33% on only 15% of
sales.
Enterprise income tax ("EIT") is provided on the basis of the statutory
profit for financial reporting purposes, adjusted for income and expense
items, which are not assessable or deductible for income tax purposes.
Retirement Benefit Costs - According to The People's Republic of China
regulations on pension, the Company contributes to a defined contribution
retirement plan organized by municipal government in the province in which
the Company was registered and all qualified employees are eligible to
participate in the plan. Contributions to the plan are calculated at 20%
or 26% of the employees' salaries above a fixed threshold amount and the
employees contribute 6% while the Company contributes the balance
contribution of 14% or 20%. The Company has no other material obligation
for the payment of retirement benefits beyond the annual contributions
under this plan.
For the six months ended June 30, 2005 and 2004, the Company's pension
cost charged to the statements of operations under the plan amounted to
$4,818 and $3,171, respectively.
Fair Value of Financial Instruments - The carrying amounts of certain
financial instruments, including cash, accounts receivable, commercial
notes receivable, other receivables, accounts payable, commercial notes
payable, accrued expenses, and other payables approximate their fair
values as of December 31, 2004 because of the relatively short-term
maturity of these instruments.
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Expressed in US dollars)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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. The most significant estimates related to allowance for
uncollectible accounts receivable, depreciation, costs to complete
construction in progress, taxes, and contingencies. Estimates may be
adjusted as more current information becomes available, and any adjustment
could be significant.
Recent Accounting Pronouncements - In December 2004, the FASB issued a
revision of SFAS No. 123, Share-Based Payment. The statement establishes
standards for the accounting for transactions in which an entity exchanges
its equity investments for goods and services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods
or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of those equity
instruments. The statement does not change the accounting guidance for
share-based payments with parties other than employees.
The statement requires a public entity to measure the cost of employee
service received in exchange for an award of equity instruments based on
the grant-date fair value of the award (with limited exception). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award (usually the vesting period). A
public entity will initially measure the cost of employee services
received in exchange for an award of liability instrument based on its
current fair value; the fair value of that award will be remeasured
subsequently at each reporting date through the settlement date. Changes
in fair value during the requisite service period will be recognized as
compensation over that period.
The grant-date for fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of these instruments.
The statement is effective for the quarter beginning January 1, 2006.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets-amendment of APB Opinion No. 29. SFAS No. 153 eliminates the
exception to fair value for exchanges of similar productive assets and
replaces it with a general exception for exchange transactions that do not
have commercial substance, defined as transactions that are not expected
to result in significant changes in the cash flows of the reporting
entity. This statement is effective for exchanges of nonmonetary assets
occurring after June 15, 2005.
Management believes adoption of these new statements will not have any
significant effect on the Company's financial condition or results of
operations.
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
Significant amounts of the Company's bank accounts are in banks located in
the People's Republic of China ("PRC") and are not covered by any type of
protection similar to that provided by the FDIC on funds held in U.S
banks.
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Expressed in US dollars)
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK - Continued
The Company has real estate in the PRC and in the United States of
America. Through June 30, 2005, the Company had generated no income and
very few expenses associated with its U.S. real estate development
activities.
The Company provides credit in the normal course of business. The Company
performs ongoing credit evaluations of its customers and clients and
maintains allowances for doubtful accounts based on factors surrounding
the credit risk of specific customers and clients, historical trends, and
other information. Accounts receivable totaling $1,333,978 and $2,055,902
as of June 30, 2005 and 2004, respectively, were collateralized by real
estate.
4. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
Accounts receivable and other receivables consist of the following as of
June 30, 2005:
Accounts receivable $ 1,333,978
Less: Provision for doubtful debts (455,592)
-----------
Accounts receivable net of provision for
doubtful debts 878,386
-----------
Other receivables:
Staff advances 135,569
Loans to third parties 120,419
Others 155,558
-----------
$ 1,289,932
===========
5. PROPERTIES HELD FOR SALE
As of June 30, 2005, the Company had the following properties held for
sale:
Properties held for sale $5,837,017
Repossessed properties held for resale --
----------
$5,837,017
==========
As of June 30, 2005, the carrying value of inventory of $636,721 has been
pledged as collateral on a short-term bank loan.
6. LAND HELD FOR DEVELOPMENT
At June 30, 2005, the Company held three parcels of land for development,
as follows:
Las Vegas, Nevada $1,156,348
Chino Hills, California 2,007,111
Fontana, California 1,603,844
----------
$4,767,303
==========
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Expressed in US dollars)
7. PROPERTIES AND EQUIPMENT
Properties and equipment, stated at cost less accumulated depreciation and
amortization, consist of the following at June 30, 2005:
Land use rights and buildings $ 2,502,964
Plant and machineries 29,590
Motor vehicles 561,113
Office equipment 174,614
-----------
Less: Accumulated depreciation and 3,268,281
amortization (355,696)
-----------
$ 2,912,585
===========
At June 30, 2005, fixed assets with a carrying value of $1,603,844 were
pledged as collateral to a bank with respect to an outstanding loan.
8. CONSTRUCTION-IN-PROGRESS
Construction-in-progress represents three combined residential and
commercial projects. Construction-in-progress represents the cost of the
land use rights, capitalized interest expenses, related pre-approval
capital expenditures and government approval fees. A breakdown on these
costs by project is as follows:
Current
Diamond Mansion Phase 2 $ 107,285
==========
Non-Current
Yi Chang Project 4,256,628
Jing Qi Project 931,433
----------
$5,188,061
==========
Due to a change in business strategy, construction costs of $4,256,628 on
the YiChang project was transferred to non-current
construction-in-progress in 2005, with construction expected to be
completed by the end of 2006.
Construction of the Jing Qi Project has been temporarily suspended until
the completion of the construction of a main road near the site of the
project by the Wuhan City Government. As of June 30, 2005, construction to
the road is still incomplete and, although the Company anticipates that
the road will be completed by the end of 2005, re-start of construction on
Jing Qi remains uncertain due to circumstances beyond control of the
Company.
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Expressed in US dollars)
9. ADVANCES FROM BUYERS
Advances from buyers represented deposits from residential property buyers
and which procedures for the transfer of ownership of the property
purchased have not been completed as of the balance sheet date. The
deposits from such property buyers for residential properties to be
transferred in the subsequent years are carried forward as deferred
revenue.
10. TRANSACTIONS WITH RELATED PARTIES
Net amounts due from/ (to) directors at June 30, 2005, are as follows:
Name June 30, 2005
------------------------ -------------
Fang Zhong (Director) $(1,671,077)
Hu Min (Director) 5,970
Luo Yun Fang (Director) 17,409
Fang Wei Jun (Director) (440)
Fang Hui (Deceased) (440)
Fang Wei Feng (Director) (77,744)
-------------
$(1,726,316)
=============
The amounts due are unsecured, interest free and have no fixed repayment
terms.
11. SHORT-TERM LOANS
The Company had the following short-term loans at June 30, 2005:
Amount
----------
Secured:
Wuhan Town House short-term bank loan, partially secured by
residential units of Town House Plaza (39 units valued at
$636,721 at June 30, 2005), interest at 120% of the Chinese
national rate paid periodically, principle due on February
1, 2006 $1,570,048
Wuhan Town House short-term bank loan, secured by corporate
guarantee, interest at 6.696% paid periodically, principle
due on December 31, 2005 792,297
Town House Land (USA) short-term bank loan, secured by real
estate property in the United States, interest at Far East
Bank Prime Rate plus 1% (7.0% at June 30, 2005) paid
periodically, principle due on May 1, 2006 760,000
Town House Land short-term loan from a financial
institution, secured by 433,000 shares of Town House Land
stock issued to a director, interest at 20% paid
periodically, principle due on October 25, 2005 700,000
----------
$3,822,345
==========
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Expressed in US dollars)
12. LONG-TERM DEBT
The Company had the following long-term debt at June 30, 2005:
Current Long-term
---------- ----------
Note payable to a bank for construction
development, interest at 115% of the
Chinese national rate paid monthly,
principle due December 20, 2006, secured
by Yi Chang construction-in-progress $ -- $3,381,643
Hire purchase 7,851 8,251
---------- ----------
$ 7,851 $3,389,894
========== ==========
Maturities of the long-term debts for each of the next five years and
thereafter are as follows:
Amount
----------
2006 $3,389,894
2007 --
2008 --
2009 --
2010 --
Thereafter --
----------
$3,389,894
==========
13. CAPITAL
Authorized, issued and outstanding:
500,000 ordinary share at $.12 (HK$1.00) each $64,103
=======
Town House Land Limited (formerly Hong Kong Window of the World Apparel
Co., Limited) (the "Company") was registered in Hong Kong, as a limited
liability company on August 13, 2001 with a registered capital of $64,103
(HK $500,000).
Based on the Certificate of Incorporation on Change of Name dated August
3, 2003, the Company changed its name from "Hong Kong Window of the World
Apparel Co., Limited" to "Town House Land Limited".
14. INCOME TAX
Enterprise income tax ("EIT") is provided on the basis of the statutory
profit for financial reporting purposes, adjusted for income and expense
items, which are not assessable or deductible for income tax purposes. For
the six month periods ended June 30, 2005 and 2004, the Company has been
granted the privilege of computing the gross profit margins on real estate
development sales at 15% of sales and computed the enterprise income tax
at 33% on only 15% of sales.
TOWN HOUSE LAND LIMITED AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(Expressed in US dollars)
15. COMMITMENTS
As of Jun 30, 05
----------------
Capital Commitments (Wuhan Town House):
Estimated (Fifth floor - Diamond Mansion II) $ 371,000
Contracted and authorized (Jing Qi Project) 42,880
Contracted and authorized (Yichang Project) 543,000
----------------
$ 956,880
================
Operating Commitments (Town House Land(Miami)):
Lease commitment $ 75,210
Advertising commitment 26,280
----------------
$ 101,490
================
In 2004 the Company elected to suspend construction on the Jing Qi project
temporarily until the main road currently under construction by the local
government is completed. As of June 30, 2005, construction on this main
road has not been completed. The Company has agreed with certain
contractors for an extension of contractual payments due to the deferment
of construction on the project.
(b) Pro forma financial information: The unaudited consolidated pro
forma financial statements of Xerion EcoSolutions Group Inc. and
of Town House Land Limited for the six month period ended June
30, 2005.
XERION ECOSOLUTIONS GROUP, INC.
PROFORMA BALANCE SHEET
JUNE 30, 2005
(UNAUDITED)
ASSETS
Xerion Town House Adjustments Proforma
------------ ------------ ----------- ------------
Current assets:
Cash and equivalents $ 11,577 $ 5,105,515 $ -- $ 5,117,092
Accounts receivable, net -- 1,289,932 -- 1,289,932
Properties held for sale -- 5,837,017 -- 5,837,017
Prepaid and other assets -- 695,399 -- 695,399
Construction-in-progress -- 107,285 -- 107,285
------------ ------------ ----------- ------------
Total current assets 11,577 13,035,148 -- 13,046,725
Land held for development 3,367 4,767,303 -- 4,770,670
Property and equipment, net -- 2,912,585 2,912,585
Construction-in-progress - non-current -- 5,188,061 -- 5,188,061
------------ ------------ ----------- ------------
Total assets $ 14,944 $ 25,903,097 $ -- $ 25,918,041
============ ============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 180,466 $ 2,303,525 $ -- $ 2,483,991
Advances from buyers -- 872,257 -- 872,257
Amounts due to directors 13,234 1,726,316 -- 1,739,550
Enterprise taxes payable -- 1,068,215 -- 1,068,215
Other taxes payable -- 1,450,368 -- 1,450,368
Short-term loans -- 3,822,345 -- 3,822,345
Current portion of long-term debt -- 7,851 -- 7,851
------------ ------------ ----------- ------------
Total current liabilities 193,700 11,250,877 -- 11,444,577
Long term debt, net of current portion shown above -- 3,389,894 -- 3,389,894
------------ ------------ ----------- ------------
Total liabilities 193,700 14,640,771 -- 14,834,471
------------ ------------ ----------- ------------
Minority interest -- 476,896 -- 476,896
------------ ------------ ----------- ------------
Stockholders' equity:
Common stock 2,842 64,103 -- 66,945
Preferred stock -- -- -- --
Additional paid in capital 10,014,413 5,857,936 -- 15,872,349
Capital reserve -- 1,316,042 -- 1,316,042
Donated capital 126,000 -- -- 126,000
Retained earnings (10,322,011) 3,547,349 -- (6,774,662)
------------ ------------ ----------- ------------
Total stockholders' equity (178,756) 10,785,430 -- 10,606,674
------------ ------------ ----------- ------------
Total liabilities and stockholders' equity $ 14,944 $ 25,903,097 $ -- $ 25,918,041
============ ============ =========== ============
XERION ECOSOLUTIONS GROUP, INC.
PROFORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005
(UNAUDITED)
Xerion Town House Adjustments Proforma
------------ ------------ ------------- ------------
Sales Revenues $ -- $ 5,193,341 $ -- $ 5,193,341
Cost of Properties Sold -- 4,134,499 -- 4,134,499
------------ ------------ ------------- ------------
Gross profit -- 1,058,842 -- 1,058,842
------------ ------------ ------------- ------------
Selling, General and Administrative Expenses:
Selling expenses -- 348,989 -- 348,989
General and administrative expenses 36,961 567,800 -- 604,761
Depreciation 1,469 74,714 -- 76,183
------------ ------------ ------------- ------------
Total expenses 38,430 991,503 -- 1,029,933
------------ ------------ ------------- ------------
Income from operations (38,430) 67,339 -- 28,909
------------ ------------ ------------- ------------
Other income (expense)
Other revenues -- 33,987 -- 33,987
Interest and finance costs -- (116,348) -- (116,348)
------------ ------------ ------------- ------------
Total other income (expense) -- (82,361) -- (82,361)
------------ ------------ ------------- ------------
Loss from continuing operations (38,430) -- -- (38,430)
------------ ------------ ------------- ------------
Income before income taxes (38,430) (15,022) -- (53,452)
(Provision for) benefit from income taxes -- 697,046 -- 697,046
------------ ------------ ------------- ------------
Net Income before Minority Interest (38,430) 682,024 -- 643,594
Minority Interest in Earnings -- (25,861) -- (25,861)
------------ ------------ ------------- ------------
Net income (loss) $ (38,430) $ 656,163 $ -- $ 617,733
============ ============ ============= ============
Weighted average basic and diluted shares outstanding 2,841,523 500,000 28,415,230
============ ============ ============= ============
Basic and diluted net income (loss) per common share $ (0.01) $ 1.31 $ 0.02
============ ============ ============= ============
XERION ECOSOLUTIONS GROUP, INC.
PROFORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
(UNAUDITED)
Xerion Town House Adjustments Proforma
------------ ------------ ------------- ------------
Sales Revenues $ -- $ 4,157,687 $ -- $ 4,157,687
Cost of Properties Sold -- 1,999,155 -- 1,999,155
------------ ------------ ------------- ------------
Gross profit -- 2,158,532 -- 2,158,532
------------ ------------ ------------- ------------
Selling, General and Administrative Expenses:
Selling expenses -- 298,147 -- 298,147
General and administrative expenses 55,515 317,006 -- 372,521
Business development 3,307 -- -- 3,307
Depreciation -- 28,201 -- 28,201
------------ ------------ ------------- ------------
Total expenses 58,822 643,354 -- 702,176
------------ ------------ ------------- ------------
Income from operations (58,822) 1,515,178 -- 1,456,356
------------ ------------ ------------- ------------
Other income (expense)
Other revenues -- (5,614) -- (5,614)
Interest and finance costs -- (18,275) -- (18,275)
------------ ------------ ------------- ------------
Total other income (expense) -- (23,889) -- (23,889)
------------ ------------ ------------- ------------
Loss from continuing operations (58,822) -- -- (58,822)
------------ ------------ ------------- ------------
Income before income taxes (58,822) 1,491,289 -- 1,432,467
(Provision for) benefit from income taxes -- (208,087) -- (208,087)
------------ ------------ ------------- ------------
Net Income before Minority Interest (58,822) 1,283,202 -- 1,224,380
Minority Interest in Earnings -- (39,861) -- (39,861)
------------ ------------ ------------- ------------
Net income (loss) $ (58,822) $ 1,243,341 $ -- $ 1,184,519
============ ============ ============= ============
Basic and diluted net income (loss) per common share $ (0.02) $ 2.49 $ 0.04
============ ============ ============= ============
Weighted average basic and diluted shares outstanding 2,841,523 500,000 28,415,230
============ ============ ============= ============
(c) Exhibits
2.1 Exchange Agreement between Xerion EcoSolutions Group
Inc., a Colorado corporation, and Town House Land
Limited, a limited liability company under the Company
Law of The People's Republic of China (the "PRC"), and
each member of Town House dated October 19, 2005.
23.1 Consent of Murrell Hall McIntosh & Co., P.L.L.C.
independent registered public accounting firm.
99.1 Form of press release.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 24, 2005 Xerion EcoSolutions Group Inc.
a Colorado corporation
By:
--------------------------------------
Ben Traub
Chief Executive Officer and President
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Exchange Agreement between Xerion EcoSolutions Group Inc., a
Colorado corporation ("Xerion"), and Town House Land Limited
("Town House"), a limited liability company organized under the
Company Law of The People's Republic of China (the "PRC"), and
each member of Town House dated October 19, 2005.
23.1 Consent of Murrell Hall McIntosh & Co., P.L.L.C. independent
registered public accounting firm.
99.1 Form of press release.