As filed with the Securities and Exchange Commission on April 30, 2006
Registration No. 333-122622
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
Amendment No. 4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DAHUA INC.
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(Name of small business issuer in its charter)
Delaware 6500 04-3616479
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(State or jurisdiction (Primarily Standard (I.R.S Employer
of incorporation or Industrial classification I.D. No.)
organization Code Number)
19th Floor, Building C, Tianchuangshiyuan, Huizhongbeili,
Chaoyang District, Beijing, China, 100012
86-10-6480-1527
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(Address and telephone number of principal executive offices)
19th Floor, Building C, Tianchuangshiyuan, Huizhongbeili,
Chaoyang District, Beijing, China, 100012
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(Address of principal place of business or intended principal place of business)
Schonfeld & Weinstein, L.L.P.
80 Wall Street, Suite 815
New York, NY 10005
Tel: (212) 344-1600, Fax: (212) 480-0717
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(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
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If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Proposed Proposed
Class of Maximum Maximum Amount of
Securities to Amount to Offering Price Aggregate Registration
be Registered be Registered Per Share Offering Price Fee
- --------------- ------------------- ---------------- ------------------ --------------
Common Stock 7,548,000 shares $0.05 $ 377,400 $ 44.42
(1) This registration statement registers the resale of up to 7,548,000 shares
of common stock offered by our selling shareholders.
(2) The Proposed Maximum Offering Price Per Share and the Proposed Maximum
Aggregate Offering Price in the table above are estimated solely for the
purpose of calculating the registration fee pursuant to Rule 457 promulgated
under the Securities Act of 1933. Since there is no current trading market for
the common stock, the Proposed Maximum Offering Price is based upon the initial
offering price of the shares.
We hereby amend this registration statement on such date or dates as may be
necessary to delay its effective date until we shall file a further amendment
which specifically states that this registration statement shall thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933
or until the registration statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to said Section 8(a), may
determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion Dated April 30, 2006
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DAHUA INC.
Prospectus
7,548,000 SHARES OF COMMON STOCK
This prospectus covers the resale of up to 7,548,000 shares of our common stock
owned by our selling shareholders who will offer their shares at a fixed price
of $0.05 per share and thereafter, or if our common stock is quoted on the
Over-the-Counter Bulletin Board, at then prevailing market prices or privately
negotiated prices. We will not receive any of the proceeds from the sale of
those shares.
There are no underwriting commissions involved in this offering. We have agreed
to pay all expenses of registering the shares for the selling stockholders.
No public market currently exists for our common stock. There is no guarantee
that our securities will ever trade on the OTC Bulletin Board or other exchange.
Investing in our common stock involves substantial risks. See "Risk Factors"
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starting at page 7.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the disclosures in this prospectus. Any representation
to the contrary is a criminal offense.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this prospectus is April 30, 2006.
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TABLE OF CONTENTS
Prospectus Summary........................................................... 5
Risk Factors................................................................. 7
Use of Proceeds............................................................. 14
Determination of Offering Price............................................. 14
Dilution.................................................................... 14
Selling Security Holders.................................................... 14
Plan of Distribution........................................................ 18
Legal Proceedings........................................................... 19
Directors, Executive Officers, Promoters and Control Persons................ 19
Security Ownership of Certain Beneficial Owners and Management.............. 22
Description of Securities................................................... 23
Interest of Named Experts and Counsel....................................... 24
Disclosure of Commission Position of Indemnification for Securities
Act Liabilities............................................................. 25
Organization Within Last Five Years......................................... 25
Description of Business..................................................... 27
Management's Discussion and Analysis or Plan of Operation................... 35
Description of Property..................................................... 40
Certain Relationships and Related Transactions.............................. 41
Market for Common Equity and Related Stockholder Matters.................... 43
Executive Compensation...................................................... 44
Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure...................................... 46
Additional Information...................................................... 48
Financial Statements........................................................ 48
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PROSPECTUS SUMMARY
This prospectus contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors
including those set forth under "Risk Factors" and elsewhere in this
prospectus. You should read and carefully consider the entire prospectus
before making a decision to purchase our common stock.
The Company
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Dahua Inc. ("Dahua", "we", or "our") was incorporated on March 8, 2002 in the
State of Delaware as Norton Industries Corp. ("Norton"). We changed our name
to Dahua Inc. on February 7, 2005, as a result of a reverse acquisition in
which Norton acquired all capital shares of Bauer Invest Inc. ("Bauer"). The
acquisition was accounted for as a recapitalization, rather than a business
combination. Accordingly, the historical operations of Bauer and its
subsidiaries were represented as our historical operations.
Prior to the acquisition, Norton was a blank check company seeking to complete
a merger or business acquisition. Since its inception, Norton had conducted
virtually no business until January 30, 2005, when Norton acquired Bauer.
Bauer is a holding company, which conducts its business through its 80% owned
subsidiary Beijing Dahua Real Estate Development, Ltd., an operating company
organized in the People's Republic of China ("Dahua Real Estate").
Dahua Real Estate was incorporated on September 24, 2001, to engage in the
development and sale of luxury single-family houses in Beijing, China. The
operating activities of Dahua Real Estate are entirely located in a suburb of
Beijing, China. It began to build luxury single-family houses in July 2003. The
construction of its First Phase of the development,a total of 76 housing units,
was completed in December 2005. As of December 31, 2005, six units were sold,
26 units were reserved with clients' deposits, and 44 units were available for
sale. For the year ended December 31, 2005, we recognized sales revenues of
$2,267,399 from the sale of our housing units.
Our executive offices are located at 19th Floor, Building C, Tianchuangshiyuan,
Huizhongbeili, Chaoyang District, Beijing, China, 100012. Our telephone number
at that address is 86-10-6480-1527.
We have no website. Our operating subsidiary Beijing Dahua Real Estate
Development, Ltd. has a website, whose address is www.dhzhy.com.cn.
Information contained on the website is not a part of this prospectus.
Our fiscal year end is December 31.
The Offering
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Securities Offered: Up to 7,548,000 shares of common stock. The securities
being offered are those of the existing shareholders
only.
Price Per Share: The sales price is fixed at $0.05 per share until the
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shares are listed on the OTC Bulletin Board or other
national exchange, and thereafter at prevailing market
prices or privately negotiated prices.
Securities Issued
and Outstanding 25,000,000 shares of common stock were issued and
outstanding as of the date of this prospectus.
Use of Proceeds We will not receive any proceeds from the sale of the
common stock by the selling shareholders.
Plan of Distribution We are unaware of the nature and timing of any future
sales of our common stock by existing shareholders.
There is no minimum number of shares to be sold in
this offering. No underwriting arrangements for this
offering exist. There are no arrangements to place any
of the proceeds in escrow.
Registration Costs We estimate our total offering registration costs to
be $65,545. We have agreed to pay all costs and
expenses relating to the registration of our common
stock.
FINANCIAL SUMMARY INFORMATION
The following Financial Summary and Operating Data have been derived from our
audited financial statements and unaudited interim financial statements for
the periods indicated. You should read the following financial data in
conjunction with our financial statements and the notes thereto included
elsewhere in this prospectus.
Statement of Operations Data:
- -----------------------------
For the Years Ended December 31,
-------------------------------------------------
2005 2004
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Revenue $ 2,267,399 $ -
Expenses $ 474,588 $ 543,398
Net Income (Loss) $ 137,182 $ (432,866)
Net Income (Loss) Per Share $ 0.01 $ (0.02)
Balance Sheet Data:
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December 31, 2005 December 31, 2004
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Total Assets $ 15,781,714 $ 10,849,879
Total Liabilities $ 12,464,975 $ 10,524,837
Shareholders' Equity $ 2,633,499 $ 260,034
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RISK FACTORS
The shares of common stock offered by this prospectus involve a high degree of
risk. You should carefully consider the following risk factors, in addition to
the other information set forth in this prospectus, before you purchase these
shares. The risks and uncertainties described below are those we have
identified as material. If any of the events contemplated by the following
discussion of risks should occur, our business, financial condition and
results of operations may suffer. As a result, the trading price of our common
stock could decline and you could lose part or all of your investment in our
common stock.
Risks Related to Our Business
-----------------------------
1. WE LACK AN OPERATING HISTORY UPON WHICH AN EVALUATION OF OUR FUTURE
SUCCESS OR FAILURE CAN BE MADE.
We were incorporated in March 2002 as a blank check company for the purpose of
seeking to complete a merger or business acquisition. We conducted virtually
no business until January 30, 2005, when we acquired Bauer Invest Ltd. Bauer
is a holding company, which conducts its business through its 80% owned
subsidiary Beijing Dahua Real Estate Development, Ltd., a private company
operating in the People's Republic of China ("Dahua Real Estate"). Dahua Real
Estate was incorporated on September 24, 2001, to engage in the development
and sale of luxury single-family houses in Beijing, China. The acquisition of
Bauer was accounted for as a recapitalization, rather than a business
combination. Accordingly, the historical operations of Bauer and its
subsidiaries were represented as our historical operations. Our limited
operating history makes it difficult for you to evaluate our business and
future prospects.
2. WE HAVE INCURRED LOSSES IN THE PAST. IF THE LOSSES CONTINUE, WE MAY HAVE
TO SUSPEND OUR OPERATIONS OR CEASE CARRYING ON BUSINESS.
While we had net income of $137,182 for the year ended December 31, 2005, we
had accumulated deficit of $570,136 as of December 31, 2005. We are a
development stage company, and we may incur additional losses. There is no
assurance that our operations will become profitable. Failure to generate
revenue will cause us to go out of business and could cause you to lose all
or a substantial part of your investment.
3. WE WILL NEED ADDITIONAL FINANCING TO CARRY OUT OUR SECOND PHASE PROJECT.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, WE MAY HAVE TO DELAY THE
IMPLEMENTATION OF OUR SECOND PHASE PROJECT, AND OUR ABILITY TO INCREASE
REVENUE WILL BE MATERIALLY IMPAIRED.
Since inception, we have been dependent on short-term loans and customer
deposits to meet our cash requirements. As of December 31, 2005 we completed
the construction of our First Phase of Dahua Garden project consisting of 76
luxury single-family houses. Of 76 units, six houses were sold, 26 houses were
reserved with clients' deposits, and 44 houses were available for sale. We are
currently applying with Beijing municipal and Changping district governmental
agencies for all the requisite licenses, permits, and approvals to start our
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Second Phase of Dahua Garden. To date we have not received any licenses,
permits or approvals from governmental authorities to commence our Second
Phase construction. We expect to obtain the licenses, permits and approvals by
the second half of 2006. It is estimated that we need approximately $60.5
million in order to complete our Second Phase project. We intend to use (i)
our proceeds from sales of our First Phase housing units, (ii) customer
deposits from our pre-sale of the housing units in the Second Phase, and
(iii) short-term borrowings from DahuaGroup, our affiliate, to finance our
Second Phase of Dahua Garden. At present we do not have any arrangements for
additional financing. If we are unable to obtain additional financing on terms
acceptable to us, we may have to delay or curtail our Second Phase project,
and our ability to increase revenue will be materially impaired.
4. IF WE RAISE ADDITIONAL CAPITAL THE VALUE OF YOUR INVESTMENT MAY DECREASE.
If we need to raise additional capital to implement or continue operations, we
will likely issue additional equity or convertible debt securities. If we
issue equity or convertible debt securities, the net tangible book value per
share may decrease, the percentage ownership of our current stockholders may
be diluted and such equity securities may have rights, preferences or
privileges senior or more advantageous to our common stockholders.
5. WE NEED PERMITS, LICENSES OR APPROVALS FROM GOVERNMENT AUTHORITIES TO
BEGIN OUR CONSTRUCTION OF THE SECOND PHASE PROJECT. IF WE FAIL TO OBTAIN ALL
REQUIRED LICENSES, PERMITS, OR APPROVALS, WE MAY HAVE TO CEASE OUR OPERATIONS.
Before we can develop a property, we must obtain a variety of approvals from
local and municipal governments with respect to such matters as zoning,
density, subdivision, traffic considerations, site planning and environmental
issues. Although there are currently no unfavorable rulings that would have a
significant adverse effect on the development of our proposed Second Phase of
Dahua Garden, there is no assurance that we will be able to obtain all
required licenses, permits, or approvals from government authorities. If we
fail to obtain all required licenses, permits, or approvals, we may have to
cease our operations.
6. WE ACT AS GENERAL CONTRACTOR ON OUR CONSTRUCTION PROJECTS, AND IF ANY OF
OUR SUBCONTRACTORS SHOULD FAIL TO COMPLETE THEIR JOBS ON TIME, OUR BUSINESS
COULD BE DISRUPTED.
We act as general contractor on our construction projects. We hire
unaffiliated subcontractors to do work for us. In the event that any of our
subcontractors should fail to complete their jobs on time, our business could
be disrupted, which will have an adverse effect on our results of operation and
our financial condition.
7. WE ARE VULNERABLE TO CONCENTRATION RISKS BECAUSE OUR OPERATIONS ARE
EXCLUSIVELY IN THE BEIJING, CHINA MARKET.
We operate our business in Beijing, China. All of our revenues will be derived
from the sale of our luxury single-family houses in Beijing, China. Although
some of our customers are from the neighboring areas in Beijing, we may not be
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able to generate adequate revenue if local business conditions in Beijing
change adversely. These changes may include business downsizing, industry
slowdowns, local oversupply or reduction in demand for real estate properties,
and changes in local governmental policies. Operating exclusively in Beijing
exposes us to greater economic risks than if we operated in several geographic
regions. Any adverse changes in business conditions in Beijing, China, could
adversely impact our financial condition, results of operations and cash flow.
8. WE DEPEND ON KEY PERSONNEL FOR THE SUCCESS OF OUR BUSINESS. OUR BUSINESS
MAY BE SEVERELY DISRUPTED IF WE LOSE THE SERVICES OF OUR CEO OR FAIL TO
SUCCESSFULLY RECRUIT QUALIFIED MANAGERIAL PERSONNEL HAVING EXPERIENCE IN
BUSINESS.
Our success is heavily dependent upon the continued service of Yonglin Du, our
chief executive officer. Mr. Du has valuable personal relationships with
government agencies and executive officers in the industry. A good personal
relationship is sometimes crucial for doing business in China. If Mr. Du is
unable or unwilling to continue in his position, we may not be able to easily
replace him. Loss of his services could delay our applications for construction
permit and land acquisition, and our business may be severely disrupted. We do
not maintain key-man insurance on the life of Mr. Du. In addition, in order to
successfully implement and manage our business plan, we will be dependent upon,
among other things, successfully recruiting qualified managerial personnel
having experience in business. Competition for qualified individuals is
intense. There can be no assurance that we will be able to retain existing
employees or that we will be able to find, attract and retain qualified
personnel on acceptable terms.
9. OUR OFFICERS AND DIRECTORS ARE SUBJECT TO CONFLICTS OF INTEREST, AND THERE
IS A RISK THAT THEY MAY PLACE THEIR INTERESTS AHEAD OF YOURS.
We believe that our officers and directors will be subject to conflicts of
interest. The conflicts arise from their relationships with our affiliate.
Yonglin Du, our chief executive officer, also serves as president and a
director of Dahua Project Management Group Co. Ltd. ("Dahua Group"), a Beijing
Municipal Government licensed construction project supervising business entity.
Hua Meng, our chief financial officer, and Qinna Zeng, our corporate secretary,
are also employed by Dahua Group. They may have conflicts of interest in
allocating time, services, and functions between us and Dahua Group, in which
any of them are or may become involved. Mr. Du anticipates devoting a minimum
of twenty to thirty-two hours per week of his business hours, and each of Ms.
Meng and Ms. Zeng fifteen to twenty hours of theirbusiness hours to our
business activities. If and when the business operations increase and a more
extensive time commitment is needed, they are prepared to devote more time to
our affairs, in the event that becomes necessary.
To ensure that potential conflicts of interest are avoided or declared to us
and to comply with the requirements of the Sarbanes-Oxley Act of 2002, our
Board of Directors, on January 30, 2005, adopted a Code of Business Conduct
and Ethics, among other things, to reduce potential conflicts of interest.
Conflicts of interest must, to the extent possible, be avoided, and any
material transaction or relationship involving a potential conflict of interest
must be reviewed and approved in advance by a majority of the board of
directors, or, if required by law, a majority of disinterested stockholders.
No personal loans will be made to executive officers and directors.
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All our transactions with affiliates have been and will be made on terms no
less favorable to us than could have been obtained from unaffiliated third
parties. Our policy is to require that a majority of board members approve
all transactions between us and our officers, directors, principal stockholders
and their affiliates.
10. WE HAVE NOT CARRIED PROPERTY OR CASUALTY INSURANCE. ANY BUSINESS
DISRUPTION, LITIGATION OR NATURAL DISASTER MIGHT RESULT IN SUBSTANTIAL COSTS
AND DIVERSION OF RESOURCES.
The insurance industry in China is still at an early stage of development.
Insurance companies in China offer limited business insurance products, and do
not, to our knowledge, offer business liability insurance. As a result, we do
not have any business liability insurance coverage for our operations. Any
business property loss, natural disaster or litigation might result in
substantial costs and diversion of resources.
11. OUR QUARTERLY OPERATING RESULTS, REVENUES AND EXPENSES MAY FLUCTUATE
SIGNIFICANTLY, WHICH COULD HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF OUR
COMMON STOCK.
Our operating results, revenues and expenses may fluctuate significantly from
quarter to quarter due to a variety of factors including:
o The timing, size and execution of sales contracts and home deliveries;
o Lengthy and unpredictable sales cycles;
o Changes in our operating expenses; and
o Fluctuations in general economic conditions.
We believe that period-to-period comparisons of our results of operations are
not a good indication of future performance. It is possible that our operating
results will be below your expectations. In that event, the trading price of
our common stock may fall.
12. MANY OF OUR COMPETITORS ARE SIGNIFICANTLY LARGER THAN WE ARE, AND THEY
HAVE GREATER FINANCIAL RESOURCES AND HAVE MORE EXPERIENCED MANAGERS THAN WE DO.
We are a small company and have little market share in our target market. The
market of residential housing development in Beijing, China, is highly
competitive. We compete with numerous entities, many of which are significantly
larger than we are, and have greater financial resources and have more
experienced managers than we do. As a result, they may be able to respond more
quickly to new or emerging house plans or construction materials and changes
in customer demands or to devote greater resources to the development,
promotion and sale of their products or services than we can. If we cannot
compete effectively, we may never become profitable. Although no one of our
competitors currently dominates or significantly influences the market, they
could adversely affect us.
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13. THE RESIDENTIAL REAL ESTATE DEVELOPMENT INDUSTRY IS A HIGH RISK INDUSTRY.
IF MARKET CONDITIONS CHANGE DRAMATICALLY UNFAVORABLY TO US, WE MAY GO OUT OF
BUSINESS.
The real estate development industry in general, and the residential luxury
real estate development industry in particular, is a high risk industry,
subject to changes in general economic conditions, fluctuating interest rates,
and changing demand for the types of developments being considered. Volatility
in local and regional land use demands, as well as changing supply and demand
for the specific uses for which the real property is being developed, are also
factors in assessing the relative risks of the business. The demand for
residential real estate development is particularly sensitive to changing
interest rates and shifting demographics. Both of these factors affecting the
demand for residential housing are highly unpredictable over both the
short-and long-term. If market conditions change dramatically and unfavorably
to us, we may go out of business.
Risks Related to Doing Business in China
----------------------------------------
14. POLITICAL AND ECONOMIC POLICIES IN CHINA COULD AFFECT OUR
BUSINESS INUNPREDICTABLE WAYS.
Substantially all of our assets are located in China and substantially all of
our revenues are expected to derive from our operations in China. Therefore,
our results of operations and prospects are subject, to a significant degree,
to economic and political developments in China. The economy of China differs
from the economies of most developed countries in many respects, including:
o The extent of government involvement;
o Level of development; and
o Allocation of resources.
The economy of China has been in transition from a planned economy to a more
market-oriented economy. Although in recent years the Chinese government has
implemented measures emphasizing the utilization of market forces and the
reduction of state ownership of productive assets, a substantial portion of
productive assets in China is still owned by the Chinese government, which
continues to play a significant role in regulating China's economic
development, setting monetary policy and providing preferential treatment to
particular industries or companies. Political and economic policies in China
could affect our business in unpredictable ways. If there are any unfavorable
changes in government policies, such as government control over capital
expenditures, changes in monetary policy, or changes in planning and zoning
policy, we may experience delays or other problems in obtaining government
permits or licenses to start or complete our projects.
15. OUR ASSETS, OFFICERS AND DIRECTORS ARE LOCATED OUTSIDE OF THE U.S. IT IS
DIFFICULT TO EFFECT SERVICE OF PROCESS AND ENFORCEMENT OF LEGAL JUDGMENTS UPON
US AND OUR OFFICERS AND DIRECTORS.
Our assets, officers and directors are located in China. As a result, it may
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be difficult to effect service of process within the United States and enforce
judgment of the US courts obtained against us and our executive officers and
directors. Particularly, our shareholders may not able to:
o Effect service of process within the United States on us or any of
our executive officers and directors;
o Enforce judgments obtained in U.S. courts against us based upon the
civil liability provisions of the U.S. federal securities laws;
o Enforce, in a court in China, judgments of U.S. courts based on the
civil liability provisions of the U.S. federal securities laws; and
o Bring an original action in a court in China to enforce liabilities
against us or any of our executive officers and directors based upon the U.S.
federal securities laws.
16. GOVERNMENT CONTROL OF CURRENCY CONVERSION MAY AFFECT OUR ABILITY TO PAY
DIVIDENDS DECLARED, IF ANY, IN FOREIGN CURRENCIES.
It is expected that a substantial portion of our revenues, if any, will be in
"yuan", the national currency of China, which is currently not a freely
convertible currency. A portion of our revenues may have to be converted into
US dollars to make payment of dividends declared, if any, in respect of our
common shares. Under China's existing foreign exchange regulations, we will be
able to pay dividends in foreign currencies without prior approval from the
State Administration of Foreign Exchange of China by complying with certain
procedural requirements. However, the Chinese government may take measures at
its discretion in the future to restrict access to foreign currencies if
foreign currencies become scarce in China. We may not be able to pay dividends
in foreign currencies to our shareholders if the Chinese government restricts
access to foreign currencies for current account transactions.
17. FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN THE CHINESE CURRENCY AND THE
UNITED STATES DOLLAR MAY BRING DOWN OUR OPERATING INCOME.
The functional currency of our operations in China is "Yuan." Results of our
operations are translated at average exchange rates into United States dollars
for purposes of reporting results. As a result, fluctuations in exchange rates
may adversely affect our expenses and results of operations as well as the
value of our assets and liabilities. Although the exchange rate for Yuan to US
dollars has relatively been stable, exchange rate fluctuations, if any, could
bring down our operating income and lower our stock price. We have no current
plans to undertake any hedging activity to minimize exchange rate fluctuations.
Risks Related to Investment in Our Securities
---------------------------------------------
18. THERE IS NOT NOW AND THERE MAY NEVER BE A PUBLIC MARKET FOR OUR COMMON
STOCK SHARES, WHICH MAY MAKE IT DIFFICULT FOR SHAREHOLDERS TO SELL SHARES.
There is currently no market for our common stock and we can provide no
12
assurance that a market will develop. We plan to apply for listing of our
common stock on the OTC Bulletin Board upon the effectiveness of our
registration statement on Form SB-2, which we have filed with the SEC. However,
there is no assurance that our shares will be traded on the Bulletin Board or,
if traded, that a public market will materialize. If no market is ever
developed for our shares, it will be difficult for shareholders to sell their
stock. In such a case, shareholders may find that they are unable to achieve
benefits from their investment.
19. OUR COMMON STOCK IS DEEMED A PENNY STOCK. AS A RESULT, TRADING OF OUR
SHARES IS SUBJECT TO SPECIAL REQUIREMENTS THAT COULD IMPEDE OUR SHAREHOLDERS'
ABILITY TO RESELL THEIR SHARES.
The shares offered by this prospectus constitute penny stock under the
Securities Exchange Act of 1934 (the "Exchange Act"). The shares will remain
penny stock for the foreseeable future. As defined in Rule 3a51-1 of the
Exchange Act, penny stocks generally are equity securities with a price of
less than $5.00, other than securities registered on certain national
securities exchanges or quoted on the NASDAQ system, provided that current
price and volume information with respect to transactions in such securities
is provided by the exchange or system.
Section 15(g) of the Exchange Act and Rule 15g-2 of the Exchange Act require
broker-dealers dealing in penny stocks to provide potential investors with a
document disclosing the risks of penny stocks and to obtain a manually signed
and dated written receipt of the document before effecting any transaction in
a penny stock for the investor's account. Moreover, Rule 15g-9 of the Exchange
Act requires broker-dealers in penny stocks to approve the account of any
investor for transactions in such stocks before selling any penny stock to
that investor. This procedure requires the broker-dealer to:
o Obtain from the investor information concerning his or her financial
situation, investment experience and investment objectives;
o Reasonably determine, based on that information, that transactions in
penny stocks are suitable for the investor and that the investor has
significant knowledge and experience to be reasonably capable of evaluating
the risks of penny stock transactions;
o Provide the investor with a written statement setting forth the basis
on which the broker-dealer made the determination in (ii) above; and
o Receive a signed and dated copy of such statement from such investor,
confirming that it accurately reflects the investor's financial situation,
investment experience and investment objectives.
Compliance with these requirements may make it more difficult for investors in
our common stock to resell the shares to third parties or to otherwise dispose
of them.
FORWARD-LOOKING STATEMENTS
This prospectus contains certain forward-looking statements that involve risks
and uncertainties. We use words such as "anticipate," "believe", "expect",
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"future", "intend", "plan", and similar expressions to identify forward-looking
statements. These statements are only predictions. Although we believe that the
expectations reflected in these forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us and described on
the preceding pages and elsewhere in this prospectus.
USE OF PROCEEDS
The selling shareholders are selling shares of common stock covered by this
prospectus for their own accounts. We will not receive any proceeds from the
sale of the securities being registered pursuant to this prospectus.
DETERMINATION OF OFFERING PRICE
The selling shareholders will sell their shares at a fixed price of $0.05 per
share until our shares are quoted on the OTC Bulletin Board and thereafter at
prevailing market prices or privately negotiated prices. There is no
established public market for our shares. As a result, the offering price and
other terms and conditions relative to our shares have been arbitrarily
determined by us and do not bear any relationship to assets, earnings, book
value, or any other objective criteria of value. No investment banker,
appraiser, or other independent third party has been consulted concerning
the offering price for the shares or the fairness of the offering price used
for the shares.
DILUTION
The shares offered for sale by the selling shareholders are already outstanding
and, therefore, do not contribute to dilution.
SELLING SHAREHOLDERS
The following table sets forth information concerning the selling shareholders
including:
o The number of shares owned by each shareholder prior to this offering;
o The total number of shares that are to be offered for each shareholder;
and
o The total number of shares and the percentage of stock that will be
owned by each shareholder upon completion of the offering.
All costs, expenses and fees in connection with the registration of the
selling shareholders' shares will be borne by us. All brokerage commissions,
if any, attributable to the sale of shares by selling shareholders will be
borne by such holders.
14
The offered shares of common stock may be offered from time to time by each of
the selling shareholders named below. However, they are under no obligation to
sell all or any portion of the shares of common stock offered, neither are the
selling shareholders obligated to sell such shares of common stock immediately
under this prospectus, and therefore, no accurate forecast can be made as to
the number of securities that will be held by the shareholders upon completion
of this offering. To the best of our knowledge, the selling shareholders
listed in the table set forth below have sole voting and investment powers
with respect to the securities indicated, and none of the selling shareholders
are broker-dealers or affiliates of broker-dealers.
None of the selling shareholders has held any position or office with us,
except as specified on the notes to the table. Other than the relationships
described below, none of the selling shareholders had or have any material
relationship with us.
Except for Waywood Investment Ltd., to which Section 4(2) of the Securities Act
of 1933 applies, all the shares covered in this prospectus were issued pursuant
to the exemption afforded under Regulation S. All selling shareholders listed
below are non-U.S. persons as that term is defined under Regulation S. Except
as specified in the table, all other shareholders are located at c/o Dahua
Inc., 19th Floor, Building C, Tianchuangshiyuan, Huizhongbeili, Chaoyang
District, Beijing, China, 100012.
Shares Owned Prior Shares Owned After
to the Offering the Offering
Selling No. of Shares ------------------------- -------------------
Stockholders Offered Number Percentage Number Percentage
- ------------------- ---------------- ------------ ----------- -------- ----------
Toshiaki Mashima 952,000 1,190,000 4.76% 238,000 *(v)
802, Sonoochou,
Inage-ku, Chibaken,
Japan, 263-0051
Comp Hotel 850,000 1,062,500 4.25% 212,500 *
International Ltd. (i)
Li Yiyang 596,000 745,000 2.98% 149,000 *
Duan Lei 596,000 745,000 2.98% 149,000 *
#1402, Qingdongyuanhao Bldg.
Taiyuanxiaoqu
Haidian District, Beijing
Hiroyuki Itakura 380,000 475,000 1.90% 95,000 *
27-4, Nakachou,
Itabashiku, Tokyo,
Japan, 173-0022
Masako Horie 380,000 475,000 1.90% 95,000 *
1-22-3-3004,
Nishiwaswda, Shinjuku-ku
Tokyo, Japan, 169-0051
Hisahiro Kashida 286,000 357,500 1.43% 71,500 *
2-11-24, Ebisu-nishi,
Shibuya-ku, Tokyo,
Japan, 150-0021
Hisakuni Kashida 286,000 357,500 1.43% 71,500 *
7-5-16, Shirakashichou,
Kashiharashi
Naraken, Japan, 634-0003
Li Weiwei 224,000 280,000 1.12% 56,000 *
Dong Yuhua 224,000 280,000 1.12% 56,000 *
Zhao Shumin 196,000 245,000 0.98% 49,000 *
Li Yan 196,000 245,000 0.98% 49,000 *
Naoko Takemura 190,000 237,500 0.95% 47,500 *
Flat403, Bambao Grove,
84 Kennedy Road, Hong Kong
Takayoshi Ishibashi 190,000 237,500 0.95% 47,500 *
802, Sonoochou,
Inage-ku, Chibaken,
Japan, 263-0051
Katsuhisa Aga 190,000 237,500 0.95% 47,500 *
6-37-2-804, Minamisenju,
Arakawaku, Tokyo
Japan, 116-0003
Gao Jingjie 184,000 230,000 0.92% 46,000 *
Waywood
Investments Ltd. (ii) 150,000 187,500 0.75% 37,500 *
Huang Qihan 126,000 157,500 0.63% 31,500 *
Shi Wei 114,000 142,500 0.57% 28,500 *
Chigusa Itakura 96,000 120,000 0.48% 24,000 *
27-4, Nakacho,
Itabash-ku, Tokyo
Japan, 173-0022
Mitsuhiko Tadatsu 96,000 120,000 0.48% 24,000 *
3-12-8, Honamanuma,
Suginami-ku, Tokyo
Japan, 167-0031
Takako Kashida 96,000 120,000 0.48% 24,000 *
1114, Shimobuchi,
Oyodochou, Yoshinogun,
Naraken, Japan, 638-0821
Yutaka Kobayashi
4-27-4-201, Horikiri,
Katsushika-ku, Tokyo,
Japan, 167-0031 96,000 120,000 0.48% 24,000 *
Yan Ruiqing 58,000 72,500 0.29% 14,500 *
Zeng Qinna (iii) 58,000 72,500 0.29% 14,500 *
#1712, Courtyard 5,
Beiyuan Road
Chaoyang District, Beijing
Zhang Bin 58,000 72,500 0.29% 14,500 *
Cao Jing 46,000 57,500 0.23% 11,500 *
Cao Xuefen 46,000 57,500 0.23% 11,500 *
Fu Weihong 46,000 57,500 0.23% 11,500 *
Lin Minya 46,000 57,500 0.23% 11,500 *
Liu Chunxiu 46,000 57,500 0.23% 11,500 *
Wang Liancheng 46,000 57,500 0.23% 11,500 *
Xue Yuwei 46,000 57,500 0.23% 11,500 *
Bldg 11, Anyuan,
Anhuibeili, Chaoyang District,
Beijing
Qu Pingji 34,000 42,500 0.17% 8,500 *
Chen Min 22,000 27,500 0.11% 5,500 *
Dong Fu 22,000 27,500 0.11% 5,500 *
Gan Xuemei 22,000 27,500 0.11% 5,500 *
Gao Yugui 22,000 27,500 0.11% 5,500 *
He Bing 22,000 27,500 0.11% 5,500 *
Li Jian 22,000 27,500 0.11% 5,500 *
Li Ying 22,000 27,500 0.11% 5,500 *
Song Fuying 22,000 27,500 0.11% 5,500 *
17
Wang Jun 22,000 27,500 0.11% 5,500 *
Wang Yong 22,000 27,500 0.11% 5,500 *
Wei Wei 22,000 27,500 0.11% 5,500 *
Zhang Jie 22,000 27,500 0.11% 5,500 *
Huang Meishu 12,000 15,000 0.06% 3,000 *
Meng Hua (iv) 12,000 15,000 0.06% 3,000 *
#8104, Courtyard 11,
Anning Zhuang, Xisanqi
Haidian District, Beijing
Song Liqiang 12,000 15,000 0.06% 3,000 *
Wang Shoujian 12,000 15,000 0.06% 3,000 *
Wen Weiping 12,000 15,000 0.06% 3,000 *
- ---------------------------------------------------------------------------------------
TOTAL 7,548,000 9,435,000 37.74% 1,887,000 7.55%
(i) Comp Hotel International Ltd. is the control person of our predecessor,
Norton Industries Corp.
(ii) Waywood Investment Ltd. is the promoter of our predecessor, Norton
Industries Corp.
(iii) Zeng Qinna is our corporate secretary.
(iv) Meng Hua is our chief financial officer.
(v) Less than one percent.
The numbers in this table assume that none of the selling shareholders sells
shares of common stock not being offered in this prospectus or purchases
additional shares of common stock, and assumes that all shares offered are
sold. The percentages are based on 25,000,000 shares of common stock
outstanding on the date of this prospectus.
We are not aware of any agreements or arrangements among the selling
shareholders listed above. To our knowledge, there are no coordinated
investment efforts among the selling shareholders, and they are not acting as
a "group" as that term is used in Instruction 7 to Item 403 of Regulation S-B.
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from time to time
by the selling shareholders. The selling shareholders will act independently of
us in making decisions with respect to the timing, manner and size of each sale
The sale price is fixed at $0.05 per share until our shares are quoted on the
OTC Bulletin Board, thereafter, at then prevailing market prices or privately
negotiated prices.
The selling shareholders may sell their shares directly to purchasers or to or
through broker-dealers, which may act as agents or principals. These broker-
dealers may receive compensation in the form of discounts, concessions or
18
commissions from the selling shareholders. They may also receive compensation
from the purchasers of common shares for whom such broker-dealers may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). Each
selling shareholder and any broker-dealer that assists in the sale of the
common stock may be deemed to be an underwriter within the meaning of Section
2(a)(11) of the Securities Act of 1933, as amended. Any discounts, commissions,
or concessions received by such underwriters, broker-dealers, or agents may be
deemed to be underwriting discounts and commissions under the Securities Act.
The selling shareholders have advised us that they have not entered into
agreements, understandings or arrangements with any underwriters or broker-
dealers regarding the sale of their shares. The selling shareholders do not
have an underwriter or coordinating broker acting in connection with the
proposed sale of the common shares.
The selling shareholders have agreed to comply with applicable securities laws.
Each of the selling shareholders and any securities broker-dealer or others
who may be deemed to be statutory underwriters will be subject to the
prospectus delivery requirements under the Securities Act. The offer and sale
by the selling shareholders may be a 'distribution' under Regulation M, in
which the selling stockholder, any "affiliated purchasers", and any
broker-dealer or other person who participates in such distribution may be
subject to Rule 102 of Regulation M until their participation in that
distribution is completed. Rule 102 makes it unlawful for any person who is
participating in a distribution to bid for or purchase stock of the same class
of securities that are the subject of the distribution. A "distribution" is
defined in Rule 102 as an offering of securities "that is distinguished from
ordinary trading transactions by the magnitude of the offering and the presence
of special selling efforts and selling methods." In addition, Rule 101 under
Regulation M prohibits any "stabilizing bid" or "stabilizing purchase" by a
selling shareholder in connection with a distribution for the purpose of
pegging, fixing or stabilizing the price of the common stock in connection
with this offering.
The selling shareholders also may resell all or a portion of their shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.
We are responsible for all costs, expenses and fees incurred in registering
the shares offered hereby. The selling shareholders are responsible for
brokerage commissions, if any, attributable to the sale of such securities.
We will not receive any of the proceeds from the sale of any of the shares by
the selling shareholders.
LEGAL PROCEEDINGS
There are no legal actions pending against us nor are any legal actions
contemplated by us.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers
- --------------------------------
Each of our directors is elected by the shareholders to a term of one year and
serves until his or her successor is elected and qualified, or until he or she
19
resigns or is removed from office. Each of our officers is elected by the board
of directors to a term of one year and serves until his or her successor is
duly elected and qualified, or until he or she resigns or is removed from
office. The board of directors has no nominating or compensation committees.
The board of directors does not have an audit committee financial expert.
The name, address, age and position of our officers and directors are set
forth below:
Name Age Position Held
- -------------- ---- ------------------------------------------------
Du Yonglin 64 President, Chief Executive Officer and Director
Wang Wulong 66 Director
Meng Hua 30 Chief Financial Officer
Zeng Qinna 28 Corporate Secretary
The following is a brief description of business experience of each of our
directors and executive officers during the past five years.
Mr. Yonglin Du has been our Chairman, Chief Executive Officer and President
since January 30, 2005. From 1982 to 2003, Mr. Du held various positions in
China's petroleum and petrochemical industries, including Deputy Director of
the Research Institute of Daqing Oilfield, Head of Petroleum and Petrochemical
Division of the State Planning Commission, Deputy Director of the Energy
Institute of the State Planning Commission, President of Shanghai Petroleum
and Natural Gas Company. In 2000, he founded Dahua Project Management Group
Co. Ltd. ("Dahua Group"), of which he has been serving as its Chairman of the
Board of Directors and Chief Executive Officer. Dahua Group is a Beijing
Municipal Government licensed construction project supervising business entity
located in Beijing, China.
Mr. Wulong Wang has been our Director since January 30, 2005. A graduate of
Beijing Post and Telecommunication University, Mr. Wang is a senior engineer
and China's registered Consulting Engineer. He joined China's State Planning
Commission in 1979, and served as its Deputy Chief of Investment Bureau from
1988 to 1992, Chief of Key Construction Bureau from 1992 to 1994, Chief of
Investment Bureau from 1994 to 1995. From 1995 to 2002, Mr. Wang served as the
President of China International Engineering Consulting Co. Limited, and from
2002 to the present as a member of the Expert Committee of China Engineering
Consulting Co. Limited, as well as a member of the Economic Commission of
Chinese National People's Political Consultative Conference.
Ms. Hua Meng has been our Chief Financial Officer since January 30, 2005. She
graduated from the Central University of Finance and Economics of China in
July 2003 with a master degree in accounting. Ms. Meng is a Certified Public
Accountant in China. From July 1999 to May 2000, she was employed at Beijing
Baisheng Light Industry Development Co. Ltd. as an accountant. From July 2003
to the present, Ms. Meng has also been chief financial officer of Dahua Project
Management Group Co., Ltd., a Beijing Municipal Government licensed
construction project supervising business entity in Beijing, China.
Ms. Qinna Zeng has been our Corporate Secretary since January 30, 2005. She
graduated from the Central University of Finance and Economics in China in
20
July 2003 with a master degree in finance. From July 1999 to August 2000,
Ms. Zeng worked for the Lichuan Branch of People's Bank of China as a
statistician. From July 2003 to the present, Ms. Zeng has also been corporate
secretary of Dahua Project Management Group Co. Ltd., a Beijing Municipal
Government licensed construction project supervising business entity in
Beijing, China.
None of our directors and officers has ever held any position in a reporting
company.
Significant Employees
- ---------------------
There are no significant employees other than our executive officers.
Family Relationships
- --------------------
There are no family relationships among directors or officers.
Involvement in Certain Legal Proceedings
- ----------------------------------------
During the past five years, none of our officers, directors, promoters or
control persons has had any involvement in any of the following events:
1. Any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at the time of
the bankruptcy or within two years prior to that time;
2. Any conviction in a criminal proceeding or being subject to a pending
criminal proceeding, excluding traffic violations and other minor offenses;
3. Being subject to any order, judgment or decree, not substantially
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently enjoining, barring, suspending or otherwise limiting his
involvement in any type of business, securities or banking business; and/or
4. Being found by a court of competent jurisdiction, in a civil action,
the Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated a federal or state securities or commodities law,
and the judgment has not been reversed, suspended or vacated.
Code of Ethics
- --------------
On January 30, 2005, our Board of Directors established a written code of
ethics that applies to our executive officers and financial officers. A copy
of the code of ethics has been filed as Exhibit 14.1 of this prospectus and or
may be obtained by any person, without charge, who sends a written request to
Dahua Inc. c/o Corporate Secretary, 19th Floor, Building C, Tianchuangshiyuan,
Huizhongbeili, Chaoyang District, Beijing, China, 100012. We will disclose any
waivers or amendments to our Code of Business Code and Ethics on Item 10 of
a Form 8-K.
21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
- -----------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 30, 2006, each person who is known
by us to own beneficially more than 5% of our outstanding common stock. We have
only one class of securities outstanding. Except as otherwise indicated, we
believe that the beneficial owners of the common stock listed below, based on
information furnished by such owners, have sole investment and voting power
with respect to such shares, subject to community property laws where
applicable.
Name and Address of Amount & Nature of
Title of Class Beneficial Owner Beneficial Owner Percent of Class
- ----------------- ------------------------ -------------------- ---------------
Common Stock Yonglin Du 1,900,000 shares 7.60%
19th Floor, Building C,
Tianchuangshiyuan,
Huizhongbeili,
Beijing, China, 100012
- ---------------------------------------------------------------------------------
Security Ownership of Management
- --------------------------------
The following table sets forth certain information, as of April 30, 2006, as to
each class of our equity securities beneficially owned by all of our directors
and nominees, each of the named executive officers, and our directors and
executive officers as a group.
Name and Address of Amount & Nature of
Title of Class Beneficial Owner(1) Beneficial Owner Percent of Class
- --------------- --------------------------- -------------------- ------------------
Common Stock Yonglin Du(2) 1,900,000 shares 7.60%
19th Floor, Building C,
Tianchuangshiyuan,
Huizhongbeili,
Beijing, China, 100012
Common Stock Qinna Zeng (3) 72,500 shares * (4)
#1712, Courtyard 5,
Beiyuan Road, Chaoyang District,
Beijing
Common Stock Hua Meng (5) 15,000 shares *
# 8104, Courtyard
11, Anning Zhuang,
Xisanqi, Haidian District,
Beijing
22
Common Stock Wang Wulong Nil Nil
c/o Dahua Inc.
19th Floor, Building C,
Tianchuangshiyuan,
Huizhongbeili,
Beijing, China, 100012
All officers and directors
as a group 1,987,500 7.95%
- ----------------------------------------------------------------------------------
(1) The persons named above do not have any specified rights to acquire,
within 60 days of the date of this registration statement any options,
warrants or rights and no conversion privileges or other similar obligations
exist.
(2) Yonglin Du is our CEO, President and a director.
(3) Qinna Zeng is our Corporate Secretary.
(4) Less than one percent of the total number of shares outstanding.
(5) Hua Meng is our Chief Financial Officer.
We do not have any securities that are convertible into common stock.
Changes in Control
- ------------------
There are no arrangements that the management is aware of that may result in
changes in control as that term is defined by the provisions of Item 403(c) of
Regulation S-B. There are no provisions within our Articles or Bylaws that
would delay or prevent a change of control.
DESCRIPTION OF SECURITIES
We are authorized to issue up to 80,000,000 shares of our common stock, $.0001
par value, and 20,000,000 shares of preferred stock, $.0001 par value per
share. As of April 30, 2006, there were 25,000,000 shares of common stock
issued and outstanding, and no shares of preferred stock were issued and
outstanding.
Common Stock
- ------------
The holders of the common stock are entitled to one vote per share on each
matter submitted to a vote at any meeting of shareholders. Shares of common
stock do not carry cumulative voting rights and, therefore, a majority of the
outstanding shares of common stock will be able to elect the entire Board of
Directors and, if they do so, minority shareholders would not be able to elect
any members to the Board of Directors.
23
Shareholders have no preemptive rights to acquire additional shares of common
stock or other securities. The common stock is not subject to redemption and
carries no subscription or conversion rights. In the event of our liquidation,
the shares of common stock are entitled to share equally in corporate assets
after satisfaction of all liabilities.
Preferred Stock
- ---------------
As of the date of this prospectus, there were no preferred shares that have
been designated or issued. The Board of Directors is authorized to provide
for the issuance of shares of preferred stock in series and, by filing a
certificate pursuant to the applicable laws of Delaware, to establish from
time to time the number of shares to be included in each such series, and to
fix the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof without any
further vote or action by the shareholders. Any shares of preferred stock so
issued would have priority over the common stock with respect to dividend or
liquidation rights. Any future issuance of preferred stock may have the effect
of delaying, deferring or preventing a change in control of us without further
action by the shareholders and may adversely affect the voting and other
rights of the holders of common stock. We have no current plans to issue any
preferred stock or adopt any series, preferences or other classification of
preferred stock.
Debt Securities
- ---------------
As of the date of this prospectus, we do not have any debt securities.
Other Securities To Be Registered
- ---------------------------------
There are no other securities to be registered.
INTEREST OF NAMED EXPERTS AND COUNSEL
The financial statements included in this prospectus and the registration
statement have been audited by Child, Van Wagoner & Bradshaw, PLLC, to the
extent and for the periods set forth in their reports appearing elsewhere in
this document and in the registration statement, and are included in reliance
upon such report given upon the authority of said firm as experts in auditing
and accounting.
Schonfeld & Weinstein, L.L.P., our legal counsel, has provided an opinion on
the validity of our common stock. We retained him solely for the purpose of
providing this opinion and have not received any other legal service from him.
No expert or counsel named in this prospectus as having prepared or certified
any part of this prospectus or having given an opinion upon the validity of
the securities being registered or upon other legal matters in connection with
the registration or offering of the common stock was employed on a contingency
basis, or had, or is to receive, in connection with the offering, an interest,
direct or indirect, in the registrant or any of its parents or subsidiaries.
Nor was any such person connected with the registrant or any of its parents
or subsidiaries as a promoter, managing or principal underwriter, voting
trustee, director, officer, or employee.
24
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
Our directors and officers are indemnified as provided by the Delaware General
Corporation Law and our Articles of Incorporation. We have been advised that
in the opinion of the Securities and Exchange Commission indemnification for
liabilities arising under the Securities Act is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities is asserted by
one of our directors, officers, or controlling persons in connection with the
securities being registered, we will, unless in the opinion of our legal
counsel the matter has been settled by controlling precedent, submit the
question of whether such indemnification is against public policy to a court
of appropriate jurisdiction. We will then be governed by the court's decision.
ORGANIZATION WITHIN LAST FIVE YEARS
Dahua Inc. ("we" or the "Company") was incorporated on March 8, 2002, in the
State of Delaware under the name of Norton Industries Corp. ("Norton") as a
blank check company for the purpose of either merging with or acquiring an
operating company with operating history and assets. In June 2002, the Company
filed a registration statement on Form 10-SB with the Securities and Exchange
Commission ("SEC") in order to become a Section 12(g) registered company under
the Securities Exchange Act of 1934, as amended. The registration statement
became effective on or about August 10, 2002.
From March 8, 2002, to January 30, 2005, Norton conducted virtually no business
other than organizational matters and filings of periodic reports with the SEC
pursuant to the reporting requirements of Securities Exchange Act of 1934, as
amended. The promoters, control persons and affiliates of Norton were Mr.
Jianjun Zhang, Waywood Investments Ltd. ("Waywood"), Comp HotelInternational
Ltd. ("Comp Hotel"), and South Sea Petroleum Holdings Ltd. ("South Sea
Petroleum"). Waywood is a small business consulting firm organized in the
British Virgin Islands. Mr. Jianjun Zhang is the sole shareholder of Waywood.
From Norton's inception in March 2002, to February 2003, Waywood owned 100%
of Norton, and Mr. Jianjun Zhang, from March 2002 to January 2005, was the sole
director and officer of Norton. On February 26, 2003, Waywood sold 85%, or
4,250,000 shares, of Norton's capital shares to Comp Hotel for $42,500 in cash.
Comp Hotel is a travel-related service provider operating in Hong Kong, and is
controlled by South Sea Petroleum, a Hong Kong corporation, whose principal
business is the exploration and production of crude oil in Indonesia.
On January 30, 2005, Waywood and Comp Hotel entered into a Share Exchange
Agreement with Bauer Invest Inc. for a reverse acquisition. Pursuant to the
agreement, Waywood and Comp Hotel sold all of their capital stock, or 5,000,000
shares of common stock, to Bauer for retirement in exchange for $100,000 in
cash and 5%, or 1,000,000 shares of Norton's post-merger common stock. To
effectuate the reverse acquisition, Norton issued 19,000,000 shares of its
common shares to 108 shareholders of Bauer in exchange for 100% of shares in
Bauer on a pro rata basis, i.e. the number of shares received by each
shareholder is proportionate to the number of shares he/she had originally
owned in Bauer. Following the transaction, on February 7, 2005, the name of
Norton was changed to Dahua Inc.
25
Bauer is a holding company, which conducts its business through its 80% owned
subsidiary Beijing Dahua Real Estate Development, Ltd., an operating company
organized in the People's Republic of China ("Dahua Real Estate"). As a result
of the reverse acquisition, Bauer became our wholly owned subsidiary, and the
shareholders of Bauer became our controlling shareholders. This transaction
was accounted for as a recapitalization, rather than a business combination.
Under accounting principles generally accepted in the United States of America,
after completion of this transaction, the Company files prior historical
financial information of Bauer and its subsidiaries for the years prior to the
acquisition on a stand-alone basis. The continuing operations of the Company
will reflect the consolidated operations of Dahua and its subsidiaries.
On May 12, 2005, Dahua Real Estate increased its registered capital, in which
the company increased its investment in Dahua Real Estate by $2,265,600 and the
minority shareholder of Dahua Real Estate increased its investment by $566,265.
Dahua Project Management Group ("Dahua Group") advanced the Company funds to
allow for the increase in investment, which amount was recorded as short-term
loans-related parties. On September 21, 2005, the Company issued, on a pro rata
basis, an aggregate of 4,750,000 shares of its common stock to shareholders of
Dahua Group in exchange for the conversion of the short-term loan ($2,265,600)
to equity shares. In connection with issuance of additional shares, pursuant to
a no-dilution clause of the Share Exchange Agreement dated January 30, 2005 the
Company entered into with Comp Hotel and Waywood, on September 21, 2005, the
Company issued 212,500 and 37,500 shares of our common stock to Comp Hotel and
Waywood, respectively.
Bauer was incorporated on December 10, 2003, under the laws of the British
Virgin Islands. On May 25, 2004, the shareholders of Dahua Group transferred
to Bauer 80% of the capital stock of Dahua Real Estate in exchange for all the
capital stock of Bauer. Dahua Group is a Beijing Municipal Government licensed
construction project supervising business entity in Beijing, China. This
transaction was accounted for as a recapitalization of Dahua Real Estate,
rather than a business combination. Before the stock transfer, the shareholders
of Dahua Group owned 80% of capital stock of Dahua Real Estate, and Beijing
Dahua Bidding Agency owned the remaining 20%. Beijing Dahua Bidding Agency
is a Chinese corporation servicing construction companies in biddings for major
construction projects. After the transfer, the shareholders of Bauer replaced
the shareholders of Dahua Group as holder of 80% of the capital stock of Dahua
Real Estate, while Beijing Dahua Bidding Agency still owns the remaining 20%.
Both Bauer and Dahua Group were owned by the same group of shareholders in the
same proportions prior to the acquisition by Norton.
Prior to the acquisition, other than owning 80% of Dahua Real Estate's capital
stock, Bauer had no operations. Dahua Real Estate was incorporated in China on
September 24, 2001, to engage in the development, construction, and sale of
luxury single-family housing units. Both Norton and Bauer were non-operating
shell companies and incurred minimal costs to acquire Bauer or Dahua Real
Estate, and therefore there was no need for adjustments for any costs incurred
by Norton or Bauer to be "pushed down" in the accounts of Norton, Bauer or
Dahua Real Estate. Dahua Real Estate did not incur any other costs which were
required to be "pushed down" for the completion of the transaction.
The promoters, control persons and affiliates of Bauer Invest, Inc. and Dahua
Real Estate are Mr. Yonglin Du and Dahua Group. Prior to the acquisition, a
group of shareholders owned 100% of Dahua Group, and the same group of the
shareholders owned 100% of Bauer in the same shareholding proportion as they
owned Dahua Group. At present, the same group of shareholders own 95% of Dahua
26
Inc. Yonglin Du, our CEO and President, also acts as president of Dahua Group
and Bauer. In 2000, Mr. Du founded Dahua Group and has since been its Chairman
of the Board of Directors and Chief Executive Officer. Dahua Group is a Beijing
Municipal Government licensed construction project supervising business entity
which is operating in Beijing, China. Since January 30, 2005, Mr. Du has been
our Chairman of the Board of Directors and Chief Executive Officer.
We have not been involved in any bankruptcy, receivership or similar
proceedings.
DESCRIPTION OF BUSINESS
Business
- --------
The Company, through its 80% owned subsidiary Beijing Dahua Real Estate
Development Ltd. ("Dahua Real Estate"), engages in the business of development,
construction and sale of luxury single-family homes in the northern suburb of
Beijing, China.
Development Projects
- --------------------
In July 2003, the Company began to develop its first real estate project. The
project is called the first phase of Dahua Garden (the "First Phase"), which
consists of 76 luxury residential housing units, all of which are single houses
ranging from approximately 2,000 to 5,000 square feet, each with 3-4 bedrooms
with built-in closets and adjacent bathrooms, an open eat-in kitchen, a family
room, a living room, and an attic solarium for indoor sun bathing. Those homes
are within reasonable driving distances from Beijing metropolitan areas. The
project is located at the northern skirt of Beijing, China. The property being
developed sits on a hot spring, spewing 10,000 cubic meters per day providing
every house with hot spring water for baths. The water temperature at the mouth
of the hot spring is over 60 degrees centigrade. The surplus hot spring water
is discharged into the surrounding creeks and ponds, making them unfrozen all
year round.
The average sales price is around 1,000 yuan (approximately $124) per square
foot. The price does not include interior finishing, light fixtures, plumbing
and appliances, which are custom tailored to suit individual tastes and
preferences of the buyer from a menu of options. The average cost for interior
finishing is approximately 200 yuan (approximately $25) per square foot. The
interior finishing can be done by outside contractors of the buyer's choice.
The First Phase is constructed on land licensed from the government of China
for a period of 70 years, which expires on April 27, 2073. The granting of
land use licenses is a common practice in China as all land is government
- -owned, and, at present, no option to purchase land has ever been granted.
Pursuant to the laws of China, all land belongs to the government. Regardless
of whether real estate is purchased or sold for residential or business
purposes, the purchaser will receive the ownership license and a permit to
only use the land, as opposed to owning the land. Upon transfer of title of
the units to the owners, we will not have any interest in such units or
licensed land.
The construction began in July 2003 and was completed in December 2005. As of
the date of this prospectus, we had sold 35 of the 76 units of the First Phase,
27
out of which 7 units have been paid in full, while 28 units were reserved with
clients' deposits, and 41 units were available for sale. It is expected that
the remaining 41 units will be sold out by the end of 2006.
We are currently in the process of applying with Beijing municipal and
Changping district government agencies for the requisite licenses, permits,
and approvals in order to start our Second Phase of Dahua Garden, which will
include 250 units of luxury single-family houses located in Changping District,
Beijing, China, on an approximately 267,000 square-meter site with a community
clubhouse, creeks, ponds, and professionally manicured gardens and landscape.
Each will be 3,000 to 5,000 square feet in size to be sold for 4.5 to 6
million yuan, or approximately $550,000 to $720,000. We will serve as the sole
developer of the project, including construction and sales. The Second Phase
is not contingent upon our successful completion of the First Phase. As of the
date of this prospectus, the status of our applications for permits, licenses
and approvals is set forth below:
(i) We have entered into an agreement with the land owner, the Village
Committee of Lutuan Village, Beiqijia Township, North Changping District,
which has been approved by the government of Beiqijia Township;
(ii) Upon receipt of such approval, we have submitted a proposal for the
Second Phase development to the Development and Reconstruction Commission of
Changping District, which, in turn, submitted the proposal to the Development
and Reconstruction Commission of Beijing Municipal government;
(iii) Upon receipt of the proposal, the Development and Reconstruction
Commission of Beijing sent a letter to the Urban Planning Commission of
Beijing for its opinion, which it is reviewing; and
(iv) We are currently applying with the National Land Resource Bureau and
Housing Administration Bureau of Beijing Municipality for the initial
development rights and land use rights of the Second Phase development.
In addition to the above permits and approvals, we will need a permit to
commence construction by Beijing Municipal Construction Commission. We expect
to obtain the permit before the end of 2006. There is no assurance that said
permit will be issued within the timeframe anticipated. The construction will
take up to 18 to 20 months to complete, and we expect to commence sales in the
second part of 2008.
Home Construction
- -----------------
We act as the general contractor for our residential home developments and
hire subcontractors for all construction activities. The use of subcontractors
enables us to reduce our investment in direct labor costs, equipment and
facilities. We generally price our housing only after we have entered into
construction contracts with subcontractors, an approach which improves our
ability to estimate costs accurately.
As the general contractor, we select our subcontractors for construction
through a competitive bidding process. In addition to the bid price, our
criteria include the bidders' experience, reputation, recommendations and
28
references from other developers. The construction prices are capped and cover
all materials and labor needed to complete the construction under the
construction contract. The bid-winning subcontractor will make advance payments
for all materials and labor. We make payments to the subcontractors over time
upon completion and acceptance of certain phases of construction according to
agreed-upon milestones specified in the construction contract.
Our competitive bidding process includes the following steps: (1) Bid
invitation registration, (2) Bid invitation announcement, (3) Bid submission,
(4) Pre-screening of bidders' qualifications, (5) Purchase of bid document
package by the pre-qualified bidders, (6) Opening bids, (7) Assessment of bids,
(8) Selection and determination of the winning bidder, (9) Notice of award,
and (10) Execution of the construction contract.
To assure quality, construction has been monitored by Beijing Aocheng
Construction Management Ltd. ("Aocheng") and by construction quality control
authorities under the Changping District government. Aocheng is not a related
party. We entered into an agreement with Aocheng on September 24, 2003. The
agreement covered a period from October 15, 2003 to June 20, 2004. The total
management fee was 333,860 yuan, or approximately $40,000, paid in four
installments: (1) 10% within 10 days after the management company staff enters
the construction site; (2) 60% within one week after the roof of the main
building structure is completed; (3) 25% within 14 days after examination and
acceptance of construction; and (4) 5% on the first anniversary of acceptance
of construction. Although the contract has expired, according to Chinese law,
the company in charge of quality control of a construction product bears
life-long responsibility for the quality of such construction. Thus, Aocheng
shall remain responsible for quality assurance of our construction.
As the general contractor, we are responsible for all planning, scheduling and
budgeting operations. There is an on-site superintendent who oversees the
subcontractors. We supervise the construction of our project, coordinate the
activities of subcontractors and suppliers, subject their work to quality and
cost controls and assure compliance with zoning and building codes.
29
Subcontractors typically are retained on a project-by-project basis to complete
construction at a fixed price. Agreements with our subcontractors are generally
entered into after competitive bidding on an individual basis. We generally
obtain information from prospective subcontractors and suppliers with respect
to their financial conditions and abilities to perform under their agreements
prior to commencement of a formal bidding process. The services performed for
us by subcontractors are generally readily available from a number of
qualified subcontractors.
We use, to the extent feasible, standardized materials in our commercial
construction and homebuilding operations in order to permit efficiencies in
construction and material purchasing that can result in higher margins. Our
subcontractors generally negotiate the purchase of major raw material
components such as concrete, lumber and structural steel. They are responsible
for what they purchase and for what they pay for. Raw materials used in our
operations are generally readily available from a number of sources but prices
of such raw materials may fluctuate due to various factors, including supply
and demand.
As the general contractor, we are not subject to any bonding and/or insurance
requirements under Chinese law and common practice in housing construction. We
may suffer heavy or total losses in the event of fire, earthquake or other
disasters.
To date, we have not encountered any problems that would affect the delivery
date of our First Phase units, nor have we experienced a significant increase
in prices of materials.
The First Phase is subject to government inspections prior to transfer of
title to buyers. The purpose of the inspection is to ensure that real estate
developers adhere to government standards of quality and safety.
Other Government regulations that we must adhere to are:
o Any structures being constructed must be for residential and commercial
use;
o All structures must be within certain dimensions;
o Public infrastructures must be in place, such as electrical and telephone
poles, underground pipe systems;
o There must be various safety access routes in case of emergencies such as
fire or earthquake;
o Construction must not violate environmental laws in effect; and
o Compliance with certain infrastructure standards.
To date we have not violated any of the above-noted regulations.
We typically obtain all necessary development approvals, complete a
satisfactory environmental assessment of the site, secure any necessary
financing and complete other due diligence deemed appropriate by us prior to
becoming obligated to commence the construction.
Acquisition of Land-Use Rights
- ------------------------------
The residential home development process in China generally consists of three
phases: (1) acquisition of land-use rights; (2) land development and
construction; and (3) sale. The development cycles vary depending on the extent
of the government approvals required, the size of the development, necessary
site preparation, weather conditions and marketing results.
The whole development process for our First Phase is set forth below.
The date enclosed in the parenthesis following each step indicates the date on
which such approval was granted.
1. Signing of a land use rights transfer agreement with the owner of such
rights, i.e. Lutuan Village Committee of Beiqijia County, Changping District,
Beijing. Said agreement was then submitted to the Beiqijia County Government
for approval (September 25, 2001).
2. Preparation of a 'Proposal of the First Phase of Dahua Low Density
30
Residential Development Subdivision, which, after approval by Beiqijia County
Government and Changping District Government, was submitted to the Development
and Reconstruction Commission of Beijing Municipal Government for approval
(2001).
3. Approval of the Proposal by the Development and Reconstruction
Commission of Beijing Municipal Government after consultation with Beijing
Construction Commission and Planning Commission (June 12, 2002).
4. Submission of the Proposal by the Land Resources Bureau of Changping
District to Beijing National Land Resources Bureau to apply for changing the
nature of the proposed construction site from collective-owned land to
state-owned land (November 8, 2002).
5. Signing of a 'Land Use Rights Transfer Agreement' with Beijing National
Land Resources Bureau and Beijing Housing Administration, making payment of
land use fee, and obtaining the "National Land Use Permit" (October 20, 2003).
6. Submission of a detailed development plan to Beijing Planning Commission
to obtain "Development Planning Permit" and "Development Construction Permit"
(September 4, 2003 and September 28, 2003).
7. Upon issuance of the four Permits as set forth above, submission of an
application to Beijing National Land Resource Bureau and Beijing Housing
Administration for the "Residential Housing Pre-sale Permit"(November 2003 and
June 2, 2004).
The above-mentioned Permits are needed for all real estate development projects
in Beijing. Upon issuance of the "Residential Housing Pre-sales Permit", we may
begin to sell housing units to the public. After signing a purchase agreement
with the buyer, the agreement is recorded at the National Land Resource Bureau
and Housing Administration of Changping District, Beijing.
Sales and Marketing
- -------------------
Our sales and marketing activities are conducted principally through our sales
employees. They are paid by base salary, plus sales commission, which is 0.3%
of gross sales. We have no single customer that will account for any
substantial portion of our sales revenues.
Our residential homes are targeted toward buyers who desire high quality
property with many attractive features on which to build luxury homes for
use as their primary residences, vacation retreats, retirement residences,
or investments. Our target buyers include upper and middle class Chinese
citizens and foreign nationals working in Beijing and the surrounding area,
such as Shanxi and Hebei provinces, ranging from 30 to 60 years of age,
including private entrepreneurs, senior executives, technology elites, college
professors and self-employed professionals. The foreign nationals are
expatriates of foreign companies based in China. Our strategy for remaining
competitive in this market involves building on our reputation of offering
quality homes; using our own sales offices and personnel; and offering
properties with many appealing features, such as trails, water access,
creeks, and attractive views.
31
We sell our homes through our sales representatives who typically work from
sales offices located in the model homes at the development site. Sales
representatives assist potential buyers by providing them with basic floor
plans, price information, development and construction timetables, preview of
model homes and the selection of options. Our sales representatives are
trained by us and generally have had prior experience selling new homes in the
local market. We also market our homes for sale through direct mailing to an
identified population of prospective buyers and, to a lesser extent, through
other media, including newspapers, television and radio advertising, airplane
advertising, product tie-ins, billboards and other signage. For the years
ended December 31, 2005 and 2004, our advertising expenses were $98,970 and
$122,534, respectively.
Homes are sometimes sold prior to or during construction using sales contracts
which are accompanied by cash deposits. After receiving the Residential Housing
Pre-sale Permit issued by the government, we, the developer, are permitted by
government authorities to sell the residential units to be built to the public,
which is common practice in China. Upon execution of a binding purchase
contract between the developer and the buyer, a deposit, ranging from 10% to
20% of the sales price, is required to be made to the developer, which we use
to construct our residential units. As of December 31, 2005, the balance of
our customer deposits were $6,286,992.
Our sales are made pursuant to a standard sales contract. Subject to particular
contract provisions, we generally permit purchasers to cancel their contractual
obligations in the event mortgage approvals are unobtainable within a specified
period of time and under certain other circumstances, including rescission
rights which may be given under local law. We believe that our cancellation
rate is consistent with that generally experienced at other similar home
developments, which stands at 5.5%. To date we have two contracts that have
been cancelled.
Although we believe that our cancellation rate is consistent with that
generally experienced at other similar home developments, which stands at 5.5%,
the possibility of clients, even though they have put down a certain amount of
deposit, turn out choosing not to purchase our housing units creates an
uncertainty and risk to our results of operations.
To assist in the marketing of our homes and to limit our liability for certain
construction defects, we sell our homes subject to a limited warranty that is
provided by our subcontractors. We don't provide any kind of warranty to
homebuyers. Our subcontractors are responsible for the cost to repair major
structural defects, roofing, internal walls, heating, tiling problems, if any,
for a certain period of time, from one to five years. The foregoing repair
costs are limited by our subcontractors' policy to the repair, replacement or
payment of the reasonable cost of repair or replacement of such warranted
items not to exceed an aggregate amount equal to the final sales price of the
home covered by the warranty. Once all homes have been constructed and sold,
we do not have any post-sale obligations.
Home Buyer Financing and Deed Application
- -----------------------------------------
We do not provide financing to prospective homebuyers. Approximately 25% of
homebuyers in China currently use their savings or funds from their relatives
to pay for the houses they buy. We are permitted to sell our homes before they
are built. It usually takes 18 to 24 months from ground breaking to completion,
within which the homebuyers make installment payments to the developer. At the
32
time of completion and delivery, the purchase price will have been paid in
full. After viewing the model units, the potential buyer usually leaves
10,000 yuan, or $1,245, refundable deposit, upon receipt of which we will hold
the unit for that buyer. The potential buyer may withdraw the commitment
within two weeks and receive a full refund of said deposit. The parties may
also enter into a binding contract, and the buyer is required to make a 10%
to 20% down payment at the time of signing. Thereafter, the buyer makes
installment payments every 2 to 3 months until the purchase price is paid
in full. The actual payment terms vary on a case-by-case basis depending
on negotiations.
The majority of homebuyers in China need to finance their homes with mortgage
loans from banks. To facilitate their mortgage application, most developers in
China, including us, are involved in the buyers' mortgage application process.
We first initiate negotiations with two banks to obtain a blanket lending
commitment which covers all potential buyers for the homes to be built by us.
If a potential buyer needs financing, we conduct a preliminary screening of
the buyer's creditworthiness. Then we forward the mortgage applications to the
banks for further processing, which usually takes 30 to 60 days. Upon approval
of the mortgage extended to each buyer by the banks, the loan proceeds are
transferred directly to our bank account, rather than the buyer's. We have not,
and will not receive any finder's fees or referral fees from the banks.
It is customary in China that developers may, depending on the type of
property, use up to 95% of the loan proceeds so obtained to meet their working
capital needs. The banks require that 5% to 20% of the proceeds be set aside.
On our balance sheets, such loan proceeds are treated as customer deposits.
We have not taken any measure to safeguard customer deposits because currently
Chinese law does not require that such deposits be placed in an escrow or trust
account for safeguarding purpose.
The life of a mortgage loan in China can be up to 30 years. Because our Dahua
Garden project is considered luxury housing, the maximum life of mortgage loans
is 20 years. The mortgage rates, which are flexible in nature, are dictated by
the Chinese central government based on prime commercial lending rates from
time to time. Due to competition among lending institutions, mortgage rates
can be adjusted downward by up to 10%. The mortgage rates currently range from
5.51% to 6.12%, which are applied to primary residence and second home,
respectively.
Unlike the United States, deeds for newly-built homes in China are applied for
by the developer with the government, which owns the land. Upon issuance of the
deeds, the developer distributes the deeds to individual homeowners. In order
to obtain government approval of deeds, the developer must have obtained all
requisite permits and licenses and paid all fees and taxes. Before the actual
issuance of deeds, the ownership of the real property remains with the
developer even if the homes have already been sold. Generally, the developer
will wait until all homes are completed to apply for the deeds in a blanket
application, which takes approximately 40 to 60 days. Before the issuance of
deeds, the title to the homes legally remains with the developer.
Regulation
- ----------
Real estate development is a highly regulated industry in China, and we are
subject to extensive local, district, municipal and national rules and
regulations regarding permitting, zoning, subdivision, utilities and water
quality. Regulation is carried on by municipal, district, and national
authorities, of which the municipal and district governments have the greatest
regulatory impact. The City of Beijing, in which we operate, has been adopting
33
increasingly restrictive regulations associated with development activities,
including the adoption of more restrictive ordinances, greater emphasis on
land use planning, pressure to increase the number of low density residential
developments, and heightened public concern aimed at limiting development as
a means to control growth. Such regulation may delay development of our
properties and result in higher developmental and administrative costs.
To engage in the business of real estate development and sale of residential
units in Beijing, China, certain government approval is required. We have
obtained all necessary licenses and permits, which include (i) State-Owned
Land Using License issued by Beijing Land Resources and Residential Housing
Management Bureau; (ii) Constructive Lands Planning License issued by Beijing
Planning Committee; (iii) Constructive Project Construction License issued by
Beijing Construction Committee; (iv) Constructive Project Planning License
issued by Beijing Planning Committee; and (v) Commercial Residential House
Pre-Sales License issued by Beijing Land Resources Bureau and Building
Management Bureau.
To date, we are in material compliance with these laws and regulations.
Environmental Matters
- ---------------------
We are subject to China's national and local environmental protection laws.
These laws could hold us liable for the costs of removal and remedy of certain
hazardous substances or wastes released on our property regardless of whether
we were responsible for the presence of hazardous substances. The presence of
hazardous substances, or the failure to properly remedy them, may have a
material adverse effect on our results of operations and financial condition.
As of the date of this prospectus, we are not aware of any material
noncompliance, liability or claim relating to hazardous or toxic substances
in connection with our property and operations. To date, we have not incurred
any costs in complying with environmental laws and regulations. We believethat
we are in material compliance with these laws and regulations.
Patents and Trademarks
- ----------------------
We do not own any patents or trademarks.
Product Research and Development
- --------------------------------
To date we have not conducted any product research and development. We do not
plan to conduct any product research and development activities in the next
twelve months.
Employees
- ---------
Currently we have 20 full-time employees. We expect that there will be no
significant changes in the number of employees in the coming twelve months.
None of our employees is represented by trade unions. We consider our employee
relations to be satisfactory.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
We were incorporated on March 8, 2002 in the State of Delaware under the name
of Norton Industries Corp. ("Norton") as a blank check company for the purpose
of either merging with or acquiring an operating company with operating history
and assets. From March 8, 2002 to January 30, 2005, Norton had conducted
virtually no business other than organizational matters and the filings of
periodic reports with the SEC pursuant to the reporting requirements of the
Securities Exchange Act of 1934, as amended.
On January 30, 2005, Norton entered into a share exchange agreement, by which
Norton acquired all of the capital shares of Bauer Invest Inc. Bauer is a
holding company, which conducts its business through its 80% owned subsidiary
Beijing Dahua Real Estate Development, Ltd., an operating company organized
in China ("Dahua Real Estate"). As a result of this transaction, Bauer became
our wholly owned subsidiary. This transaction was accounted for as a
recapitalization, rather than a business combination. Under accounting
principles generally accepted in the United States of America, after
completion of this transaction, we filed prior historical financial
information of Bauer and its subsidiaries, on a stand-alone basis, for two
years prior to the acquisition. Our continuing operations will reflect the
consolidated operations of Dahua and its subsidiaries.
We, through our subsidiary Beijing Dahua Real Estate Development Ltd., are
engaged in the business of development, construction and sale of luxury
residential single-family homes in Beijing, China. In July 2003, we began to
develop our first real estate project, Dahua Garden (the "First Phase"), which
consists of 76 luxury residential units, all of which are single-family houses
ranging from approximately 2,000 to 5,000 square feet, each with 3 - 4
bedrooms. The construction site is located at the northern skirt of Beijing,
China. The construction began in July 2003 and was completed in December 2005.
As of December 31, 2005, six units were sold, 26 units were reserved with
clients' deposits, and 44 units were available for sale.
Plan of Operations
- ------------------
For the next 12 months, we plan to do the following:
(1) To date, we have made the full payment to the government, which amounts
to approximately 20,000,000 yuan, approximately $2.49 million, for the
acquisition of land use rights. We are applying for deeds for our newly
built homes with the government. Upon receipt of the deeds, we will distribute
the deeds to individual homeowners. We expect to complete this process by
June of 2006.
(2) As of December 31, 2005, we have sold 32 units, including 26 which were
reserved with clients' deposits, out of the 76 housing units. For the next 12
months, we will continue to sell the remaining 44 units to the public. At
present, we don't know when they can be sold, although we expect that they
canbe sold out by the end of December 2006. There is no significant amount
of budget required.
(3) We are currently in the process of applying with Beijing municipal and
Changping district government agencies for the requisite licenses, permits,
and approvals in order to start the Second Phase of Dahua Garden, which will
include 250 units of luxury single-family houses located in Chanping District,
Beijing, China, on an approximately 267,000 square-meter site with a community
35
clubhouse, creeks, ponds, and professionally manicured gardens and landscape.
Each will be 3,000 to 5,000 square feet in size to be sold for 4.5 to 6 million
yuan, or approximately $550,000 to $720,000. We will serve as the sole
developer of the project, including construction and sales. The Second Phase
is not contingent upon our successful completion of the First Phase. As of the
date of this prospectus, the status of the Company's applications for permits,
licenses and approvals is set forth below:
(i) We have entered into an agreement with the land owner, the Village
Committee of Lutuan Village, Beiqijia Township, North Changping District,
which has been approved by the government of Beiqijia Township;
(ii) Upon receipt of such approval, we have submitted a proposal for the
Second Phase development to the Development and Reconstruction Commission of
Changping District, which, in turn, submitted the proposal to the Development
and Reconstruction Commission of Beijing Municipal government;
(iii) Upon receipt of the proposal, the Development and Reconstruction
Commission of Beijing sent a letter to the Urban Planning Commission of
Beijing for its opinion, which it is reviewing; and
(iv) We are currently applying with the National Land Resource Bureau and
Housing Administration Bureau of Beijing Municipality for the initial
development rights and land use rights of the Second Phase development.
In addition to the above permits and approvals, we also need to obtain a permit
to commence construction by Beijing Municipal Construction Commission. We
expect to obtain this permit by the end of September 2006. There is no
assurance that said permit will be issued within the timeframe anticipated.
There is no significant amount of budget required.
(4) After we obtain all necessary permits and approvals, we plan to begin our
construction of 250 units of luxury single-family homes. We plan to begin our
Second Phase of Dahua Garden in August 2006. The construction will take up to
18 to 20 months to complete, and we expect to commence sales in the end of
2008. It is estimated that approximately $60.5 million is needed to complete
the project.
Results of Operations
- ---------------------
Years Ended December 31, 2005 and 2004
- --------------------------------------
Revenues
We began our First Phase of Dahua Garden construction, which consists of 76
luxury residential units, in July 2003. The construction was completed in
December 2005. As of December 31, 2005, we have sold six units out of 76
units. For the year ended December 31, 2005, we recognized sales revenues
of $2,267,399 from the sale of our housing units. No sales revenues was
recognized for the year ended December 31, 2004 because the house
construction was not completed at that time, and all clients' deposits and
installment payments were recorded as customer deposits until physical
delivery and release of any Company's guarantees to the financing bank.
36
Cost of Good Sold
Cost of good sold consists primarily of land acquisition and development costs,
engineering, infrastructure, capitalized interest, and construction costs. For
the year ended December 31, 2005, our cost of good sold was $1,530,731. No cost
of good sold was recorded for the year of 2004, because no houses had been sold.
Operating Expenses
For the year ended December 31, 2005, our operating expenses decreased by
$68,810, or 12.6%, to $474,588 from $543,398 in the prior year, mainly due to
the substantial completion of our First Phase of Dahua Garden housing project.
Except other general and administrative expenses, which increased $20,688,
or 7.4%, all expense items, such as advertising and payroll expenses were
substantially reduced.
Net Income (Loss)
For the year ended December 31, 2005, we had net income of $137,182, or $0.01
per share, as compared with net loss of $432,866, or $0.02 per share, for the
year of 2004.
Liquidity and Capital Resources
- -------------------------------
Since inception, our operations have been primarily funded by equity capital,
unsecured short-term loans from Dahua Project Management Group ("Dahua Group"),
our affiliate, and customer deposits that we received from our pre-sale of
housing units.
After receiving the Residential Housing Pre-sale Permit issued by the
government, we are permitted to sell the residential units to be built to the
public, which is common practice in China. Upon execution of a binding purchase
contract between the developer and a homebuyer, a deposit and installment
payments are required to be made to the developer, which we use to construct
our residential housing units. As of December 31, 2005, our customer deposit
balance was $6,286,992.
We also borrow from time to time based on a verbal line of credit agreement
from Dahua Group, our affiliate. There was no written line of credit agreement
until June 20, 2005, to recapture the credit arrangement. The funds so borrowed
are unsecured and there is no upper limit on the amount of money that we can
borrow as long as there are funds available and we need it for our operation.
The money we borrow under this arrangement bears interest at an annual rate
of 6%, repayable within 30 days upon demand by the lender. As of December 31,
2005, the short-term loans due to related parties had balance of $5,829,673,
including accrued interest of $460,279.
On May 12, 2005, Beijing Dahua Real Estate Development, Ltd, our operating
subsidiary, increased its registered capital, in which Dahua increased its
investment by $2,265,600 and the minority shareholder increased its investment
by $566,265. Dahua Group advanced funds to us to allow for the increase in
investment. On September 21, 2005, we issued 4,750,000 shares to Dahua Group
at the price of $0.478 per share in exchange for the short-term loans Dahua
Group provided. At the same time, according to the Shares Exchange Agreement
signed on January 30, 2005, it is our responsibility to maintain the ownership
37
percentage held by Comp Hotel International Ltd. ("Comp Hotel") and Waywood
Investments Ltd. ("Waywood"). In this regard, we issued 212,500 shares and
37,500 shares to Comp Hotel and Waywood, respectively. There was no cash
inflow from this issuance. After the capital increase, the subsidiary's
registered capital is $4,036,145, of which we, through Bauer, hold 80%
of the shares of Dahua Real Estate.
As of December 31, 2005, we had cash and cash equivalent balance of $417,065.
For the year ended December 31, 2005, our operating activities used $3.02
million of net cash, largely due to increase in inventories of $6.48 million,
and offset by increase in prepaid construction costs of $1.53 million and
customer deposits of $1.26 million. For the year December 31, 2005, we had
no investing activities. For the same period, the financing activities
provided us with $2.88 million of net cash, which includes net proceeds of
$2.27 million from issuance of our common stock, investments in subsidiary
of $566,265 by minority shareholders, and borrowings of $140,115 from a
related party.
As of December 31, 2005, our First Phase of Dahua Garden was completed. We are
currently applying with Beijing municipal and Changping district governmental
agencies for all the requisite licenses, permits, and approvals to start our
Second Phase of Dahua Garden. It is estimated that approximately $60.5 million
is needed to complete the Second Phase. In addition to customer deposits, and
short-term loans (line of credit) from Dahua Group, the proceeds generated
from sale of the First Phase will also be used to finance the Second Phase
development. There are no material commitments for capital expenditures.
While there can be no assurance that we will have sufficient funds over the
next twelve months, we believe that funds generated from the sale of our First
Phase of Dahua Garden housing units, purchaser deposits from pre-sale
contracts, and the line of credit provided by our affiliate, Dahua Group, will
be adequate to meet our anticipated operating expenses, capital expenditure
and debt obligations for at least the next twelve months. Nevertheless, our
continuing operating and investing activities may require us to obtain
additional sources of financing. In that case, we may seek financing from
institutional investors, banks, or other sources of financing. There can be
no assurance that any necessary additional financing will be available to us
on commercially reasonable terms, if at all.
Off-balance sheet arrangements
- ------------------------------
We entered into an agreement with a bank that extended mortgage loans to our
home buyers, whereby we agreed to provide a certain limited guarantee, which
covers the risk before the conveyance of title upon closing. Upon initiating
the loan on behalf of the buyer for the down payment, the bank has withheld a
percentage ranging from 5% to 20% of the loan and deposited such funds into a
segregated account in the bank. At December 31, 2005, the balance of this
separate account was $355,674. Since the Company does not recognize revenue
when its receivables are subject to future subordination, the entire amount
that could become payable to the bank under the limited guarantee is recorded
as a liability on the balance sheet and is included in customer deposits.
Please see Note 6 and Note 7 of Notes to the Financial Statements for details.
Critical Accounting Policies and Estimates
- ------------------------------------------
Our financial statements have been prepared in accordance with accounting
38
principles generally accepted in the United States. The preparation of these
financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, which are based on our historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. We believe that revenue recognition is
one of our more significant judgments and estimates used in the preparation
of our financial statements.
Revenue Recognition
- -------------------
The Company recognizes revenue on the sale of a house when the consummation of
a sale is evidenced by: 1) a contractual arrangement that is binding to both
parties; 2) the exchange of all consideration (i.e. the seller has transferred
to the buyer the usual risks and rewards of ownership and the buyer has made
payment in full to the seller); 3) the arrangement of all permanent financing
for which the seller is responsible and; 4) the performance of all conditions
precedent to closing. No revenue is recognized when the Company's receivable
is subject to future subordination, as is the case when the Company guarantees
a bank loan for the period prior to the certification of title transfer.
Inventory Valuation and Related Prepaid Construction Costs
- ----------------------------------------------------------
The inventories are valued at cost based on the level of completion. No
provision for potential obsolete inventory has been made. Prepaid construction
costs consist of payment to our subcontractors before they provide us services.
Prepaid construction costs were converted into inventory when the
subcontractors finished their work.
At each balance sheet date, we review the carrying amounts of its tangible and
intangible assets to determine whether there is any indication that those
assets have suffered an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated in order to determine the extent
of the impairment loss (if any). Where it is not possible to estimate the
recoverable amount of an individual asset, the company estimates the
recoverable amount of the cash-generating unit to which the asset belongs.
Recoverable amount is the greater of net selling price and value in use. In
assessing value in use, the estimated future cash flows are discounted to
their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset.
If the recoverable amount of an asset (or cash-generating units) is estimated
to be less than its carrying amount, the carrying amount of the asset
(cash-generating unit) is reduced to its recoverable amount. An impairment
loss is recognized as an expense immediately, unless the relevant asset is
carried at a revalued amount, in which case the impairment loss is treated as
a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the
asset (cash-generating unit) is increased to the revised estimate of its
recoverable amount, but so that the increased carrying amount does not exceed
the carrying amount that would have been determined had no impairment loss
39
been recognized for the asset (cash-generating unit) in prior years. A
reversal of an impairment loss is recognized as income immediately, unless
the relevant asset is carried at a revalued amount, in which case the
reversal of the impairment loss is treated as a revaluation increase.
DESCRIPTION OF PROPERTY
We do not own any real estate properties other than the residential units we
develop for sale. Our executive offices are located in an office complex of
approximately 2,000 square feet at 19th Floor, Building C, Tianchuangshiyuan,
Huizhongbeili, Chaoyang District, Beijing, China, 100012. This office space
is provided by Beijing Guohong Dahua Economic Research Center, a member of
the Dahua Group. We have contracted with Beijing Guohong Dahua Economic
Research Center to provide administrative and management services. Included
in those services are the payment of officer salaries and provision of office
space and other shared costs and services. We accrued $74,349 and $145,103
for each year ending December 31, 2005 and 2004 respectively, into short-
term loans due to related parties for payment of the services. We believe
that these facilities are adequate for our current and anticipated needs.
Investment Policies
- -------------------
At present we have no established policy with respect to investments on real
estate or interests in real estate. However, we intend that substantially all
of our investments will be residential luxurious single-family houses. The
purpose of such investments will primarily be generating sales revenues. There
are no limitations on the percentage of assets which may be invested in any
one investment or type of investment. Our Board of Directors may set such
policy without a vote of our shareholders. We will not invest in real estate
mortgages, and we will not invest in securities of or interests in real estate
investment trusts, partnership interests, or other persons primarily engaged
in real estate activities.
We do not plan to limit the geographical area in which we may invest, but we
expect that all of our investments will be made in metropolitan Beijing, China.
We have no current plans to form a joint venture or other arrangements with
third parties to engage in real estate development.
We may finance our investments through both public and private secured and
unsecured debt offerings, as well as public and private placements of our
equity securities. The equity securities may include both common and preferred
equity issues. There are currently no restrictions on the amount of debt that
we may incur. Since inception, our operating activities have been mainly
financed by equity capital, an unsecured line of credit provided by Dahua
Group, our affiliate, and purchaser deposits received from our pre-sale of
the First Phase units of Dahua Garden.
Description of Real Estate and Operating Data
- ---------------------------------------------
Our only real estate project currently being developed is the First Phase of
Dahua Garden, which is located in the northern suburban areas of Beijing,
China, approximately 20 kilometers from the downtown of Beijing. It consists
of 76 luxurious residential units, each ranging from 2,000 to 5,000 square
feet in size with 3 to 4 bedrooms. The residential units are constructed on a
40
piece of land of approximately 30 acres. The construction of all of the units
has been completed and they are being sold to the public. As the developer,
we do not have title to the land, the use of which is licensed from the
Chinese government for a period of 70 years expiring on April 27, 2073, but
we own all the residential units constructed thereon until such units are sold.
There are no material mortgages, liens or other encumbrances against the land
or residential units. Upon conveyance of title to the residential units to the
buyer, the land use rights will be passed to the buyer.
The Second Phase of Dahua Garden development includes 250 homes located on a
267,000 square meter site with community clubhouse, creeks, ponds, and
professionally manicured gardens and landscape. We are currently applying with
the Beijing municipal and local governmental authorities for all the requisite
licenses, permits, and approvals.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Officers and Directors
- ----------------------------------------
As a shareholder of Bauer Invest Inc., Yonglin Du, our Chairman of the Board of
Directors and Chief Executive Officer received 1,520,000 shares of our common
stock as result of our reverse acquisition of Bauer on January 30, 2005. On
September 21, 2005, as a result of the registered capital increase of Dahua
Real Estate, Yonglin Du, received an additional 380,000 shares of our common
stock. Please see "Recent Sales of Unregistered Securities" for more detailed
information. The number of shares Mr. Du received in both events was on pro
rata basis, i.e., the number of shares he received is proportionate to the
number of shares he owned in Bauer.
Transactions with Promoters
- ---------------------------
Prior to the reverse merger on January 30, 2005, Comp Hotel International Ltd.
("Comp Hotel") and Waywood Investment Ltd. ("Waywood") collectively owned 100%
of capital stock of our predecessor, Norton Industries Corp. On January 30,
2005, Comp Hotel and Waywood entered into a share exchange agreement with
Bauer Invest Inc., a British Virgin Islands corporation ("Bauer"), pursuant
to which Comp Hotel and Waywood sold all outstanding capital shares, or
5,000,000 shares of common stock of Norton, to Bauer in exchange for $100,000
in cash and 5% of the post-acquisition shares. As a result, Waywood and Comp
Hotel received 150,000 and 850,000 shares, respectively, of our common stock.
The numbers of shares they received were proportionate to the respective
numbers of shares they originally owned in Norton Industries Corp.
Waywood Investment Ltd. ("Waywood") is the sole promoter of our predecessor,
Norton Industries Corp ("Norton"). Waywood is a small business consulting firm
incorporated in the British Virgin Islands. Jianjun Zhang is the sole
shareholder of Waywood. From inception of Norton until the reverse merger of
Norton on January 30, 2005, Mr. Zhang was the sole director and executive
officer of Norton. On February 26, 2003, Waywood entered into a stock purchase
agreement with Comp Hotel International Ltd., a British Virgin Islands
corporation ("Comp Hotel"), pursuant to which Comp Hotel acquired 4,250,000
shares, or 85%, of Norton's common stock from Waywood in exchange for $42,500
in cash. Comp Hotel is a travel-related service provider operating in Hong
Kong, and is controlled by South Sea Petroleum Holdings Limited, a Hong Kong
corporation, whose principal business is the exploration and production of
crude oil in Indonesia. Immediately prior to the date of reverse merger
41
between Bauer Invest and Norton Industries Corp., Comp Hotel, owned 85%,
and Waywood owned 15%, of Norton's issued and outstanding shares,
respectively.
In connection with issuance of additional common shares as a result of capital
increase in our subsidiary, pursuant to a no-dilution clause of the Share
Exchange Agreement dated January 30, 2005, on September 21, 2005, we issued
212,500 and 37,500 shares of our common stock to Comp Hotel and Waywood,
respectively.
Related Party Loans
- -------------------
Set forth below is a chart of all related party loans (lines of credit)
extended to us as of December 31, 2005:
Party Current Loan Balance Date
- ---------------------------------- ------------------------ ------------------
Dahua Project Management Group $ 3,708,113 October 2001
Dahua Designation Institute 557,621 September 2003
Beijing Dahua Guohong Invest Inc. 68,154 November 2002
Beijing Guohong Dahua Economic
Research Center 337,051 September 2002
Beijing Dahua Bidding Agency 532,837 November 2004
Donghui Du 52,355 December 2001
Beijing Hua'an International
Detector Technology Co., 10,595 April 2005
Beijing Dahua Weiye Invest Inc. 44,428 December 2005
Zhong He Fu Equipment Ltd. 58,240 December 2005
- --------------------------------------------------------------------------------
Total $ 5,369,394
All the related parties set forth above are parties in which Mr. Yonglin Du,
our president and CEO, holds an executive position. Donghui Du is Mr. Yongling
Du's son.
We entered a written loan agreement with Dahua Project Management Group. Please
see Exhibit 10. 6. All other loans or lines of credit are extended based on
verbal agreements. All the loans so borrowed are unsecured. The money we borrow
from them bears interest at an annual rate of 6%, then prevailing market rate,
repayable within 30 days upon demand by lender.
Transaction with Guohong Dahua Economic Research Center
- -------------------------------------------------------
For the past two years, we have contracted with Beijing Guohong Dahua Economic
Research Center, a related party, to provide us with administrative and
management services. Included in those services are the payment of officer
salaries and provision of office space and other shared costs and services.
We accrued $145,103 and $74,349 for each year ending December 31, 2004 and
2005 respectively into short- term loans due to related parties for payment
of the services. The agreements were filed as Exhibits 10.7 and 10.8.
42
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
- ------------------
There is no public trading market for our common stock.
Holders
- -------
As of April 30, 2006, there were 110 holders of record for our common shares.
We have only one class of stock outstanding.
Stock Options, Warrants and Convertible Securities
- --------------------------------------------------
We have not granted any stock options or warrants to purchase shares of our
common stock, and we have not issued and do not have any securities outstanding
that may be converted into our common shares or have any rights convertible or
exchangeable into shares of our common stock.
Dividends
- ---------
We have not paid any dividends since our incorporation and do not anticipate
paying dividends in the foreseeable future. We intend to retain future
earnings, if any, to fund the expansion and growth of our business.
There are no restrictions in our Articles of Incorporation or Bylaws that
prevent us from declaring dividends. The Delaware Revised Statutes, however,
do prohibit us from declaring dividends, after giving effect to the
distribution of the dividend if: (i) we would not be able to pay our debts as
they become due in the usual course of business; or (ii) our total assets
would be less than the sum of our total liabilities plus the amount that would
be needed to satisfy the rights of shareholders who have preferential rights
superior to those receiving the distribution.
Securities Authorized for Issuance under Equity Compensation Plans
- ------------------------------------------------------------------
We do not have any compensation plan under which equity securities are
authorized for issuance.
Future Sales by Existing Shareholders
- -------------------------------------
As of the date of this prospectus, there are 25,000,000 shares of common stock
issued and outstanding, all of which are "restricted securities", as that term
is defined under Rule 144 of the Securities Act of 1933. Under Rule 144, such
shares can be publicly sold, subject to volume restrictions and certain
restrictions on the manner of sale, commencing one year after their
acquisition, except the shares held by Waywood Investments Ltd. (150,000
shares) and Comp Hotel International Ltd (850,000 shares). The SEC is of the
opinion that Rule 144 is not available for resale transactions for securities
issued by a blank check company, like Norton, and, consequently, the resale of
such securities cannot occur without registration under the Securities Act.
Furthermore, promoters and affiliates of a blank check company and their
transferees would be considered "underwriters" under the Securities Act when
43
reselling the securities of a blank check company. The SEC also states
that these securities can only be resold through a registered offering. Rule
144 would not be available for those resale transactions despite technical
compliance with the requirements of Rule 144.
A total of 19,000,000 shares were issued, on January 30, 2005, to 108
shareholders of Bauer Invest Inc. on a pro rata basis. The number of shares
received by each person is proportionate to the number of shares he/she
originally owned in Bauer. The above-mentioned shares were issued pursuant to
Regulation S of the Securities Act of 1933, as amended. These shares can be
sold under Rule 144 resale restrictions.
In general, under Rule 144 as currently in effect, any of our affiliates and
any person or persons whose sales are aggregated who has beneficially owned
his or her restricted shares for at least one year, may be entitled to sell
in the open market within any three-month period a number of shares of common
stock that does not exceed the greater of (i) 1% of the then outstanding
shares of our common stock, or (ii) the average weekly trading volume in the
common stock during the four calendar weeks preceding such sale. Sales under
Rule 144 are also affected by limitations on manner of sale, notice
requirements, and availability of currentpublic information about us.
Non-affiliates who have held their restricted shares for one year may be
entitled to sell their shares under Rule 144 without regard to any of the
above limitations, provided they have not been affiliates for the three
months preceding such sale.
Shares purchased in this offering, which will be immediately resalable, and
sales of all of our other shares after applicable restrictions expire, could
have a depressive effect on the market price, if any, of our common stock and
the shares we are offering.
We do not have any securities that are convertible into common stock. We have
not registered any shares for sale by selling shareholders under the
Securities Act other than as disclosed in this prospectus.
EXECUTIVE COMPENSATION
We have contracted with Beijing Guohong Dahua Economic Research Center, a
related party, to provide administrative and management services. Included in
those services are the payment of officer salaries and provision of office
space and other shared costs and services. We accrued $74,349 and $145,103 for
the year ending December 31, 2005 and 2004 respectively into short- term loans
due to related parties for payment of the services.
44
Summary Compensation Table
- --------------------------
SUMMARY COMPENSATION TABLE
Long Term Compensation
- ---------------------------------------------------- -------------------------------------------------
Annual Compensation Awards Payouts
- ---------------------------------------------------- ------------------------- ------- -------------
Securities
Name and Other Annual Restricted Underlying
Principal Salary Bonus Compensation Stock Options/ LTIP All Other
Position Year ($) ($) ($) Awards($) SARS Payouts Compensation
- -------------------------------------------------------------------------------------------------------
Yonglin Du 2005 24,145 - - - - - -
CEO and 2004 24,145 - - - - - -
President 2003 24,145 - - - - - -
Hua Meng 2005 7,250 - - - - - -
CFO 2004 7,250 - - - - - -
2003 7,250 - - - - - -
- -------------------------------------------------------------------------------------------------------
(i) The annual salaries paid Mr. Du were 200,000 yuan, or approximately
$24,145, and Ms. Meng 60,000 yuan, or approximately $7,250, respectively.
45
Option/SAR Grants
- -----------------
We do not currently have a stock option plan. No stock options have been
granted or exercised by any of the officers or directors since we were
founded.
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Values
- ---------------------------------------------------------------------
No individual grants of stock options, whether or not in tandem with stock
appreciation rights known as SARs or freestanding SARs have been made to any
executive officer or any director since our inception; accordingly, no stock
options have been granted or exercised by any of the officers or directors
since we were founded.
Long-Term Incentive Plans and Awards
- ------------------------------------
We do not have any long-term incentive plans that provide compensation intended
to serve as incentive for performance. No individual grants or agreements
regarding future payouts under non-stock price-based plans have been made to
any executive officer or any director or any employee or consultant since our
inception; accordingly, no future payouts under non-stock price-based plans or
agreements have been granted or entered into or exercised by any of the
officers or directors or employees or consultants since we were founded.
Compensation of Directors
- -------------------------
The members of the Board of Directors are not compensated by us for their
service as members of the Board of Directors, but may be reimbursed for
reasonable expenses incurred in connection with attendance of meetings of the
board of directors. There are no arrangements pursuant to which directors are
or will be compensated in the future for any services provided as a director.
Employment Contracts, Termination of Employment, Change-in-Control Arrangements
- -------------------------------------------------------------------------------
We have not entered employment agreements with our executive officers. There
are no compensatory plans or arrangements, including payments to be received
from us, with respect to a named executive officer, if such plan or arrangement
would result from the resignation, retirement or any other termination of such
executive officer's employment with us or form a change-in-control of us or a
change in the named executive officer's responsibilities following a
change-in-control.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
On or about January 1, 2006, Child, Sullivan & Company, our principal
accountant, changed its accounting practice from a corporation to a
professional limited liability company named Child, Van Wagoner & Bradshaw,
PLLC. As this is viewed as a separate legal entity, we dismissed Child,
Sullivan & Company as principal accountant and engaged Child, Van Wagoner &
Bradshaw, PLLC, as our principal accountant for our fiscal year ending
December 31, 2005 and the interim periods for 2005 and 2006. The decision
to change principal accountants was ratified by our Board of Directors.
46
None of the reports of Child, Sullivan & Company, on our financial statements
for either of the past two years or subsequent interim period contained an
adverse opinion or disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles.
There were no disagreements between us and Child, Sullivan & Company, for the
previous two fiscal years and interim period up to the date of dismissal on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of Child, Sullivan & Company, would have caused them to make
reference to the subject matter of the disagreement in connection with its
report. Further, Child, Sullivan & Company has not advised us that: 1) internal
controls necessary to develop reliable financial statements did not exist; or
2) information has come to the attention of Child, Sullivan & Company which
made it unwilling to rely upon management's representations, or made it
unwilling to be associated with the financial statements prepared by
management; or 3) the scope of the audit should be expanded significantly,
or information has come to the attention of Child, Sullivan & Company that
they have concluded will, or if further investigated might, materially impact
the fairness or reliability of a previously issued audit report or the
underlying financial statements, or the financial statements issued or to be
issued covering the fiscal year ended December 31, 2005.
As a result of our acquisition of Bauer Invest Inc., we dismissed Stan J. H.
Lee, CPA, a member firm of DMHD Hamilton Clark & Co., as our independent
public accountant, and engaged Child, Sullivan & Company, the auditors of
Bauer, as our certifying accountants. Since September 2004, Bauer has engaged
Child, Sullivan & Company as its independent public accountants. The decision
to dismiss Stan J.H. Lee, CPA and appoint Child, Sullivan & Company was
approved by our whole Board of Directors.
Stan J.H. Lee, CPA served as the independent public accountants of our
predecessor, Norton Industries Corp., for the period from March 8, 2002
(inception) to October 2003, when Stan J. H. Lee, CPA became unqualified
because he did not register with the Public Company Accounting Oversight Board
("PCAOB") as required by the Sarbanes - Oxley Act of 2002 (the "Act"). Pursuant
to the Act, accounting firms that are not registered with PCAOB are prohibited
from preparing or issuing audit reports on U.S. public companies and from
participating in such audits.
During the period as our independent public accountant, Stan J. H. Lee, CPA,
issued a report for the period from March 8, 2002 (date of inception) to
December 31, 2002. Stan J. H. Lee's report did not contain an adverse opinion
or a disclaimer of opinion, nor was it qualified or modified as to uncertainty,
audit scope or accounting principle, except that the report of Stan J. H. Lee
for such period indicated conditions which raised substantial doubt about our
ability to continue as a going concern.
During the period from March 8, 2002, to October 2003, there were no
disagreements between us and Stan J.H. Lee, CPA on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreement(s), if not resolved to the satisfaction of Stan
J.H. Lee, CPA would have caused Stan J.H. Lee, CPA to make reference to the
matter of the disagreement(s) in connection with its reports. In addition,
during the period from March 8, 2002 to October 2003, there were no reportable
events as that term is described in Item 304(a)(1)(iv) of Regulation S-B.
47
At no time prior to January 30, 2005, did we (or anyone on behalf of us)
consult with Child, Sullivan & Company on matters regarding (i) the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
its financial statements, or (ii) any matter that was the subject of a
disagreement with Stan J.H. Lee, CPA or a reportable event, as defined in
Item 304(a)(2) of Regulation S-B.
ADDITIONAL INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
of 1934, as amended. In accordance with those regulations, we file periodic
reports, and other information with the Securities and Exchange Commission.
Our reports and other information can be inspected and copied at the public
reference facilities maintained by the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can obtain information on
the operations of the Public Reference Room by calling the SEC at (800)
SEC-0330. Information also is available electronically on the Internet
at http://www.sec.gov.
We will provide without charge to each person to whom a copy of this prospectus
is delivered, upon oral or written request of such person, a copy of any or all
documents which are incorporated by reference in this prospectus, other than
exhibits to such documents (unless such exhibits are specifically incorporated
by reference into such documents). Written requests for such documents should
be directed to Dahua Inc., c/o 80 Wall Street, Suite 818, New York, NY 10005.
Telephone requests may be directed to us at (212)809-1200.
We intend to furnish our shareholders with annual reports containing audited
financial statements and quarterly reports containing unaudited financial
information for the first three quarters of each year.
FINANCIAL STATEMENTS
The following report of independent registered public accounting firm and the
consolidated financial statements of the Company are included below:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet
Consolidated Statements of Operations and Comprehensive Income (Loss)
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders' Equity
Notes to Consolidated Financial Statements
48
Child, Van Wagoner & Bradshaw, PLLC
A Professional Limited Liability Company of CERTIFIED PUBLIC ACCOUNTANTS
5296 S. Commerce Dr., Suite 300, Salt Lake City, UT 84107
Phone: (801) 281-4700, Fax: (801) 281-4701
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors
Dahua, Inc.
We have audited the accompanying consolidated balance sheet of Dahua, Inc. as
of December 31, 2005, and the related consolidated statements of operations
and comprehensive income (loss), changes in stockholders' equity, and cash
flows for the years ended December 31, 2005 and 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our
audits 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
consolidated 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 audits provide 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 Dahua, Inc. as of
December 31, 2005, and the results of its operations and its cash flows for the
years ended December 31, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Child, Van Wagoner & Bradshaw, PLLC
- ----------------------------------------
Child, Van Wagoner & Bradshaw, PLLC
Salt Lake City, Utah
February 10, 2006
49
DAHUA, INC.
CONSOLIDATED BALANCE SHEET
December 31,
ASSETS 2005
Current assets
Cash and cash equivalents................................ $ 417,065
Inventory................................................ 14,931,368
--------------
Total current assets................................... 15,348,433
Property, plant & equipment
Computer equipment....................................... 3,536
Office equipment......................................... 44,541
Telephones............................................... 1,051
Vehicles................................................. 11,783
-------------
Total property, plant & equipment....................... 60,911
Accumulated depreciation.................................. (29,083)
-------------
Net property, plant and equipment...................... 31,828
Restricted cash (note 7).................................. 355,674
Due from related parties.................................. 45,779
-------------------
Total assets $ 15,781,714
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable........................................ $ 92,937
Customer deposits....................................... 6,286,992
Short-term loans-related parties........................ 5,369,394
Accrued interest-short-term loans, related parties...... 460,279
Accrued sales and income taxes.......................... 223,782
Accrued others.......................................... 31,591
----------------
Total current liabilities............................. 12,464,975
Minority interest in subsidiary........................... 683,240
Stockholders' equity
Preferred stock: par value $.0001; 20,000,000 shares
authorized; none issued and outstanding................. -
Common stock: par value $.0001; 80,000,000 shares
authorized; 25,000,000 issued and outstanding.......... 2,500
Additional paid in capital............................... 3,130,452
Accumulated deficit...................................... (570,136)
Accumulated other comprehensive income................... 70,683
----------------
Total stockholders' equity............................. 2,633,499
Total liabilities and stockholders' equity................ $ 15,781,714
=============
See accompanying notes to consolidated financial statements
DAHUA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
Year ended
December 31,
-----------------------------------------
2005 2004
-----------------------------------------
Revenues
Sales revenues................................... $ 2,267,399 $ -
Cost of goods sold............................... 1,530,731 -
---------------- ----------------
Gross profit................................... 736,668 -
Expenses
Advertising...................................... 98,970 122,534
Depreciation..................................... 8,635 9,148
Payroll expense.................................. 65,201 130,622
Other general and administrative................. 301,782 281,094
---------------- ----------------
Total expenses................................ 474,588 543,398
---------------- ----------------
Net income (loss) from operations................. 262,080 (543,398)
Other income (expense)
Interest income.................................. 3,625 2,315
Interest expense................................. (9,768) -
---------------- ----------------
Total other income (expense).................. (6,143) 2,315
Net income (loss) before taxes and minority interest 255,937 (541,083)
Provision for income taxes........................ (84,459) -
Net income (loss) before minority interest........ 171,478 (541,083)
Less minority interest in subsidiary gain (loss).. 34,296 (108,217)
---------------- ----------------
Net income (loss)................................. $ 137,182 $ (432,866)
Foreign currency translation adjustment........... 70,683 -
Comprehensive income (loss)....................... $ 207,865 $ (432,866)
================ ================
Basic and diluted earnings (loss) per share....... $ 0.01 $ (0.02)
================ ================
Weighted average common shares outstanding........ 22,520,548 20,000,000
================ ================
See accompanying notes to consolidated financial statements
DAHUA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
December 31,
-----------------------------------------
2005 2004
-----------------------------------------
Cash flows from operating activities:
Net income (loss)............................. $ 137,182 $ (432,866)
Adjustments to reconcile net loss to
net cash (used in )operations:
Depreciation............................... 8,635 9,148
Provision for allowance on accounts receivable - 56,943
Minority interest.......................... 34,296 (108,217)
Changes in operating assets and liabilities:
Inventory................................... (6,481,319) (3,621,344)
Prepaid construction costs.................. 1,531,457 (1,651,397)
Loans receivable............................ - 22,848
Accounts payable............................ 67,544 (183,313)
Customer deposits........................... 1,256,601 4,913,361
Accrued interest............................ 200,880 -
Accrued sales and income taxes.............. 223,782 -
Accrued others.............................. (518) 22,862
---------------- ----------------
Net cash used in operations.................... (3,021,460) (971,975)
Cash flows from investing activities:
Advances to related parties................... - (50,039)
Repayment of advances to related parties...... 4,260 -
Purchases of property, plant & equipment...... - (2,185)
---------------- ----------------
Net cash provided by (used in) investing activities 4,260 (52,224)
Cash flows from financing activities:
Net proceeds from issuance of common stocks... 2,265,600 -
Purchase of stock in merger transaction....... (100,000) -
Net proceeds from related party loans payable. 140,115 1,394,284
Investment in subsidiary by minority owner.... 566,265 -
---------------- ----------------
Net cash provided by financing activities...... 2,871,980 1,394,284
Effect of rate changes on cash................. 87,501 -
Increase in cash and cash equivalents.......... (57,719) 370,085
Cash and cash equivalents, beginning of period. 474,784 104,699
Cash and cash equivalents, end of period....... $ 417,065 $ 474,784
================ ================
Supplemental disclosures of cash flow information:
Interest paid in cash......................... $ 9,768 $ -
================ ================
Income taxes paid in cash..................... $ - $ -
================ ================
See accompany notes to consolidated financial statements
DAHUA INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Common Common Paid in Retained Comprehensive Total
Shares Stock Capital Deficit Income Equity
---------- ---------- -------------- ------------- -------------- ----------
Balance January 1, 2004 20,000,000 $ 2,000 $ 965,352 $ (274,452) $ - $ 692,900
Net loss (432,866) - (432,866)
---------- ---------- -------------- ------------- -------------- ----------
Balance December 31, 2004 20,000,000 2,000 965,352 (707,318) - 260,034
Stock purchased and
canceled in merger
transaction - - (100,000) - - (100,000)
Issued common stock 5,000,000 500 2,265,100 2,265,600
Net income - - - 137,182 - 137,182
Foreign currency
Translation - - - - 70,683 70,683
---------- ---------- -------------- ------------- -------------- ----------
Balance
December 31, 2005 25,000,000 $ 2,500 $ 3,130,452 $ (570,136) $ 70,683 $2,633,499
========== ========== =========== ============= ============= ==========
See accompany notes to consolidated financial statements
DAHUA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations
Dahua, Inc. ("Dahua") was incorporated on March 8, 2002 in the State of
Delaware as Norton Industries Corp. ("Norton"). The name was changed to Dahua,
Inc. on February 7, 2005 as result of a reverse acquisition in which Norton
acquired all capital shares of Bauer Invest Inc. ("Bauer"). Incident to the
reverse acquisition the Company paid $100,000 to the previous shareholders of
Norton for shares of stock that were canceled. The acquisition was accounted
for as a reverse merger, as the post acquisition owners and control persons of
Dahua are substantially the same as the pre-acquisition owners and control
persons of Bauer and the $100,00 paid to purchase and cancel the previous
shares was treated as an adjustment to paid in capital.
Bauer Invest Inc. was incorporated on December 10, 2003, under the laws of the
Territory of the British Virgin Islands ("BVI"). Bauer has had no operations
other than the acquisition of 80% of Beijing Dahua Real Estate Development,
Ltd. ("Subsidiary") on May 25, 2004. The Subsidiary is a corporation
established on September 24, 2001 in the People's Republic of China ("PRC").
The acquisition was accounted for as a reverse merger, as the post acquisition
owners and control persons of Bauer are substantially the same as the
pre-acquisition owners and control persons of the subsidiary. These financial
statements are essentially those of the Subsidiary with a recapitalization to
show the effects due to the reverse mergers. The consolidated entity is
hereafter referred to as "the Company."
The Company engages in the development of real estate and the sale of commodity
housing. The Company has completed all of the construction on its current
development project and all of the houses are available for sale.
2. Basis of Presentation
The consolidated financial statements include the accounts of Dahua, Inc.,
Bauer Invest, Inc. and Beijing Dahua Real Estate Development, Ltd. All
material intercompany accounts and transactions have been eliminated in
consolidation. The Company records minority interest expense, which reflects
the 20% portion of the earnings of Beijing Dahua Real Estate Development, Ltd.
allocable to holders of the minority interest.
The accompanying consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
("US GAAP"). This basis differs from that used in the statutory accounts of
the Company, which were prepared in accordance with the accounting principles
and relevant financial regulations applicable to enterprises in the PRC. All
necessary adjustments have been made to present the financial statements in
accordance with US GAAP.
Economic and Political Risks
The Company faces a number of risks and challenges as a result of having
primary operations and markets in the PRC. Changing political climates in the
PRC could have a significant effect on the Company's business.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
includes cash on hand and demand deposits held by banks. Deposits held in
financial institutions in the PRC are not insured by any government entity
or agency.
Trade Accounts Receivable
Trade accounts receivable are recognized and carried at original invoice amount
less an allowance for any uncollectible amounts. An estimate for doubtful
accounts is made when collection of the full amount becomes questionable. The
Company had no trade accounts receivable at December 31, 2005 and 2004.
Inventories
Inventories consist primarily of land acquisition and development costs,
engineering, infrastructure, capitalized interest, and construction costs. The
inventories are valued at cost based on the level of completion using the
weighted-average method. No provision for potential obsolete inventory has
been made.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated
depreciation, which is computed using the straight-line method over the useful
lives of the assets. Upon disposal of assets, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is included in
income. Property and equipment are depreciated over their estimated useful
lives as follows:
Computer equipment 3 years
Office equipment 7 years
Vehicles 7 years
Depreciation expense for the years ended December 31, 2005 and 2004 was $8,635
and $9,148, respectively.
Long-term assets of the Company are reviewed annually to assess whether the
carrying value has become impaired, according to the guidelines established in
Statement of Accounting Standards ("SFAS") No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company also evaluates the
periods of amortization to determine whether subsequent events and
circumstances warrant revised estimates of useful lives. No impairment of
assets was recorded in the periods reported.
Revenue Recognition
The Company recognizes revenue on the sale of a house when the consummation of
a sale is evidenced by: 1) a contractual arrangement that is binding to both
parties; 2) the exchange of all consideration (i.e. the seller has transferred
to the buyer the usual risks and rewards of ownership and the buyer has made
payment in full to the seller); 3) the arrangement of all permanent financing
for which the seller is responsible and; 4) the performance of all conditions
precedent to closing. No revenue is recognized when the Company's receivable
is subject to future subordination, as is the case when the Company guarantees
a bank loan for the period prior to the certification of title transfer.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expense amounted to
$98,970 and $122,534 for years ended December 31, 2005 and 2004.
Foreign Currencies
The accompanying financial statements are presented in United States ("US")
dollars. The functional currency is the Yuan Renminbi ("RMB") of the PRC. The
financial statements are translated into US dollars from RMB at period-end
exchange rates for assets and liabilities, and weighted average exchange rates
for revenues and expenses. Capital accounts are translated at their historical
exchange rates when the capital transactions occurred.
During July 2005, China changed its foreign currency exchange policy from a
fixed RMB/US dollar exchange rate into a flexible rate under the control of
China's government. We used the Closing Rate Method in translation of the
financial statements.
RMB is not freely convertible into the currency of other nations. All such
exchange transactions must take place through authorized institutions. There
is no guarantee the RMB amounts could have been, or could be, converted into
US dollars at rates used in translation.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statement
of operations in the period that includes the enactment date. A valuation
allowance is provided for deferred tax assets if it is more likely than not
these items will either expire before the Company is able to realize their
benefits, or that future deductibility is uncertain. Nearly all differences
in tax bases and financial statement carrying values are permanent differences.
Therefore, the Company has recorded no deferred tax assets or liabilities.
Earnings Per Share
Basic earnings per common share ("EPS") are calculated by dividing net income
by the weighted average number of common shares outstanding during the year.
Diluted EPS is calculated by adjusting the weighted average outstanding shares,
assuming conversion of all potentially dilutive securities, such as stock
options and warrants. The numerators and denominators used in the computations
of basic and diluted EPS are presented in the following table:
2005 2004
NUMERATOR FOR BASIC AND DILUTED EPS
Net income (loss) to common stockholders $ 137,182 $ (432,866)
============= ==============
DENOMINATORS FOR BASIC AND DILUTED EPS
Weighted average shareds of common stock outstanding 22,520,548 20,000,000
------------- --------------
Add: dilutive equity securities outstanding - -
------------- --------------
Denominator for diluted EPS 22,520,548 20,000,000
------------- --------------
EPS - Basic $ 0.01 $ (0.02)
------------- --------------
EPS - Diluted $ 0.01 $ (0.02)
------------- --------------
The Company had no potentially dilutive securities outstanding at December 31, 2005 and 2004.
4. Inventory
Inventory represents completed houses available for sale at December 31, 2005.
During the year, the Company completed all of its construction-in-progress. The
Company had total of 76 luxurious residential units available for sale during
2005. As of December 31, 2005, six houses were sold, 26 houses were reserved
with clients' deposits, and 44 houses were available for sale.
5. Related Party Transactions
The Company made an advance to a director in the amount of $45,779. The advance
bears no interest and has no fixed repayment terms. Consequently, it has been
excluded from current assets.
Short-term loans due to related parties had balances of $5,829,673 and
$5,488,678 (including accrued interest of $460,279 and $259,399) at December
31, 2005 and 2004. The loans carry an annual interest rate of 6 percent and
are due on demand. Interest accrued on the loans was $200,880 and $161,238
for years ended December 31, 2005 and 2004. The entire interest amounts
accrued through the completion of construction were capitalized as costs
of construction.
6. Customer Deposits
Customer deposits consist of down payments received on sales contracts for
houses. When all of the conditions set forth in the Company's revenue
recognition policy are met, the Company will recognize the down payments as
revenue. The aggregate of the 26 customers' deposits at December 31, 2005
was $6,286,992. Of the 26 units reserved, 10 unit's deposits are money
received from bank arrangements (see note 7) in the amounts of $2,918,216.
Accordingly, the bank has liens against these 10 units.
7. Off-Balance Sheet Arrangements
The Company entered into an agreement with two banks that extended mortgage
loans to its home buyers, where the Company agrees to provide a certain
limited guarantee, which covers the risk before the conveyance of title upon
closing. Upon initiating the loan on behalf of the buyer for the down payment,
the Bank has withheld a percentage ranging from 5% to 20% of the loan and
deposited such funds into a segregated account in each bank. At December 31,
2005, the balance of this separate account was $355,674. Since the Company
does not recognize revenue when its receivables are subject to future
subordination, the entire amount that could become payable to the bank
under the limited guarantee is recorded as a liability on the balance sheet
and is included in customer deposits, as is explained in note 6.
8. Accrued Taxes Payables
The Company made a provision for sales tax and income tax, which totaled
$138,067 and $85,715 respectively at December 31, 2005. Sales tax accrued is
included as part of cost of inventory.
9. Additional Paid in Capital
The subsidiary increased its registered capital on May 12, 2005 and acquired
the license on May 19, 2005. In this capital increase, Dahua increased its
investment in the subsidiary by $2,265,600 and the minority shareholder
increased its investment by $566,265. Dahua Project Management Group advanced
funds to the Company to allow for the increase in investment. On September 21,
2005, the Company issued 4,750,000 shares to the individual owners of Dahua
Project Management Group at the price of $0.477 per share in exchange for the
short-term loans Dahua Group provided. According to the Share Exchange
Agreement signed on January 30, 2005, it is Dahua's responsibility to maintain
the proportionate ownership of the Company held by Comp Hotel International
Ltd. ("Comp") and Waywood Investments Ltd. ("Waywood"). In this regard the
Company issued 212,500 shares and 37,500 shares to Comp and Waywood,
respectively. There's no cash inflow from this issuing. After the capital
increase, the subsidiary's registered capital is $4,036,145, of which the
Company, through Bauer, holds 80% of the shares.
10. Contingencies
The Company has not, historically, carried any property or casualty insurance.
No amounts have been accrued for any liability that could arise from the lack
of insurance. Management feels the chances of such an obligation arising are
remote.
Deposits in banks in the PRC are not insured by any government entity or
agency, and are consequently exposed to risk of loss. Management believes the
probability of a bank failure, causing loss to the Company, is remote.
11. Recent Accounting Pronouncements
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of
FASB Statements No. 133 and 140". The statement permits fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise would require bifurcation, clarifies which interest-
only strips are not subject to the requirements of Statement 133, establishes
a requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation,
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives, and amends Statement 140 to eliminate the prohibition
on a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. The Statement is effective for financial instruments
acquired or issued after the beginning of the first fiscal year that begins
after September 15, 2006. The Company expects that the Statement will have no
material impact on its financial statements.
In February 2006, the FASB issued Staff Position No. FAS 123(R)-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
Event". This position addresses the classification of options and similar
instruments issued as employee compensation that allow for cash settlement
upon the occurrence of a contingent event, amending paragraphs 32 and A229 of
SFAS No. 123 (revised 2004), "Share-Based Payment". As the Company has not
traditionally paid compensation through the issuance of equity securities, no
impact is expected on its financial statements.
In October 2005, the FASB issued Staff Position No. FAS 13-1, "Accounting for
Rental Costs Incurred during a Construction Period". This position addresses
the accounting for rental costs associated with operating leases that are
incurred during a construction period. Management believes that this position
has no application to the Company.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS No. 154"), which replaced Accounting Principles Board
Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements. SFAS No. 154 changes the requirements for the
accounting for and reporting of a change in accounting principles. It requires
retrospective application to prior periods' financial statements of changes in
accounting principles, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. This statement
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The impact on the Company's
operations will depend on future accounting pronouncements or changes in
accounting principles.
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47, "Accounting
for Conditional Asset Retirement Obligations." FIN 47 clarifies that the term
"Conditional Asset Retirement Obligation" as used in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within
the control of the entity. Accordingly, an entity is required to recognize
a liability for the fair value of a Conditional Asset Retirement Obligation
if the fair value of the liability can be reasonably estimated. FIN 47 is
effective no later than the end of fiscal years ending after December 15,
2005. Management does not believe the adoption of FIN 47 will have a
material effect on the Company's financial position, results of operations
or cash flows.
61
Dealer Prospectus Delivery Obligation
- -------------------------------------
Until __________, 2006, (90 days after the effective date of this prospectus)
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligations to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
Prospectus Summary....................................................... 5
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 14
Determination of Offering Price.......................................... 14
Dilution................................................................. 14
Selling Security Holders................................................. 14
Plan of Distribution..................................................... 18
Legal Proceedings........................................................ 19
Directors, Executive Officers, Promoters and Control Persons............. 19
Security Ownership of Certain Beneficial Owners and Management........... 22
Description of Securities................................................ 23
Interest of Named Experts and Counsel.................................... 24
Disclosure of Commission Position of Indemnification
for Securities Act Liabilities........................................... 25
Organization Within Last Five Years...................................... 25
Description of Business.................................................. 27
Management's Discussion and Analysis or Plan of Operation................ 35
Description of Property.................................................. 40
Certain Relationships and Related Transactions........................... 41
Market for Common Equity and Related Stockholder Matters................. 43
Executive Compensation................................................... 44
Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure................................... 46
Additional Information................................................... 48
Financial Statements..................................................... 48
62
DAHUA INC.
PROSPECTUS
7,548,000 Shares of Common Stock
April 30, 2006
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our Certificate of Incorporation permits us to indemnify each person who is or
was our director or officer to the fullest extent permitted by Delaware General
Corporation Law and any current or future legislation or judicial or
administrative decision, against all fines, liabilities, costs and expenses,
including attorney's fees, arising from claims against such persons in
connection with their acting as our director or officer. We may maintain
director and officer liability insurance, at our expense, to mitigate such
exposure.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth expenses, incurred or expected to be incurred by
us in connection with the issuance and distribution of the securities being
registered by this prospectus. We have agreed to pay all the costs and expenses
of this offering. Selling shareholders will not pay any part of these expenses.
SEC registration fee $ 45
Accounting fees and expenses 38,000
Legal fees and expenses 20,000
Transfer agent fees 1,500
Federal tax -
State tax and fees -
Blue Sky expense 1,500
Printing and engraving 2,000
Miscellaneous expenses 2,500
---------------
Total $ 65,545
All expenses are estimated except the SEC filing fee.
63
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
On March 8, 2002, we issued 5,000,000 shares of our common stock to Waywood
Investment Ltd. ("Waywood") in connection with the organization of Norton
Industries Corp. The shares were issued under the exemption from registration
provided by Section 4(2) of the Securities Act, as amended. We believe this
exemption is available because the issuance was a transaction not involving
public offering. The beneficial owner was a sophisticated investor, and was
our then sole officer and director, and was in possession of all material
information relating to us. Furthermore, no commissions were paid to anyone
in connection with the sale of the shares and no public solicitation was
made to anyone.
On February 26, 2003, Waywood entered into a stock purchase agreement with Comp
Hotel International Limited, a British Virgin Islands corporation ("Comp
Hotel"), pursuant to which Comp Hotel International acquired 4,250,000 shares
of our common stock from Waywood in exchange for $42,500 in cash.
On January 30, 2005, Waywood and Comp Hotel entered into a Share Exchange
Agreement with Bauer Invest Inc. for a reverse acquisition. Pursuant to the
agreement, Waywood and Comp Hotel sold all of their capital stock, or 5,000,000
shares of common stock, to Bauer for retirement in exchange for $100,000 in
cash and 5%, or 1,000,000 shares of our post-merger common stock. To
effectuate the reverse acquisition, we issued 19,000,000 shares of our common
shares to 108 shareholders of Bauer in exchange for 100% of shares in Bauer
on a pro rata basis, i.e. the number of shares received by each shareholder
is proportionate to the number of shares he/she had originally owned in Bauer.
All shares were issued under the exemption from registration provided by
Regulation S of the Securities Act of 1933, as amended. All share recipients
are residents outside of the United States; the transaction took place
outside the United States; and no directed selling efforts were made in the
United States.
On May 12, 2005, our subsidiary, Bauer Invest Inc. ("Bauer"), increased its
registered capital. In this capital increase, we increased our investment in
the subsidiary by $2,273,277 and the minority shareholder increased its
investment by $568,320. Dahua Project Management Group ("Dahua Group") advanced
funds to us to allow for the increase in investment, which amount was recorded
as short-term loans - related parties. On September 21, 2005, we issued, on a
pro rata basis, an aggregate of 4,750,000 shares of our common stock to
shareholders of Dahua Group in exchange for the conversion of the short-term
loan ($2,273,277) to equity shares. All shares were issued under the exemption
from registration provided by Regulation S of the Securities Act of 1933, as
amended. All share recipients are residents outside of the United States;
the transaction took place outside the United States; and no directed selling
efforts were made in the United States.
In connection with issuance of additional common shares as mentioned above,
pursuant to a no-dilution clause of the Share Exchange Agreement dated January
30, 2005 we entered into with Comp Hotel and Waywood, on September 21, 2005,
we issued 212,500 and 37,500 shares of our common stock to Comp Hotel and
Waywood, respectively. All shares were issued under the exemption from
registration provided by Regulation S of the Securities Act of 1933, as
amended. All share recipients are residents outside of the United States;
the transaction took place outside the United States; and no directed selling
efforts were made in the United States.
64
We have never utilized an underwriter for an offering of our securities. Other
than the securities mentioned above, we have not issued or sold any securities.
Item 27. EXHIBITS
(a) Exhibits
Exhibit No. Description
- ---------- ---------------------------------------------------------------------
<s> <c>
2.1 Share Exchange Agreement dated January 30, 2005 between Norton
Industries Corp. and Bauer Invest, Inc. (Incorporated by reference
to Current Report on Form 8-K filed on February 1, 2005, Commission
File No. 0-49852).
2.2 Share Exchange Agreement dated January 26, 2003 between Norton
Industries Corp. and Comp Hotel International Ltd. (Incorporated
by reference to Registration Statement on Form SB-2/A filed on
November 14, 2005, Commission File No. 333-122622).
2.3 Share Transfer Agreement dated May 25, 2004 between Bauer Invest,
Inc. and Dahua Project Management Group Co., Ltd. (Incorporated by
reference to Registration Statement on Form SB-2/A filed on November 14,
2005, Commission File 333-122622).
3.1 Articles of Incorporation (Incorporated by reference to Registration
Statement on Form 10-SB filed on June 10, 2002, Commission File No. 0-49852).
3.2 Certificate of Amendment of Articles of Incorporation (Incorporated
by reference to Registration Statement on Form SB-2 filed on February 8,
2005, Commission File No. 333-122622).
3.3 Bylaws (Incorporated by reference to Registration Statement on
Form 10-SB filed on June 10, 2002 Commission File No. 0-49852).
4.1 Specimen Stock Certificate (Incorporated by reference to Registration
Statement on Form 10-SB/A filed on July 29, 2002, Commission File
No. 0-49852).
5.1 Opinion of Schonfeld & Weinstein, L.L.P. regarding the legality
of the securities being registered.
10.1 Land Use Rights Transfer Agreement (Incorporated by reference to
Registration Statement on Form SB-2/A filed on November 14, 2005,
Commission File 333-122622).
10.2 Agreement dated September 24, 2003, between Beijing Dahua Real
Estate and Aocheng Construction Management Ltd. (Incorporated by
reference to Registration Statement on Form SB-2/A filed on November 14,
2005, Commission File No. 333-122622).
65
10.3 National Land Use Permit issued on October 20, 2003 (Incorporated
by reference to Registration Statement on Form SB-2/A filed on November
14, 2005, Commission File No. 333-122622).
10.4 Development Planning Permit issued on September 4, 2003 (Incorporated
by reference to Registration Statement on Form SB-2/A filed on
November 14, 2005, Commission File No. 333-122622).
10.5 Development Construction Permit issued on September 28, 2003
(Incorporated by reference to Registration Statement on Form SB-2/A
filed on November 14, 2005, Commission File No. 333-122622).
10.6 Line of Credit Agreement between Beijing Dahua Real Estate and Dahua
Project Management Group (Incorporated by reference to Registration
Statement on Form SB-2/A filed on November 14, 2005, Commission
File No. 333-122622).
10.7 Agreement between Beijing Dahua Real Estate Development Ltd. and
Beijing Dahua Gonghong Economic Research Center dated June 18, 2003
(Incorporated by reference to Registration Statement on Form SB-2/A
filed on March 8, 2006, Commission File No. 333-122622).
10.8 Agreement between Beijing Dahua Real Estate Development Ltd. and
Beijing Dahua Gonghong Economic Research Center dated June 2004
(Incorporated by reference to Registration Statement on Form SB-2/A
filed on March 8, 2006, Commission File No. 333-122622).
14.1 Code of Business Conduct and Ethics (Incorporated by reference to
Registration Statement on Form SB-2 filed on February 8, 2005,
Commission File No. 333-122622).
21 Subsidiaries of the Registrant (Incorporated by reference to Registration
Statement on Form SB-2/A filed on November 14, 2005, Commission
File No. 333-122622).
23.1 Consent of Child, Sullivan & Company, Independent Registered Certified
Public Accountants
23.2 Consent of Schonfeld & Weinstein, L.L.P. included in Exhibit 5.1.
66
Item 28. UNDERTAKINGS
The registrant hereby undertakes:
(1) To file, during any period in which offers or sells securities, a post-
effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
in the aggregate, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent more than a 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information on the plan
of distribution;
(2) For determining liability under the Securities Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at end of the offering.
67
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in the City of
Beijing, the People's Republic of China, on April 30, 2006.
Dahua Inc.
By:/s/ Yonglin Du
- ------------------------------
Yonglin Du, President and CEO
(principal executive officer)
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates stated:
By: /s/ Yonglin Du 4/30/2006
- ---------------------------------------- ----------------------
Yonglin Du, President, CEO, and Director Date
(principal executive officer)
By: /s/ Hua Meng 4/30/2006
- ---------------------------------------- ----------------------
Hua Meng, Chief Financial Officer Date
(principal financial officer and
principal accounting officer)
By: /s/ Wulong Wang 4/30/2006
- --------------------------------------- ----------------------
Wulong Wang, Director Date