PROSPECTUS
SUNRISE REAL ESTATE DEVELOPMENT GROUP, INC.
10,739,880 SHARES OF COMMON STOCK
This prospectus covers an aggregate of 10,739,880 outstanding shares of our
common stock, which will be sold, from time to time by some of our existing
shareholders. We will not receive any of the proceeds from these shareholders
when they sell their shares of common stock.
Our common stock is traded on the NASD Over-the-Counter Bulletin Board under the
symbol "SRRE". On March 31, 2006, the last reported sale price of our common
stock was $2.20 per share. We have issued and outstanding 22,996,614 shares of
common stock as of April 19, 2006.
The securities offered hereby are speculative and involve a high degree of risk.
You should read "Risk Factors", beginning on page 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
April 28, 2006
The information in this prospectus is not complete and may be changed. The
Selling Shareholders 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 the Selling Shareholders
are not soliciting offers to buy these securities in any jurisdiction where the
offer or sale is not permitted.
1
(Prospectus inside cover page)
10,739,880 shares
SUNRISE REAL ESTATE DEVELOPMENT GROUP, INC.
TABLE OF CONTENTS
Page
The Company 3
Risk Factors 4
Use of Proceeds 13
Selling Shareholders 14
Plan of Distribution 15
Market For Our Common Stock 16
Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Description of Business 23
Property 26
Management 29
Executive Compensation and Other Information 32
Employee Incentive Stock Options 33
Certain Relationships and Related Transactions 33
Security Ownership of Principal Shareholders and Management 33
Description of Common Stock 34
Legal Matters 34
Experts 34
Disclosure Regarding Forward-Looking Statements 34
Where You Can Get More Information 36
Consolidated Financial Statements 37
THE COMPANY
We are a provider of real estate brokerage services in connection with office
and multifamily properties, real estate marketing services, and property leasing
and management services in the People's Republic of China (the "PRC"). We
operate through a tier of subsidiaries. The Registrant, Sunrise Real Estate
Development Group, Inc., a Texas corporation, hereinafter called
"Sunrise-Texas", has no operations. Sunrise-Texas has two wholly owned
subsidiaries, Sunrise Real Estate Development Group, Inc., a Cayman Islands
corporation, hereinafter called "Sunrise-Cayman", and LIN RAY YANG Enterprise,
Ltd., a British Virgin Islands company, hereinafter called "Lin Ray Yang".
Neither Sunrise-Cayman nor Lin Ray Yang has operations.
Sunrise-Cayman owns all of the capital stock of Shanghai Xin Ji Yang Real Estate
Consultation Co. Ltd., an entity formed under the laws of the People's Republic
of China, hereinafter called "Shanghai Xin Ji Yang". Shanghai Xin Ji Yang
markets or brokers commercial and multifamily residential properties for
non-affiliated real estate developers. Sunrise-Cayman also owns 5% of the
capital stock of Suzhou Xin Ji Yang Real Estate Agency Co., Ltd., an entity
formed under the laws of the People's Republic of China, hereinafter called
"Suzhou Xin Ji Yang". Shanghai Xin Ji Yang owns 75% of the capital stock of
Suzhou Xin Ji Yang. Suzhou Xin Ji Yang is an exclusive agency primary marketer
of new residential and commercial real estate developments in Suzhou and its
surrounding area.
Shanghai Xin Ji Yang also owns 85% of the capital stock of Beijing Xin Ji Yang
Real Estate Agency Co., Ltd., an entity formed under the laws of the People's
Republic of China, hereinafter called "Beijing Xin Ji Yang". Beijing Xin Ji Yang
provides agency sales, marketing as well as consulting services for real estate
developers.
Lin Ray Yang owns all of the capital stock of Shanghai Shang Yang Real Estate
Consultation Company Limited, an entity formed under the People's Republic of
China, hereinafter called "Shanghai Shang Yang". Shanghai Shang Yang provides
marketing services to real estate developers and also invests in real estate
development projects in China. Lin Ray Yang also owns 80% of the capital stock
of Suzhou Gao Feng Hui Property Management Company Limited, an entity formed
under the laws of the People's Republic of China, hereinafter called "Suzhou Gao
Feng". Suzhou Gao Feng provides rental, management and maintenance services to
office and multifamily residential property owners.
Sunrise Real Estate Development Group, Inc. was incorporated in Texas, United
States of America, on October 10, 1996, and was formerly known as Parallax
Entertainment, Inc. Our principal executive officers are located at Suite 701,
No. 333 Zhaojiabang Road, Shanghai, People's Republic of China. Our telephone
number is 011 86 (21) 64 220505.
Our organizational chart is as follows:
Sunrise Real Estate
Development Group, Inc.
|
------------------------------------------------
| 100% | 100%
Sunrise Real Estate LIN RAY YANG
- -- Development Group, Inc. Enterpise Ltd., BVI
| Cayman 100% | 80%
| | -------------------------------------------------
| | 100% | |
| Shanghai Xin Ji Yang Real Shanghai Shang Yang Suzhou Gao Feng Hui
| Estate Consultation Real Estate Consultation Property Management
| Company Limited Company Limited Company Limited
| |
| |---------------------------------|
|5% |75% |85%
|Suzhou Xin Jin Yang Beijing Xin Ji Yang
Real Estate Agency Real Estate Agency
Co, Ltd. Co, Ltd.
3
RISK FACTORS
An investment in our shares as offered in this prospectus involves a high degree
of risk. In deciding whether to purchase shares of our common stock, you should
carefully consider the following risk factors, in addition to other information
contained in this prospectus. This prospectus also contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those discussed here. Factors that could cause or contribute to
differences in our actual results include those discussed in this section, as
well as those discussed elsewhere in this prospectus.
We have identified a number of risk factors that you should consider before
investing in Sunrise-Texas. These factors, among others, may cause actual
results, events or performance to differ materially from those expressed in this
prospectus or in press releases or other public disclosures. Investors should be
aware of the existence of these factors.
RISKS RELATING TO THE SUNRISE-TEXAS GROUP
Sunrise-Texas is a holding company and depends on its subsidiaries' cash flow to
meet its obligations.
Sunrise-Texas is a holding company, and it conducts all of its operations
through its subsidiaries. As a result, its ability to meet any obligations
depends upon its subsidiaries' cash flow and payment of funds as dividends,
loans, advances or other payments. In addition, the payment of dividends or the
making of loans, advances or other payments to Sunrise Real Estate Development
Group, Inc. may be subject to regulatory or contractual restrictions.
Our invoicing for commissions may be delayed.
Generally, we recognize our commission revenues after the contracts signed with
developers are completed and confirmations are received from the developers.
However, sometimes we do not recognize income even when we have rendered our
services for any of the following reasons:
|X| The developers have not received payments from potential purchasers who
have promised to pay the outstanding sum by cash;
|X| The purchasers, who need to obtain mortgage financing to pay the
outstanding balance due, are unable to obtain the necessary financing
from their banks;
|X| Banks are sometimes unwilling to grant the necessary bridge loan to the
developers in time due to the developers' relatively low credit rating;
|X| The developers tend to be in arrears with sales commissions and,
therefore, do not grant confirmation to us to be able to invoice them
accordingly.
Development of new business may stretch our cash flow and strain our operation
efficiency.
At the end of 2004, we established a joint venture with SIP Hi-Dragon Real
Estate Development Co., Ltd. - Suzhou Gao Feng Hui Property Management Co. Ltd.-
to expand our business. Our proportionate amount of investment in Suzhou Gao
Feng is 80%. The business scope of the new company is to provide rental,
management and maintenance services to office and multifamily residential
property owners. We have little experience with some of these activities. Such
expansion and the need to integrate operations arising from the expansion may
place a significant strain on our managerial, operational and financial
resources, and will further contribute to a needed increase in our financial
needs.
Risks associated with a Guaranteed Return Promotion.
In order to sell out the underwritten property of the Sovereign Building Project
as scheduled, we launched a promotional package at the end of November 2004.
This promotional package allows property buyers and investors to enjoy a 5 or 8
year guaranteed rental return at 8.5% or 8.8% of the property purchase costs per
annum for a leasing period of 5 or 8 years, respectively. The return is
guaranteed by our 80% owned subsidiary, Suzhou Gao Feng. However, we may not
successfully sublease the targeted properties at prices higher than what we
committed as per the promotional package. Our failure to do so could adversely
affect our financial condition. In addition, one of our subsidiaries, Shanghai
Shang Yang Real Estate Consultation Co., Ltd., must bear joint liability for any
guaranteed investment return agreements that Suzhou Gao Feng may enter into with
any property owners. If Suzhou Gao Feng fails to fulfill the agreement, Shanghai
Shang Yang's financial condition may also be adversely affected.
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Our acquisition of new property may involve risks.
On November 18, 2004, Shanghai Shang Yang entered into sales and purchase
agreements to acquire two floors of the Suzhou Property Underwriting Project at
a total consideration of $3,036,946. On October 18, 2005, Shanghai Shang Yang
entered into sales and purchase agreements to acquire one floor and six units of
the same building at a total consideration of $12,804,265. On November 29, 2005,
Suzhou Xin Ji Yang entered into sales and purchase agreements to acquire an
additional floor of the same building at a total consideration of $1,735,497. We
decided two floors will be held for sale, one floor will be held for our own use
and the remaining properties will be held for long-term investment purpose. As
of January 5, 2006, deposits amounting to $13,841,214 have been paid to the
property developer. The remaining balance of $3,735,494 will be payable upon the
completion of these properties. In accordance with the sales and purchase
agreements, the properties under development will be completed on or before
April 30, 2006. These acquisitions involve several risks including, but not
limited to, the following:
a. The acquired property may not perform as well as we expected or ever
become profitable.
b. Improvements to the properties may ultimately cost significantly more
than we had estimated.
c. If we are unable to generate sufficient cash flow from operations, we
may not be able to pay timely the remaining balance of these
properties.
Additional acquisitions might harm our business.
As part of our business strategy, we may seek to acquire or invest in additional
businesses, products, services or technologies that we feel could complement or
expand our business. If we identify an appropriate acquisition opportunity, we
might be unable to negotiate the terms of that acquisition successfully, finance
it, or integrate it into our existing business and operations. We may also be
unable to select, manage or absorb any future acquisitions successfully.
Further, the negotiation of potential acquisitions, as well as the integration
of an acquired business, would divert management time and other resources. We
may have to use a substantial portion of our available cash to consummate an
acquisition. If we consummate acquisitions through an exchange of our
securities, our shareholders could suffer significant dilution. In addition, we
cannot assure you that any particular acquisition, even if successfully
completed, will ultimately benefit our business.
Our real estate investments are subject to numerous risks.
We are subject to the risks that generally relate to investments in real
property. The investment returns available from equity investments in real
estate depend in large part on the amount of income earned and capital
appreciation generated by the related properties, as well as the expenses
incurred. In addition, a variety of other factors affect income from properties
and real estate values, including governmental regulations, insurance, zoning,
tax and eminent domain laws, interest rate levels and the availability of
financing. For example, new or existing real estate zoning or tax laws can make
it more expensive and/or time-consuming to develop real property or expand,
modify or renovate properties. When interest rates increase, the cost of
acquiring, developing, expanding or renovating real property increases and real
property values may decrease as the number of potential buyers decreases.
Similarly, as financing becomes less available, it becomes more difficult both
to acquire and to sell real property. Finally, governments can, under eminent
domain laws, take real property. Sometimes this taking is for less compensation
than the owner believes the property is worth. Any of these factors could have a
material adverse impact on our results of operations or financial condition. In
addition, equity real estate investments, such as the investments we hold and
any additional properties that we may acquire, are relatively difficult to sell
quickly. If our properties do not generate revenue sufficient to meet operating
expenses, including debt service and capital expenditures, our income will be
reduced.
Competition, economic conditions and similar factors affecting us, and the real
estate industry in general could affect our performance.
Our properties and business are subject to all operating risks common to the
real estate industry. These risks include:
|X| Adverse effects of general and local economic conditions;
|X| Increases in operating costs attributable to inflation and
other factors; and
|X| Overbuilding in certain property sectors.
These factors could adversely affect our revenues, profitability and results of
operations.
We operate in a highly competitive environment.
Our competitors may be able to adapt more quickly to changes in customer needs
or to devote greater resources than we can to developing and expanding our
services. Such competitors could also attempt to increase their presence in our
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markets by forming strategic alliances with other competitors, by offering new
or improved services or by increasing their efforts to gain and retain market
share through competitive pricing. As the market for our services matures, price
competition and penetration into the market with intensify. Such competition may
adversely affect our gross profits, margins and results of operations. There can
be no assurance that we will be able to continue to compete successfully with
existing or new competitors.
We may be unable to effectively manage our growth.
We will need to manage our growth effectively, which may entail devising and
effectively implementing business and integration plans, training and managing
our growing workforce, managing our costs and implementing adequate control and
reporting systems in a timely manner. We may not be able to successfully manage
our growth or to integrate and assimilate any acquired business operations. Our
failure to do so could affect our success in executing our business plan and
adversely affect our revenues, profitability and results of operations.
If we fail to successfully manage our planned expansion of operations, our
growth prospects will be diminished and our operating expenses could exceed
budgeted amounts.
Our ability to offer our services in an evolving market requires an effective
planning and management process. We have expanded our operations rapidly since
inception, and we intend to continue to expand them in the foreseeable future.
This rapid growth places significant demand on our managerial and operational
resources and our internal training capabilities. In addition, we have hired a
significant number of employees and plan to further increase our total work
force. This growth will continue to substantially burden our management team. To
manage growth effectively, we must:
|X| Implement and improve our operational, financial and other
systems, procedures and controls on a timely basis; and
|X| Expand, train and manage our workforce, particularly our sales
and marketing and support organizations.
We cannot be certain that our systems, procedures and controls will be adequate
to support our current or future operations or that our management will be able
to handle such expansion and still achieve the execution necessary to meet our
growth expectations. Failure to manage our growth effectively could diminish our
growth prospects and could result in lost opportunities as well as operating
expenses exceeding the amount budgeted.
We may be unable to maintain internal funds or obtain financing or renew credit
facilities in the future.
Our real estate underwriting operation requires significant capital. Adequate
financing is one of the major factors which can affect our ability to execute
our business plan in this regard. We finance our business mainly through
internal funds and bank loans and, currently, we are preparing to raise equity
funds. There is no guarantee that we will always have internal funds available
for future developments or that we will not experience difficulties in obtaining
financing and renewing credit facilities granted by financial institutions in
the future. In addition, there may be a delay in equity fund raising activities.
Our access to obtain debt or equity financing depends on the banks' willingness
to lend and on conditions in the capital markets, and we may not be able to
secure additional sources of financing on commercially acceptable terms, if at
all.
We may need to raise additional capital that may not be available on terms
favorable to us, if at all.
We may need to raise additional capital in the future, and we cannot be certain
that we will be able to obtain additional financing on favorable terms, if at
all. If we cannot raise additional capital on acceptable terms, we may not be
able to develop or enhance our services, take advantage of future opportunities
or respond to competitive pressures or unanticipated requirements. To fully
realize our business objectives and potential, we may require additional
financing. We cannot be sure that we will be able to secure the financing we
will require, or that it will be available on favorable terms. If we are unable
to obtain any necessary additional financing, we will be required to
substantially curtail our approach to implementing our business objectives.
Additional financing may be debt, equity or a combination of debt and equity. If
equity, it could result in significant dilution to our shareholders.
Our operations and growth prospects may be significantly impeded if we are
unable to retain our key personnel or attract additional key personnel,
particularly since experienced personnel and new skilled personnel are in short
supply.
Competition for key personnel is intense. As a small company, our success
depends on the service of our executive officers, and other skilled managerial
and technical personnel, and our ability to attract, hire, train and retain
personnel. There is always the possibility that certain of our key personnel may
6
terminate their employment with us to work for one of our competitors at any
time for any reason. There can be no assurance that we will be successful in
attracting and retaining key personnel. The loss of services of one or more key
personnel could have a material adverse effect on us and would materially impede
the operation and growth of our business.
If our partnering developers experience financial or other difficulties, our
business and revenues could be adversely affected.
Currently, Shanghai Xin Ji Yang is a major contributor in terms of both revenues
and net income. As a service-based company, Shanghai Xin Ji Yang greatly depends
on the working relationships and agency contracts with its partnering
developers. We are exposed to the risks that our partnering developers may
experience financial or other difficulties, which may affect their ability or
will to carry out any existing development projects or resell contracts, thus
delaying or canceling the fulfillment of their agency contracts with Shanghai
Xin Ji Yang. Any of these factors could adversely affect our revenues,
profitability and results of operations.
If we fail to establish and maintain strategic relationships, the market
acceptance of our services, and our profitability, may suffer.
To offer services to a larger customer base, our direct sales force depends on
strategic partnerships, marketing alliances, and partnering developers to obtain
customer leads and referrals. If we are unable to maintain our existing
strategic relationships or fail to enter into additional strategic
relationships, we will have to devote substantially more resources to the
marketing of our services. We would also lose anticipated customer introductions
and co-marketing benefits. Our success depends in part on the success of our
strategic partners and their ability to market our services successfully. In
addition, our strategic partners may not regard us as significant for their own
businesses. Therefore, they could reduce their commitment to us or terminate
their respective relationships with us, pursue other partnerships or
relationships, or attempt to develop or acquire services that compete with our
services. Even if we succeed in establishing these relationships, they may not
result in additional customers or revenues.
We are subject to the risks associated with investments through joint ventures.
Three of our subsidiaries are owned by joint ventures in which we have
controlling interests. We may enter into similar joint ventures in the future.
Any joint venture investment involves risks such as the possibility that the
co-venturer may seek relief under federal or state insolvency laws, or have
economic or business interests or goals that are inconsistent with our business
interests or goals. While the bankruptcy or insolvency of our co-venturer
generally should not disrupt the operations of the joint venture, we could be
forced to purchase the co-venturer's interest in the joint venture or the
interest could be sold to a third party. Additionally, we may enter into joint
ventures in the future in which we have non-controlling interests. If we do not
have control over a joint venture, the value of our investment may be affected
adversely by a third party that may have different goals and capabilities than
ours. It may also be difficult for us to exit a joint venture that we do not
control after an impasse. In addition, a joint venture partner may be unable to
meet its economic or other obligations and we may be required to fulfill those
obligations.
We are subject to risks relating to acts of God, terrorist activity and war.
Our operating income may be reduced by acts of God, such as natural disasters or
acts of terror, in locations where we own and/or operate significant properties
and areas from which we draw customers and partnering developers. Some types of
losses, such as from earthquake, hurricane, terrorism and environmental hazards,
may be either uninsurable or too expensive to justify insuring against. Should
an uninsured loss or a loss in excess of insured limits occur, we could lose all
or a portion of the capital we have invested in any particular property, as well
as any anticipated future revenue from such property. In that event, we might
nevertheless remain obligated for any mortgage debt or other financial
obligations related to the property. Similarly, wars (including the potential
for war), terrorist activity (including threats of terrorist activity),
political unrest and other forms of civil strife as well as geopolitical
uncertainty have caused in the past, and may cause in the future, our results to
differ materially from anticipated results.
We have limited business insurance coverage in China.
The insurance industry in China is still at an early stage of development.
Insurance companies in China offer limited business insurance products. As a
result, we do not have any business liability or disruption insurance coverage
for our operations in China. Any business disruption, litigation or natural
disaster might result in substantial costs and diversion of resources.
7
RISKS RELATING TO OUR SECURITIES
Our controlling shareholders could take actions that are not in the public
shareholders' best interests.
Ace Develop Properties Limited directly controls 38.6% of our outstanding common
stock and Lin Chi-Jung, our Chairman, is the principal and controlling
shareholder of Ace Develop Properties Limited. Accordingly, pursuant to our
Articles of Incorporation and bylaws, Ace Develop Properties Limited and Lin
Chi-Jung, by virtue of their controlling ownership of share interests, will be
able to exercise substantial control over our business by directly or indirectly
voting at either shareholders meetings or the board of directors meetings in
matters of significance to us and our public shareholders, including matters
relating to:
|X| Election of directors and officers;
|X| The amount and timing of dividends and other distributions;
|X| Acquisition of or merger with another company; and
|X| Any proposed Amendments to our Articles of Incorporation.
Our quarterly results depend on a small number of large contracts, so the loss
of any single contract could harm those results and cause our stock price to
drop.
Each quarter, we derive a significant portion of our revenues from a small
number of relatively large contracts or orders. As a result, our operating
results could suffer if any larger orders or contracts are delayed or canceled
in any future period. We expect that we will continue to depend on a small
number of large orders and/or contracts for a significant portion of our
revenues.
Future sales of our common stock could adversely affect our stock price.
If our shareholders sell substantial amounts of our common stock in the public
market after this offering, the market price of our common stock could be
adversely affected. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional equity securities.
We are listed on the OTC Bulletin Board, which can be a volatile market.
Our common stock is quoted on the OTC Bulletin Board, a NASD sponsored and
operated quotation system for equity securities. It is a more limited trading
market than the Nasdaq SmallCap, and timely, accurate quotations of the price of
our common stock may not always be available. You may expect trading volume to
be low in such a market. Consequently, the activity of only a few shares may
affect the market and may result in wide swings in price and in volume.
We may be subject to exchange rate fluctuations.
A majority of our revenues are received, and a majority of our operating costs
are incurred, in Renminbi. Because our financial statements are presented in
U.S. Dollars, any significant fluctuation in the currency exchange rates between
the Renminbi and the U.S. Dollar will affect our reported results of operations.
We do not currently engage in currency-hedging transactions.
Trading of our common stock is limited, which may make it difficult for you to
sell your shares at times and prices that you feel are appropriate.
Trading of our common stock has been extremely limited. This adversely effects
the liquidity of our common stock, not only in terms of the number of shares
that can be bought and sold at a given price, but also through delays in the
timing of transactions and reduction in security analysts' and the media's
coverage of us. This may result in lower prices for our common stock than might
otherwise be obtained and could also result in a larger spread between the bid
and asked prices for our common stock.
There is a limited market for our common stock and an active trading market for
our common stock may never develop.
Trading in our common stock has been limited and has been characterized by wide
fluctuations in trading prices, due to many factors that may have little to do
with a company's operations or business prospects.
8
Because it may be a "penny stock," it will be more difficult for you to sell
shares of our common stock.
In addition, our common stock may be considered a "penny stock" under SEC rules
because it has been trading on the OTC Bulletin Board at prices lower than
$1.00. Broker-dealers who sell penny stocks must provide purchasers of these
stocks with a standardized risk-disclosure document prepared by the SEC. This
document provides information about penny stocks and the nature and level of
risks involved in investing in the penny-stock market. A broker must also give a
purchaser, orally or in writing, bid and offer quotations and information
regarding broker and salesperson compensation, make a written determination that
the penny stock is a suitable investment for the purchaser, and obtain the
purchaser's written agreement to the purchaser. Broker-dealers also must provide
customers that hold penny stocks in their accounts with such broker-dealers a
monthly statement containing price and market information relating to the penny
stock. If a penny stock is sold to you in violation of the penny stock rules,
you may be able to cancel your purchase and get your money back. The penny stock
rules may make it difficult for you to sell your shares of our stock, however,
and because of the rules, there is less trading in penny stocks. Also many
brokers simply choose not to participate in penny-stock transactions.
Accordingly, you may not always be able to resell shares of our common stock
publicly at times and prices that you feel are appropriate.
Our stock price is, and we expect it to remain, volatile, which could limit
investors' ability to sell stock at a profit.
Since the completion of the Sunrise-Texas - Sunrise-Cayman/Lin Ray Yang merger
transactions the market price of our common stock has ranged from a high of
$10.01 per share to a low of $0.21 per share. The volatile price of our stock
makes it difficult for investors to predict the value of our investment, to sell
shares at a profit at any given time, or to plan purchases and sales in advance.
A variety of factors may affect the market price of our common stock. These
include, but are not limited to:
|X| Announcements of new technological innovations or new
commercial services by our competitors or us;
|X| Developments concerning proprietary rights;
|X| Regulatory developments in Mainland China and foreign
countries;
|X| Period-to-period fluctuations in our revenues and other
results of operations;
|X| Economic or other crises and other external factors;
|X| Changes in financial estimates by securities analysts; and
|X| Sales of our common stock.
We will not be able to control many of these factors, and we believe that
period-to-period comparisons of our financial results will not necessarily be
indicative of our future performance.
In addition, the stock market in general has experienced extreme price and
volume fluctuations that may have been unrelated and disproportionate to the
operating performance of individual companies. These broad market and industry
factors may seriously harm the market price of our common stock, regardless of
our operating performance.
Because we do not expect to pay dividends, you will not realize any income from
an investment in our common stock unless and until you sell your shares at
profit.
We have never paid dividends on our common stock and do not anticipate paying
any dividends in the foreseeable future. You should not rely on an investment in
our stock if you require dividend income. Further, you will only realize income
on an investment in our stock in the event you sell or otherwise dispose of your
shares at a price higher than the price you paid for your shares. Such a gain
would result only from an increase in the market price of our common stock,
which is uncertain and unpredictable.
We intend to retain all of our earnings for use in our business and do not
anticipate paying any cash dividends in the near future.
We have not declared or paid any cash dividends on our capital stock. We
currently intend to retain all of our earnings, if any, for use in our business
and do not anticipate paying any cash dividends in the foreseeable future. The
payment of any future dividends will be at the discretion of the Board of
Directors and will depend upon a number of factors, including future earnings,
the success of our business activities, general financial condition and future
prospects, in addition to our general business conditions and such other factors
as our Board of Directors may deem relevant.
9
RISKS RELATING TO THE REAL ESTATE INDUSTRY IN YANGTZE DELTA AND OTHER AREAS OF
THE PRC
The real estate market in Yangtze Delta and other areas of the PRC is at an
early stage of development.
We are subject to real estate market conditions in the PRC generally and Yangtze
Delta in particular. Private ownership of property in the PRC is still at an
early stage of development. Although there is a perception that economic growth
in the PRC and the higher standard of living resulting from such growth will
lead to a greater demand for private properties in the PRC, it is not possible
to predict with certainty that such a correlation exists as many social,
political, economic, legal and other factors may affect the development of the
property market.
The PRC property market, including the Yangtze Delta property market, is
volatile and may experience oversupply and property price fluctuations. The
central and local governments frequently adjust monetary and other economic
policies to prevent and curtail the overheating of the PRC and local economies,
and such economic adjustments may affect the real estate market in Yangtze Delta
and other parts of China. Furthermore, the central and local governments from
time to time make policy adjustments and adopt new regulatory measures in a
direct effort to control the over development of the real estate market in
China, including Yangtze Delta. Such policies may lead to changes in market
conditions, including price instability and imbalance of supply and demand of
residential properties, which may materially adversely affect our business and
financial conditions. Also, there is no assurance that there will not be over
development in the property sector in Yangtze Delta and other parts of China in
the future. Any future over development in the property sector in Yangtze Delta
and other parts of China may result in an oversupply of properties and a fall of
property prices in Yangtze Delta or any of our other markets, which could
adversely affect our business and financial condition.
We face increasing competition, which may adversely affect our revenues,
profitability and results of operations.
In recent years, a large number of property companies have begun undertaking
property sales and investment projects in Yangtze Delta and elsewhere in the
PRC, some of which may have better track records and greater financial and other
resources than we do. The intensity of the competition may adversely affect our
business and financial position. In addition, the real estate market in Yangtze
Delta and elsewhere in the PRC is rapidly changing. If we cannot respond to the
changes in the market conditions more swiftly or effectively than our
competitors do, our business and financial position will be adversely affected.
If the availability or attractiveness of mortgage financing were significantly
limited, many of our prospective customers would not be able to purchase the
properties thus adversely affecting our business and financial position.
Mortgages are becoming increasingly popular as a means of financing property
purchases in the PRC. An increase in interest rates may significantly increase
the cost of mortgage financing, thus reducing the affordability of mortgages as
a source of financing for residential property purchases. The PRC government has
increased the down payment requirements and imposed certain other conditions
that make mortgage financing unavailable or unattractive for some potential
property purchasers. There is no assurance that the down payment requirements
and other conditions will not be further revised. If the availability or
attractiveness of mortgage financing is significantly limited even more, many of
our prospective customers would not be able to purchase the properties and, as a
result, our business and future prospects would be adversely affected.
Our future prospects are heavily dependent on the performance of property
sectors in specific geographical areas.
The properties we resell and intend to invest in are mainly based in Yangtze
Delta, especially in Shanghai. Our future prospects are therefore heavily
dependent on the continued growth of the property sector around Yangtze Delta,
and our business may be affected by any adverse developments in the supply and
demand or housing prices in the property sector around Yangtze Delta.
The current level of property development and investment activity in Yangtze
Delta and other markets is substantial. However, there is no assurance that such
property resale and investment activity in Yangtze Delta or any of our other
markets will continue at this level in the future or that we will be able to
benefit from the future growth of these property markets.
10
Our revenues and operating income could be reduced by adverse conditions
specific to our property locations.
The properties we resell and intend to invest in are concentrated geographically
and are located predominately in Yangtze Delta, especially in Shanghai. As a
result, our business and our financial operating results may be materially
affected by adverse economic, weather or business conditions in this area.
Adverse conditions that affect these areas such as economic recession, changes
in extreme weather conditions and natural disasters, may have an adverse impact
on our operations.
RISKS RELATING TO THE PEOPLE'S REPUBLIC OF CHINA
All of our current prospects and deals are generated in Mainland China and thus,
all of our revenues are derived from our operations in the PRC. Accordingly, our
business, financial condition, results of operations and prospects are subject,
to a significant extent, to economic, political and legal developments in the
PRC.
PRC economic, political policies and social conditions could adversely affect
our business.
The economy of PRC differs from the economies of most developed countries in a
number ofiirespects, including the amount of government involvement, level of
development, growth rate, control of foreign exchange and allocation of
resources.
The PRC Government has been reforming the PRC economic system from planned
economy to market oriented economy for more than 20 years, and has also begun
reforming the government structure in recent years. These reforms have resulted
in significant economic growth and social progress. Although we believe these
reforms will have a positive effect on our overall and long-term development, we
cannot predict whether any future changes in PRC's political, economic and
social conditions, laws, regulations and policies will have any adverse effect
on our current or future business, results of operations or financial condition.
Changes in foreign exchange regulations may adversely affect our ability to pay
dividends and could adversely affect our results of operations and financial
condition.
Substantially all of our revenues and operating expenses are denominated in
Renminbi. Conversion of Renminbi is under strict government regulation in the
PRC. The Renminbi is currently freely convertible under the "current account",
including trade and service related foreign exchange transactions and payment of
dividends, but not under the "capital account", which includes foreign direct
investment and loans. Under the existing foreign exchange regulations in the
PRC, we will be able to pay dividends in foreign currencies without prior
approval from the State Administration for Foreign Exchange by complying with
certain procedural requirements. However, there is no assurance that the above
foreign policies regarding payment of dividends in foreign currencies will
continue in the future.
Fluctuation of the Renminbi could materially affect the value of, and dividends
payable on, shares of our common stock in foreign currency terms.
The value of the Renminbi is subject to changes in the PRC Government's policies
and depends to a large extent on China's domestic and international economic and
political developments, as well as supply and demand in the local market. Since
1994, the official exchange rate for the conversion of Renminbi to U.S. Dollars
has generally been stable. However, we cannot give any assurance that the value
of the Renminbi will continue to remain stable against the U.S. Dollar or any
other foreign currency. Since our income and profit are denominated in Renminbi,
any devaluation of the Renminbi would adversely affect the value of, and
dividends, if any, payable on, our shares in foreign currency terms.
Our operations could be adversely affected by changes in the political and
economic conditions in the PRC.
The PRC is our main market and accounted for all of our revenue in 2004 and
2005. Therefore, we face risks related to conducting business in the PRC.
Changes in the social, economic and political conditions of the PRC may
adversely affect our business. Unfavorable changes in government policies,
political unrest and economic developments may also have a negative impact on
our operations.
Since the adoption of the "open door policy" in 1978 and the "socialist market
economy" in 1993, the PRC government has been reforming and is expected to
continue to reform its economic and political systems. Any changes in the
political and economic policies of the PRC government may lead to changes in the
laws and regulations or the interpretation of the same, as well as changes in
the foreign exchange regulations, taxation and import and export restrictions,
which may, in turn, adversely affect our financial performance. While the
current policy of the PRC government seems to be one of imposing economic reform
policies to encourage foreign investments and greater economic decentralization,
we can not assure you that such a policy will continue to prevail in the future.
11
The PRC Legal System Embodies Uncertainties
The PRC legal system is a civil law system based on written statutes. Unlike
common law systems, it is a system in which decided legal cases have little
precedential value. In 1979, the PRC Government began to promulgate a
comprehensive system of laws and regulations governing economic matters in
general. The overall effect of legislation over the past 25 years has
significantly enhanced the protections afforded to various forms of foreign
investment in Mainland China. Our PRC operating subsidiaries, Shanghai Xin Ji
Yang and Shanghai Shang Yang, both wholly foreign-owned enterprises ("WFOEs"),
are subject to laws and regulations applicable to foreign investment in the PRC
in general and laws and regulations applicable to WFOEs in particular. However,
these laws, regulations and legal requirements are constantly changing, and
their interpretation and enforcement involve uncertainties. These uncertainties
could limit the legal protections available to us and other foreign investors.
In addition, we cannot predict the effect of future developments in the PRC
legal system, including the promulgation of new laws, changes to existing laws
or the interpretation or enforcement thereof, or the pre-emption of local
regulations by national laws.
Our shareholders may not be able to enforce U.S. civil liabilities claims.
Our assets are located outside the United States and are held through
subsidiaries incorporated under the laws of the Cayman Islands, British Virgin
Islands and the PRC. Our current operations are conducted in the PRC. In
addition, our directors and officers are residents of the PRC. As a result, it
may be difficult for you to effect service of process within the United States
upon these persons. In addition, there is uncertainty as to whether the courts
of China would recognize or enforce judgments of United States courts obtained
against us or such persons predicated upon the civil liability provisions of the
securities laws of the United States or any state thereof, or be competent to
hear original actions brought in these countries against us or such persons
predicated upon the securities laws of the United States or any state thereof.
Interpretation of agreements and other documentation translated to English may
be difficult.
Most of the agreements we enter into and documentation we provide in the
attached Exhibits were originally prepared in Chinese. Although every attempt is
made to translate these documents to plain English to the best of our ability,
the language used may not be similar to North American standards.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM SB-2
In addition to historical information, this Form SB-2 contains forward-looking
statements. Forward-looking statements are expressions of our current beliefs
and expectations, based on information currently available to us, estimates,
projections about our industry, and certain assumptions made by our management.
These statements are not historical facts. We use words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and similar
expressions to identify our forward-looking statements, which include, among
other things, our anticipated revenue and cost of our agency and investment
business.
Because we are unable to control or predict many of the factors that will
determine our future performance and financial results, including future
economic, competitive, and market conditions, our forward-looking statements are
not guarantees of future performance. They are subject to risks, uncertainties,
and errors in assumptions that could cause our actual results to differ
materially from those reflected in our forward-looking statements. We believe
that the assumptions underlying our forward-looking statements are reasonable.
However, you should not place undue reliance on these forward-looking
statements. They only reflect our view and expectations as of the date of this
Form SB-2. We undertake no obligation to publicly update or revise any
forward-looking statement in light of new information, future events, or other
occurrences.
There are several risks and uncertainties, including those relating to the
Company's ability to raise money and grow its business and potential
difficulties in integrating new acquisitions with our current operations,
especially as they pertain to foreign markets and market conditions. These risks
and uncertainties can materially affect the results predicted. The Company's
future operating results over both the short and long term will be subject to
annual and quarterly fluctuations due to several factors, some of which are
outside the control of the Company. These factors include but are not limited to
fluctuating market demand for our services, and general economic conditions.
12
USE OF PROCEEDS
All of the shares offered hereby are being offered by the Selling Shareholders
for their own accounts. We will not receive any proceeds from the sale of shares
by the Selling Shareholders. In addition, the Company will pay all of the
offering expenses.
DILUTION
The common stock to be sold by the Selling Shareholders is common stock that is
currently issued and outstanding. Accordingly, there will be no dilution to our
existing shareholders.
13
SELLING SHAREHOLDERS
We are registering for sale shares that are issued and outstanding and owned by
certain existing shareholders.
The following table includes certain information about the selling shareholders
for whom we are registering the shares for resale to the public.
Selling Shareholder Shares Shares Owned
beneficially Shares Beneficially
owned before Offered After the
the offering Percent Hereby Percent Offering Percent
Glorystar International Enterprises Limited 619,000 2.69 619,000 2.69 0 *
Infoworth International Ltd. 480,000 2.09 480,000 2.09 0 *
Chih-Fen Wu 325,000 1.41 325,000 1.41 0 *
Yi-Hui Cheng 275,000 1.20 275,000 1.20 0 *
Ya-Ping Hsu 202,500 * 202,500 * 0 *
NP Corp. 170,000 * 170,000 * 0 *
Hsi-Chuan Chin 140,700 * 140,700 * 0 *
Hui-Ling Yu 122,500 * 122,500 * 0 *
Yu-Cheng Lin 120,000 * 120,000 * 0 *
Wen-Chao Lee 90,000 * 90,000 * 0 *
Chin-Ti Lu 78,500 * 78,500 * 0 *
Man-Tzu Fan Chiang 65,000 * 65,000 * 0 *
Gong-Bu Yu 350,000 1.52 350,000 1.52 0 *
Pi-Lien Chang 430,000 1.87 430,000 1.87 0 *
Hung-To Liu 30,000 * 30,000 * 0 *
Olympus Investment Corporation 21,680 * 21,680 * 0 *
Chien-To Chen 20,000 * 20,000 * 0 *
Marco Partners, Inc. # 1,030,000 4.48 1,030,000 4.48 0 *
Chiang, Hui Hsiung * 330,000 1.43 330,000 1.43 0 *
Hsin-Hung, Lin 300,000 1.30 300,000 1.30 0 *
Kuang-Hao, Peng 165,000 * 165,000 * 0 *
Su-Li, Peng 819,334 3.56 819,334 3.56 0 *
Su-Yin, Peng 800,000 3.48 800,000 3.48 0
Hsiu-Chen, Lin 30,500 * 30,500 * 0 *
Chao-Jan, Lin 50,000 * 50,000 * 0 *
Pan-Chao, Lin 10,000 * 10,000 * 0 *
Show-Hwa, Widmer-Lin 5,000 * 5,000 * 0 *
Hui-Fang, Chang 10,000 * 10,000 * 0 *
Tou-Ru, Wen 39,500 * 39,500 * 0 *
Ling-Yu, Chou 120,000 * 120,000 * 0 *
Ling-Ya, Kao 120,000 * 120,000 * 0 *
Shu-Ching, Chang 800,000 3.48 800,000 3.48 0 *
Shu-Chen, Chang 429,334 1.87 429,334 1.87 0 *
Good Speed Services Limited 941,332 4.09 941,332 4.09 0 *
Better Time International Limited 1,000,000 4.35 1,000,000 4.35 0 *
An-Chin, Hsu 200,000 * 200,000 * 0 *
0 *
Total 10,739,880 10,739,880
14
# Marco Partners, Inc. is the financial advisory and consulting services
provider to the Company. The Senior Vice President of the Company is a principal
of Marco Partners, Inc. * Chiang, Hui Hsiung is the strategic planning advisory
and consulting services provider to the Company. Chiang, Hui Hsiung was
appointed as a director of the Company on May 23, 2005, and resigned on October
11, 2005.
Refer to Pages 33-34 for information related to Security Ownership of Certain
Beneficial Owners and Management.
PLAN OF DISTRIBUTION
The shares of common stock currently owned by the selling shareholders may be
sold from time to time by the selling shareholders in one or more transactions
at fixed prices, at market prices at the time of sale, at varying prices
determined at the time of sale or at negotiated prices. The selling shareholders
may offer their shares of common stock in one or more of the following
transactions:
- on any national securities exchange or quotation service at
which the common stock may be listed or quoted at the time of
sale, including the over-the counter market on the
Over-the-Counter Bulletin Board;
- in private transactions;
- through options;
- by pledge to secure debts and other obligations; and/or
- a combination of any of the above transactions.
If required, we will distribute a supplement to this prospectus to describe
material changes in the terms of the offering.
The shares of common stock described in this prospectus may be sold directly,
from time to time, by the selling shareholders. Alternatively, the selling
shareholders may from time to time offer shares of common stock to or through
underwriters, broker/dealers or agents. The selling shareholders and any
underwriters, broker/dealers or agents that participate in the distribution of
the shares of common stock may be deemed to be "underwriters" within the meaning
of Section 2 (11) of the Securities Act of 1933, as amended (the "Securities
Act").
Any profits on the resale of shares of common stock and any compensation
received by any underwriter, broker/dealer or agent may be deemed to be
underwriting discounts and commissions under the Securities Act.
Any shares covered by this prospectus, which qualify for sale pursuant to Rule
144 under the Securities Act, may be sold under Rule 144 rather than pursuant to
this prospectus. The selling shareholders may not sell all of the shares. The
selling shareholders may transfer, devise or gift such shares by other means not
described in this prospectus.
To comply with the securities laws of certain jurisdictions, the common stock
must be offered or sold only through registered or licensed brokers or dealers.
In addition, in certain jurisdictions, the common stock may not be offered or
sold unless they have been registered or qualified for sale or an exemption is
available and complied with.
Under the Securities Exchange Act of 1934 (the "Exchange Act"), any person
engaged in a distribution of the common stock may not simultaneously engage in
market-making activities with respect to the common stock for nine (9) business
days prior to the start of the distribution. In addition, each selling
shareholder and any other person participating in a distribution will be subject
to the Exchange Act which may limit the timing of purchases and sales of common
stock by the selling shareholders or any such other person. These factors may
affect the marketability of the common stock and the ability of brokers or
dealers to engage in market-making activities.
We will pay all expenses of this registration. These expenses include the SEC's
filing fees and fees under state securities or "blue sky" laws. All expenses for
the issuance of a supplement to this prospectus, when requested by selling
shareholder(s), will be paid by the requesting shareholder(s). The selling
shareholders may pay selling commissions or brokerage fees with respect to the
sale of the shares by them.
The Securities and Exchange Commission has also adopted rules that regulate
broker-dealer practices in connection with transactions in penny stocks. Penny
stocks are generally 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).
15
The penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from those rules, deliver a standardized risk
disclosure document prepared by the Commission, which:
o contains a description of the nature and level of risk in the
market for penny stocks in both public offerings and secondary
trading;
o contains a description of the broker's or dealer's duties to
the customer and of the rights and remedies available to the
customer with respect to a violation of such duties;
o contains a brief, clear, narrative description of a dealer
market, including "bid" and "ask" prices for penny stocks and
the significance of the spread between the bid and ask price;
o contains a toll-free telephone number for inquiries on
disciplinary actions;
o defines significant terms in the disclosure document or in the
conduct of trading penny stocks; and
o contains such other information and is in such form (including
language, type, size, and format) as the Commission shall
require by rule or regulation;
The broker-dealer also must provide, prior to proceeding with any transaction in
a penny stock, the customer:
o with bid and offer quotations for the penny stock;
o details of the compensation of the broker-dealer and its
salesperson in the transaction;
o the number of shares to which such bid and ask prices apply,
or other comparable information relating to the depth and
liquidity of the market for such stock; and
o monthly account statements showing the market value of each
penny stock held in the customer's account.
In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from those rules; the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements will have the effect of reducing the trading
activity in the secondary market for our stock because it will be subject to
these penny stock rules. Therefore, shareholders may have difficulty selling
those securities.
MARKET FOR OUR COMMON STOCK
Our common stock is now traded on the Over-the-Counter Bulletin Board ("OTCBB")
under the symbol "SRRE".
No dividends have been declared or paid on our common stock.
As of March 31, 2006, Sunrise-Texas had 22,996,614 shares of common stock issued
and outstanding and held by 777 shareholders of record.
The following table sets forth the high and low bid prices of the shares of our
common stock on a quarterly basis for the calendar years 2003, 2004 and 2005 and
the First Quarter of 2006, as reported by the OTCBB:
Calendar Period High Low
- --------------- ---- ---
2003:
First Quarter $1.85 $0.00
Second Quarter $0.55 $0.21
Third Quarter $0.50 $0.21
Fourth Quarter $6.50 $0.25
16
2004:
First Quarter $6.30 $5.90
Second Quarter $10.01 $3.50
Third Quarter $7.50 $7.00
Fourth Quarter $6.00 $3.50
2005:
First Quarter $5.00 $3.00
Second Quarter $5.00 $2.50
Third Quarter $4.00 $1.25
Fourth Quarter $1.25 $0.51
2006:
First Quarter (through March 31) $2.20 $0.51
The above quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not represent actual transactions.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere in this
prospectus. Except for the historical information contained herein, the
discussion in this prospectus contains certain forward-looking statements that
involve risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. The cautionary statements made in this prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this prospectus.
Management's Discussion and Analysis contains statements that are
forward-looking. These statements are based on current expectations and
assumptions that are subject to risks and uncertainties. Actual results could
differ materially because of factors discussed in "Risk Factors" and elsewhere
in this report.
OVERVIEW
In October 2004, the former shareholders of Sunrise-Cayman and Lin Ray Yang
acquired a majority of the voting interests of Sunrise-Texas in a merger, and
the transaction was treated as a reverse acquisition, with Sunrise-Cayman and
Lin Ray Yang treated as the acquirer for accounting purposes. Accordingly, the
pre-merger financial statements of Sunrise-Cayman and Lin Ray Yang are
Sunrise-Texas' historical financial statements. Before the completion of the
merger, Sunrise-Texas had no continuing operations and its historical results
would not be meaningful if combined with the historical results of
Sunrise-Cayman, Lin Ray Yang and their subsidiaries.
As a result of the acquisition, the former owners of Sunrise-Cayman and Lin Ray
Yang hold a majority interest in the combined entity. Generally accepted
accounting principles require, in certain circumstances, that a company whose
shareholders retain the majority voting interests in the combined business be
treated as the acquirer for financial reporting purposes. Accordingly, the
acquisition has been accounted for as a "reverse acquisition" arrangement
whereby Sunrise-Cayman and Lin Ray Yang are deemed to have purchased
Sunrise-Texas. However, Sunrise-Texas remains the legal entity and the
Registrant for Securities and Exchange Commission reporting purposes. The
historical financial statements prior to October 5, 2004 are those of
Sunrise-Cayman and Lin Ray Yang and their subsidiaries. All shares and per share
data prior to the acquisition have been restated to reflect the stock issuance
as a recapitalization of Sunrise-Cayman and Lin Ray Yang.
Sunrise-Texas and its subsidiaries, namely, Sunrise-Cayman, Lin Ray Yang,
Shanghai Xin Ji Yang, Suzhou Xin Ji Yang, Beijing Xin Ji Yang, Shanghai Shang
Yang and Suzhou Gao Feng are collectively referred to in this Management's
Discussion and Analysis as "the Company". The principal activities of the
Company are the provision of property brokerage services, real estate marketing
services, property leasing services and property management services in the PRC.
RECENT DEVELOPMENTS
Before 2004, our major business was an agency business, whereby our only
subsidiary then, Shanghai Xin Ji Yang, was contracted by property developers to
market and sell their newly developed property units; in return for which we
earned a commission fee calculated as a percentage of the selling price. Our
business operation in Shanghai Xin Ji Yang continues to demonstrate growth in
revenue.
In 2004, through another subsidiary, Shanghai Shang Yang, we ventured into a
higher risk business model (the "Underwriting Model") whereby our commission was
not calculated as a percentage of the sales price. Instead, our commission
revenue is equal to the price difference between the final sales price and the
underwriting price. In this model, we negotiate with the developer for an
underwriting price that is as low as possible, with the guarantee that all units
will be sold by a specific date. In return, we have the flexibility to establish
the final sales price, and earn the price difference between the final sales
price and the underwriting price. The risk in this kind of agreement is that, if
there are any unsold units on the expiry date, we may have to absorb the unsold
units from developers at the underwriting price. We would hold these units in
our inventory or as investments.
Shanghai Shang Yang has entered into a Property Underwriting Agreement with an
independent property developer to underwrite the Sovereign Building Project, a
commercial building located in the Suzhou Industry Park in Suzhou, PRC, at a
fixed underwriting price. Being the sole distribution agent for the foregoing
office building, Shanghai Shang Yang committed to a sales target of $50.39
million being achieved on or before November 25, 2005. We started selling units
in the building in December 2004,and as of December 31, 2005, we achieved the
sales target by selling 221 units with a total sales price of $60.70 million.
However, there are still unsold properties with floor area of 3,189 square
meters, which represents 6.9% of total floor area underwritten, as of December
31, 2005. The underwriting period has been extended to the end of April 2006,
the estimated completion date of the building.
18
Over the past two years, we have also acquired interests in the Sovereign
Building Project. On November 18, 2004, Shanghai Shang Yang entered into sales
and purchase agreements to acquire two floors of the Sovereign Building Project
at a total consideration of $3,036,946. On October 18, 2005, Shanghai Shang Yang
entered into sales and purchase agreements to acquire an additional floor and
six units for a total consideration of $12,804,265. On November 29, 2005, Suzhou
Xin Ji Yang entered into sales and purchase agreements to acquire an additional
floor of the Sovereign Building Project for a total consideration of $1,735,497.
Of these acquired floors, two floors will be held for sale, one floor will be
held for our own use, and the remaining properties will be held for long-term
investment purposes. As of December 31, 2005, deposits amounting to $12,601,596
have been paid to the property developer. On January 5, 2006, an additional
deposit of $1,239,618 was paid to the property developer. The remaining balance
of $3,735,494 will be payable upon the completion of these properties that we
estimate to be April 30, 2006.
While we expect revenue to stem from these two subsidiaries' businesses, we can
provide no assurance that this will result in any increase in profitability.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB) issued a
revision of FASB Statement No. 123, (FASB 123R) Accounting for Stock-Based
Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. FASB 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity, equity instruments or
that may be settled by the issuance of those equity instruments. FASB 123R
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions. FASB 123R does not change
the accounting guidance for share-based payment transactions with parties other
than employees provided in FASB 123 as originally issued and EITF Issue No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services. FASB 123R does
not address the accounting for employee share ownership plans, which are subject
to AICPA Statement of Position 93-6, Employers Accounting for Employee Stock
Ownership Plans. For small business issuers, FASB 123R is effective for fiscal
years beginning after December 15, 2005. We do not believe the adoption of FASB
123R will have a material impact on our financial statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Revision of FASB Statement No. 123, (FASB 123R) Accounting for Stock-Based
Compensation
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Critical accounting policies for us include revenue
recognition, impairment of goodwill, and accounting for income taxes.
SFAS 142, Goodwill and Other Intangible Assets
SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill be tested
for impairment on an annual basis (December 31 for us) and between annual tests
if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value. These events
or circumstances could include a significant change in the business climate,
legal factors, operating performance indicators, competition, or the sale or
disposition of a significant portion of the company. Application of the goodwill
impairment test requires judgment, including the determination of the fair value
of the Company. The fair value of the Company is estimated using a discounted
cash flow methodology. This requires significant judgments including estimation
of future cash flows, which is dependent on internal forecasts, estimation of
the long-term rate of growth for our business, the useful life over which cash
flows will occur, and the determination of our weighted average cost of capital.
Changes in these estimates and assumptions could materially affect the
determination of fair value and/or goodwill impairment for the Company.
19
SFAS 109, Accounting for Income Taxes
SFAS 109, Accounting for Income Taxes, establishes financial accounting and
reporting standards for the effect of income taxes. The objectives of accounting
for income taxes are to recognize the amount of taxes payable or refundable for
the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in an entity's financial
statements or tax returns. Judgment is required in assessing the future tax
consequences of events that have been recognized in our financial statements or
tax returns. Variations in the actual outcome of these future tax consequences
could materially impact our financial position or results of our operations.
Revenue Recognition
Agency commission revenue from property brokerage is recognized when the
property developer and the buyer complete a property sales transaction, which is
normally at the time when the property developer receives from the buyer a
portion of the sales proceeds in accordance with the terms of the relevant
property sales agreement, or when we can confirm that the balance of the bank
loan to the buyer has been approved.
Commission revenue from underwriting service is recognized when the property
developer and the buyer complete a property sales transaction, which is normally
at the time when the property developer has confirmed that the predetermined
level of sales proceeds have been received from buyers.
Revenue from marketing consultancy services is recognized when services are
provided to clients.
RESULTS OF OPERATIONS
We provide the following discussion and analyses of our changes in financial
condition and results of operations for the year ended December 31, 2005, with
comparisons to the historical year ended December 31, 2004.
Revenue
The following table shows the net revenue detail by line of business:
Years ended December 31,
-------------------------------------------------------------------
2005 % to total 2004 % to total % change
------------ ------------ ------------ ------------ ----------
Agency sales 6,477,636 60 7,587,715 98 (15)
Underwriting sales 4,402,832 40 135,926 2 3,239
------------ ------------ ------------ ------------
Net revenue 10,880,468 100 7,723,641 100 41
------------ ------------ ------------ ------------ ----------
The net revenue of 2005 was $10,880,468, which was an increase of 41% from
$7,723,641 in 2004. In 2005, agency sales represented 60% of net revenues, and
underwriting sales represented 40% of net revenue. In 2004, agency sales
represented 98% of net revenues and underwriting sales represented 2% of net
revenue. The increase in net revenues of 2005 was mainly due to the increase in
our underwriting sales revenues.
Agency sales
60% of our net revenue, after sales tax, is due to agency commission fees, most
of which were from the business activities of Shanghai Xin Ji Yang. The primary
reason that agency commission fees decreased in 2005 was that, in the Second
Quarter of 2004 in a growing real estate market, we launched an agency project
of luxury villas in Shanghai. The project was successfully closed in 2004 and
generated net revenues of $2,307,489. In 2005, on the other hand, our projects
were located in several secondary cities and the macro economic policies on the
real estate market had little impact on our business. Also in 2005, several
projects were in the start-up stages and did not contribute significantly to
commission revenue in 2005. We estimate that the agency sales revenues from the
real estate projects will rebound in 2006.
20
Underwriting sales
In February 2004, Shanghai Shang Yang entered into an agreement to underwrite an
office building in Suzhou, known as Suzhou Sovereign Building. Being the sole
distribution agent for the foregoing office building, Shanghai Shang Yang
committed to a sales target of $50.39 million being achieved on or before
November 25, 2005. Property underwriting sales is comparatively a higher risk
business model compared to our pure commission based agency business. Under this
higher risk business model, the Underwriting Model, our commission is not
calculated as a percentage of the selling price; instead, our commission revenue
is equivalent to the price difference between the final selling price and
underwriting price. We negotiate with a developer for an underwriting price as
low as possible, with the condition that we guarantee all unsold units will be
acquired within a certain a period. In return, we are given the flexibility to
establish the final selling price and earn the price difference between the
final selling price and the underwriting price. The risk of this kind of
arrangement is that, if there is any unsold unit upon the expiry period, we may
have to absorb the unsold property units from developers at the underwriting
price and hold them in our inventory or as an investment.
We started selling units in the building in December 2004. As of December 31,
2005, we achieved the sales target by selling 221 units with a total sales price
of $60.70 million. However, there are still unsold properties with floor area of
3,189 square meters, which represents 6.9% of total floor area underwritten, as
of December 31, 2005. The underwriting period has been extended to the end of
April 2006, the estimated completion date of the building. As of December 31,
2005, the developer, SIP Hi-Dragon Real Estate Development Co., Ltd., has
confirmed net revenue of $4,538,758, that we have recognized as our revenue as
of December 31, 2005. As we approach the completion of the building, SIP
Hi-Dragon Real Estate Development Co., Ltd. will gradually receive all sales
proceeds from the buyers; at that time, we can recognize our total underwriting
sales revenue for this project.
Cost of Revenue
The following table shows the cost of revenue detail by line of business:
Years ended December 31,
---------------------------------------------------------------
2005 % to total 2004 % to total % change
----------- ----------- ----------- ------------ ----------
Agency sales 2,560,266 76 3,531,527 85 (28)
Underwriting sales 800,734 24 631,235 15 27
----------- ----------- ----------- ------------
Cost of revenue 3,361,000 100 4,162,762 100 (19)
----------- ----------- ----------- ------------ ----------
The cost of revenue in 2005 was $3,361,000, a decrease of 19% from $4,162,762 in
2004. In 2005, agency sales represented 76% of cost of revenues and underwriting
sales represented 24% of cost of revenue. In 2004, agency sales represented 85%
of cost of revenue and underwriting sales represented 15% of cost of revenue.
Agency sales
The cost of revenue for agency sales in 2005 was $2,560,266, a decrease of 28%
from $3,531,527 in 2004. The primary reasons for the difference are the
following:
i) In the Second Quarter of 2004, we launched an agency project of luxury villas
in Shanghai and we agreed to bear all advertising costs of the project, which
were $1,001,364. However, we had no project for which we had to bear advertising
costs in 2005. Therefore, a significant decrease resulted.
ii) Commission expenses decreased in 2005 due to the decrease in commission
income from agency services.
For most projects that we market, advertising costs are borne by the respective
property developers. For some projects, we commit to bear all advertising costs
in exchange for a higher agency commission rate. All advertising costs incurred
in the promotion of our property projects are expensed in the period incurred.
Due to the nature of our business, we cannot necessarily match the timing of
advertising costs with related revenues. Advertising costs are usually incurred
according to the timeline specified in project budgeting; they are budgeted as a
percentage of our projected sales revenues. In the property marketing and sales
cycle, advertising costs are usually incurred two to three months prior to
formal sales launch activities. In some cases, advertising costs and activities
may take place before period-end, while sales launch activities take place after
period-end. As advertising costs are expensed as incurred, it is possible that
advertising costs incurred in any period do not match the revenues earned in the
same period.
21
Underwriting sales
The cost of revenue for underwriting sales in 2005 was $800,734; it increased
27% from $631,235 in 2004. We started our underwriting sales activities in
December 2004 and the costs incurred in 2004 mainly comprised initial setup
costs, exhibition costs and advertising costs whereas the costs incurred in 2005
mainly comprised commission expenses and advertising costs. The direct staff
costs and commission expenses took a smaller proportion to the net revenue when
compared with that of agency sales. As stated in the preceding paragraph,
advertising costs were expensed as incurred and most of the promotional
activities were launched in 2004. As a result, the costs of revenue for
underwriting sales merely increased 27% whereas the net revenue increased
3,108%.
Operating Expenses
The following table shows operating expenses detail by line of business:
Years ended December 31,
------------------------------------------------------------------
2005 % to total 2004 % to total % change
------------ ------------ ------------ ------------ ----------
Agency sales $894,741 88 $1,036,925 99 (14)
Underwriting sales $116,477 11 $11,649 1 900
Property management $7,198 1 - - n/a
------------ ------------ ------------ ------------
Operating expenses $1,018,416 100 $1,048,574 100 (3)
============ ============ ============ ============ ==========
The operating expenses for 2005 were $1,018,416; this is a 3% decrease from
$1,048,574 in 2004. Operating expenses related to agency sales and underwriting
sales varied in line with agency sales and underwriting sales.
Agency sales
The operating expenses for agency sales in 2005 were $894,741; this is a
decrease of 14% from $1,036,925 in 2004. Some operating expenses, e.g., travel
expenses and allowances, decreased as agency sales revenues decreased 15% in
2005.
Underwriting sales
The operating expenses for underwriting sales in 2005 were $116,477; this is an
increase of 900% from $11,649 in 2004. We started our underwriting sales
activities in December 2004. This significant increase in expenses is related to
the increase in underwriting sales in 2005.
Property management
Suzhou Gao Feng is our property management subsidiary. Suzhou Gao Feng is still
at the start-up stage, and there was a low level of daily operating expenses
incurred in 2005. We launched the property management business in the First
Quarter of 2006.
General and Administrative Expenses
- -----------------------------------
The general and administrative expenses in 2005 were $3,651,186, increasing 56%
from $2,335,714 in 2004. The increase in general and administrative expenses was
mainly due to:
i) The increase in professional fees for maintaining our listing status, e.g.,
audit, legal and other professional fees. The professional fees for 2005 were
$878,833, including expenses for consulting services rendered to us in 2005 by
Marco Partners Limited and Mr. Chiang Hui Hsiung for a total of $693,600. No
such expenses were incurred in 2004.
ii) The establishment of Suzhou Xin Ji Yang and two branches of Shanghai Xin Ji
Yang and the acquisition of Beijing Xin Ji Yang. The general and administration
expenses for these subsidiaries and branches in 2005 and 2004 were $576,434 and
$249,978, respectively.
22
Interest Expenses
- -----------------
Interest expenses in 2005 were $162,496, increasing 596% from $23,333 in 2004.
The interest expenses were mainly incurred for bank loans and promissory notes
payable. The increase was due to increases in interest on bank loans for the
acquisition of properties and for promissory notes payable.
LIQUIDITY AND CAPITAL RESOURCES
Source of Cash
- --------------
In 2005, our principal sources of cash were revenues from our agency sales
business and underwriting sales business. We expect these sources will continue
to meet our cash requirements, including debt service, operating expenses and
promissory deposits for various property projects.
Another source of cash is from bank loans in an aggregate amount of $5,131,004
obtained during the year. These bank loans include two 5-year loans that bear
interest at banks' prevailing rate, which is currently at 5.85% per annum and
one 5-year loan that bears interest at a rate of 6.435% per annum. They will be
maturing in December 2010. These bank loans are guaranteed by the developer as
mentioned in Note 7 and will be secured by the properties as mentioned in Note 7
once the title of the properties is transferred to us.
Uses of Cash
- ------------
Most of our cash resources were used to pay deposits for acquisition of
properties in Suzhou.
Another major use of cash was to fund our revenue related expenses, such as
salaries and commissions paid to the sales force, advertising costs, maintenance
of regional offices etc.
Potential Cash Needs for 2006
- -----------------------------
The potential cash needs for 2006 will be the repayments of our bank loans,
balancing payment of properties acquired and the rental guarantee payment.
We anticipate that our current available funds, cash inflows from providing
property agency services and underwriting services and sales proceeds from
disposal of properties acquired will be sufficient to meet our anticipated needs
for working capital expenditures, business expansion and the above potential
cash needs through 2006. We also expect Suzhou Gao Feng can contribute cash flow
to the Company as it will start its property management business in the second
quarter of 2006. However, we may need to raise additional funds in the future in
order to fund acquisitions, develop new projects, or if our business otherwise
grows more rapidly than we currently predict. If we do need to raise such
additional funds, we expect to raise those funds through the issuance of
additional shares of our equity securities in one or more public or private
offerings, or through credit facilities obtained with lending institutions.
There can be no guarantee that we will be able to obtain such funding, whether
through the issuance of debt or equity, on terms satisfactory to management and
our board of directors.
DESCRIPTION OF BUSINESS
CORPORATE HISTORY
Sunrise Real Estate Development Group, Inc. ("Sunrise-Texas") was incorporated
in the State of Texas on October 10, 1996, under the original name of Parallax
Entertainment, Inc. ("Parallax"). On October 28, 2003, Olympus Investment
Corporation, a Brunei corporation, based in Taipei, Taiwan, purchased 78,400
shares of common stock, and then became the majority, 51% shareholder of
Parallax.
Effective December 12, 2003, the name of Parallax was changed to Sunrise Real
Estate Development Group, Inc. On December 9,], 2003, the Board of Directors of
Sunrise-Texas adopted a resolution authorizing a five-to-one reverse split in
the Company's $0.01 par value common stock. This resulted in 30,614 shares being
issued and outstanding post reverse split. Thereafter, on December 27, 2003,
Sunrise-Texas sold 6,600,000 shares of common stock for $0.025 per share,
23
amounting to an aggregate of $165,000, in a private placement to non-US
individuals. Sunrise-Texas relied on the Regulation S exemption from the
registration requirements of the Securities Act of 1933, as amended, in
connection with this private placement.
On August 31, 2004, Sunrise-Texas, Sunrise-Cayman and Lin Chi-Jung, an
individual and agent for the beneficial shareholder of Sunrise-Cayman, Ace
Develop Properties Limited ("Ace Develop"), entered into an exchange agreement
whereby Sunrise-Texas would issue 5,000,000 shares of its common stock to the
beneficial shareholder of Sunrise-Cayman or its designees, in exchange for all
of the outstanding capital stock of Sunrise-Cayman. The transaction was closed
on October 5, 2004. Lin Chi-Jung is Chairman of the Board of Directors of
Sunrise-Texas, the President of Sunrise-Cayman and the principal and controlling
shareholder of Ace Develop.
Also on August 31, 2004, Sunrise-Texas, Lin Ray Yang and Lin Chi-Jung, an
individual and agent for the beneficial shareholders of Lin Ray Yang, (i) Ace
Develop, (ii) Planet Technology Corporation ("Planet Tech"), and (iii) Systems &
Technology Corporation ("Systems Tech"), entered into an exchange agreement
whereby Sunrise-Texas would issue 10,000,000 shares of its common stock to the
beneficial shareholders, or their designees, in exchange for all of the
outstanding capital stock of Lin Ray Yang. The transaction was closed on October
5, 2004. Lin Chi-Jung is Chairman of the Board of Directors of Sunrise-Texas,
the President of Lin Ray Yang and the principal and controlling shareholder of
Ace Develop. Regarding the 10,000,000 shares of common stock of Sunrise-Texas
issued in this transaction, 8,500,000 shares were issued to Ace Develop, 750,000
shares were issued to Planet Tech and 750,000 shares were issued to Systems
Tech.
Prior to the closing of the aforesaid exchange agreements, Sunrise-Texas was an
inactive "shell" company. Following the closings of the aforesaid exchange
agreements, Sunrise-Texas, through its two wholly owned subsidiaries, Lin Ray
Yang and Sunrise-Cayman, has engaged in the business of real estate brokerage
services in connection with office and multifamily properties, real estate
marketing services, and property leasing and property management services in
Mainland China.
As a result of the acquisition, the former owners of Sunrise-Cayman and Lin Ray
Yang now hold a majority interest in the combined entity. Generally accepted
accounting principles require, in certain circumstances, that a company whose
shareholders retain the majority voting interest in the combined business to be
treated as the acquirer for financial reporting purposes. Accordingly, the
acquisition has been accounted for as a "reverse acquisition" arrangement
whereby Sunrise-Cayman and Lin Ray Yang are deemed to have purchased
Sunrise-Texas. However, Sunrise-Texas remains the legal entity and the
Registrant for Securities and Exchange Commission reporting purposes. The
historical financial statements prior to October 5, 2004 are those of
Sunrise-Cayman and Lin Ray Yang and their subsidiaries. All shares and per share
data prior to the acquisition have been restated to reflect the stock issuance
as a recapitalization of Sunrise-Cayman and Lin Ray Yang.
We are now a sales brokerage business with accumulated expertise in the areas of
property sales & marketing. We generated consolidated revenues of more than $7.7
million from our sales brokerage business in 2004. With experience and in-depth
local market know-how, we are now ready to enter the property underwriting
sector, while at the same time maintaining our steady growth in the brokerage
business.
On January 15, 2006, Sunrise-Texas ratified its agreement with Marco Partners,
Inc, a Hong Kong corporation, to provide financial advisory services to
Sunrise-Texas in the calendar year 2005. In this connection, Sunrise-Texas
agreed to issue and has issued Marco Partners 1,030,000 shares of common stock
in payment for its services. Chiu, Chi-Yuan, a Senior Vice-President of
Sunrise-Texas, is a principal of Marco Partners. Marco Partners is a related
party. Also, on January 15, 2006, Sunrise-Texas ratified its agreement with
Chiang, Hui Hsiung to provide strategic consulting services to Sunrise-Texas in
calendar year 2005. In this connection, Sunrise-Texas agreed to issue and has
issued to Chiang, Hui Hsiung 330,000 shares of common stock in payment for his
services. These 1,360,000 shares were valued by Sunrise-Texas at US $0.51 per
share, the closing market price of the Sunrise-Texas shares on January 15, 2006.
CORPORATE STRUCTURE
Sunrise-Texas, operates through a tier of subsidiaries. Sunrise Texas owns 100%
of the capital stock of Sunrise Real Estate Development Group, Inc., a Cayman
Islands corporation ("Sunrise-Cayman") and LIN RAY YANG Enterprise, Ltd., a
British Virgin Islands company ("Lin Ray Yang"). Neither Sunrise-Cayman nor Lin
Ray Yang have operations but respectively conduct operations in Mainland China
through wholly owned subsidiaries and joint ventures based in Shanghai, PRC.
Sunrise-Cayman operates through its wholly owned subsidiary, Shanghai Xin Ji
Yang, and two (2) joint venture subsidiaries: (i) Suzhou Xin Ji Yang Real Estate
Agency Co, Ltd. ("Suzhou Xin Ji Yang") of which Sunrise-Cayman holds a 5% equity
interest and Shanghai Xin Ji Yang holds a 75% equity interest; and (ii) Beijing
Xin Ji Yang Real Estate Agency Co, Ltd. ("Beijing Xin Ji Yang") of which
Shanghai Xin Ji Yang holds an 85% equity interest. Shanghai Xin Ji Yang provides
marketing and sales services to developers.
24
Shanghai Xin Ji Yang has fifty-two (52) sales teams operating in fifteen (15)
provinces in the PRC. As of December 31, 2005, Shanghai Xin Ji Yang had
contracts to market and sell a total property area exceeding 10.7 million square
meters. Shanghai Xin Ji Yang is comprised of three major divisions: research and
development, planning, and sales. It has a total work force of 331 personnel
including 30 Taiwanese expatriates. Shanghai Xin Ji Yang is one of the largest
foreign-based brokerage agencies in Shanghai.
Lin Ray Yang operates through its wholly owned subsidiary, Shanghai Shang Yang
Real Estate Consultation Co. Ltd. ("Shanghai Shang Yang"). Shanghai Shang Yang
was incorporated in February 2004 and provides marketing services to developers
with whom it may partner in a particular real estate development project.
Shanghai Shang Yang identifies, evaluates and negotiates development projects.
Shanghai Shang Yang is comprised of professional project planning, property
investment evaluation and project marketing teams.
Shanghai Shang Yang's first project was the development of a commercial building
within the Suzhou Industrial Park, called the Sovereign Building. The Sovereign
Building is a joint venture between Shanghai Shang Yang and SIP Hi-Dragon Real
Estate Development Co., Ltd. Shanghai Shang Yang has undertaken to sell all of
the units of this project.
In January 2005, Lin Ray Yang formed a new, majority owned subsidiary - Suzhou
Gao Feng Hui Property Management Co, Ltd ("Suzhou Gao Feng"). Lin Ray Yang owns
80% and its partnering developer, SIP Hi-Dragon Real Estate Development Co.,
Ltd. owns 20% of this company. Suzhou Gao Feng provides rental, management and
maintenance services for office buildings and apartments.
Figure 1: Company Organization Chart
Sunrise Real Estate
Development Group, Inc.
|
|
------------------------------------------------
| |
| |
Sunrise Real Estate LIN RAY YANG
- -- Development Group, Inc. Enterpise Ltd., BVI
| Cayman 100% | 80%
| | -------------------------------------------------
| 100% | | |
| Shanghai Xin Ji Yang Real Shanghai Shang Yang Suzhou Gao Feng Hui
| Estate Consultation Real Estate Consultation Property Management
| Company Limited Company Limited Company Limited
| |
| |---------------------------------|
|5% |75% |85%
|Suzhou Xin Jin Yang Beijing Xin Ji Yang
Real Estate Agency Real Estate Agency
Co, Ltd. Co, Ltd.
25
BUSINESS ACTIVITIES
Since 2002, our main operating subsidiary has operated as a sales and marketing
agency for newly built property units. We have developed a good network with
landowners and earned the trust of developers, allowing us to explore
opportunities in property investment.
As part of this goal, a new operating subsidiary , Shanghai Shang Yang, with an
experienced management team has been acquired to focus on developing a new
strategic plan for property investment activities. The new strategic plan is
designed to expand our activities beyond our existing revenue base, to assume a
higher risk of investment and allow flexibility in structuring collaboration
models with partnering developers. While we have an excellent track record as a
sales and marketing agency for new developments, we are also becoming a small
equity participant in property development projects.
Commission Based Services
Depending on the scope of our engagement and our partners' requirements, the
scope of our services could be a combination of any of the following models.
Commission based services refer to any of the following marketing and sales
agency services:
a. Integrated Marketing Planning
b. Advertising Planning and Execution
c. Sales Planning and Execution
In this type of business, we execute a Marketing and Sales Agency Agreement (the
"Agency Agreement") with property developers to undertake the marketing and
sales activities of a specified project. The scope of service varies according
to the clients' needs; it could be a full package of all the above services (a,
b and c), a combination of any two (2) of the above services, or a single
service.
Most of our current existing revenue comes from commission-based services,
currently representing at least 80% of our annual revenues. We secure
commission-based projects via bidding or direct appointment. Through existing
client rapport and selling results, we have secured a number of projects from
previous clients via direct appointment, especially on subsequent phases of
projects that we had previously marketed. Almost 40% of our existing projects
are such subsequent phases, representing a quarter of our current year revenues.
Normally, before a developer retains our services, we will evaluate and
determine the acceptable selling value of a project; this value will be proposed
to the developer and the parties will negotiate an Average Sales Value ("ASV")
as the basis of the property-selling price in the Agency Agreement.
The actual retail value of the project is generally priced higher than the ASV
depending upon the actual market conditions. On average, we have been able to
sell the property at a small premium of ASV.
Our normal commission structure is a combination of:
a) Base Commission of 1% to 1.5% of the ASV;
b) Surplus Commission of 10% to 30% of the difference between the
ASV and the actual sales price.
Our wholly owned subsidiary, Shanghai Xin Ji Yang, engages in this sales and
marketing phase of our business.
Underwriting sales business
- ---------------------------
In 2004, through Shanghai Shang Yang, we ventured into a higher risk business
model (the "Underwriting Model") whereby our commission was not calculated as a
percentage of the selling price; instead, our commission revenue is equal to the
price difference between the final selling price and underwriting price. Under
this Underwriting Model, we negotiate with the developer for an underwriting
price that is as low as possible with the guarantee that all unsold units will
be sold by a specific date. In return, we have the flexibility to establish the
final sales price, and we earn the price difference between the final sales
price and the underwriting price. The risk in this kind of agreement is that if
there are any unsold units on the expiry date, we may have to absorb the unsold
units from developers at the underwriting price. We would then hold these units
in our inventory or as investments.
26
PRC's Property Sector
In the PRC, all land titles are owned by the government, and private companies
are granted the Land Use Rights Certificate ("LURC") for a period not exceeding
70 years, depending on the purpose of the development. For example, residential
property has a land use right of 70 years, commercial and entertainment land has
land use right of 50 years.
During tenure of a land use right, the assignee may claim the piece of land as
its property asset, whereby this property is transferable and may be used for
various commercial purposes, i.e., sales and purchase, rent and lease, subject
to mortgage and guarantee, provided that the principal owner of the rights would
have to pay government usage fees. The PRC's regulation framework also requires
that a property development company possess Land Use Right Certificates before
registering itself as a Property Development Company. We have not acquired any
Land Use Rights; therefore, we are not registered as a Property Development
Company.
With our accumulated expertise and experience, we will slowly take a more
aggressive role by participating in property development. We plan to select
property developers with outstanding qualifications as our strategic partners,
and to continue to build strength in design, planning, positioning and marketing
services. Further, we plan to become a small equity participant in property
development projects.
Government regulation
- ---------------------
The Law on the Protection Investments from Taiwan Compatriots ensures that the
PRC Government shall under no circumstances interfere in the economic
cooperation between the Mainland China and Taiwan because of political
differences. Under this law, the PRC Government may not discriminate and must
protect the legal rights of Taiwan compatriots' investments in Mainland China.
This policy allows Taiwan businesses to safely operate in Mainland China without
government discrimination.
On August 31, 2003, the State Council of the PRC issued Guo Fa (2003) No.18,
State Council's notice regarding the accelerating real estate market in the
direction of continuous and healthy development. There is no doubt that this
policy will become an important contribution to the PRC's economic development.
It explicitly provides for assistance to middle/low income households by means
of subsidies, clearly defining the regulations to control land pricing so as to
enable the majority of households to pay housing prices and fulfill Chinese
citizens' dreams of buying ordinary housing. This policy will have a positive
influence on the overall economic growth of the country.
While the No.18 Policy conforms to the public opinion to satisfy market supply
and demand, it also provides that strong support will be provided to qualified
real estate development companies. The construction cost for economical and
suitable housing will also be reduced through measures such as land transfers,
reducing or waiving administrative and institutional charges, as well as tax
revenue preferential policies, etc. Enterprises will operate in a fair
competition environment, thus eliminating under-the-table transactions that
occurred in the past.
The items that benefit real estate developers under No.18 Policy are the
following:
- Increase the supply of middle and low income housing.
- Control construction of upscale commodity apartments.
- Stimulate the secondary housing market.
- Increase the collection of housing accumulation funds, and exert more
efforts in granting loans.
- Strengthen the supervision and management of mortgages, and provide
more credit support to qualifying real estate development projects.
In March and May, 2005, the State Council of the PRC issued two proposals for
stabilizing the housing prices. The purpose of these proposals was to stabilize
housing prices, to adjust and improve the structure of the real estate market,
to adjust supply and demand in the market, to decrease financing risk, and to
enhance the supervision of the real estate market.
These proposals will promote the development of China's real estate market and
help improve the national economy. We believe that we will benefit from these
proposals.
27
Mainland China's Property Sector
The industry's macro environment is slowly opening up, and the property sector
is gradually developing to be a more regulated market. Stable economic growth
provides a solid and secure base for investment returns in the property sector.
GDP Growth of PRC for the period of 2001 through 2005
-------- ------------
GDP GROWTH
-------- ------------
2001 8.30%
-------- ------------
2002 9.10%
-------- ------------
2003 10.00%
-------- ------------
2004 10.10%
-------- ------------
2005 9.90%
-------- ------------
Figure 2: GDP Growth of US, Japan, Taiwan, and China for the period of 2000
through 2004
[GRAPHIC OMITTED]
Figure 3: Per Capita GDP as Multiple of China for US, Japan, Hong Kong,
Singapore, Taiwan, and China.
[GRAPHIC OMITTED]
28
EMPLOYEES
As of December 31, 2005, we had the following number of employees:
NO. OF
DEPARTMENT EMPLOYEES
Sunrise Group
Taiwan Management 4
Chairman's Office 3
Marketing Dept. 1
Accounting Dept. 5
Administration Dept. 8
Investment Relations Dept. 2
Subtotal 23
Shanghai Branch of XJY
Administration Dept. 16
Accounting Dept. 5
Advertising & Communication Planning Dept. 18
Research & Development Dept. 7
Marketing Dept. 50
Subtotal 96
Suzhou Branch of XJY
Administration Dept. 9
Accounting Dept. 2
Research & Development Dept. 12
Advertising & Communication Planning Dept. 1
Marketing Dept. 88
Subtotal 112
Nanchang Branch of XJY
Administration Dept. 7
Accounting Dept. 2
Research & Development Dept. 3
Advertising & Communication Planning Dept. 1
Marketing Dept. 44
Subtotal 57
Beijing Branch of XJY
Administration Dept. 5
Accounting Dept. 1
A & D Dept. 1
Subtotal 7
Yangzhou Branch of XJY
Administration Dept. 3
Accounting Dept. 1
Marketing Dept. 32
Subtotal 36
TOTAL 331
29
MANAGEMENT
The following table sets forth certain information concerning the
executive officers and directors of Sunrise-Texas.
Date of Appointment Name of Individual Age Positions Held
October 11, 2004 LIN, CHI-JUNG 46 President, CEO and Chairman
Senior Vice President,
May 23, 2005 LIN, CHAO CHIN 56 Director and Vice Chairman
April 25, 2005 HONANYAN, ART 61 Chief Financial Officer
November 23, 2004 LI XIAO GANG 48 Director
October 14, 2005 CHEN, WEI HUA 32 Director
November 23, 2004 CHEN REN 58 Director
November 23, 2004 FU XUAN-JIE 55 Director
August 23, 2005 ZHANG XI 35 Director
Following is biographical information for each of the executive officers and
directors consisting of their age, principal occupation, and other relevant
information. There are no family relationships among any of the directors or
executive officers of Sunrise-Texas. The designation of "Affiliated" noted
beside the director name indicates that the director is an officer or employee
of Sunrise-Texas.
Lin Chi-Jung (Affiliated), age 46, is the Chairman, President & Chief Executive
Officer, and controlling shareholder of Sunrise-Texas. Mr. Lin began serving as
a Director of SRRE Sunrise-Texas on October 28, 2003, and was appointed Chairman
on October 11, 2004. Mr. Lin also serves as the Chairman of all of the operating
subsidiaries under the Sunrise-Texas Group. He founded Shanghai Xin Ji Yang in
late 2001 and Shanghai Shang Yang in 2004. In addition, he serves as the
President of Sunrise-Cayman, Lin Ray Yang, Shanghai Xin Ji Yang and Shanghai
Shang Yang. Mr. Lin is the principal and controlling shareholder of Ace Develop
Properties Limited. In addition, Mr. Lin serves as the agent for the beneficial
shareholders of Sunrise-Cayman and Lin Ray Yang. Prior to establishing the
property business, Mr. Lin started his career and business in the entertainment
industry and became a famous actor in Chinese communities around the world,
including Mainland China, Taiwan, North America and South East Asia before
turning to be a film director, producer, distributor and investor in the
mid-90's.
Lin, Chao-Chin (Affiliated), age 56, is one of the co-founders of Xin Ji Yang.
He has 28 years of real estate industry experience, particularly in the areas of
agency, property investment, and development services. Prior to starting his
business in the PRC, he co-founded Taipei Xin Lian Yang Property Co. Ltd. in
Taiwan back in the early 1980's, which grew to have contracted sales of NT 120
Billion (approx. US$ 3.4 billion) and 800 employees. In 2001, he joined Lin
Chi-Jung to re-establish his career in China. Currently, Lin Chao-Chin is
managing the day-to-day business operations of Xin Ji Yang. Lin Chao-Chin
graduated from Taiwan Chung Yuan University with a Bachelors Degree in Business
Administration.
Honanyan, Art, age 61, is a Certified Management Accountant (USA). He was on the
faculty of three Southern California based MBA programs during the past 11
years. He was Chief Financial Officer and member of the Board of Directors of
the California Central Trust Bank and its holding company during between 1983
and 1992. He holds an MBA degree from New York University, New York, NY, USA and
a BA degree from George Washington University, Washington, DC, USA.
Li Xiao-Gang, age 48, was appointed as an independent director of Sunrise-Texas
on November 23, 2004. Mr. Li graduated from Shanghai Finance and Economics
University in 1984, and joined the Shanghai Academy of Social and Science. In
30
1992, he was the deputy director of the Economics Law Consultation Center of the
Shanghai Academy. In 2000, he was the Director of the Foreign Investment
Research Center of the Academy. From 1992 to the present, Mr. Li served as a
Director cum Deputy Secretary-General of the Shanghai Consultation Association.
Chen, Wei Hua, age 32, Taiwan Certified Public Accountant. For the past 5 years,
Ms. Chen has been an accountant in Lian Hua Accounting Firm.
Fu Xuan-Jie, age 55, was appointed as an independent director of Sunrise-Texas
on November 23, 2004. Mr. Fu is an attorney and currently practices law in his
co-founded firm, Fu Xuan-Jie & Associates Law Office. Prior to establishing his
own law firm, Mr. Fu was associated with several other law offices. Mr. Fu
specializes in corporate and international law, especially in the areas of
international compensation and financial legality cases.
Chen Ren, age 58, was appointed as an independent director to Sunrise-Texas on
November 23, 2004. Mr. Chen is currently the general manager of the Shanghai
Housing Developing Center, a subsidiary of Shanghai Real Estate Group of
Companies. He has been involved in the Shanghai real property market for the
past 15 years. Among some of the companies that he has been associated with are:
Shanghai She-ye Property Ltd., Shanghai Rui Nan Property Limited, the General
Manager of Shanghai Gong Zhi Jing Center.
Zhang, Xi, age 35, was appointed as an independent director to Sunrise-Texas on
August 23, 2005. Mr. Zhang is an Economy Doctor, Senior Economist, Certificated
Public Accountant and Certificated Public Valuer. He has served in Shanghai
Zhonghua Auditor Company as the manager of International Department, Shanghai
Zhangjiang Hi-tech Zone Development Company. Ltd as Vice General Manager and
Financial Controller of Shanghai Zhang Jiang Semiconductor Industry Park Co.,
Ltd as General Manager.
CONFLICTS OF INTEREST
We believe that our officers and directors will be subject to conflicts of
interest. The conflicts of interest arise from their time spent on other
businesses unrelated to ours.
FAMILY RELATIONSHIPS
There are currently no family relationships among the directors, executive
officers, or persons nominated or chosen to become the directors or executive
officers of Sunrise-Texas.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
To our knowledge, during the past five (5) years, our officers and directors
have: (a) not filed a petition under the federal bankruptcy laws or any state
insolvency laws, nor had a receiver, fiscal agent or similar officer appointed
by a court for the business or present of such a person, or any partnership in
which he was a general partner at or within two (2) years before the time of
such filing, or any corporation or business association of which he was an
executive officer within two (2) years before the time of such filing; (b) not
been convicted in a criminal proceeding or named subject of a pending criminal
proceeding (excluding traffic violations and other minor offenses); (c) not been
the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining him from or otherwise limiting the following activities:
(i) acting as a futures commission merchant, introducing broker, commodity
trading advisor, commodity pool operator, floor broker, leverage transaction
merchant, associated person of any of the foregoing, or as an investment
advisor, underwriter, broker or dealer in securities, or as an affiliated
person, director of any investment company, or engaging in or continuing any
conduct or practice in connection with such activity; (ii) engaging in any type
of business practice; (iii) engaging in any activity in connection with the
purchase or sale of any security or commodity or in connection with any
violation of federal or state securities laws or federal commodity laws; (d) not
been the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any federal or state authority barring, suspending or
otherwise limiting for more than 60 days the right of such person to engage in
any activity described above, or to be associated with persons engaged in any
such activity; (e) not been found by a court of competent jurisdiction in a
civil action or by the Securities and Exchange Commission to have violated any
federal or state securities law and the judgment in such civil action or finding
by the Securities and Exchange Commission has not been subsequently reversed,
suspended or vacated; (f) not been found by a court of competent jurisdiction in
a civil action or by the Commodity Futures Trading Commission to have violated
any federal commodities law, and the judgment in such civil action or finding by
the Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
31
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended December 31, 2004, the Board of Directors did not
hold any meetings. However, the Board of Directors did enter into three
Unanimous Consents to Corporate Action. The Board's Audit and Compensation
Committees did not hold any meetings during 2004.
During the fiscal year ended December 31, 2005, the Board of Directors held 2
meetings and entered into 11 Unanimous Consents to Corporate Action. Each
director attended 100% of the meetings of the Board of Directors held during the
period for which he was a Director. The Board's Audit Committee met once and the
Compensation Committee and the Governance and Nominating Committee did not hold
any meetings during 2005. There was a Board of Directors meeting held on March
23, 2006.
The Board's compensation committee consists of Lin Chao Chin, Li Xiao Gang and
Fu Xuan Jie. The Board's audit committee consists of Zhang Xi, Li Xiao Gang and
Fu Xuan Jie, who are independent within the meaning of Item 7(d)(3)(iv) of
Schedule 14A under the Exchange Act. Zhang Xi serves as the Audit Committee's
financial expert as that term is used under Item 401(e) of Regulation S-B. The
Board's Governance and Nominating Committee consists of Lin Chao Chin, Li Xiao
Gang and Fu Xuan Jie.
COMPENSATION OF DIRECTORS
During fiscal year ended December 31, 2005, each member of the Board of
Directors received cash compensation for their services as Directors: Chen, Wei
Hua received $6,292; Zhang, Xi received $5,416; and the remaining five directors
each received $14,670. The Directors were also reimbursed for their reasonable
expenses incurred in connection with attendance at meetings of the Board of
Directors and its committees.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
The Sunrise-Texas Articles of Incorporation allows member of the Board of
Directors to directly or indirectly contract with Sunrise-Texas for his or her
benefit if the transaction and the member's interest therein is known to the
other directors or shareholders who approve the transaction. Sunrise-Texas may
indemnify its officers and directors to the extent permitted by the Texas
Business Corporation Act.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
The following table reflects the compensation of our Chief Executive Officer and
each of our compensated executive officers whose compensation exceeds $100,000
in fiscal years 2003, 2004 and 2005 for services rendered Sunrise-Texas and its
subsidiaries.
Summary Compensation Table In US Dollars
Long Term Compensation(1)
---------------------------------
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Year Salary Bonus Other Annual Restricted Securities LTIP All Other
Compensation Stock Underlying Payouts Compensation
Award(s) Options/SARs
Name and Principal ($) ($) ($) ($) (#) ($) ($)
Position
Lin, Chi-Jung, CEO, 2005 153,886 164,072(2) 100,148(3) 0 0 0 0
President & Chairman 2004 86,509 282,728 134,115 0 0 0 0
(appointed on Oct 11, 2003 44,468 0 14,499 0 0 0 0
2004)
32
Long Term Compensation(1)
---------------------------------
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Year Salary Bonus Other Annual Restricted Securities LTIP All Other
Compensation Stock Underlying Payouts Compensation
Award(s) Options/SARs
Lin, Chao-Chin 2005 153,886 164,072(2) 100,148(3) 0 0 0 0
Senior Vice 2004 55,096 282,728 108,742 0 0 0 0
President 2003 41,080 0 14,499 0 0 0 0
Managing Director of
a Subsidiary
Chiu, Chi-Yuan,
CEO, President & 2004 0 0 0 0 0 0 0
Chairman 2003 0 0 0 0 0 0 0
(appointed on October
28, 2003 and resigned
on October 11, 2004)
Yarek Bartosz 2003 0 0 0 0 0 0 0
President, Secretary
(resigned on October
28, 2003)
(1) There are no stock option, retirement, pension, or profit sharing plans
for the benefit of our officers and directors.
(2) Lin Chi-Hung and Lin Chao-Chin each received discretionary bonus of
$164,072 in 2005. This incentive was attributed to the initial
management team members for their valuable contribution to the Company.
It was calculated at 15% of net profit before income tax of SHXJY and
subsidiaries in 2005.
(3) Lin Chi-Jung and Lin Chao-Chin each received housing allowance of
$96,690 and travel allowance of $4,959 during the year 2005.
EMPLOYEE INCENTIVE STOCK OPTIONS/SAR GRANTS
We do not have any stock option, retirement, pension or profit sharing plans for
the benefit of our officers, directors or employees. Accordingly, no individual
grants of stock options, whether or not in tandem with Stock Appreciation Rights
("SARs") and freestanding SARs have been made to any executive officer or any
director since our inception, and no stock options have been exercised by any of
our officers or directors in any fiscal year.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Chang, Shu-Ching, a former director of Sunrise-Texas has contributed $277,895
during 2004 into a co-operation agreement with Sunrise-Texas to jointly carry
out the Sovereign Building Project. This cash participation was used as a
portion of the $2,416,480 Performance Guarantee Deposit paid to SIP HI-Dragon
Real Estate Development Co., Ltd. for participation in the Sovereign Building
Project. It represents an investment risk sharing participation of the former
director into the project, whereby the director will share the investment risk
and profit of the project via an agreed upon proportionate profit sharing
scheme. This cash advance bears no interest rate and will be fully paid off upon
the fulfillment of the underwriting contract, however if the underwriting
contract fails to deliver its return, this amount will not be paid off.
SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following tables set forth information concerning the holdings of each
person known to Sunrise-Texas to be the beneficial owner of more than five
percent (5%) of our common stock, of each director and named executive officer,
and of all of Sunrise-Texas's directors and executive officers as a group. The
respective director, officer or shareholder furnished all information with
respect to beneficial ownership to Sunrise-Texas.
33
Security Ownership of Certain Beneficial Owners and Management
- ---------------- -------------------------------------- ----------------------- ------------
(1)
Title of Class Name and Address of Beneficial Owner Amount and Nature of Percent of
Beneficial Ownership Class
- ---------------- -------------------------------------- ----------------------- ------------
Common Stock Lin Chi-Jung, CEO, President and 8,760,000 shares (2) 38.09
Chairman 11F, No. 249, Sec 1, Fushing
S Rd., Da-an District, Taipei City
106, Taiwan R.O.C
Common Stock Directors and Executive Officers as a
group 9,790,000 shares (2) 42.6%
- ---------------- -------------------------------------- ----------------------- ------------
(1) Percentage is based on 22,996,614 shares of common stock
outstanding as at March 31, 2006.
(2) Includes 8,760,000 shares owned by Ace Develop Properties Limited,
of which Mr. Lin Chi-Jung is the sole owner. and 1,030,000 shares owned
by Marco Partners, Inc., of which Chiu, Chi-Yuan, Senior Vice President
of Sunrise-Texas, is a principal.
Changes in Control
To the knowledge of management, there are no present arrangements or pledges of
our securities that may result in a change in control of Sunrise-Texas.
DESCRIPTION OF COMMON STOCK
Sunrise-Texas has authority to issue 200,000,000 shares of common stock, par
value $0.01 per share. Holders of common stock are entitled to one vote per
share and to receive dividends or other distributions when, and if, declared by
the board of directors. As of the date of this prospectus, there were 22,996,614
shares of common stock outstanding.
DESCRIPTION OF PROPERTY
We currently rent our facilities at Suite 701, No.333, Zhaojiabang Road,
Shanghai, the PRC. In addition, we have regional field support offices in
various cities in Mainland China, namely Suzhou, Beijing, Nachang and Yangzhou.
We lease the facilities that house our regional field support offices.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings of a material nature.
LEGAL MATTERS
Carl A. Generes, Esq., Dallas, Texas, will pass upon the validity of the common
stock offered by this prospectus.
EXPERTS
The financial statements included in the Prospectus have been audited by BDO
McCabe Lo Limited, an independent registered public accounting firm, to the
extent and for the periods set forth in their report appearing elsewhere herein
and are included in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Any statements about our
expectations, beliefs, plans, objectives, assumptions or future events or
performance are not historical facts and may be forward-looking. These
34
statements are often, but not always, made through the use of words or phrases
like "anticipate," "estimate," "plans," "projects," "continuing," "ongoing,"
"expects," "management believes," "the Company believes," "the Company intends,"
"we believe," "we intend" and similar words or phrases. Accordingly, these
statements involve estimates, assumptions and uncertainties, which could cause
actual results to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed in this prospectus or incorporated by reference.
Because the factors discussed in this prospectus could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us or on behalf of us, you should not place undue reliance on
any such forward-looking statements.
Further, any forward-looking statement speaks only as of the date on which it is
made, and we undertake no obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for us to predict which
will arise. In addition, we cannot assess the impact of each factor on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements.
35
WHERE YOU CAN GET MORE INFORMATION
We are a reporting company and file annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy these
reports, proxy statements and other information at the SEC's public reference
rooms in Washington, D.C., New York, NY and Chicago, IL. You can request copies
of these documents by writing to the SEC and paying a fee for the copying cost.
Please call the SEC at 1-800-SEC-0330 for more information about the operation
of the public reference rooms. Our SEC filings are also available at the SEC's
website at "http:\\www.sec.gov."
We have not authorized any dealer, salesperson or other person to give any
information or to make any representations not contained in this prospectus or
any prospectus supplement. You must not rely on any unauthorized information.
This prospectus is not an offer of these securities in any state where an offer
is not permitted. The information in this prospectus is current as of the date
of this prospectus. You should not assume that this prospectus is accurate as of
any other date.
36
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm................. F-1
Consolidated Balance Sheets -
December 31, 2005 and 2004............................................ F-2
Consolidated Statements of Operations -
December 31, 2005 and 2004............................................ F-4
Consolidated Statements of Stockholders' Equity -
December 31, 2005 and 2004............................................ F-5
Consolidated Statements of Cash Flows -
December 31, 2005 and 2004............................................ F-6
Notes to Consolidated Financial Statements.............................. F-8
37
Report of Independent Registered Public Accounting Firm
To the Board of Directors and stockholders of
Sunrise Real Estate Development Group, Inc.
We have audited the accompanying consolidated balance sheets of Sunrise Real
Estate Development Group, Inc. as of December 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 2005 and 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the 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. The audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sunrise Real
Estate Development Group, Inc. as of December 31, 2005 and 2004 and the results
of its consolidated operations and cash flows for the years ended December 31,
2005 and 2004, in conformity with generally accepted accounting principles in
the United States of America.
BDO McCabe Lo Limited
Hong Kong, March 20, 2006
F-1
Sunrise Real Estate Development Group, Inc.
Consolidated Balance Sheets
(Expressed in US Dollars)
December 31, December 31,
2005 2004
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 855,588 $ 969,913
Accounts receivable 1,359,246 2,280,172
Deposits for acquisition of properties (Note 7) 4,150,476 --
Promissory deposits (Note 3) 247,924 2,784,994
Amounts due from venturers (Note 4) 820,040 --
Other receivables and deposits (Note 5) 168,709 362,586
------------ ------------
Total current assets 7,601,983 6,397,665
Plant and equipment - net (Note 6) 531,458 596,685
Deferred tax assets (Note 14) 144,333 --
Deposits for acquisitions of properties (Note 7) 7,488,899 1,480,036
Goodwill (Note 8) 187,783 183,029
------------ ------------
Total assets $ 15,954,456 $ 8,657,415
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank loans (Note 9) $ 1,073,650 $ 276,084
Promissory notes payable (Note 10) 1,123,962 1,000,000
Accounts payable 73,522 193,762
Venture deposits -- 972,633
Amount due to director (Note 11) 169,416 59,167
Other payables and accrued expenses (Note 12) 1,914,622 1,620,980
Other tax payable (Note 13) 158,439 114,747
Income tax payable (Note 14) 511,700 56,575
------------ ------------
Total current liabilities 5,025,311 4,293,948
------------ ------------
F-2
Commitments and contingencies (Note 15) -- --
Long-term bank loan (Note 9) 5,306,506 1,203,952
Minority interest 223,580 3,948
Shareholders' equity
Common stock, par value $0.01 per share;
200,000,000 shares authorized; 21,636,614
shares issued and outstanding 216,366 216,366
Additional paid-in capital 2,233,844 2,233,844
Statutory reserve (Note 16) 241,664 175,004
Retained earnings 2,559,836 530,353
Accumulated other comprehensive income (Note 17) 147,349 --
------------ ------------
Total shareholders' equity 5,399,059 3,155,567
------------ ------------
Total liabilities and shareholders' equity $ 15,954,456 $ 8,657,415
============ ============
See accompanying notes to consolidated financial statements.
F-3
Sunrise Real Estate Development Group, Inc.
Consolidated Statements of Operations
(Expressed in US Dollars)
Years Ended December 31,
2005 2004
------------ ------------
Net revenue $ 10,880,468 $ 7,723,641
Cost of revenue (3,361,000) (4,162,762)
------------ ------------
Gross profit 7,519,468 3,560,879
Operating expenses (1,018,416) (1,048,574)
General and administrative expenses (3,651,186) (2,335,714)
------------ ------------
Operating profit 2,849,866 176,591
Interest income 10,958 7,887
Other income, net 63,374 54,891
Interest expenses (162,496) (23,333)
------------ ------------
Profit before income tax and minority interest 2,761,702 216,036
Income tax (Note 14) (500,732) (164,174)
------------ ------------
Profit before minority interest 2,260,970 51,862
Minority interest (164,827) 12,082
------------ ------------
Profit for the year $ 2,096,143 $ 63,944
============ ============
Earnings per share - basic and diluted $ 0.10 $ 0.00
============ ============
Weighted average common shares outstanding -
basic and diluted 21,636,614 16,600,060
============ ============
See accompanying notes to consolidated financial statements.
F-4
Sunrise Real Estate Development Group, Inc.
Consolidated Statements of Stockholders' Equity
(Expressed in US Dollars)
Common Stock
------------------------
Accumulated Retained
Number Additional other earnings/ Total
of share paid-in Statutory comprehensive (accumulated stockholders'
issued Amount capital reserve income losses) equity
----------- ----------- ----------- ----------- ------------- ----------- -----------
Balance, December 31, 2003 15,000,000 $ 150,000 $ 200,000 $ 143,163 -- $ 498,250 $ 991,413
Issuance of common stock in --
respect of reverse acquisition 6,636,614 66,366 33,844 -- 100,210
-----------
Recapitalization of LRY --
-- -- 2,000,000 -- -- 2,000,000
Profit for the year --
-- -- -- -- 63,944 63,944
Transfer between reserves -- -- -- 31,841 -- (31,841) --
----------- ----------- ----------- ----------- ------------- ----------- -----------
Balance, December 31, 2004 21,636,614 $ 216,366 $ 2,233,844 $ 175,004 -- $ 530,353 $ 3,155,567
Profit for the year -- -- -- -- -- 2,096,143 2,096,143
Transfer between reserves -- -- -- 66,660 -- (66,660) --
Translation of foreign
operations -- -- -- -- 147,349 -- 147,349
----------- ----------- ----------- ----------- ------------- ----------- -----------
Balance, December 31, 2005 21,636,614 $ 216,366 $ 2,233,844 $ 241,664 $ 147,349 $ 2,559,836 $ 5,399,059
=========== =========== =========== =========== ============= =========== ===========
See accompanying notes to consolidated financial statements.
F-5
Sunrise Real Estate Development Group, Inc.
Consolidated Statements of Cash Flows
Increase/(Decrease) in Cash and Cash Equivalents
(Expressed in US Dollars)
Years Ended December 31,
2005 2004
----------- -----------
Cash flows from operating activities
Net income $ 2,096,143 $ 63,944
Adjustments to reconcile net income to
net cash provided by/(used in) operating activities
Depreciation of plant and equipment 131,072 81,602
Loss on disposal of plant and equipment 13,273 --
Deferred tax credit (142,202) --
Minority interest 164,827 (12,082)
Change in:
Accounts receivable (3,407,046) (1,931,644)
Promissory deposits 126,865 (2,748,747)
Other receivables and deposits 257,248 (256,935)
Accounts payable (122,101) 59,075
Venture deposits -- 972,633
Deferred commission income 948,013 --
Customer deposits -- (22,451)
Other payables and accrued expenses 212,636 1,451,144
Other tax payable 39,678 97,049
Income tax payable 442,173
(60,609)
----------- -----------
Net cash used in operating activities 760,579 (2,307,021)
----------- -----------
Cash flows from investing activities
Acquisition of plant and equipment (69,270) (451,451)
Deposits paid for acquisition of properties (5,799,951) (1,480,036)
Cash increase due to reverse acquisition by CY-SRRE & LRY -- 118,797
Acquisition of interest in subsidiary -- (193,180)
Proceeds from disposal of plant and equipment 4,519 --
Proceeds from disposal of equity interest in subsidiary 39,714 --
----------- -----------
Net cash used in investing activities (5,824,988) (2,005,870)
----------- -----------
Cash flows from financing activities
Bank loan repayment (262,503) --
Bank loans obtained 5,001,125 1,480,036
Proceeds from promissory note 123,962 1,000,000
Recapitalization of LRY -- 2,000,000
Capital contribution from minority interest 12,082 12,082
Dividends paid -- (543,708)
Advances from director 110,249 54,635
----------- -----------
Net cash provided by financing activities 4,984,915 4,003,045
----------- -----------
Effect of exchange rate changes on cash and cash equivalents (34,831) --
----------- -----------
Net decrease in cash and cash equivalents (114,325) (309,846)
Cash and cash equivalents at beginning of year 969,913 1,279,759
----------- -----------
Cash and cash equivalents at end of year $ 855,588 $ 969,913
=========== ===========
F-6
Supplemental disclosure of cash flow information
Cash paid during the period:
Income tax paid 187,809 224,783
Interest paid 188,160 --
Non-cash activities (Note 20)
See accompanying notes to consolidated financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in US Dollars)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Sunrise Real Estate Development Group, Inc. ("CY-SRRE") was established in the
Cayman Islands on April 30, 2004 as a limited liability company. CY-SRRE was
wholly owned by Ace Develop Properties Limited ("Ace Develop"), of which Lin
Chi-Jung, an individual, is the principal and controlling shareholder. Shanghai
Xin Ji Yang Real Estate Consultation Company Limited ("SHXJY") was established
in the People's Republic of China (the "PRC") on August 14, 2001 as a limited
liability company. SHXJY was originally owned by a Taiwanese company, of which
the principal and controlling shareholder was Lin Chi-Jung. On June 8, 2004, all
the fully paid up capital of SHXJY was transferred to CY-SRRE. On June 25, 2004
SHXJY and two individuals established a subsidiary, namely, Suzhou Xin Ji Yang
Real Estate Consultation Company Limited ("SZXJY") in the PRC. SHXJY holds 90%
of equity interest in SZXJY. On December 24, 2004, SHXJY acquired 85% of equity
interest in Beijing Xin Ji Yang Real Estate Consultation Company Limited
("BJXJY"), a PRC company incorporated on April 16, 2003 with limited liability.
On August 9, 2005, SHXJY sold a 10% equity interest in SZXJY to a company owned
by a director of SZXJY, and transferred a 5% equity interest in SZXJY to
CY-SRRE. Following the disposal and the transfer, CY-SRRE effectively holds 80%
equity interest in SZXJY.
LIN RAY YANG Enterprise Ltd. ("LRY") was established in the British Virgin
Islands on November 13, 2003 as a limited liability company. LRY was owned by
Ace Develop, Planet Technology Corporation ("Planet Tech") and Systems &
Technology Corporation ("Systems Tech"). On February 5, 2004, LRY established a
wholly owned subsidiary, Shanghai Shang Yang Real Estate Consultation Company
Limited ("SHSY") in the PRC as a limited liability company. On January 10, 2005,
LRY and a PRC third party established a subsidiary, namely, Suzhou Gao Feng Hui
Property Management Company Limited ("SZGFH") in the PRC. LRY holds 80% of the
equity interest in SZGFH.
SHXJY, SZXJY, BJXJY, SHSY and SZGFH commenced operations in November 2001, June
2004, January 2004, February 2004 and January 2005, respectively. Each of SXJY,
SZXJY, BJXJY, SHSY and SZGFH has been granted a twenty year operation period
from the PRC which can be extended with approvals from relevant PRC authorities.
On August 31, 2004, Sunrise Real Estate Development Group, Inc. ("SRRE"),
CY-SRRE and Lin Chi-Jung, an individual and agent for the beneficial shareholder
of CY-SRRE, i.e., Ace Develop, entered into an exchange agreement under which
SRRE issued 5,000,000 shares of common stock to the beneficial shareholder or
its designees, in exchange for all outstanding capital stock of CY-SRRE. The
transaction was closed on October 5, 2004. Lin Chi-Jung is Chairman of the Board
of Directors of SRRE, the President of CY-SRRE and the principal and controlling
shareholder of Ace Develop.
Also on August 31, 2004, SRRE, LRY and Lin Chi-Jung, an individual and agent for
beneficial shareholders of LRY, i.e., Ace Develop, Planet Tech and Systems Tech,
entered into an exchange agreement under which SRRE issued 10,000,000 shares of
common stock to the beneficial shareholders, or their designees, in exchange for
all outstanding capital stock of LRY. The transaction was closed on October 5,
2004. Lin Chi-Jung is Chairman of the Board of Directors of SRRE, the President
of LRY and the principal and controlling shareholder of Ace Develop. Regarding
the 10,000,000 shares of common stock of SRRE issued in this transaction,
8,500,000 shares were issued to Ace Develop, 750,000 shares were issued to
Planet Tech and 750,000 shares were issued to Systems Tech.
As a result of the acquisition, the former owners of CY-SRRE and LRY hold a
majority interest in the combined entity. Generally accepted accounting
principles require in certain circumstances that a company whose shareholders
retain the majority voting interest in the combined business be treated as the
acquirer for financial reporting purposes. Accordingly, the acquisition has been
accounted for as a "reverse acquisition" arrangement whereby CY-SRRE and LRY are
deemed to have purchased SRRE. However, SRRE remains the legal entity and the
Registrant for Securities and Exchange Commission reporting purposes. The
historical financial statements prior to October 5, 2004 are those of CY-SRRE
and LRY and their subsidiaries. All shares and per share data prior to the
acquisition have been restated to reflect the stock issuance as a
recapitalization of CY-SRRE and LRY.
SRRE was initially incorporated in Texas on October 10, 1996, under the name of
Parallax Entertainment, Inc. ("Parallax"). On December 12, 2003, Parallax
changed its name to Sunrise Real Estate Development Group, Inc.
SRRE and its subsidiaries, namely, CY-SRRE, LRY, SHXJY, SZXJY, BJXJY, SHSY and
SZGFH are collectively referred to as "the Company" hereafter.
F-8
The principal activities of the Company are the provision of property brokerage
services, real estate marketing services, property leasing services and property
management services in the PRC.
NOTE 2 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting and Principles of Consolidation
The consolidated financial statements are prepared in accordance with generally
accepted accounting principals in the United States of America and present the
financial statements of SRRE and its subsidiaries, CY-SRRE, LRY, SHXJY, SZXJY,
BJXJY, SHSY and SZGFH. All inter-company transactions and balances have been
eliminated.
Foreign Currency Translation and Transactions
The functional currency of SRRE, CY-SRRE and LRY is United States Dollars
("US$") and the financial records are maintained and the financial statements
prepared in US$. The functional currency of SHXJY, SZXJY, BJXJY, SHSY and SZGFH
is Renminbi ("RMB") and the financial records are maintained and the financial
statements prepared in RMB.
Foreign currency transactions during the period are translated into each
company's denominated currency at the exchange rates ruling at the transaction
dates. Gain and loss resulting from foreign currency transactions are included
in the consolidated statement of operations. Assets and liabilities denominated
in foreign currencies at the balance sheet date are translated into each
company's denominated currency at period end exchange rates. All exchange
differences are dealt with in the consolidated statements of operations.
The financial statements of the Company's operations based outside of the United
States have been translated into US$ in accordance with SFAS 52. Management has
determined that the functional currency for each of the Company's foreign
operations is its applicable local currency. When translating functional
currency financial statements into US$, year-end exchange rates are applied to
the consolidated balance sheets, while average period rates are applied to
consolidated statements of operations. Translation gains and losses are recorded
in translation reserve as a component of shareholders' equity.
Exchange rate between US$ and RMB had a little fluctuation during the years
presented. The rates ruling as of December 31, 2005 and 2004 are US$1: RMB8.07
and US$1: RMB8.28, respectively.
Plant, Equipment and Depreciation
Plant and equipment are stated at cost. Depreciation is computed using the
straight-line method to allocate the cost of depreciable assets over the
estimated useful lives of the assets as follows:
Estimated Useful Life (in years)
--------------------------------
Furniture and fixtures 5-10
Computer and office equipment 5
Motor vehicles 5
Maintenance, repairs and minor renewals are charged directly to the statement of
operations as incurred. Additions and improvements are capitalized. When assets
are disposed of, the related cost and accumulated depreciation thereon are
removed from the accounts and any resulting gain or loss is included in the
statement of operations.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires the Company's management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Advertising Costs
All advertising costs incurred in the promotion of the Company's real estate
projects are expensed as incurred.
F-9
Revenue Recognition
Agency commission revenue from property brokerage is recognized when the
property developer and the buyer complete a property sales transaction, which is
normally at the time when the property developer receives from the buyer a
portion of the sales proceeds in accordance with the terms of the relevant
property sales agreement, or when we can confirm that the balance of the bank
loan to the buyer has been approved.
Commission revenue from underwriting service is recognized when the property
developer and the buyer complete a property sales transaction, which is normally
at the time when the property developer has confirmed that the predetermined
level of sales proceeds have been received from buyers.
Revenue from marketing consultancy services is recognized when services are
provided to clients.
Net Earnings per Common Share
The Company computes net earnings per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic net earnings
per share is computed by dividing the net earnings available to common
shareholders for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net earnings per
share gives effect to common stock equivalents, however; potential common stock
in the diluted EPS computation is excluded in net loss periods, as their effect
is anti-dilutive.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax liabilities or
assets at the end of each period are determined using the tax rate expected to
be in effect when taxes are actually paid or recovered. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Guarantees
The Company accounts for its liability for its obligations under a guarantee in
accordance with FASB Interpretation No. 45, (FIN45) Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Direct Guarantees of
Indebtedness of Others. FIN 45 requires that guarantors recognize a liability
for certain guarantees at the fair value of the guaranteed obligation at the
inception of the guarantee, even if the likelihood of performance under the
guarantee is remote. The initial recognition and measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002.
NOTE 3 - PROMISSORY DEPOSITS
Promissory deposits represent deposits placed with several property developers
in respect of a number of real estate projects where the Company is appointed
sales agent.
NOTE 4 - AMOUNTS DUE FROM VENTURERS
The Company has entered into co-operation agreements with two venturers, one of
them an independent third party; the other the Company's ex-director, Chang
Shu-Ching, to jointly carry out a property underwriting project for a commercial
building under development in Suzhou, the PRC. According to the agreements, the
Company, Chang Shu-Ching and the other venturer are entitled to share 65%, 10%
and 25% of the net results of the project, respectively.
The balance represents amounts due from venturers to acquire four units of the
commercial building on their own. The balance is unsecured, interest free and
expected to be offset against their shares of results from the project. As of
December 31, 2005, they were not entitled to any sharing in accordance with the
agreements.
F-10
NOTE 5 - OTHER RECEIVABLES AND DEPOSITS
December 31, December 31,
2005 2004
------------ ------------
Other receivables $ 100,807 $ 100,266
Trade deposits -- 190,933
Advances to staff 13,322 21,699
Rental deposits 54,580 49,688
------------ ------------
$ 168,709 $ 362,586
============ ============
NOTE 6 - PLANT AND EQUIPMENT, NET
December 31, December 31,
2005 2004
------------ ------------
Furniture and fixtures $ 57,811 $ 50,924
Computer and office equipment 182,867 143,683
Motor vehicles 532,887 519,645
------------ ------------
773,565 714,252
Less: Accumulated depreciation (242,107) (117,567)
------------ ------------
$ 531,458 $ 596,685
============ ============
NOTE 7 - DEPOSITS FOR ACQUISITION OF PROPERTIES
December 31, December 31,
2005 2004
------------ ------------
Deposits paid for acquisition of properties $ 12,601,596 $ 1,480,036
Less: Deferred commission income from properties acquired (962,221) --
------------ ------------
$ 11,639,375 $ 1,480,036
============ ============
In 2004, the Company entered into sales and purchase agreements to acquire two
floors of a commercial building under development in Suzhou, the PRC, mentioned
in Note 4 above. During 2005, the Company entered into a sales and purchase
agreement to further acquire two floors and six units of the commercial building
at an aggregate consideration of $14,539,762. As of December 31, 2005, deposits
amounting to $12,601,596 have been paid to the property developer. As the
Company acts as that property developer's sole distribution agent and earns
commission income, the corresponding commission income of $962,221 generated
from the properties purchased by the Company was therefore deferred and offset
against the deposits paid. In accordance with the sales and purchase agreements,
the properties under development will be completed on or before April 30, 2006.
The Company decided two floors will be held for sale, one floor will be held for
the Company's own use, and the remaining properties will be held for long-term
investment purpose. Accordingly, deposits of $4,150,476 paid for the properties
available for sale were classified as current assets.
NOTE 8 - GOODWILL
The Company accounted for the acquisition of BJXJY as described in Note 1 in
accordance with SFAS No. 141 "Business Combinations", which resulted in the
recognition of goodwill. Goodwill represents the excess of acquisition cost over
the estimated fair value of the net assets acquired as of December 24, 2004. The
portion of the purchase price allocated to goodwill was $187,783.
No amortization of goodwill was necessary in accordance with SFAS No. 142
"Goodwill and other Intangible Assets".
The Company has tested goodwill for impairment annually during the forth quarter
of each fiscal year using a fair value approach, in accordance with the
provisions of SFAS 142. As of December 31, 2005, the Company completed the
F-11
annual impairment test. Based on the result of the first step of the test, the
Company believes that there was no impairment of goodwill as of December 31,
2005. If an event occurs or circumstances change that would more likely than not
reduce the fair value of the Company below its carrying value, goodwill will be
evaluated for impairment between annual year-end tests.
NOTE 9 - BANK LOANS
Bank loans are guaranteed by the property developer as mentioned in Note 7
above, bear interest at banks' prevailing rates ranging from 5.85% to 6.435% per
annum, and are repayable within five years by monthly installments. The bank
loans will be secured by the properties as mentioned in Note 7 above when the
title of the properties is transferred to the Company.
NOTE 10 - PROMISSORY NOTES PAYABLE
The balance includes two promissory notes of $1,000,000 and $123,962,
respectively. The promissory notes of $1,000,000 and $123,962 bear interest at a
rate of 5% and 10% per annum respectively. The promissory notes are unsecured
and their terms of repayment are not specifically defined.
NOTE 11 - RELATED PARTY
A related party is an entity that can control or significantly influence the
management or operating policies of another entity to the extent one of the
entities may be prevented from pursuing its own interests. A related party may
also be any party the entity deals with that can exercise that control.
Amount due to director
- ----------------------
Prior to April 25, 2005, the amount due to one of the directors was
interest-free. Thereafter, the amount due to this director has borne interest at
a rate of 9.6% per annum. As of December 31, 2005, the balance includes
principal of $159,026 and accrued interest of $10,390 thereon. The principal is
unsecured and will be payable before April 25, 2006.
NOTE 12 - OTHER PAYABLES AND ACCRUED EXPENSES
December 31, December 31,
2005 2004
------------ ------------
Accrued staff commission & bonus $ 1,022,333 $ 1,359,562
Other payables 198,689 261,418
Accrued consulting services fees (Note 21) 693,600 --
------------ ------------
$ 1,914,622 $ 1,620,980
============ ============
NOTE 13 - OTHER TAX PAYABLE
Other tax payable represents PRC business tax which is charged at a rate of 5%
on the revenue from services rendered.
NOTE 14- INCOME TAX
Enterprise Income Tax ("EIT") in the PRC is generally charged at 33% of the
assessable profit. According to the relevant PRC tax rules and regulations,
SHXJY and SHSY are companies registered in Shanghai Pudong Development Zone that
are entitled to a lower EIT rate of 15%, whereas SZXJY, BJXJY and SZGFH are
subject to EIT rate of 33%.
Income tax represents current PRC income tax, which is calculated at the
statutory income tax rate on the assessable income for the years ended December
31, 2005 and 2004.
No provision for United States Income Taxes has been made as the Company has no
assessable profits for 2004 and 2005.
F-12
The provision for income tax consisted of:
Years ended December 31,
2005 2004
---------- ----------
Current PRC corporate income tax $ 642,934 $ 164,174
Deferred tax credit (142,202) --
---------- ----------
$ 500,732 $ 164,174
========== ==========
Reconciliation between the provision for income taxes computed by applying the
statutory tax rate in Mainland China to income before income taxes and the
actual provision for income taxes is as follows:
Years ended December 31,
2005 2004
---------- ----------
Provision for income taxes at statutory tax rate $ 911,363 $ 71,291
Tax concessions (464,774) (94,870)
Permanent difference (20,871) (8,645)
Increase in valuation allowances 75,014 196,398
---------- ----------
Income tax $ 500,732 $ 164,174
========== ==========
The components of deferred tax assets are as follows:
December 31, December 31,
2005 2004
------------ ------------
Net operating loss carried forwards $ 149,041 $ 267,456
Tax effect on deferred commission income (Note 7) 144,333 --
------------ ------------
293,374 267,456
Less: Valuation allowances (149,041) (267,456)
------------ ------------
Deferred tax assets $ 144,333 $ --
============ ============
NOTE 15- COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
During the years ended December 31, 2005 and 2004, the Company incurred lease
expenses amounting to $358,914 and $342,067, respectively. As of December 31,
2005, the Company had commitments under operating leases, requiring annual
minimum rentals as follows:
2005 2004
---------- ----------
Within one year $ 183,816 $ 230,703
Two to five years 46,169 55,572
---------- ----------
Operating lease commitments $ 229,985 $ 286,275
========== ==========
In order to distribute all the properties of the property underwriting project
mentioned in Note 4 above, during the year, the Company launched a promotional
package by entering into leasing agreements with certain buyers to lease the
properties from them. In accordance with the leasing agreements, the owners of
the properties can enjoy an annual rental return at 8.5% and 8.8% per annum for
a period of 5 years and 8 years, respectively. The leasing period would start 45
days after the titles of the relevant properties are passed to the buyers. The
Company would then sublease the leased properties to earn rental income. As of
March15, 2006, no sub-leasing agreements have been signed.
As of December 31, 2005, the lease commitments under the above promotional
package are as follows:
2005
-----------
Within one year $ 1,630,983
Two to five years 9,210,256
Over five years 4,216,715
-----------
Operating lease commitments arising from the promotional package $15,057,954
===========
F-13
According to the leasing agreements, the Company has an option to terminate any
agreement by paying a predetermined compensation. As of December 31, 2005, the
compensation to terminate all leasing agreements is approximately $3 million. As
of December 31, 2005, the management of the Company considers that no provision
should be made for the Company's obligations under the foregoing guarantees.
Capital Commitments
As of December 31, the Company had capital commitments for the acquisition of
properties mentioned in Note 7 above as follows:
2005 2004
---------- ----------
Commitments for the acquisition of properties $4,975,112 $1,480,036
========== ==========
On January 5, 2006, the Company obtained a bank loan of $1,239,618 to pay the
property developer. The remaining balance of $3,735,494 will be payable before
the completion of these properties. In accordance with the sales and purchase
agreements, the properties under development will be completed on or before
April 30, 2006.
As of December 31, 2005, the Company had capital commitments for the acquisition
of 20% of the equity interest of SZGFH as follows:
2005
----------
Commitments for the acquisition of the equity interest $ 12,396
==========
Following the acquisition, the Company will effectively hold 100% equity
interest in SZGFH.
Other commitments
One of the buyers of the properties of the property underwriting project
mentioned above appointed the Company as an agent to sell the properties held by
him. In accordance with this agreement with the buyer, the Company must sell the
said properties on or before November 30, 2006; otherwise, the Company has to
acquire the properties at a consideration of $4,334,426 or pay compensation of
$1,020,700 to the buyer.
NOTE 16 - STATUTORY RESERVE
According to the relevant corporation laws in the PRC, a PRC company is required
to transfer a least 10% of its profit after taxes, as determined under
accounting principles generally accepted in the PRC, to the statutory reserve
until the balance reaches 50% of its registered capital. The statutory reserve
can be used to make good on losses or to increase the capital of the relevant
company.
NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME
As of December 31, 2005, the only component of accumulated other comprehensive
income was translation reserve.
NOTE 18 - CONCENTRATION OF CUSTOMERS
During the years ended December 31, 2005 and 2004, the following customers
accounted for more than 10% of total net revenue:
F-14
Percentage of Net Revenue for Percentage of Accounts Receivable
the years ended December 31, as at December 31,
2005 2004 2005 2004
Customer A 40% * * *
Customer B 10% * * *
Customer C * 30% * 85%
Customer D * 10% * *
* less than 10%
NOTE 19- PRO-FORMA INFORMATION
The following table reflects the results of operations on a pro-forma basis as
if the acquisition of BJXJY had occurred at the beginning of the year shown.
Year ended
December 31,
2004
(Unaudited)
------------
Net revenue $ 7,723,641
============
Net loss $ (99,234)
============
Loss per share - basis and diluted $ (0.01)
============
The pro-forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been consummated
as of the dates indicated, nor are they necessarily indicative of the future
operating results.
F-15
NOTE 20- NON-CASH ACTIVITIES
During the year, the Company and venturers mentioned in Note 4 above
respectively acquired certain properties of the property underwriting project
mentioned in Note 4 above. Deposits for the acquisition of properties and
venture deposits payable were settled by the accounts and promissory deposits
receivable from the property developer from whom the properties were acquired.
After the transactions, the venturers owed the Company $799,283 representing the
deposits settled on their behalf. The non-cash financial information is as
follows:
Year ended December
31, 2005
Deposits for acquisition of properties $ 5,002,630
Venture deposits payable 972,633
Amounts due from venturers 799,283
-------------------
$ 6,774,546
===================
Satisfied by:
Accounts receivable $ 4,358,066
Promissory deposits 2,416,480
-------------------
$ 6,774,546
===================
NOTE 21 - SUBSEQUENT EVENTS
On January 5, 2006, the Company obtained a 5-year bank loan of $1,239,618 that
bears interest at the bank's prevailing rate, which is currently at 5.85% per
annum, to settle the part of the capital commitment for the acquisition of the
properties mentioned in Note 7 above. The bank loan is repayable in monthly
installments and will mature in January 2011. The bank loan is guaranteed by the
developer as mentioned in Note 7 above and will be secured by the properties as
mentioned in Note 7 above when the title of the properties is transferred to the
Company.
On January 15, 2006, the Board of Directors of the Company approved the issue of
1,030,000 shares and 330,000 shares to Marco Partners Limited and Chiang Hui
Hsiung, a former director of the Company, respectively, for their consulting
services rendered to the Company in 2005. Accrued consulting services fees of
$693,600 have been made and disclosed in Note 12.
F-16