UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended June 30, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ______________ to _____________
Commission File Number: 0-26760
SINO-AMERICAN DEVELOPMENT CORPORATION
Nevada 20-5065416
--------------------------------- ------------------------
(State or other jurisdiction (IRS Employer ID Number)
of incorporation or organization)
1427 West Valley Boulevard
Suite 101
Alhambra, CA 91803
----------------------------------------
(Address of principal executive offices)
(604) 902 0178
---------------------------
(Issuer's telephone number)
Xerion EcoSolutions Group Inc.
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (of for such
shorter period than that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days Yes [X] No
[ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to
be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes [ ] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act. Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: August 28, 2006, 28,416,500 shares.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
SINO-AMERICAN DEVELOPMENT CORPORATION.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Condensed Consolidated Balance Sheet as of June 30, 2006...............1
Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2006, and 2005....................2
Condensed Consolidated Statements of Cash Flows for the three
months and six months ended June 30, 2006, and 2005....................3
Notes to the Condensed Consolidated Financial Statements...............4
Item 2. Management's Discussion and Analysis or Plan of Operations............13
Item 3. Controls and Procedures ..............................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...........18
Item 3. Defaults upon Senior Securities.......................................18
Item 4. Submission of Matters to a Vote of Security Holders...................18
Item 5. Other Information.....................................................18
Item 6. Exhibits .............................................................18
Signatures....................................................................19
Item 1. Financial statements.
SINO-AMERICAN DEVELOPMENT CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
June 30, 2006
(Unaudited)
ASSETS
Current Assets
Cash and equivalents $ 2,198,268
Accounts receivable, net of allowance of $418,737 316,546
Construction in progress 6,949,941
Properties held for resale 9,771,181
------------
Total Current Assets 19,235,936
Land held for development 4,826,378
Property and equipment, net of accumulated depreciation 2,874,271
------------
$ 26,936,585
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 2,100,282
Accrued construction costs 8,616,730
Advances from buyers 5,562,557
Enterprise taxes payable 459,139
Other taxes payables 1,542,231
Short-term loans 4,833,711
------------
Total Current Liabilities 23,114,650
Long-term Liabilities 97,082
Minority Interest 211,303
------------
Stockholders' Equity
Common stock, par value $0.001, 150,000,000 shares authorized,
28,415,230 shares issued and outstanding at June 30, 2006 28,415
Preferred stock, par value $0.001, 50,000,000 shares authorized,
no shares issued and outstanding at June 30, 2006 --
Additional paid in capital 5,946,588
Retained deficit (1,338,514)
Accumulated other comprehensive income 582,711
------------
Total stockholders' equity before advances offset 5,219,200
Advances to directors (1,705,650)
------------
Total stockholders' equity, net of advances offset 3,513,550
------------
$ 26,936,585
============
See accompanying summary of accounting policies
and notes to financial statements.
1
SINO-AMERICAN DEVELOPMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------- -----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Sales Revenues $ 597,923 $ 5,193,341 $ 4,885,728 $ 5,193,341
Cost of properties sold 1,587,484 4,134,499 4,866,534 4,134,499
------------ ------------ ------------ ------------
Gross profit (loss) (989,561) 1,058,842 19,194 1,058,842
------------ ------------ ------------ ------------
Selling, general and administrative expense
Selling expenses 13,621 239,156 173,589 348,989
Depreciation expense 62,482 37,700 101,376 74,714
Impairment loss 2,289,176 -- 3,246,031 --
General and administrative epenses 510,358 289,454 1,068,281 567,800
------------ ------------ ------------ ------------
2,875,637 566,310 4,589,277 991,503
------------ ------------ ------------ ------------
Income (loss) from operations (3,865,198) 492,532 (4,570,083) 67,339
Other income (expense)
Other revenues 4,464 29,476 6,575 33,987
Interest and finance costs (74,852) (66,391) (132,735) (116,348)
------------ ------------ ------------ ------------
(70,388) (36,915) (126,160) (82,361)
------------ ------------ ------------ ------------
Net income before income taxes and minority interest (3,935,586) 455,617 (4,696,243) (15,022)
(Provision for) benefit from income taxes (29,598) 697,046 (241,844) 697,046
------------ ------------ ------------ ------------
Net income before minority interest (3,965,184) 1,152,663 (4,938,087) 682,024
Minority interest in (earnings) loss 114,068 (25,861) 141,177 (25,861)
------------ ------------ ------------ ------------
Net income (loss) $ (3,851,116) $ 1,126,802 $ (4,796,910) $ 656,163
------------ ------------ ------------ ------------
Other comprehensive income $ 316,188 $ -- $ 320,002 $ --
------------ ------------ ------------ ------------
Total comprehensive income (loss) $ (3,534,928) $ (470,639) $ (4,476,908) $ 656,163
============ ============ ============ ============
Basic and diluted earnings (loss) per share $ (0.14) $ (0.02) $ (0.17) $ 0.02
============ ============ ============ ============
Basic and diluted comprehensive income (loss) per share $ (0.12) $ (0.02) $ (0.16) $ 0.02
============ ============ ============ ============
Basic and diluted weighted average shares outstanding 28,415,230 28,415,230 28,415,230 28,415,230
============ ============ ============ ============
See accompanying summary of accounting policies
and notes to financial statements.
2
SINO-AMERICAN DEVELOPMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
---------------------------
2006 2005
----------- -----------
Cash Flows From Operating Activities
Net Income (Loss) $(4,796,910) $ 656,163
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation 101,376 74,714
Minority interest (141,177) 25,861
Impairment of properties 3,246,031 --
Changes in
Accounts receivable, net and other receivable 278,239 (436,417)
Properties held for resale (8,330,457) (1,543,391)
Advances to suppliers 196,637 (497,526)
Construction-in-progress 9,888,409 1,797,823
Accounts payable and other payables (459,475) 549,590
Advances from buyers 109,339 (357,801)
Income and other taxes payable 324,603 (667,324)
----------- -----------
Net Cash Flows From (Used By) Operating Activities 416,615 (398,308)
Cash Flows From Investing Activities
Purchase of land held for development -- (4,767,303)
Purchases/transfer of fixed assets (139,254) (36,468)
----------- -----------
Net Cash Provided (Used) by Investing Activities (139,254) (4,803,771)
Cash Flows from Financing Activities
Loan proceeds 428,710 6,427,793
Principal loans repayments (910,444) (90,245)
Minority interest in capital contributions -- 69,901
Advances to directors and affiliated companies (775,705) (351,533)
----------- -----------
Net Cash Provided (Used) by Financing Activities (1,257,439) 6,055,916
----------- -----------
Foreign currency translation adjustment 320,002 --
----------- -----------
Increase (Decrease) in Cash (660,076) 853,837
Cash at Beginning of Year 2,858,344 4,251,678
----------- -----------
Cash at End of Year $ 2,198,268 $ 5,105,515
=========== ===========
Supplemental disclosure of cash flow information
Interest Paid in Cash $ 132,735 $ 395,134
=========== ===========
Enterprise income taxes paid $ -- $ --
=========== ===========
See accompanying summary of accounting policies
and notes to financial statements.
3
SINO-AMERICAN DEVELOPMENT CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
ORGANIZATIONAL STRUCTURE
SINO-American Development Corporation, (the "Company") was originally
incorporated in Colorado in 1985 as Gemini Ventures, Inc. The name was
changed in 1989 to Solomon Trading Company, Ltd., in 1994 to the Voyageur
First, Inc., in 1995 to North American Resorts, Inc., in 2000 to Immulabs
Corp. Effective March 28, 2003, as filed with the State of Colorado, the
Company changed its name to Xerion EcoSolutions Group Inc. and was engaged
in the business of developing gold extraction technology for the mining
industry until it became inactive in 2004.
In October of 2005, the Company entered into a stock exchange agreement
with Town House Land Limited (`Town House") whereby the Company issued
stock equal to 98.75% in its ownership in exchange for 100% of the
ownership interest in Town House.
This transaction was treated as a recapitalization of Town House for
financial reporting purposes.
On June 16, 2006, the shareholders elected to reincorporate the Company
from the State of Colorado to the State of Nevada and to change its name
to SINO-American Development Corporation. The Company also approved an
eight for one reverse stock split which reduced the number of shares
outstanding from 227,321,840 to 28,415,230. The effect of this reverse
stock split has been reflected retroactively for all periods included in
these financial statements.
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.
At June 30, 2006 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".
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.
4
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").
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.
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.
Town House Land (USA) Inc. ("Town House USA") was incorporated in
California on March 4, 2004 and owns real estate which it is holding for
development. Town House Land is a wholly owned subsidiary of Wuhan Town
House.
Town House Land (Miami) Corporation ("Town House Miami") was incorporated
in Florida on November 18, 2004 and owns real estate which it is holding
for development. Town House Miami is a wholly owned subsidiary of Wuhan
Town House.
The Company's principal activity is the development and sale of commercial
and residential real estate. The Company's principal country of operations
through June 30, 2006 was The People's Republic of China ("PRC"), however,
the Company held substantial real estate holdings in the United States as
of that date which it plans to develop in the near future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies:
BASIS OF PRESENTATION - The accompanying condensed consolidated financial
statements have been prepared in compliance with Rule 10-01 of Regulation
S-X and U.S. generally accepted accounting principles, but do not include
all of the information and disclosures required for audited financial
statements. These statements should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in
the Company's latest Annual Report on Form 10-KSB for the period ended
December 31, 2005. In the opinion of management, these statements include
all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation of the results of operations, financial
position and cash flows for the interim periods presented.
CONSOLIDATION POLICY - The consolidated financial statements include the
accounts of the Company, Town House, Wuhan Town House, Town House USA, and
Town House Miami. 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. As of June 30, 2006 there were no restrictions on the Company's
cash balances.
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, interest
and any overhead costs incurred in bringing the developed properties to
their present location and condition.
5
Net realizable value is determined by reference to management estimates
based on prevailing market conditions.
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 net of a 5%
salvage value 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 six months ended June 30, 2006 and 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 costs, development
expenditures, and professional fees 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.
RELATED COMPANIES - A related company is a company in which a 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 $283,423 and $296,663 for the six months ended June 30, 2006
and 2005, respectively.
ADVERTISING - Advertising costs are expensed as incurred. During the six
months ended June 30, 2006 and 2005, the Company incurred advertising
expenses of $16,600 and $172,347 respectively.
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.
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.
6
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
("PRC")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
years ended December 31, 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. During 2005, the Company was able to settle its 2004
and prior years enterprise tax liabilities with the PRC taxing authorities
for substantially less than the prevailing statutory rate resulting in the
recognition of a net income tax benefit of $697,046 during the six months
ended June 30, 2006.
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, 2006 and 2005, the Company's pension
cost charged to the statements of operations under the plan amounted to
$3,234 and $4,814, 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 June 30, 2006 because of the relatively short-term maturity
of these instruments.
EARNINGS PER SHARE - Basic earnings per share is computed by dividing net
income by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed by dividing net income
by the weighted-average number of common shares and dilutive potential
common shares outstanding during the period. As of June 30, 2006 and 2005,
there were no outstanding securities or other contracts to issue common
stock, such as options, warrants or conversion rights, which would have a
dilutive effect on earnings per share. For presentation purposes, earnings
per share for 2006 and 2005 were computing assuming the reorganization
occurred on January 1, 2004.
On June 16, 2006 the Company approved an eight for one reverse stock split
which reduced the number of shares outstanding from 227,321,840 to
28,415,230. The effect of this reverse stock split has been reflected
retroactively for all periods included in these financial statements.
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.
7
RECENT ACCOUNTING PRONOUNCEMENTS - SFAS 123(R), SFAS 151, SFAS 152, SFAS
153 and SFAS 154 - SFAS 123 (R), Share Based Payment replaces SFAS 123,
Accounting for Stock-Based Compensation, SFAS No. 151, Inventory Costs -
an amendment of ARB No. 4 and SFAS No. 152, Accounting for Real Estate
Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67,
SFAS No. 153, Exchange of Non-monetary Assets - an amendment of APB
Opinion No. 29 and SFAS No. 154, Accounting Changes and Error Corrections
- a replacement of APB No. 20 and SFAS 3 were recently issued. SFAS No.
123(R), 151, 152, 153 and 154 have no current applicability to the Company
and have no effect on the consolidated financial statements.
RECLASSIFICATIONS - Certain amounts in the 2005 financial statements have
been reclassified to conform to the 2006 presentation.
3. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
At June 30, 2006, the Company had $2,121,276 cash in banks located in The
People's Republic of China ("PRC") and these balances are not covered by
any type of protection similar to that provided by the FDIC on funds held
in United States banks.
Substantially all of the Company's operations are in the PRC other than
three significant undeveloped real estate holdings in the United States.
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 $316,546 and $1,289,932 as
of June 30, 2006 and 2005, respectively, were collateralized by real
estate.
4. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
Accounts receivable consist of the following as of June 30, 2006:
Accounts receivable $ 735,283
Less: Provision for doubtful debts (418,737)
----------
Accounts receivable net of provision for doubtful debts $ 316,546
----------
5. PROPERTIES HELD FOR RESALE
As of June 30, 2006, the Company had the following properties held for
resale:
General Garden $ 13,461
Diamond Mansion Phase I Residential 28,678
Diamond Mansion Phase I Commercial 1,335,446
Diamond Mansion Phase 2 287,055
Gutian Apartments 222,565
Wuhan Town House Plaza 197,580
YiChang Town House Plaza Commercial 2,111,016
YiChang Town House Plaza Residential 5,481,630
Other 93,750
==========
Total $9,771,181
==========
During the quarter ended June 30, 2006, management determined that the
unsold commercial properties located on floors one through five of the
Diamond Mansion, Phase One should be converted to residential properties
as the commercial space was not selling. This resulted in impairment in
value of $2,289,176 on these properties as residential properties have a
significantly lower retail value than commercial properties.
8
During the quarter ended June 30, 2006 the Company revised its cost
estimates to complete the YiChang Town House Plaza project. These upward
revisions resulted in an increase in cost of sales during the second
quarter to reflect both additional cost associated with sales made in the
first quarter as well as costs incurred on sales during the second
quarter. Management anticipates that it will be able to recover its costs
in remaining unsold and uncompleted units on this project
6. PROPERTIES AND EQUIPMENT
Properties and equipment as of June 30, 2006, stated at cost less
accumulated depreciation and amortization, consist of:
Land use rights and buildings $ 2,516,903
Plant and machineries 30,625
Motor vehicles 677,500
Office equipment 198,834
Furniture and fixtures 30,497
-----------
3,454,359
Less: Accumulated depreciation and amortization (580,088)
-----------
$ 2,874,271
===========
As of June 30, 2006, the Company owned three tracts of land located in the
United States which it was holding for development. The cost basis in this
land at June 30, 2006 was $4,826,378. At June 30, 2006, substantially all
of this land was pledged as collateral on various loans.
7. CONSTRUCTION-IN-PROGRESS
Construction-in-progress represents the cost of the land use rights,
capitalized interest expenses, related pre-approval capital expenditures
and government approval fees. A detail of these costs by project as of
June 30, 2006 is as follows:
YiChang Town House Plaza 6,949,941
----------
$6,949,941
==========
YiChang Town House Plaza construction-in-progress is pledged as collateral
on certain short-term and long-term borrowings of Wu Han Town House.
During the first quarter of 2006, the Company decided to abandon the Jing
Qi project which had been long delayed waiting for the Province to build
access roads. This resulted in an impairment loss of $956,855.
8. 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.
9
9. TRANSACTIONS WITH RELATED PARTIES
Amounts due from/(to) directors at June 30, 2006 are as follows:
Fang Zhong (Director) $ 1,701,910
Hu Min (Director) 45,420
Fang Wei Jun (Director) 39,010
Fang Wei Feng (Director) (80,690)
-----------
$ 1,705,650
===========
The amounts due are unsecured, interest free and have no fixed repayment
terms. For financial reporting purposes, the net balance due from
directors has been reflected as an offset against stockholders equity.
During the six months ended June 30, 2006 Fang Zhong received $684,506 in
advances from the Company. Of these advances, $546,271 went to Wuhan
Pacific Shopping Mall Limited pursuant to a guarantee of Fang Zhong.
10. OTHER TAXES PAYABLE
Other tax payables at June 30, 2006 consist of the following:
Business tax $1,313,541
Other taxes 228,690
----------
$1,542,231
==========
11. SHORT-TERM LOANS
The Company had the following short-term loans at June 30, 2006:
Wu Han Town House short-term bank loan, secured by
residential units of Town House Plaza, interest at 120%
of the national rate, paid periodically, due on February
7, 2006. $ 168,309
Town House Land (Miami) short-term bank loan, secured by
real estate property in the United States, interest at
1% over prime (8.250% at December 31, 2005), principal
due on December 31, 2006. 800,000
Wuhan Town House short-term bank loan, secured by
corporate guarantee, interest at 6.696% paid
periodically, principal due on December 31, 2007. 701,693
Wuhan Town House short-term bank loan, secured by
YiChang Project construction- in-progress, interest at
115% of the national rate, principal due based upon a
percentage of sales through December 20, 2006. 1,687,500
10
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 September 30,
2005) paid periodically, principal due on May 1, 2006.
760,000
Town House Land (Miami) short-term loan from a financial
institution, secured by real property, interest at Far
East Bank Prime Rate plus 1% (7.25% at September 30,
2005) paid periodically, principal due on September 1,
2006. 100,000
Wuhan Town House short-term bank loan, Secured by
YiChang Project construction- in-progress, interest at
115% of national rate paid periodically, principal due
based upon a percentage of sales through February 28,
2007. 187,500
Indirect financing 428,709
-----------
$4,833,711
===========
12. EQUITY
On June 16, 2006, the shareholders elected to reincorporate the Company
from the State of Colorado to the State of Nevada and to change the name
to SINO-American Development Corporation. The Company also approved an 8
for one reverse stock split which reduced the number of shares outstanding
from 227,321,840 to 28,415,230. The effect of this reverse stock split has
been reflected retroactively for all periods included in these financial
statements.
The Common Stock retained a par value of $.001 per share but the
authorized capital was reduced from 300,000,000 shares to 150,000,000
shares. The preferred stock, of which there was none outstanding at June
30, 2006 was changed to a par value of $.001 per share from no par.
13. 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 six months ended June 30, 2006 and 2005, 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.
11
A reconciliation of EIT tax at the statutory rate to the Company's
effective rate is as follows:
2006 2005
----------- -----------
Computed tax at Federal statutory rate of 34% $(1,630,949) $ (5,107)
Difference primarily attributable to EIT tax assessed on gross real
estate sales and adjustments to prior years tax liabilities based on
assessments from the PRC taxing
authorities 1,872,793 (691,939)
----------- -----------
Provision for (benefit from) income taxes $ 241,844 $ (697,046)
=========== ===========
14. COMMITMENTS
As of June 30, 2006 the Company had contractual commitments of the
construction projects totaling $6,251,250; commitments for lease
expenditures of $7,500; and an advertising commitment of $22,697.
During January of 2005, the Company and Fang Zhong entered into a three
year commitment to advance up to 30,000,000 Rmb. ($3,699,137) to Wuhan
Pacific Shopping Mall Limited. Fang Zhong has personally guaranteed the
repayment of these advances. As of June 30, 2006, the Company had advanced
a total of $3,278,774 to Wuhan Pacific Shopping Mall Limited, all of which
was treated as a repayment/advance of funds to Fang Zhong.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Form 10-QSB contains forward-looking statements that involve
substantial risks of uncertainties. You can identify these statements by
forward-looking words such as "may", "will", "expect", "plans", "intends",
"anticipate", "believe", "estimate" and "continue" or similar words and are
intended to identify forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. You should read statements that contain these words carefully because
they discuss its future expectations, contain projections of its future results
of operations or of its financial condition or state other "forward-looking"
information. The Company believes that it is important to communicate its future
expectations to its investors. However, there may be events in the future that
the Company is not able to accurately predict or control. The factors listed
above in the section captioned "Risk Factors", as well as any differ materially
from the expectations the Company describe in its forward-looking statements.
Results of Operations
Comparison of operations for the three months ended June 30, 2006 with the three
months ended June 30, 2005:
Revenues
Sales revenues decreased by $4,595,418 or 88%, in 2006 from $5,193,341 in
2005 to $597,923 in 2006. The unfavorable variance in sales revenue was mainly
attributable to sale of only 25 residential units from YiChang Town House Plaza
and no sales generated from Wuhan Town House Plaza for which the Company had
sales of 176 units during the comparable period in 2005.
o Sales of residential properties were $597,923 for the three months ended
June 30, 2006. There were no commercial properties sold during this
period.
Cost of Goods Sold
Cost of properties sold decreased to $1,587,484 for the three months ended
June 30, 2006 from $4,134,499 during the comparable period in 2005. This
decrease is due primarily to two factors (1) an 88% decrease in sales revenues
offset in part by (2) a change in the estimated cost of construction on the
YiChang Town House Plaza project resulted in an increase to cost allocated to
sold units, for which some of the units had been sold during the previous
quarter.
Operating and other expenses
Selling expenses decreased by $159,968, or 92%, to $13,621 in 2006 from
$239,156 in 2005, primarily as a result of the following:
o Advertising expenses decreased by 96%, due to the cessation of advertising
to stimulate sales of the Wuhan Town House Plaza.
o Administrative expenses increased by $220,904, or 76%, to $510,358 in 2006
from $289,454 in 2005, primarily as a result of the following:
o Salaries of administrative staff increased by $103,518, or 167%, due to an
increase in bonuses and average monthly salaries.
o Legal and professional fees increased by $96,951, or 3237%, as a result of
increases in legal services during 2006.
o Other tax expenses increased by $24,886, or 296% as a result of increases
in stamp duty, property duty and licenses duty paid.
Depreciation expense increased by $24,783, or 66%, to $62,483 in 2006 from
$37,770 in 2005. This increase is primarily attributable to the purchase of
additional assets during 2006.
13
Impairment loss of $2,289,176 due to management's decision to convert the
unsold commercial properties located on floors one through five of the Diamond
Mansion, Phase One to residential properties. This resulted in an impairment in
value of $2,289,176 on these properties as residential properties have a
significantly lower retail value than commercial properties.
Interest and finance costs increased by $7,921, or 12%, to $74,852 in 2006 from
$66,391 in 2005. This increase is primarily a result of an increase interest
expense related to short term loans coupled with bank handling charges.
Comparison of operations for the six months ended June 30, 2006 with the six
months ended June 30, 2005:
Revenues
Sales revenues decreased by $307,613 or 6%, in 2006 from $5,193,341 in
2005 to $4,885,728 during the comparable period in 2006.
o A 17.4% decrease in the average sales price per square meter from $462 per
square meter to $382 per square meter due to the sales locations and mix
of residential and commercial property sales.
o Partially offset by an increase in square meters sold of 3.5% or 439
square meters due to a sales at the new YiChang Town House Plaza during
2006, which exceeded sales at Wuhan Town House Plaza in 2005.
Cost of Goods Sold
Cost of properties sold increased to $4,886,534 for the six months ended
June 30, 2006 from $4,134,499 during the comparable period in 2005. This is due
primarily to the fact that the Company revised its cost estimates to complete
the YiChang Town House Plaza project. This upward revision resulted in a
substantial increase in cost of sales during the second quarter to reflect both
additional cost associated with sales made in the first quarter as well as costs
incurred on sales during the second quarter. Management anticipates that it will
be able to recover its costs in remaining unsold and uncompleted units on this
project.
Operating and other expenses
Selling expenses decreased by $175,400, or 50%, to $173,589 in 2006 from
$348,989 in 2005, primarily as a result of the following:
o Advertising expenses decreased by $155,748, or 90%, due to the cessation
of advertising to stimulate sales of the Wuhan Town House Plaza.
o Administrative expenses increased by $500,481, or 50%, to $1,068,281 in
2006 from $567,800 in 2005, primarily as a result of the following:
o Salaries of administrative staff increased by $247,850, or 169%, due to an
increase in bonuses and average monthly salaries.
o Legal and professional fees increased by $126,585, or 365%, as a result of
increases in legal services during 2006.
o Other tax expenses increased by $69,386, or 782% as a result of increases
in stamp duty, property duty and licenses duty paid.
o Rental expense increased $26,662, or 36%, as a result of new offices
established in Miami and an additional sales office in YiChang.
14
Depreciation expense
Depreciation expense increased by $26,662, or 36%, to $101,376 in 2006
from $74,714 in 2005. This increase is primarily attributable to the purchase of
additional assets during 2005.
Impairment losses
Impairment loss of $956,855 due to the termination of the Jing Qi project.
The Jing Qi project has been suspended for many years waiting for the
construction of a public road near the project. Because the status of the road
construction could not be determined with any degree of certainty the Company
has canceled the project.
Impairment loss of $2,289,176 due to the fact that management determined
that the unsold commercial properties located on floors one through five of the
Diamond Mansion, Phase One should be converted to residential properties as the
commercial space was not selling. This resulted in an impairment in the amount
of $2,289,176 on these properties as residential properties have a significantly
lower retail value than commercial properties.
Interest and Finance costs
Interest and finance costs increased by $16,387, or 14%, to $132,735 in
2006 from $116,345 in 2005. This increase is primarily a result of an increase
interest expense related to short term loans coupled with bank handling charges.
Liquidity and Capital Resources
As of June 30, 2006, the Company had a working capital deficit of $3,878,714.
Cash flows
Operating
Net cash flow provided by operating activities increased by $814,923, or
205%, to $416,615 in 2006 from $(398,308) in 2005. This increase is primarily
attributable to the collection of accounts receivable and increases in advances
from buyers.
Investing
Cash used in investing activities decreased $4,664,517 to $139,254 in 2006
from $4,803,771 in 2005. This decrease is primarily attributable to the
acquisition of properties in 2005.
Financing
The Company has net loan repayments of $481,734 in 2006 compared to net
borrowing of $6,337,548 in 2005. This change is primarily a result of completing
projects and paying down financing. The Company paid cash advances to directors
and affiliated companies of $775,705 in 2006.
Critical Accounting Policies
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America and the following
is a summary of significant accounting policies:
Consolidation policy - The consolidated financial statements include the
accounts of the Company, Town House, Wuhan Town House, Town House USA, and Town
House Miami. 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.
15
At June 30, 2006, the Company had $2,121,276 cash in banks located in The
People's Republic of China ("PRC") and these balances are not covered by any
type of protection similar to that provided by the FDIC on funds held in United
States banks.
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.
Related companies - A related company is a company in which a director has
beneficial interests in and in which the Company has significant influence.
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.
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 costs, development expenditures,
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.
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.
Advertising - Advertising costs are expensed as incurred.
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.
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.
16
Enterprise income tax
Under the Provisional Regulations of The People's Republic of China
("PRC")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 three months ended March 31, 2006 and
2005, 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. During 2005, the Company was
able to settle its 2004 and prior years enterprise tax liabilities with the PRC
taxing authorities for substantially less than the prevailing statutory rate
resulting in the recognition of a net income tax benefit during the six months
ended June 30, 2005 of $697,046.
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.
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 June
30, 2006 because of the relatively short-term maturity of these instruments.
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.
Earnings Per Share - Basic earnings per share is computed by dividing net
income by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing net income by the
weighted-average number of common shares and dilutive potential common shares
outstanding during the period. As of June 30, 2006 and 2005, there were no
outstanding securities or other contracts to issue common stock, such as
options, warrants or conversion rights, which would have a dilutive effect on
earnings per share. For presentation purposes, earning per share for 2006 and
2005 were computing assuming the reorganization occurred on January 1, 2004.
On June 16, 2006 the Company approved an eight for one reverse stock split
which reduced the number of shares outstanding from 227,321,840 to 28,415,230.
The effect of this reverse stock split has been reflected retroactively for all
periods included in these financial statements.
ITEM 3 - CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief Executive
Officer and Chief Financial Officer has evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined in Rules
13a-15 and 15d-15 under the Exchange Act) as of the end of period covered by
this quarterly report (the "Evaluation Date"). Based on such evaluation, such
officer has concluded that, as of the Evaluation Date, the Company's disclosure
controls and procedures are effective.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. During the most recent
fiscal quarter, there have not been any significant changes in the Company's
internal controls over financial reporting or in other factors that have
materially affected, or are reasonably likely to materially affect internal
controls over financial reporting.
17
PART 2 - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the stockholders of the Company was held on June 16,
2006, and the stockholders approved:
1. the reincorporation of the Company from the State of Colorado to the
State of Nevada, including the change of our corporate name to "SINO-American
Development Corporation" and a change in the par value of preferred stock to
$0.001 par value per share from no par value and a change in our authorized
shares of common stock from 300,000,000 shares to 150,000,000 shares;
2. a one-for-eight (1-for-8) reverse split of the issued and outstanding
common stock of the Company;
3. the election of members to the Board of Directors of the Company
consisting of five persons: Mr. Fang Zhong, Mr. Yang Jeongho, Mr. Fang Wei Feng,
Mr. Fang Wei Jun, and Mr. Dick R. Lee;
4. the 2006 Stock Option, SAR and Stock Bonus Plan of the Company; and
5. the appointment of Murrell, Hall, McIntosh & Co., PLLP as the
registered public accounting firm of the Company for its fiscal year ending
December 30, 2005.
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
31.1 Certification of Principal Executive Officer pursuant to Rule 13a-14 and
Rule 15d-14(a) promulgated under the Securities and Exchange Act of 1934,
as amended
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Executive
Officer)
18
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on this 30th day of August, 2006
SINO-AMERICAN DEVELOPMENT CORPORATION
/s/ Fang Zhong
----------------------------------------------------------
Fang Zhong President, Chief Executive Officer and Director
19