Filed Pursuant to Rule 424(b)(2)
Registration No. 333-10746
PROSPECTUS
NEW CHINA HOMES, LTD.
2,000,000 COMMON SHARES
2,000,000 REDEEMABLE COMMON
SHARE PURCHASE WARRANTS
----------------
This is our initial public offering of common shares and redeemable common
share purchase warrants. We are offering 2,000,000 common shares and 2,000,000
warrants.
You may purchase the common shares and warrants separately and transfer
them separately at any time. Each warrant entitles the registered holder to
purchase through March 8, 2005, one common share at a price of $5.75 per share,
subject to adjustment under certain circumstances. We may redeem the warrants
at a redemption price of $.25 per warrant. Before the first anniversary of the
date of this prospectus, the warrants may not be redeemed by us without the
written consent of Barron Chase Securities, Inc., our managing underwriter.
Our common shares and warrants have been approved for listing on the
Nasdaq National Market under the symbols "NEWC" and "NEWCW."
INVESTING IN OUR COMMON SHARES AND WARRANTS INVOLVES RISKS.
FOR A DESCRIPTION OF THESE RISKS, SEE PAGES 14 THROUGH 25.
================================================================================
PER SHARE PER WARRANT TOTAL
- --------------------------------------------------------------------------------
Public Offering Price ......... $ 5.00 $ 0.125 $10,250,000
- --------------------------------------------------------------------------------
Underwriting Discount ......... $ .50 $ 0.0125 $ 1,025,000
- --------------------------------------------------------------------------------
Proceeds to New China Homes
before expenses .............. $ 4.50 $ 0.1125 $ 9,225,000
================================================================================
We have granted the underwriters a 45-day option to purchase up to 300,000
additional common shares and warrants on the same terms and conditions as set
forth above solely to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
It is expected that delivery of the certificates representing the common
shares and the warrants will be made at the offices of Barron Chase Securities,
Inc. on or about March 15, 2000.
[BARRON CHASE SECURITIES LOGO]
The date of this Prospectus is March 8, 2000
<PAGE>
[Map of China indicating its major cities] [Graphic of the original master site
plan for California Gardens with the New China Homes, Ltd. Logo]
"Some of China's largest and fastest growing cities are moving towards suburban
living." "The original master site plan for California Gardens, a suburban
development in Northwestern Shanghai."
"New China Homes" and the New China Homes logo are our service marks for
which registration has been applied. All other service marks, trademarks or
trade names appearing in this prospectus are the property of their respective
owners.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES AND
WARRANTS OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS,
SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
[Pictures of the homes in the California Gardens development. Pictures of a
tennis court, a carport area and the on-site High School within California
Gardens. A picture of the California Gardens entrance pavilion and security
area.]
"Some of the homes and the main entrance for our California Gardens project, a
350 acre planned residential community in Northwest Shanghai."
"Top Row: Three views of the California Gardens suburban community. Middle Row:
Tennis court, carport areas, and the on-site High School. Left: California
Gardens entrance pavilion and security area."
<PAGE>
TABLE OF CONTENTS
PAGE
----
Prospectus Summary ...................................................... 4
Risk Factors ............................................................ 14
Use of Proceeds ......................................................... 26
Dividend Policy ......................................................... 26
Capitalization .......................................................... 27
Dilution ................................................................ 28
Selected Financial and Operating Data ................................... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 34
Overview of the Legal Framework Regulating China's Real Estate Market ... 42
Overview of China's Economy ............................................. 49
China's Real Estate Market .............................................. 57
About Our Company ....................................................... 61
Taxation ................................................................ 70
Management .............................................................. 76
Certain Transactions .................................................... 83
Security Ownership of Beneficial Owners and Management .................. 84
Description of Securities ............................................... 85
Enforceability of Civil Liabilities and Certain Foreign Issuer
Considerations ....................................................... 91
Shares Eligible for Future Sale ......................................... 93
Underwriting ............................................................ 94
Experts ................................................................. 97
Legal Matters ........................................................... 97
Where You Can Find More Information ..................................... 97
Index to Consolidated Financial Statements .............................. F-1
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS MATERIAL ASPECTS OF OUR BUSINESS AND THIS
OFFERING, BUT YOU SHOULD READ THE ENTIRE PROSPECTUS BEFORE DECIDING TO PURCHASE
OUR COMMON SHARES OR WARRANTS. UNLESS OTHERWISE NOTED, THE INFORMATION IN THIS
PROSPECTUS ASSUMES THAT THE UNDERWRITERS WILL NOT EXERCISE THEIR OVER-ALLOTMENT
OPTION AND GIVES EFFECT TO A 999-FOR-ONE STOCK SPLIT EFFECTED IN AUGUST 1999.
ALL REFERENCES IN THIS PROSPECTUS TO "NEW CHINA HOMES," THE "COMPANY" OR "WE,"
"OUR" OR "US" REFER TO NEW CHINA HOMES, LTD. YOU SHOULD CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER THE HEADING "RISK FACTORS" ON PAGE 14.
THE CHANGING HOUSING MARKET IN CHINA
Private land ownership in China was abolished in the 1950s and was
replaced by a centrally planned and managed land resources allocation system,
which legally prohibited the transfer or lease of land in China. With the
Chinese economy moving towards a more liberalized market-oriented system,
reforms have been introduced in China's property sector. Under land reform
legislation, while the transfer of land ownership is still restricted, "land
use rights" may be granted, transferred, leased or mortgaged in accordance with
stipulated legal procedures and requirements. Upon becoming the Premier of
China in March 1998, Zhu Rongji renewed efforts for structural economic reform
by announcing, among other initiatives, a new housing reform program. The
principal policies of this new housing initiative are as follows:
/bullet/ Establishing a new urban housing system adapted to the
"socialist market economic system" and the specific national
situation of China;
/bullet/ Creating a multi-level housing supply system;
/bullet/ Expanding the scope of home financing; and
/bullet/ Improving the regulation of the housing market.
OUR COMPANY
New China Homes is a holding company which presently conducts business
through its 98.2%-owned subsidiary, Shanghai Chingchu Property Development Co.,
Ltd. Shanghai Chingchu was founded in 1997 to become a leading developer of
large, planned residential communities in China's rapidly emerging private home
building market. Through Shanghai Chingchu, we design, develop, construct,
market and sell spacious, high-quality, affordable homes in planned residential
communities, which are targeted at Chinese middle income families. We target
development sites which are within commuting distance to China's principal
population centers.
OUR CALIFORNIA GARDENS PROJECT
In May 1997, Shanghai Chingchu began construction of our first planned
residential community, called CALIFORNIA GARDENS. CALIFORNIA GARDENS is located
on a 350-acre site just inside the northwestern corner of the outer ring road
surrounding the city of Shanghai. When completed, CALIFORNIA GARDENS will
feature the following:
/bullet/ A projected 4,485 townhouses (configured in rows of 6-13
contiguous homes) and 1,280 apartments, representing a total of
approximately 10 million square feet;
/bullet/ Townhouses which provide average floor space of approximately
1,600 square feet, and feature front yards (convertible to carports)
and back yards. The apartments will provide an average floor space of
approximately 1,000 square feet and will have available parking
facilities;
4
<PAGE>
/bullet/ Close proximity to one of Shanghai's main motor transportation
arteries, which is located within eight miles of the city center; and
/bullet/ A wide range of amenities, making CALIFORNIA GARDENS a full
service residential community. These amenities include the following:
/bullet/ kindergartens, primary and high schools;
/bullet/ full sports facilities, including swimming pools and a "pitch
and putt" golf area;
/bullet/ a meeting and conference facility;
/bullet/ a 24-hour medical clinic;
/bullet/ an on-site motel; and
/bullet/ retail shopping, restaurants and a country club.
As of September 30, 1999 Shanghai Chingchu had completed the
construction of, and delivered to its customers, 1,110 homes. Shanghai Chingchu
is developing and marketing the homes at CALIFORNIA GARDENS in five phases
consisting of a specified number of homes. Phase 1 consists of 365 homes. Each
home in Phase 1 has been sold. The construction of Phase 2, consisting of a
total of 752 homes which are being offered in two-subdivisions, was completed
in June 1999, and as of September 1999, Shanghai Chingchu has delivered 745
homes in that Phase. Phase 2A will consist of 74 semi-detached home units.
Phase 2A is currently in its initial planning stage. Phase 3, consisting of 416
homes under construction, was completed at the end of 1999. Phase 4, consisting
of a total of 1,070 homes which are being offered in two sub-divisions, is
currently accepting deposits, or "booking fees." Construction of homes in the
first sub-division of Phase 4 is scheduled to commence in late January 2000,
and construction of homes in the second sub-division of Phase 4 is scheduled to
commence in June 2000. Shanghai Chingchu presently has land use rights only for
Phases 1, 2, 2A, 3 and one of the sub-divisions of Phase 4. The remaining homes
at CALIFORNIA GARDENS are in different stages of planning and pre-development
processing. Shanghai Chingchu anticipates that its development will be
completed in 2003.
PROPERTY MANAGEMENT SERVICE FEES
We may provide management services to each homeowner of CALIFORNIA
GARDENS for a monthly general maintenance service fee. These services would
include garbage collection, security, maintenance services, bus transportation
to and between mass transit locations and landscaping. These services are
currently provided to CALIFORNIA GARDENS residents by an unrelated company at
an average monthly fee of US$ 24 per unit. These fees are likely to increase
over time, subject to prior regulatory approval.
The monthly maintenance service fee does not cover the costs of major
repairs, which may include significant work required to repair or replace a
roof or facade. A one-year warranty is provided to the residents of CALIFORNIA
GARDENS to cover the costs of these major repairs. Residents of CALIFORNIA
GARDENS must also contribute an average of US$ 430 per home to a sinking fund
prior to taking occupancy of their homes. We anticipate that the sinking fund
will be adequate to cover the costs of these major repairs. To the extent that
repair costs exceed the amount within the sinking fund during the warranty
period, it will be our obligation to pay for the necessary repairs. It will
become the responsibility of the CALIFORNIA GARDENS Residents Association to
seek further payment from unit owners for major repairs to the extent that the
cost of any major repair exceeds the amount in the sinking fund and following
the expiration of the warranty period.
5
<PAGE>
OUR BUSINESS STRATEGY
Our objective is to complete the development and sale of homes at the
CALIFORNIA GARDENS project and to develop and market similar residential
communities in other principal cities in China. Key elements of our business
strategy include:
/bullet/ focusing on key urban markets in China for the development of
affordable residential communities;
/bullet/ targeting the emerging Chinese middle-income class as home
buyers;
/bullet/ providing substantial benefits to home buyers;
/bullet/ continuing our commitment to quality leadership; and
/bullet/ entering markets early.
OUR CORPORATE BACKGROUND, STRUCTURE AND CONTROLLING SHAREHOLDER
All of our present operations in China are conducted through Shanghai
Chingchu, our 98.2% indirect subsidiary. Shanghai Chingchu is organized as a
Sino-foreign equity joint venture, and is subject to various Chinese foreign
investment enterprise laws, regulations and taxes, and to legal and contractual
obligations relating to the payment of dividends and management fees, while New
China Homes, in its capacity as the holding company of Shanghai Chingchu, is
not subject to these requirements. For instance, under Chinese law, Shanghai
Chingchu must establish a reserve fund, a bonus and welfare fund for staff and
workers and an enterprise development fund to which it is required to
contribute a portion of its after-tax profits before distributing any dividends
to shareholders.
Our principal shareholder is Far East Consortium International Limited,
a Cayman Islands company whose shares have been publicly-traded and listed on
the Hong Kong Stock Exchange since 1971. Far East Consortium has holdings in
real estate development projects, hotels, manufacturing companies and other
companies engaged in property development and management business throughout
Southeast Asia, China, Australia and North America. To date, all funding for
our business activities has been provided by Far East Consortium. After this
offering, Far East Consortium will continue to own approximately 77% of our
outstanding common shares and will continue to file reports in Hong Kong under
the rules of the Hong Kong Stock Exchange that include information relating to
New China Homes, including financial statements prepared in accordance with
accounting principles generally accepted in Hong Kong that consolidate the
financial results of New China Homes, so long as it has a controlling interest
in New China Homes.
CONTACT INFORMATION
Principal Executive Offices: Offices in the United States:
16/F Far East Consortium Building 44 East 67th Street
121 Des Voeux Road New York, New York 10021
Central, Hong Kong
Telephone number: (852) 2850-0600 Telephone number: (212) 535-2592
6
<PAGE>
EXCHANGE RATES
We have prepared our financial statements in accordance with Hong Kong
GAAP and published such statements in Hong Kong dollars. All references to
"HK$" are to Hong Kong dollars. All references to "U.S. dollars," "dollars,"
"US$" or "$" are to United States dollars. For your convenience, conversion of
amounts from Hong Kong dollars into United States dollars has been made at the
unified exchange rate of US$ 1.00 = HK$ 7.7679, the noon buying rate in New
York City for cable transfers in Hong Kong dollars as certified for customs
purposes by the Federal Reserve Bank in New York on September 30, 1999.
On consolidation, the financial statements of our joint venture
subsidiary in China are translated from Renminbi which we sometimes refer to as
"RMB", being its functional currency, into Hong Kong dollars. The translation
of Hong Kong dollar amounts into United States dollars within the consolidated
financial statements are for convenience only and have been made at a rate of
HK$ 7.75 to US$ 1.00. Such translations should not be construed as
representations that the Hong Kong dollar amounts could be converted into
United States dollars, at that rate or any other rate. The following table
indicates the relevant exchange rates between one Renminbi, one Hong Kong
Dollar and one United States dollar for the periods indicated:
RENMINBI HONG KONG DOLLAR
AVERAGE NOON AVERAGE NOON
BUYING RATE(1)(2) BUYING RATE(1)(2)
------------------- ------------------
FISCAL YEAR
1997 ................................ 8.3193 7.7431
1998 ................................ 8.3008 7.7467
1999 (through September 30, 1999) ... 8.2774 7.7665
PERIOD ENDING
September 30, 1998 .................. 8.3055 7.7480
September 30, 1999 .................. 8.2774 7.7665
- ----------------
(1) The noon buying rate in New York for cable transfers payable in foreign
currencies for customs purposes by the Federal Reserve Bank of New York.
(2) Determined by averaging the rates on the last business day of each month
during the relevant period.
On March 7, 2000, the noon buying rate for cable transfers as certified
for customs purposes by the Federal Reserve Bank in New York was one United
States dollar equals 7.7840 Hong Kong dollars or 8.2784 Renminbi.
7
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered ................ 2,000,000 common shares at US$ 5.00 per share and warrants
to purchase 2,000,000 common shares at US$ 0.125 per
warrant. You may purchase the common shares and warrants
separately and transfer them separately at any time. Each
warrant entitles the registered holder to purchase, at any time
through March 8, 2005 one common share at a price of US$
5.75 per share, subject to adjustment under certain
circumstances. The warrants are not exercisable unless, at the
time of exercise, we have a current prospectus under the
Securities Act covering the common shares issuable upon
exercise of the warrants and these common shares have been
registered, qualified or are exempt under applicable state
securities laws. We are required to maintain an effective
registration statement covering the common shares underlying
the warrants before we can redeem the warrants. Before the
first anniversary of the date of this prospectus, we may not
redeem the warrants without the written consent of the
underwriter. See "Description of Securities" on page 85 and
"Underwriting" on page 94.
Common shares to be outstanding
after the offering ............... 12,400,000 common shares.
Cancellation of pre-offering common
shares if we do not earn specified All of the existing shareholders of the Company have agreed
net income ....................... with us that:
/bullet/ 25% of their common shares will be canceled if our net
income is less than US$ 10 million in the one-year
period commencing on the first day of the month
following the closing of this offering; and
/bullet/ 25% of their common shares will be canceled if our
net income is less than US$ 20 million in the following
one-year period.
Use of proceeds ................... We estimate that we will receive net proceeds before
expenses from this offering of US$ 9,225,000, and US$
10,608,750 if the managing underwriter exercises its over-
allotment option in full. We will use the proceeds from this
offering for working capital and general corporate purposes,
including the completion of additional phases of the
CALIFORNIA GARDENS project and for future development of
residential communities in China. See "Use of Proceeds" on
page 26.
Nasdaq National Market Symbols
Common shares ................... NEWC
Warrants ........................ NEWCW
</TABLE>
8
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
We have prepared our financial statements in accordance with accounting
principles generally accepted in Hong Kong ("Hong Kong GAAP"), which differ in
certain significant respects from U.S. generally accepted accounting principles
("US GAAP"). We describe these differences in note 16 of notes to our
consolidated financial statements included in this prospectus. The following
summary financial and operating data summarizes financial and certain operating
data for our business for the periods indicated. We derived the summary
statement of operations data for the fiscal years ended March 31, 1997, 1998
and 1999 and the summary balance sheet data as of March 31, 1998 and 1999
presented below from our consolidated financial statements included in this
prospectus. We derived the summary statement of operations data for the fiscal
years ended March 31, 1995 and 1996 and for the six months ended September 30,
1998 and 1999, and the summary balance sheet data as of September 30, 1998 and
1999 presented below from our unaudited consolidated financial statements which
were prepared on the same basis as our audited consolidated financial
statements, and include all adjustments which we believe are necessary to
present fairly the data for such periods. Results for the six months ended
September 30, 1999 are not necessarily indicative of the results to be expected
for the full fiscal year ending March 31, 2000. You should read the summary
financial and operating data presented below together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes thereto included elsewhere in
this prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
----------- ----------- ------------ --------------- --------------- --------------
HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Operating revenues ......................... -- -- -- 74,197,884 270,830,228 34,945,836
====== ===== ======= ========== =========== ==========
Operating (loss) income before interest
and income taxes .......................... (8,939) (8,985) (10,609) (3,360,594) 48,666,153 6,279,504
Interest expenses .......................... -- -- -- 1,451,955 6,306,527 813,746
------ ------ ------- ---------- ----------- ----------
(Loss) income before income taxes .......... (8,939) (8,985) (10,609) (4,812,549) 42,359,626 5,465,758
Income taxes ............................... -- -- -- (1,131,674) 15,706,408 2,026,633
------ ------ ------- ---------- ----------- ----------
(Loss) income before minority interests..... (8,939) (8,985) (10,609) (3,680,875) 26,653,218 3,439,125
Minority interests ......................... -- -- -- (41,358) 570,569 73,622
------ ------ ------- ---------- ----------- ----------
Net (loss) Income .......................... (8,939) (8,985) (10,609) (3,639,517) 26,082,649 3,365,503
====== ====== ======= ========== =========== ==========
(Loss) earnings per share .................. (8.94) (8.99) (10.61) (3,639.52) 26,082.65 3,365.50
====== ====== ======= ========== ============ ===========
Weighted average number of shares
outstanding (See note (1)) ................ 1,000 1,000 1,000 1,000 1,000 1,000
====== ====== ======= ========== ============ ===========
Amounts in accordance with US GAAP
Operating revenues ......................... -- -- -- 74,197,884 270,830,228 34,945,836
====== ====== ======= ========== ============ ===========
Operating (loss) income before
income taxes .............................. (8,939) (8,985) (10,609) (5,718,280) 40,915,526 5,279,423
====== ====== ======= ========== ============ ===========
Net (loss) income .......................... (8,939) (8,985) (10,609) (4,246,356) 24,571,592 3,170,528
====== ====== ======= ========== ============ ===========
(Loss) earnings per share .................. (8.94) (8.99) (10.61) (4,246.36) 24,571.59 3,170.53
====== ====== ======= ========== ============ ===========
Weighted average number of shares
outstanding (See note (1)) ................ 1,000 1,000 1,000 1,000 1,000 1,000
====== ====== ======= ========== ============ ===========
Pro Forma (loss) earnings per share ......... N/A N/A N/A N/A 2.36 0.30
====== ====== ======= ========== ============ ===========
Pro Forma number of shares .................. N/A N/A N/A N/A 10,400,000 10,400,000
====== ====== ======= ========== ============ ===========
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------------------------------
1998 1999 1999
--------------- --------------- --------------
HK$ HK$ US$
<S> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Operating revenues ......................... 102,297,739 115,946,294 14,960,812
=========== =========== ==========
Operating (loss) income before interest
and income taxes .......................... 14,162,354 17,024,774 2,196,745
Interest expenses .......................... 1,962,622 1,799,258 232,162
----------- ----------- ----------
(Loss) income before income taxes .......... 12,199,732 15,225,516 1,964,583
Income taxes ............................... 4,553,762 5,708,190 736,541
----------- ----------- ----------
(Loss) income before minority interests..... 7,645,970 9,517,326 1,228,042
Minority interests ......................... 162,990 208,608 26,917
----------- ----------- ----------
Net (loss) Income .......................... 7,482,980 9,308,718 1,201,125
=========== =========== ==========
(Loss) earnings per share .................. 7,482.98 0.90 0.12
============ ============ ===========
Weighted average number of shares
outstanding (See note (1)) ................ 1,000 10,400,000 10,400,000
============ ============ ===========
Amounts in accordance with US GAAP
Operating revenues ......................... 102,297,739 115,946,294 14,960,812
============ ============ ===========
Operating (loss) income before
income taxes .............................. 12,300,168 10,661,830 1,375,721
============ ============ ===========
Net (loss) income .......................... 7,550,272 4,711,220 607,900
============ ============ ===========
(Loss) earnings per share .................. 7,550.27 0.45 0.06
============ ============ ===========
Weighted average number of shares
outstanding (See note (1)) ................ 1,000 10,400,000 10,400,000
============ ============ ===========
Pro Forma (loss) earnings per share ......... N/A N/A N/A
============ ============ ===========
Pro Forma number of shares .................. N/A N/A N/A
============ ============ ===========
</TABLE>
No dividends have been paid during the periods indicated above.
9
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------------------------
1998 1999 1999
--------------- ------------- ------------
HK$ HK$ US$
<S> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Total assets .............................. 127,186,261 222,204,385 28,671,533
Total shareholders' equity (deficit) ...... (3,112,250) 23,042,477 2,973,223
Amounts in accordance with US GAAP
Total assets .............................. 126,578,854 221,500,707 28,580,736
Total shareholders' equity (deficit)
(See note 4) ............................. (3,719,657) 22,271,842 2,873,786
<CAPTION>
PRO FORMA AS ADJUSTED
AS OF SEPTEMBER 30, (SEE NOTES (2) TO (4))
-------------------------- -------------------------
1999 1999 1999 1999
------------- ------------ ------------- -----------
HK$ US$ HK$ US$
<S> <C> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Total assets .............................. 250,863,477 32,369,480 310,150,977 40,019,481
Total shareholders' equity (deficit) ...... 112,943,445 14,573,348 172,230,945 22,223,348
Amounts in accordance with US GAAP
Total assets .............................. 244,772,677 31,583,571 304,060,177 39,233,571
Total shareholders' equity (deficit)
(See note 4) ............................. 106,818,833 13,783,076 166,106,333 21,433,075
</TABLE>
- ----------------
(1) Adjusted to give effect to a 999-for-one stock split effected in August
1999.
(2) Adjusted to give effect to the net proceeds from the sale of 2,000,000
common shares and 2,000,000 warrants in this offering after deducting the
underwriting discounts and commissions and estimated offering expenses.
The estimated net proceeds are assumed to be included in cash balances.
(3) We have assumed that there has been no exercise of the warrants offered
hereby, the over-allotment option, the underwriter warrants or stock
options outstanding.
(4) The US GAAP pro forma as adjusted stockholders' equity amount at September
30, 1999 includes deferred compensation expense of US$ 2,125,000,
representing US$ 850,000 of future consulting services to be provided by
the consultants and US$ 1,275,000 of additional compensation arising from
the fair value of the common stock, valued by the directors at US$ 2.50
per share, issued to the consultants on April 2, 1999. This amount will be
expensed commencing the first quarter of fiscal 2000.
(5) As of September 30, 1998 and September 30, 1999, Shanghai Chingchu had a
total of HK$ 123.5 million and HK$ 82.9 million, respectively, of
outstanding mortgage loans subject to performance guarantees. Shanghai
Chingchu has agreed to secure the obligations of CALIFORNIA GARDENS home
purchasers to make repayment to the mortgagees of their homes. The
performance guarantees provide that upon default by a home purchaser of
its obligation to repay the mortgage installments for three consecutive
months, the relevant mortgage bank may require Shanghai Chingchu to pay
the outstanding mortgage principal, together with accrued interest,
subject to transferring all its rights and interests in the mortgaged
property to Shanghai Chingchu. As of September 30, 1999, Shanghai Chingchu
has not been required to make any payment under these performance
guarantees.
KEY OPERATING DATA:
The following tables set forth key operating data for the Company as of
September 30, 1999:
a) Revenue recognized for the sale of homes in CALIFORNIA GARDENS:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30,
--------------------------- ----------------------
1998 1999 1998 1999
---------- ------------ ---------- ---------
(IN HK$ MILLIONS)
<S> <C> <C> <C> <C>
Phase 1 .......... 73.92 35.26 31.95 0.23
Phase 2 .......... -- 234.66 69.83 22.71
Phase 2A ......... -- -- -- --
Phase 3 .......... -- -- -- 92.68
Phase 4 .......... -- -- -- --
----- ------ ------ ------
73.92 269.92 101.78 115.62
===== ====== ====== ======
</TABLE>
Under Hong Kong GAAP, we recognize revenue from the sale of homes on a
percentage of completion basis. The tables below, however, provide information
based upon the purchase price of units for which a sales purchase agreement has
been executed and we have received at least 90% of the purchase price, plus the
amount of deposits, or booking fees, received by us for units which have not
been purchased.
10
<PAGE>
a) Total revenue:
NUMBER OF UNITS TOTAL SALES VALUE
HK$'000
Purchased 1,444 493,206
Booked 572 214,559
Total 2,016 707,765
b) During the six months ended September 30, 1999, the Company received a
total of HK$ 10.5 million in booking fees while no booking fees were owed
to us by home buyers during that period. As of September 30, 1999, the
average booking fee taken by the Company was HK$ 18,700. As of September
30, 1999, the average unit price of HK$ 341,000 for homes sold is
comprised of a HK$ 18,700 booking fee and HK$ 322,300 for the balance of
the home price.
/bullet/ Booking fees are the refundable deposits from potential home buyers
which reserve a person's right to purchase a home at a later date
until the Company has started construction and secured the requisite
pre-sales permits from the relevant land administration bureau. The
term "sold" refers to the signing of a sales and purchase agreement
and the receipt of 90% of all sales proceeds.
c) When a home buyer has paid 30% of the total purchase price (inclusive of
the booking fee), the home buyer is eligible to sign a pre-sales
agreement. When signing a pre-sales agreement, a home buyer must specify
the method of paying the remaining 70%, which generally can be made
through one or more of the following options:
1. Mortgage;
2. Public housing fund;
3. A mixture of mortgage and public housing fund; or
4. Installment.
For settlement methods one, two or three, the balance of the purchase
price is required to be paid within two months from the date of signing
the pre-sales agreement. If a home buyer elects to pay the balance of the
purchase price in installments, 90% of the purchase price is required to
be paid within two months from the date of signing the pre-sales
agreement and the remaining 10% is required to be paid on delivery of the
home unit.
Regardless of the method of settlement selected, at least 90% of the
total purchase consideration is required to be settled within 2 months
from the date of signing the pre-sales agreements. It is at the date of
signing the pre-sales agreement that a home unit is considered to be
"purchased" by a home buyer because a condition of sales under the
percentage of completion method is established. Revenue will therefore be
recognized in accordance with the percentage of completion method of
accounting.
11
<PAGE>
The following table sets forth information as to the timing of payment of
the purchase price balance by home buyers who have paid a booking fee:
A --represents: the home buyers who made timely payment of 90% of the
purchase price, i.e. within 2 months from the date of signing the
pre-sales agreement.
B --represents: the home buyers who were late in paying 90% of the purchase
price, but paid the 90% of the purchase price as at September 30, 1999.
C --represents: the home buyers who are currently late in their payment of
90% of the purchase price, but have paid a portion of the amount due,
the booking fee excepted.
D --represents: the home buyers whose purchase price balance is not
currently due.
<TABLE>
<CAPTION>
PHASE 1 PHASE 2 PHASE 3 TOTAL
------------------------- ------------------------ ------------------------ -----------------------
NUMBER NUMBER NUMBER NUMBER
CATEGORY OF UNITS PERCENTAGE OF UNITS PERCENTAGE OF UNITS PERCENTAGE OF UNITS PERCENTAGE
- -------- ----------- ------------ ---------- ------------ ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A 75 20.55% 203 27.25% 72 21.56% 350 24.24%
B 278 76.16% 495 66.44% 107 32.04% 880 60.94%
C 12 3.29% 33 4.43% 92 27.54% 137 9.49%
D -- 0.00% 14 1.88% 63 18.86% 77 5.33%
Total 365 100.00% 745 100.00% 334 100.00% 1,444 100.00%
</TABLE>
Delays may be caused for the following reasons:
1. Mortgages are new financial products in China and bankers who provide
such facilities to new home buyers are unfamiliar with the procedure.
2. The Public Housing Fund does not have sufficient money to fund the
borrowing because of the high demand.
3. The delay was caused by home buyers' personal reasons.
d) Status of payment for homes purchased as at September 30, 1999:
<TABLE>
<CAPTION>
NUMBER OF TOTAL
UNITS SALES VALUE AMOUNT PAID AMOUNT OWING
--------- ------------ ------------ -------------
HK$'000 HK$'000 HK$'000
<S> <C> <C> <C> <C>
Phase 1 365 109,402 108,060 1,342
Phase 2 745 257,376 247,051 10,325
Total 1,110 366,778 355,111 11,667
Phase 3 334 126,428 86,452 39,976
Total 1,444 493,206 441,563 51,643
</TABLE>
Total sales value is based on the full purchase price of the home
purchased. As at September 30, 1999, Phases 1 and 2 have been constructed
and are currently ready for delivery or have been delivered.
12
<PAGE>
The following table sets forth a categorical analysis of the status of
payment of homes as at September 30, 1999:
PHASE 1 PHASE 2 PHASE 3 TOTAL
--------- --------- --------- --------
CATEGORY HK$'000 HK$'000 HK$'000 HK$'000
- -------- --------- --------- --------- --------
A -- -- 980 980 (note below)
B -- 262 938 1,200 (note below)
C 1,342 6,893 21,550 29,785
D -- 3,170 16,508 19,678
Total 1,342 10,325 39,976 51,643
Note:
These represent the remaining 10% of the purchase price
required to be paid upon the delivery of the home unit.
e) The number of homes completed but not sold as of September 30, 1999 is
as follows:
NUMBER OF NUMBER OF NUMBER OF
HOMES COMPLETED HOMES SOLD HOMES NOT SOLD
--------------- ---------- --------------
Phase 1 365 365 0
Phase 2 752 745 7
1,117 1,110 7
13
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS TOGETHER WITH
ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE YOU DECIDE TO
PURCHASE OUR COMMON SHARES AND WARRANTS.
RISKS RELATING TO THE COMPANY
WE HAVE LIMITED OPERATING HISTORY UPON WHICH YOU MAY EVALUATE US.
We only commenced operations in 1997. Accordingly, our limited operating
history makes predicting our future operating results, including operating
expenses, difficult. Our revenues may not grow at the rate that we anticipate,
or may not continue at their current levels.
TO DATE, OUR SOLE BUSINESS VENTURE HAS BEEN THE DEVELOPMENT OF THE CALIFORNIA
GARDENS PROJECT.
Shanghai Chingchu began construction of our first property development
project, CALIFORNIA GARDENS, Shanghai in 1997.
We derived all of our profits for the fiscal years ended March 31, 1998
and 1999 and the six months ended September 30, 1999 from the sale of units in
CALIFORNIA GARDENS. Our future results will heavily depend on the development
and sale of units in the additional phases. If Shanghai Chingchu is unable to
generate satisfactory sales for these units our business growth and prospects
will be impaired.
In addition, our future results depend on our ability to undertake new
property projects which involve identifying suitable development sites.
WE ARE GROWING RAPIDLY AND MANAGING OUR GROWTH MAY BE DIFFICULT.
We have grown and expect to continue to grow rapidly by developing new
residential communities. This growth is likely to place a significant strain on
our resources and systems. To manage our growth, we must implement systems and
train and manage our employees.
Some of our senior management have only recently joined us. Of the
employees listed in the management section of this prospectus, four have worked
for us for less than three years. We cannot assure you that our management will
be able to effectively or successfully manage our growth.
WE EXPECT OUR EXPENDITURES TO INCREASE.
Some of our expenditures are fixed, including salary and office
expenses. If our revenues do not increase, we may not be able to compensate by
reducing expenses in a timely manner. In addition, we plan to significantly
increase our operating expenses to:
/bullet/ develop additional residential communities;
/bullet/ increase our sales and marketing operations; and
/bullet/ purchase land for future development.
Further, as a publicly-traded company, we expect that our expenses for
professional services will also increase. If increased revenues do not
accompany these expenses, our business, financial condition, liquidity and
operating results will be materially adversely affected.
OUR SUCCESS IS DEPENDENT ON OUR SENIOR MANAGEMENT TEAM AND KEY EMPLOYEES WHO WE
MAY NOT BE ABLE TO RETAIN.
If one or more members of our senior management team or key employees,
including Michael O'Young, our President and Chief Executive Officer, were
unable or unwilling to continue in their present positions, our business,
financial condition and operating results could be materially adversely
affected. Most members of our senior management do not have employment
agreements.
We plan to hire additional employees to manage our anticipated growth.
Competition for personnel, particularly for employees with management and
technical expertise, is intense. Our business, financial condition, liquidity
and operating results may be materially adversely affected if we cannot hire
and retain suitable personnel.
14
<PAGE>
THE INTERESTS OF FAR EAST CONSORTIUM, OUR CONTROLLING SHAREHOLDER, MAY CONFLICT
WITH OUR INTERESTS AND THE INTERESTS OF OUR SHAREHOLDERS, AND FAR EAST
CONSORTIUM MAY PLACE THEIR INTERESTS BEFORE THE INTERESTS OF OUR OTHER
SHAREHOLDERS.
After this offering, Far East Consortium will own approximately 77% of
our outstanding common shares. Accordingly, Far East Consortium will retain the
power to elect all our directors and to approve most matters presented to our
shareholders for a vote. Far East Consortium's ownership might discourage
someone from making a significant equity investment in us, even if we needed
the investment to meet our obligations and to operate our business.
WE WILL REQUIRE ADDITIONAL CAPITAL RESOURCES TO DEVELOP ADDITIONAL PROJECTS,
AND THESE RESOURCES MAY NOT BE AVAILABLE WHEN NEEDED OR AT ALL.
We will require additional capital resources to develop additional
residential projects. To date, we have relied principally on financing from Far
East Consortium. Following this offering, we expect to derive capital resources
from internally generated funds, borrowings and the issuance of additional
equity or debt securities. We cannot assure you that we will be able to obtain
additional financing on satisfactory terms, or at all. If we are unable to
obtain additional financing after this offering, we will not be able to develop
additional residential projects and our business development will be curtailed
until such time, if any, as we are able to obtain additional capital resources.
WE MAY NOT BE ABLE TO SELL OUR HOMES IF INTEREST RATES INCREASE OR OUR
PROSPECTIVE HOME BUYERS ARE NOT ABLE TO OBTAIN MORTGAGE FINANCING.
Most of our prospective home buyers are expected to finance a
substantial portion of the purchase price of their homes with mortgage loans.
Because of the need for mortgages, demand for homes is likely to be adversely
affected by increases in interest rates or reduced availability of mortgage
financing in China.
WE MAY NOT BE ABLE TO GENERATE ADEQUATE REVENUES IF LOCAL BUSINESS CONDITIONS
IN SHANGHAI CHANGE ADVERSELY. OUR REVENUES MAY BE AFFECTED BY THE FOLLOWING
LOCAL BUSINESS CONDITIONS: EMPLOYMENT AND INFLATION RATES, THE EMERGENCE OF NEW
RESIDENTIAL PROPERTY DEVELOPMENTS, ADVERSE CHANGES IN PROPERTY VALUES AND LOCAL
GOVERNMENTAL REGULATIONS. AS A RESULT OF THESE CONDITIONS, THE TRADING PRICE OF
OUR COMMON SHARES MAY ALSO DECLINE IN VALUE.
All our current operations are situated in Shanghai, China. Accordingly,
demand for our homes could decrease if there occurs an adverse change in
Shanghai's local economic and other conditions, such as rates of employment and
inflation, emergence of new residential property developments, property values
generally and changes in local governmental regulations. We intend to expand
our operations into other regions in China, which we expect will reduce the
overall risk of having all of our operations concentrated in one particular
city. However, new markets may prove to be less stable than the Shanghai market
and may involve delays, problems and expenses not encountered by us in Shanghai
which may adversely affect our business.
THE MANNER IN WHICH WE RECOGNIZE PROFITS AND EXPENSES FOR ACCOUNTING PURPOSES
MAY NOT BE AN ACCURATE REFLECTION OF OUR SALES LEVELS OR OTHER IMPORTANT EVENTS
AFFECTING THE CONSTRUCTION OF OUR HOMES.
We use the percentage of completion method to recognize income from the
development and sale of our homes when construction has progressed beyond the
preliminary stage. The amount of income that we recognize from the pre-sale of
our units is based on the proportion of construction costs incurred up to the
accounting date to the estimated total construction costs to completion, but is
limited to the amount of sales proceeds received and receivable. Accordingly,
our reported results from operations are sensitive to the progress of actual
construction of our units and the changes in our estimated total construction
costs. See note 3 of notes to consolidated financial statements.
15
<PAGE>
OUR PROFITS WHICH MAY BE AVAILABLE FOR DISTRIBUTION MAY BE LIMITED.
We mainly carry out our property development business through our
subsidiaries and Sino-foreign equity joint ventures established in China.
Profits available for distribution by these companies are determined in
accordance with accounting principles and financial regulations in China, and
profits as so determined differ from profits determined in accordance with Hong
Kong GAAP in certain significant aspects, which include the use of different
bases for recognition of revenues and expenses. Under relevant Chinese foreign
investment laws and regulations, profits available for distribution are
determined after transfers to statutory reserve funds and the payment of taxes.
Under the "Law of the People's Republic of China on Chinese Foreign Equity
Joint Ventures" and its implementing rules, the "Regulations of the People's
Republic of China Concerning Financial Administration of Foreign Investment
Enterprise" and the "Accounting System of the People's Republic of China for
Foreign Investment Enterprises," profits may be distributed as dividends only
after the following payments are made: (1) enterprise income tax; (2)
compensation, liquidated damages, late-payment penalties, penalty interest and
fines; (3) to cover previous years' losses; and (4) payments to the reserve
fund, enterprise development fund, the bonus and welfare fund for staff and
workers (to be determined by the Company's board of directors and, in the case
of CALIFORNIA GARDENS, the amount paid out for such funds amounts to 15.5% of
the payroll). As of September 30, 1999, we had profits of RMB 27,222,014 which
were available for distribution to shareholders as dividends.
OUR OPERATIONS ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION IN THE AREAS OF
PLANNING AND ZONING, BUILDING DESIGN AND CONSTRUCTION, HUMAN HEALTH, AND THE
ENVIRONMENT. OUR DEVELOPMENT PROJECTS MAY BE DELAYED BY EXTENSIVE GOVERNMENTAL
REGULATIONS.
We are subject to various laws and regulations concerning planning and
zoning, building design and construction. We may experience delays or other
problems in the issuance of the necessary permits and/or licenses to complete
our projects. We cannot assure you that we will be able to obtain the necessary
licenses or permits in a timely manner. We may also be subject to periodic
delays in our home building projects due to building moratoria in any of the
areas in which we operate or plan to operate.
We are also subject to a variety of laws and regulations concerning the
protection of health and the environment. The particular environmental laws
which apply to any given home building site vary greatly according to the
site's location, the site's environmental condition, the present and former
uses of the site, as well as adjoining properties. Environmental laws and
conditions may result in delays, may cause us to incur substantial compliance
and other costs, and can prohibit or severely restrict home building activity
in environmentally sensitive regions or areas. See "Acquisitions of Land Use
Rights" on page 43 of this prospectus and "Licensing of Foreign Investment in
Property Development; Investment Structure" on page 46 of this prospectus. See
also, "Foreign Exchange Control Implications for Foreign Investors in China" on
page 47 of this prospectus.
WE ARE SUBJECT TO CLAIMS UNDER PERFORMANCE GUARANTEES FOR OUR HOME PURCHASERS.
Shanghai Chingchu usually arranges bank financing for the purchasers of
its homes and provides guarantees to secure the obligations of these purchasers
to make repayment to the mortgagees of their homes. Under the terms of the
performance guarantees, upon default by the home purchaser of his obligation to
repay the mortgage installments for three consecutive months, the relevant
mortgage bank may require Shanghai Chingchu to pay the outstanding mortgage
principal together with accrued interest of the relevant property, subject to
transferring all its rights and interests in the property to Shanghai Chingchu.
As of September 30, 1999, Shanghai Chingchu had a total of HK$ 82.9 million of
outstanding mortgage loans subject to performance guarantees. As of September
30, 1999, Shanghai Chingchu has not been required to make any payment under
these performance guarantees. There is no assurance that the purchasers whose
mortgage facilities are covered by these performance guarantees will comply
with all relevant provisions regarding the repayment of
16
<PAGE>
the mortgage loans, and substantial costs may be incurred by Shanghai Chingchu
if these provisions are breached and the performance guarantees are invoked.
WE MAY NOT BE ABLE TO PROPERLY OPERATE OUR BUSINESS IF WE FAIL TO OBTAIN YEAR
2000 READINESS.
The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
is approached and reached. The testing of our computer systems in January 2000
indicated no Year 2000 issues. However, the failure of our vendors,
subcontractors, suppliers or others with whom we do business to correct a
material Year 2000 problem could result in an interruption in, or failure of,
certain of our normal business activities or operations.
We have developed a compliance program to assess the overall impact of
the Year 2000 issue on our business and developed contingency plans designed to
mitigate certain of our Year 2000 risks. Our Year 2000 risks are related to
products purchased from third parties, computers, software, telephone systems
and other equipment used internally. If our present efforts to address the Year
2000 risks are not successful, or if other parties with which we conduct
business do not successfully address these risks, our business, operating
results and financial position could be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Our Year 2000 State of Readiness" on page 40.
RISKS RELATING TO OUR INDUSTRY
THE PRIVATE RESIDENTIAL REAL ESTATE MARKET IN CHINA IS IN AN EARLY STAGE OF
DEVELOPMENT. WE MAY NOT BE ABLE TO DEVELOP OUR RESIDENTIAL REAL ESTATE
DEVELOPMENT BUSINESS IF THIS MARKET DOES NOT DEVELOP IN ACCORDANCE WITH OUR
EXPECTATIONS.
Private ownership of property in China is still in an early stage of
development. It is therefore difficult for us to predict with certainty the
timing and the level of demand for our properties. The lack of an active
secondary market for residential properties in most regions of China and the
early stage of a market for mortgage financing in China may adversely affect
demand for our projects.
RESIDENTIAL PROPERTY DEVELOPMENT ACTIVITIES INVOLVE SIGNIFICANT RISKS,
INCLUDING MATERIAL PRE-DEVELOPMENT EXPENDITURES, UNFORESEEABLE CONSTRUCTION
DELAYS, LAGGING HOME SALES GROWTH AND THE COSTS ASSOCIATED WITH OBTAINING
GOVERNMENT APPROVALS. WE MAY NOT BE ABLE TO GENERATE ADEQUATE REVENUES TO
PROPERLY OPERATE OUR BUSINESS SHOULD THESE RISKS MATERIALIZE.
We operate by purchasing land use rights for large tracts of undeveloped
land from municipal and provincial governments of China, which we later develop
into planned communities. Acquiring land use rights and committing the
financial and managerial resources to develop this land involve significant
risks. Before a subdivision generates any revenue, material expenditures are
required for items including acquiring land use rights and constructing
subdivision infrastructure, such as roads and utilities. Property development
also involves the following risks:
/bullet/ construction may not be completed on schedule or within budget
due to unforeseeable factors such as adverse weather conditions;
/bullet/ government approvals may take more time and resources to obtain
than expected;
/bullet/ we may experience delays in the process of clearing and
resettlement of the development site; and
/bullet/ our properties may not achieve anticipated sales.
THE REVENUES FROM, AND MARKET VALUE OF, OUR PROPERTIES MAY BE ADVERSELY
AFFECTED BY MANY FACTORS BEYOND OUR CONTROL. THESE FACTORS INCLUDE ECONOMIC
CONDITIONS, THE REAL ESTATE MARKET GENERALLY, INTEREST AND EXCHANGE RATE
FLUCTUATIONS, AND CHANGES IN GOVERNMENTAL REGULATIONS.
The revenues from, and market values of, our property development
projects may be affected by a number of factors, including the
17
<PAGE>
international, regional and local economic climate, the local real estate
market, the proximity and quality of management, changes in market rates for
comparable sales and rentals and fluctuation in operating costs.
Property investment projects may also be affected by factors such as
interest rates and exchange rate fluctuations, changes in government
regulations, availability of financing, changes in tax laws or rates and
environmental policies. In addition, our costs of holding unsold properties may
be significant and may result in losses in a poorly performing project or
market. In the event of significant changes in economic or market conditions,
we may not be able to dispose of certain subdivision inventories on a bulk or
other basis which may result in a loss.
OUR INVESTMENTS IN PROPERTIES MAY BE ILLIQUID.
Due to the generally illiquid nature of property investment, it may be
difficult for us to convert real estate assets into cash upon short notice. In
addition, if we need to dispose of a property quickly, we may have to accept a
lower price than if we had the ability to hold the property until a more
opportune time. Depending on the prevailing property market conditions, we may
sometimes encounter difficulty in obtaining commercially favorable financing in
lending transactions secured by our properties.
WE MAY ENCOUNTER CONSTRUCTION DELAYS AND COST OVERRUNS.
Property development projects that we have undertaken and expect to
undertake in the future typically require substantial capital expenditures
during the construction period, and it may take many months or years before the
project can be pre-sold and/or completed to generate positive cash flow. The
duration and the costs involved in completing a development project can be
adversely affected by many factors including shortages of materials, equipment
and labor, natural catastrophe, labor disputes, accidents and other
unforeseeable circumstances. Delays in obtaining the requisite licenses,
permits or approval from governmental agencies or authorities can also increase
the costs, delay or prevent the pre-sale or completion of a project.
Construction delays or failure to complete the construction of a project to its
planned specifications or schedule may result in liabilities, loss of revenues
and less attractive returns.
WE MAY SUFFER CAPITAL INVESTMENT LOSSES AS WELL AS LOST REVENUES IF NATURAL
DISASTERS AND OTHER EVENTS RESULT IN LOSSES IN EXCESS OF OUR INSURANCE
PROCEEDS.
The climate and geology of China present increased risk of natural
disasters as compared to many other regions in the world. Our business may be
adversely affected to the extent that hurricanes, severe storms, earthquakes,
droughts, floods, wildfires or other natural disasters or similar events occur
in an area where our projects are underway. Although we have appropriate public
liability insurance and contractors' comprehensive insurance for our property
projects, certain types of losses, such as losses from natural disasters, are
generally not insured because they are either uninsurable or not cost
justifiable. If an uninsured loss or a loss in excess of our insured limits
occur, we may suffer losses of capital investment which could adversely affect
future revenue streams while we remain liable for any financial obligations
relating to the relevant project.
THE RESIDENTIAL REAL ESTATE MARKET IN CHINA IS SUBJECT TO INTENSE COMPETITION
FROM OTHER REAL ESTATE DEVELOPERS, INDIVIDUAL SALES IN THE SECONDARY MARKET AND
AVAILABLE RENTAL HOUSING.
Over the last decade, a large number of property developers have
expanded their operations into China. These include a number of leading Hong
Kong and Asian real estate development and investment groups, many of whom have
greater financial, managerial, marketing and other resources than us.
Residential property developers compete not only for home buyers, but also for
desirable development sites, raw materials and skilled subcontractors. We also
compete for residential sales with individual sales of existing homes in the
secondary market and available rental housing. We also expect that continued
economic development of China will be accompanied by further property
development and expansion. Increasing competition may substantially, adversely
affect our business.
18
<PAGE>
THE LAND APPRECIATION TAX MAY CONSUME BETWEEN 30 AND 60 PERCENT OF OUR PROFITS.
Income from the transfer of state-owned land use rights, buildings and
their attachments is subject to a land appreciation tax or LAT. LAT is payable
on the balance of proceeds received on the transfer, after deducting various
prescribed items, including sums paid for acquisition of land use rights and
the costs and expenses of the development of the land and construction of
buildings. LAT is charged on gains at progressive rates ranging from 30% to
60%.
An exemption from payment of LAT may be available if the taxpayer
constructs ordinary standard residential apartments and the appreciation amount
does not exceed 20 percent of the sum of certain deductions as allowed under
Chinese law.
If we decide to sell any of our property interests in the future, such
sale may be subject to LAT depending on:
/bullet/ the prevailing circumstances at the time of such sale;
/bullet/ the manner of sale;
/bullet/ the provisions of the relevant Chinese regulations which are in
force at the relevant time; and
/bullet/ the profit margin on the sale of our homes.
LAT could reduce the attractiveness of investment in property
development projects in China and thereby affect the prospects of the Company's
property business in China. For further information about the LAT, please refer
to note 6 of our notes to consolidated financial statements.
RISKS RELATING TO CHINA
THE EFFECT OF THE CONTINUING RAPID EVOLUTION OF CHINA'S POLITICAL AND ECONOMIC
SYSTEMS ON OUR FUTURE IS DIFFICULT TO PREDICT.
All of our operations are in China. As a result, significant political
and economic uncertainties may affect our operations and assets. The political
and economic systems of China differ significantly from those of many countries
you may be familiar with, including the United States, countries of the
European Union, Japan, etc. Compared to these countries, China's economic
system is generally characterized by a higher rate of growth, a lower level of
development and a higher level of government involvement and planning.
Central economic planning is still a major feature of the Chinese
economy. The State Council, with the approval of the National People's
Congress, plans and manages a substantial part of the Chinese economy by means
of a series of five-year economic and social development plans, referred to as
"Five-Year Plans". Each Five-Year Plan sets overall targets for development of
agriculture, industry, finance and other aspects of economic and social life.
To implement each Five-Year Plan, the State Development and Planning
Commission:
/bullet/ establishes annual production and development targets;
/bullet/ formulates and supervises annual plans to achieve the targets;
/bullet/ allocates resources necessary to achieve the targets; and
/bullet/ approves all major economic projects.
Economic reform policies are still experimental. Since the founding of
the People's Republic of China, the Chinese Government has owned the majority
of all productive assets. However, since 1978, the government has been pursuing
a course of economic reform. These reforms have emphasized, at different times:
/bullet/ decentralization of decision-making;
/bullet/ separation of regulatory and governmental functions from
management functions;
/bullet/ utilization of market forces in setting prices for many
commodities and services;
/bullet/ encouragement of private economic activity and ownership,
including private home ownership;
19
<PAGE>
/bullet/ encouragement of foreign investment in certain sectors; and
/bullet/ encouragement of exports.
We cannot assure you that the Chinese government will continue to pursue
its course of reform. The government considers many of these reform measures to
be experimental, and accordingly it may refine, modify, suspend, delay or
reverse any of the measures. Factors that have caused the government to modify
or delay the implementation of certain reform measures include political
changes, and such economic factors as changes in rates of national and regional
economic growth, unemployment and inflation. We cannot assure you that the
government will not adopt changes in policy or regulations that might have an
adverse effect on us, such as changes in the rate or method of taxation,
additional restrictions on currency conversion or remittance, or others. For
further information about the political and regulatory environment to which we
are subject, please refer to "National Legislation" and "Local Legislation"
beginning on pages 42 and 43 of this prospectus.
WE MAY NOT BE ABLE TO GENERATE ADEQUATE SALES REVENUES IF RECENT ECONOMIC
TRENDS IN CHINA'S ECONOMY CONTINUE. THESE TRENDS INCLUDE INCREASED INTEREST
RATES, SLOWER ECONOMIC GROWTH AND DECLINES IN MARKET VALUES OF REAL ESTATE.
During the 1980s and generally through 1997, the Chinese economy
experienced relatively high rates of growth, which to a certain extent has been
uneven among various geographical regions of China and among various sectors of
the economy. The government responded by implementing measures to restrain the
rate of growth and control inflation, including measures to reduce availability
of credit, giving rise to systemic liquidity constraints. However, since
mid-1997, many Asian counties have experienced significant adverse economic
developments, known as the Asian-financial crisis, including:
/bullet/ substantial deterioration in currency exchange rates between
the U.S. dollar and certain Asian currencies;
/bullet/ increased domestic interest rates;
/bullet/ reduced economic growth rates;
/bullet/ increased corporate defaults and bankruptcies;
/bullet/ declines in market values of real estate, listed shares and
other classes of assets;
/bullet/ decreases in levels of direct foreign investment; and
/bullet/ government-imposed austerity measures.
China has been somewhat less affected by the Asian financial crisis than
other Asian economies, in part because of its relatively lower levels of
foreign currency borrowings and the non-convertibility of its currency, the
Renminbi yuan, for capital account transactions. In an attempt to counteract
these effects and maintain economic growth, the government has taken steps,
including increased spending on infrastructure projects, including housing
projects, intended to increase domestic demand and consumer spending. We cannot
assure you that these steps will be successful in maintaining economic growth
in China at historical rates. Further we cannot assure you that the current
economic developments in other Asian countries will not continue to have an
adverse effect on the economy of China, or that similar economic developments
will not occur in China in the future, which would have an adverse effect on
our business.
CHINA'S LEGAL SYSTEM IS RELATIVELY NEW, AND THE APPLICATION, INTERPRETATION AND
ENFORCEMENT OF LAWS IS DIFFICULT TO PREDICT.
Commencing in 1978, China began the process of modernizing its legal
system by enacting a comprehensive system of statutory law and regulations.
Under the Chinese legal system, as in civil law jurisdictions, court decisions
are based on statute law. Prior court decisions do not have binding
precedential effect in the Chinese system, as they do in common law systems. As
a consequence, it may be difficult to predict the outcome of a dispute, as a
court's application and interpretation of the law may differ from prior
interpretations. In addition, because of the recent adoption of most laws, the
amount of guidance available in the form of published case law and judicial
interpretation of laws is limited.
20
<PAGE>
CHANGES IN LAND USE LAWS INSTITUTED BY THE CHINESE GOVERNMENT MAY MAKE THE
EXPANSION OF OUR RESIDENTIAL REAL ESTATE BUSINESS DIFFICULT.
In the past, local land bureaus had the power to approve land projects
(comprising non-farmland) of a size of up to 1,333,400 square meters. Pursuant
to the Land Administration Law of China adopted on August 29, 1998 and
effective as of January 1, 1999, China has adopted a policy of limiting the
power of local land bureaus to approve land projects of a size of 700,000
square meters or below. For projects which comprise non-farmland and which
exceed this size, approval will have to be obtained from China's central
government. Such a measure is expected to have the two-fold effect of creating
a barrier against entry to China's property market by less established
developers without an existing land bank, as well as adversely affecting the
ability of established developers to obtain approvals for the acquisition of
large sites to replenish its land bank for new projects. As this land policy
was introduced relatively recently, it will take some time before its impact on
China's property market in general and on New China Homes in particular can be
evaluated.
Further, the Chinese government may, under special circumstances, in the
needs of public interest, repossess land or structures on land. In this
situation, the Chinese government will pay compensation taking into account the
remaining term of the land use rights, as well as the development and use of
the land and the structures on the land.
IF THE GOVERNMENT DECIDES TO DEVALUE THE RENMINBI, OUR RESULTS OF OPERATIONS
COULD BE AFFECTED IN WAYS THAT MIGHT BE POSITIVE OR NEGATIVE.
In 1994, the People's Bank of China ("PBOC") eliminated the prior system
of fixed exchange rates for conversion of Renminbi into other currencies in
favor of a system in which published exchange rates reflect buying and selling
rates (within a prescribed range) quoted by foreign exchange bank participants
in an interbank market. Since that time, the exchange rates for conversion of
the Renminbi to the U.S. dollar have remained relatively stable, with the
Renminbi appreciating slightly against the dollar. Although authoritative
Chinese government sources confirm that there is no current intention to
devalue the Renminbi, many independent economists believe that with domestic
growth slowing and currency devaluations by other Asian countries putting
pressure on the competitiveness of Chinese exports, the possibility exists of a
future devaluation of the Renminbi. We have not entered into any agreements or
purchased any instruments to hedge our exchange rate risks, although we may do
so in the future.
IF WE FAIL TO OBTAIN AND MAINTAIN FOREIGN EXCHANGE REGISTRATION CERTIFICATES,
WE MAY NOT BE ABLE TO REPATRIATE OUR INCOME.
We rely on the revenue generated by our joint venture subsidiaries.
Under Chinese law, joint venture companies must complete the procedures for
obtaining their foreign exchange registration certificates and have such
certificates annually examined by the foreign exchange administrative
authorities of China, before principal and interest income in Renminbi
generated in China can be converted into foreign currency and repatriated from
the country in foreign currency. If we are unable to obtain the necessary
foreign exchange registration certificates or fail to have such certificates
examined annually for any of our joint venture companies, we may not be able to
repatriate the Renminbi income earned by these companies in China, which may
have an adverse impact on our business operations and financial position.
RISKS RELATING TO THIS OFFERING AND OUR COMMON SHARES AND WARRANTS
THE PRICE OF OUR COMMON SHARES AND WARRANTS IS LIKELY TO BE HIGHLY VOLATILE AND
THESE SECURITIES MAY TRADE AT PRICES BELOW THE PRICE THAT YOU PAY FOR THESE
SECURITIES IN THIS OFFERING.
The market price of our common shares and warrants is likely to be
highly volatile as the stock market in general, and the market for start-up
companies in particular, has been highly volatile. Investors may not be able to
resell their common shares and warrants following periods of volatility because
of the market's adverse reaction to such volatility. The trading prices of many
start-up companies' stocks have reached historical highs within the last 52
weeks and have reflected relative valuations substantially
21
<PAGE>
above historical levels. During the same period, these companies' stocks have
also been highly volatile and have recorded lows well below such historical
highs. Factors that could cause such volatility may include, among other
things:
/bullet/ actual or anticipated variations in quarterly operating
results;
/bullet/ changes in financial estimates by securities analysts;
/bullet/ conditions or trends in China or the residential housing market
in China;
/bullet/ announcements by us or our competitors of significant
acquisitions, strategic partnerships or joint ventures;
/bullet/ capital commitments;
/bullet/ additions or departures of key personnel; and
/bullet/ sales of common shares or warrants.
Many of these factors are beyond our control. These factors may
materially adversely affect the market price of our common shares and warrants,
regardless of our operating performance.
OUR COMMON SHARES AND WARRANTS HAVE NEVER BEEN PUBLICLY TRADED, SO WE CANNOT
PREDICT THE EXTENT TO WHICH A TRADING MARKET WILL DEVELOP FOR OUR COMMON SHARES
OR WARRANTS.
There has never been a public market for our common shares and warrants.
We cannot predict the extent to which a trading market will develop or how
liquid that market might become. The initial public offering price has been
determined by negotiations between the underwriters and us and may not be
indicative of prices that will prevail in the trading market.
THE MARKET PRICE OF OUR COMMON SHARES MAY DECLINE AS A RESULT OF FLUCTUATIONS
IN OUR QUARTERLY RESULTS. THE FOLLOWING FACTORS MAY AFFECT OUR QUARTERLY
RESULTS: THE SEASONALITY OF OUR REVENUES, THE GENERAL LEVEL OF MARKET
ACCEPTANCE OF OUR HOMES, INTENSE COMPETITION AND UNCERTAIN GOVERNMENTAL
REGULATIONS IN THE AREA OF REAL ESTATE.
We expect that our quarterly operating results will fluctuate
significantly due to many factors, many of which are beyond our control,
including:
/bullet/ the seasonality of our revenues;
/bullet/ the uncertain acceptance of our homes by Chinese buyers;
/bullet/ intense competition; and
/bullet/ uncertainty surrounding the regulation of the housing market.
Due to the limited history of the residential housing market in China,
we believe that period-to-period comparisons of our operating results are not
meaningful. Additionally, if our operating results in one or more quarters do
not meet the securities analysts' or your expectations, the price of our common
shares or warrants could be materially adversely affected.
IF OUR CURRENT SHAREHOLDERS SELL SHARES ELIGIBLE FOR FUTURE SALE, THE MARKET
PRICE OF OUR COMMON SHARES MAY DECLINE.
If our shareholders sell substantial amounts of our common shares,
including shares issued upon the exercise of outstanding options and warrants,
in the public market following this offering, then the market price of our
common shares could fall. On the date of this prospectus, no common shares
other than the 2,000,000 common shares being sold in the offering (2,300,000
common shares if the managing underwriter exercises its over-allotment option
in full) are freely tradable. Our directors and officers have agreed with the
underwriter not to sell or otherwise dispose of any of our securities for a
period of 24 months from the date of this prospectus without the prior written
consent of the underwriter. Sales of substantial amounts of our common shares
or warrants, or the potential for such sales, in the public market could
materially adversely affect the market price of our common shares or warrants.
OUR BOARD OF DIRECTORS HAS THE AUTHORITY TO ISSUE PREFERRED SHARES HAVING
RIGHTS AND PREFERENCES WHICH ARE MORE FAVORABLE THAN OUR COMMON SHARES.
Our Board of Directors has the authority, without further action by our
shareholders, to issue up to 5,000,000 preferred shares in one or more series
and to fix the designations, powers, preferences, privileges, and relative
participating, optional or special rights and the
22
<PAGE>
qualifications, limitations or restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption and liquidation
preferences, any or all of which may be greater than the rights associated with
our common shares. Preferred shares could thus be issued quickly with terms
calculated to delay or prevent a change in control of New China Homes or make
removal of management more difficult. In addition, if the Board of Directors
issues preferred shares, the market price of our common shares may fall and the
relative voting and other rights of the holders of our common shares may be
adversely affected. For three years after the effective date of this offering,
the Company may not issue preferred shares without the consent of the
underwriters. See "Description of Securities - Preferred Shares" on page 85 of
this prospectus.
BECAUSE WE ARE A CAYMAN ISLANDS COMPANY, OUR SHAREHOLDERS MAY FACE GREATER
DIFFICULTIES IN PROTECTING THEIR INTERESTS THAN WOULD SHAREHOLDERS OF A COMPANY
INCORPORATED IN THE UNITED STATES.
Our corporate affairs are governed by our Memorandum and Articles of
Association and by the Companies Law (1998 Revision) of the Cayman Islands. The
rights of our shareholders and the fiduciary responsibilities of our directors
under Cayman Islands law are not as clearly established as under statutes or
judicial precedent in existence in jurisdictions in the United States.
Therefore, our public shareholders may have more difficulty in protecting their
interests in the face of action by the management, directors or our controlling
shareholders than would shareholders of a corporation incorporated in a
jurisdiction in the United States. See "Differences in Corporate Law" on page
87 of this prospectus for a description of the differences between U.S. and
Cayman Islands law with respect to shareholders' rights and the fiduciary
responsibilities of directors.
YOU MAY EXPERIENCE DIFFICULTIES IN EFFECTING SERVICE OF LEGAL PROCESS AND
ENFORCING JUDGMENTS AGAINST NEW CHINA HOMES AND OUR MANAGEMENT. A MINORITY OF
OUR DIRECTORS AND OFFICERS ARE U.S. CITIZENS RESIDING IN THE STATE OF FLORIDA.
New China Homes is a Cayman Islands company and substantially all of our
assets and our subsidiaries are located in China. In addition, a majority of
the directors and officers of New China Homes are non-residents of the United
States, and all or a substantial portion of the assets of such non-residents
are located outside the United States. As a result, it may not be possible to
effect service of process within the United States upon a majority of the
directors and officers, including with respect to matters arising under the
U.S. federal securities laws and applicable state securities laws. A minority
of our directors and officers are United States nationals and live in the state
of Florida. Service of process may be effected on any of these directors or
officers at their addresses in Florida as stated in "Name and Address of
Beneficial Owner" on page 84 of this prospectus. Moreover, there is doubt as to
whether the courts of the Cayman Islands or China would enforce judgments of
United States courts against New China Homes, its directors or its officers
predicated on the civil liability provisions of the securities laws of the
United States or any state thereof or in original actions brought in the Cayman
Islands or China, liabilities against New China Homes or such non-residents
predicated upon the U.S. federal securities laws and applicable state
securities laws. See "Enforceability of Civil Liabilities and Certain Foreign
Issuer Considerations" on page 91 of this prospectus.
DATA ABOUT CHINA AND THE CHINESE HOUSING MARKET INCLUDED IN THIS PROSPECTUS MAY
PROVE TO BE INACCURATE.
Data in this prospectus relating to China's economy, its political
conditions and its property markets in various regions are derived from or
based on various official and unofficial publications. While we have taken
reasonable care to ensure that the facts presented in these statements are
accurately reproduced from such sources, such information has not been
independently verified by us. Such information may not be accurate, complete or
up-to-date. The statistical statements in this prospectus may be incorrect or
inaccurate and they may not be comparable to the statistics produced for other
jurisdictions. However, we are liable under the Securities Act for incorrect or
inaccurate statements made in this prospectus.
23
<PAGE>
IF WE ARE UNABLE TO MAINTAIN A CURRENT REGISTRATION STATEMENT FOR COMMON SHARES
UNDERLYING THE WARRANTS OR THE WARRANTS ARE NOT REGISTERED, QUALIFIED OR EXEMPT
FROM REGISTRATION UNDER STATE SECURITIES LAWS, THE WARRANT HOLDERS WILL BE
UNABLE TO EXERCISE THE WARRANTS AND THE WARRANTS MAY BECOME VALUELESS.
The warrants are not exercisable unless, at the time of the exercise, we
have a current prospectus covering the common shares issuable upon exercise of
the warrants, and such shares are registered, qualified or deemed to be exempt
under the applicable state securities laws. We will attempt to maintain a
current effective registration statement relating to the common shares issuable
upon exercise of the warrants. If we are unable to maintain a current
registration statement because the costs render it uneconomical, or because the
value of the common shares underlying the warrants is less than the exercise
price, or any number of other reasons, the warrant holders will be unable to
exercise the warrants and the warrants may become valueless.
Although the warrants will not knowingly be sold to purchasers in
jurisdictions in which common shares are not registered or otherwise qualified
for sale, purchasers may buy warrants in the after-market or may move to
jurisdictions in which the common shares underlying the warrants are not
registered or qualified during the period that the warrants are exercisable. In
this event, we would be unable to issue common shares to those persons desiring
to exercise their warrants (whether in response to a redemption notice or
otherwise), unless and until the common shares could be qualified for sale in
the jurisdictions in which such purchasers reside, or exemptions exist in such
jurisdictions from such qualification. Warrant holders would have no choice but
to attempt to sell the warrants or allow them to expire unexercised.
AS A CHINESE-BASED COMPANY, OUR SHAREHOLDERS MAY HAVE GREATER DIFFICULTY IN
OBTAINING INFORMATION ABOUT US ON A TIMELY BASIS THAN WOULD SHAREHOLDERS OF A
U.S.-BASED COMPANY.
Our operations will continue to be conducted in China and shareholders
may have difficulty in obtaining information about us from sources other than
us. Information available from newspapers, trade journals, or local, regional
or national regulatory agencies such as issuance of construction permits,
contract awards for development projects, etc. will not be readily available to
shareholders. Shareholders will be dependent upon our management for reports of
our progress, development, activities and expenditure of proceeds. The current
Chinese legal system provides that the laws and regulations governing the
issuance of construction permits and construction awards for development
projects are publicly available in China. It is uncertain, however, whether the
public will have the access to obtain copies of construction permits of a
particular developer, or other information relating to contract awards for a
particular project. While it may be possible for an unrelated third party to
instruct a local attorney in China to obtain copies of the construction
permits, it is within the discretion of the local authorities to disclose such
information. With respect to other information on contract awards, it is
unlikely that any other information will be made available to the public.
SHARES THAT MAY BE ISSUED AFTER THIS OFFERING UPON THE EXERCISE OF THE MANAGING
UNDERWRITER'S OVER-ALLOTMENT OPTION AND OPTIONS MAY RESULT IN DILUTION.
You should be aware that we are permitted, and in some cases obligated,
to issue common shares in addition to the common shares to be outstanding after
the offering. If and when we issue these common shares, the percentage of the
common shares you own may be diluted. The following is a summary of additional
common shares that we have currently approved for issuance upon the exercise of
options and warrants after the offering:
/bullet/ 2,000,000 common shares issuable upon the exercise of the
warrants;
/bullet/ 300,000 common shares issuable upon the exercise of the
managing underwriter's over-allotment option;
/bullet/ 300,000 common shares issuable upon the exercise of the
warrants granted to the managing underwriter pursuant to the managing
underwriter's over-allotment option;
/bullet/ 200,000 common shares issuable upon the exercise of the common
shares representative warrants;
24
<PAGE>
/bullet/ 200,000 common shares issuable upon the exercise of the
underlying warrants; and
/bullet/ 600,000 common shares issuable upon the exercise of outstanding
options or options which may be issued to purchase common shares
under our 1999 Stock Option Plan.
FORWARD-LOOKING INFORMATION CONTAINED IN THIS PROSPECTUS MAY PROVE INACCURATE.
You should carefully consider the foregoing risk factors and the other
information contained in this prospectus before making an investment in the
securities. Information contained in this prospectus contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes", "expects", "may", "will", "should" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology. Such
statements reflect the current views of our management with respect to future
events and are subject to numerous risks, uncertainties and assumptions,
including the risk factors described in this prospectus. No assurance can be
given that the future results covered by the forward-looking statements or
projections will be achieved. There can be no assurance that these assumptions
will prove accurate or that future events will not cause material changes in
our business which adversely affect financial results. The foregoing matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements and projections, including risks and
uncertainties that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
25
<PAGE>
USE OF PROCEEDS
The net proceeds before expenses from the offering will be approximately
$9,225,000 million, and $10,608,750 million if the underwriter exercises its
over-allotment option in full, after deducting estimated underwriting discounts
and commissions of the offering.
We expect to use the net proceeds from the offering for working capital
and general corporate purposes, including the completion of additional phases
of the CALIFORNIA GARDENS project and the acquisition of land for future
development projects. US$ 2.4 million will be used for the completion of the
additional phases of our CALIFORNIA GARDENS project and we plan to use the
balance of the proceeds to develop new projects in other Chinese cities. We are
actively seeking new opportunities, but we have no understandings, arrangements
or commitments to do so as of the date of this prospectus, and we will not
enter into any understandings, arrangements or make any commitments to do so
until this offering is completed. Accordingly, we are unable at this time to
provide any further information with respect to the amount and planned usage of
the proceeds from this offering to be used for future property development.
Pending such uses, we intend to invest the net proceeds in
interest-bearing, investment-grade instruments, certificates of deposit, or
direct or guaranteed obligations of the United States.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common shares.
We do not anticipate paying any cash dividends in the foreseeable future. We
currently intend to retain future earnings, if any, to finance operations and
the expansion of our business. Any future determination to pay cash dividends
will be at the discretion of the board of directors and will be dependent upon
our financial condition, operating results, capital requirements and such other
factors as the board of directors deems relevant.
26
<PAGE>
CAPITALIZATION
The following table sets forth the combined bank borrowings and
capitalization of the Company at September 30, 1999, as adjusted to reflect the
sale by the Company of the 2,000,000 common shares and 2,000,000 warrants
offered, after deducting underwriting discounts and commissions and estimated
offering expenses of US$ 2,600,000.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------------------------
(IN THOUSANDS)
AS AS
ACTUAL ADJUSTED ADJUSTED
------------- ------------- ------------
HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Bank borrowings ................................................ 43,149 43,149 5,568
====== ====== =====
Minority interests ............................................. 1,993 1,993 257
------ ------ -----
Shareholders' equity:
Common stock: $1.00 par value, 50,000,000 shares authorized
actual; 10,400,000 shares issued and outstanding actual;
12,400,000 shares issued and outstanding as adjusted ......... 80,600 96,100 12,400
Preferred stock: 5,000,000 shares authorized actual;
none issued and outstanding actual and as adjusted .......... -- -- --
Additional paid-in capital .................................... -- 43,788 5,650
Retained earnings ............................................. 32,273 32,273 4,164
Cumulative translation adjustment ............................. 70 70 9
------ ------ ------
Total Shareholders' Equity ................................... 112,943 172,231 22,223
------- ------- ------
Total Capitalization ........................................ 114,936 174,224 22,480
======= ======= ======
</TABLE>
27
<PAGE>
DILUTION
As of September 30, 1999, the net tangible book value of the Company was
HK$ 112,943,445 (US$ 14,573,348) or HK$ 10.860 (US$ 1.401) per share. "Net
tangible book value" per share represents the amount of Company's total
tangible assets reduced by the amount of total liabilities divided by the
number of common shares outstanding. As of September 30, 1999, the Company's
net tangible book value, on a pro forma basis to reflect for the sale of
2,000,000 shares and 2,000,000 warrants offered in this offering and the
application of the net proceeds from such sale of HK$ 59,287,500
(US$ 7,650,000) (after deducting the underwriting discounts and commissions and
other estimated offering expenses), would have been approximately HK$ 13.890
(US$ 1.792) per share. This represents an immediate increase of HK$ 3.030 (
US$ 0.391) per share to existing shareholders and an immediate dilution of
HK$ 25.920 (US$ 3.333) per share to new investors. The following table
illustrates the per share dilution (in US$):
<TABLE>
<S> <C> <C>
Combined initial public offering price per share and warrant .............. $5.125
Unaudited net tangible book value per share as of September 30, 1999 ..... 1.401
Increase per share attributable to the new investors ..................... 0.391
-----
Pro forma net tangible book value per share after the offering ............ 1.792
------
Dilution per share to new investors ....................................... $3.333
======
</TABLE>
The following table summarizes, on a pro forma basis giving effect to this
offering, the differences between the existing shareholders and the new
investors with respect to the number and percentage of common shares purchased
from the Company, the amount and percentage of total consideration paid to the
Company and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ --------- ------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing shareholders ......... 10,400,000 83.9% 10,399,001 50.4% $1.000
New investors ................. 2,000,000 16.1% 10,250,000 49.6% $5.125
---------- ---- ---------- ----
Total ........................ 12,400,000 100% $20,649,001 100%
========== ==== =========== ====
</TABLE>
The foregoing information does not give effect to the exercise of (i) the
managing underwriter's option to purchase from the Company up to an additional
300,000 common shares and 300,000 warrants to cover over-allotments, if any,
and (ii) the managing underwriter's warrants.
All of the shareholders of the Company have agreed that:
/bullet/ 25% of their common shares will be canceled if our net income is less
than $10 million in the one-year period commencing on the first day of the
month following the closing date of this offering; and
/bullet/ 25% of their common shares will be canceled if our net income is less
than $20 million in the following one-year period.
28
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
We have derived the selected statement of operations data for the fiscal
years ended March 31, 1997, 1998 and 1999 and the selected balance sheet data
as of March 31, 1998 and 1999 presented below from our consolidated financial
statements included in this prospectus. We derived the selected statement of
operations data for the fiscal years ended March 31, 1995 and 1996 and for the
six months ended September 30, 1998 and 1999, and the selected balance sheet
data as of September 30, 1998 and 1999 presented below from our unaudited
consolidated financial statements which were prepared on the same basis as our
audited consolidated financial statements, and include all adjustments which we
believe are necessary to present fairly the data for such periods. Results for
the six months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full fiscal year ending March 31, 2000. You
should read the selected financial and operating data presented below together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our consolidated financial statements and notes thereto
included elsewhere in this prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999 1999
----------- ----------- ------------ --------------- ------------- ------------
HK$ HK$ HK$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Operating revenues ......................... -- -- -- 74,197,884 270,830,228 34,945,836
====== ====== ======= ========== =========== ==========
Operating (loss) income Before interest
and Income taxes .......................... (8,939) (8,985) (10,609) (3,360,594) 48,666,153 6,279,504
Interest expenses .......................... -- -- -- 1,451,955 6,306,527 813,746
------ ------ ------- ---------- ----------- ----------
(Loss) income before income taxes .......... (8,939) (8,985) (10,609) (4,812,549) 42,359,626 5,465,758
Income taxes ............................... -- -- -- (1,131,674) 15,706,408 2,026,633
------ ------ ------- ---------- ----------- ----------
(Loss) income before minority interests..... (8,939) (8,985) (10,609) (3,680,875) 26,653,218 3,439,125
Minority interests ......................... -- -- -- (41,358) 570,569 73,622
------ ------ ------- ---------- ----------- ----------
Net (loss) Income .......................... (8,939) (8,985) (10,609) (3,639,517) 26,082,649 3,365,503
====== ====== ======= ========== =========== ==========
(Loss) earnings per share .................. (8.94) (8.99) (10.61) (3,639.52) 26,082.65 3,365.50
====== ====== ======= ========== =========== ==========
Weighted average number of shares
outstanding (See note (1)) ................ 1,000 1,000 1,000 1,000 1,000 1,000
====== ====== ======= ========== =========== ==========
Amounts in accordance with US GAAP
Operating revenues ......................... -- -- -- 74,197,884 270,830,228 34,945,836
====== ====== ======= ========== =========== ==========
Operating (loss) income Before
income taxes .............................. (8,939) (8,985) (10,609) (5,718,280) 40,915,526 5,279,423
====== ====== ======= ========== =========== ==========
Net (loss) Income .......................... (8,939) (8,985) (10,609) (4,246,356) 24,571,592 3,170,528
====== ====== ======= ========== =========== ==========
Loss) earnings per share ................... (8.94) (8.99) (10.61) (4,246.36) 24,571.59 3,170.53
====== ====== ======= ========== =========== ==========
Weighted average number of shares
outstanding (See note (1)) ................ 1,000 1,000 1,000 1,000 1,000 1,000
====== ====== ======= ========== =========== ==========
Pro Forma (loss) earnings per share ......... N/A N/A N/A N/A 2.36 0.30
====== ====== ======= ========== =========== ==========
Pro Forma number of shares .................. N/A N/A N/A N/A 10,400,000 10,400,000
====== ====== ======= ========== =========== ==========
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1998 1999 1999
------------- ------------- -------------
HK$ HK$ US$
<S> <C> <C> <C>
Amounts in accordance with
Hong Kong GAAP
Operating revenues ......................... 102,297,739 115,946,294 14,960,812
=========== =========== ==========
Operating (loss) income Before interest
and Income taxes .......................... 14,162,354 17,024,774 2,196,745
Interest expenses .......................... 1,962,622 1,799,258 232,162
----------- ----------- ----------
(Loss) income before income taxes .......... 12,199,732 15,225,516 1,964,583
Income taxes ............................... 4,553,762 5,708,190 736,541
----------- ----------- ----------
(Loss) income before minority interests..... 7,645,970 9,517,326 1,228,042
Minority interests ......................... 162,990 208,608 26,917
----------- ----------- ----------
Net (loss) Income .......................... 7,482,980 9,308,718 1,201,125
=========== =========== ==========
(Loss) earnings per share .................. 7,482.98 0.90 0.12
=========== =========== ==========
Weighted average number of shares
outstanding (See note (1)) ................ 1,000 10,400,000 10,400,000
=========== =========== ==========
Amounts in accordance with US GAAP
Operating revenues ......................... 102,297,739 115,946,294 14,960,812
=========== =========== ==========
Operating (loss) income Before
income taxes .............................. 12,300,168 10,661,830 1,375,721
=========== =========== ==========
Net (loss) Income .......................... 7,550,272 4,711,220 607,900
=========== =========== ==========
Loss) earnings per share ................... 7,550.27 0.45 0.06
=========== =========== ==========
Weighted average number of shares
outstanding (See note (1)) ................ 1,000 10,400,000 10,400,000
=========== =========== ==========
Pro Forma (loss) earnings per share ......... N/A N/A N/A
=========== =========== ==========
Pro Forma number of shares .................. N/A N/A N/A
=========== =========== ==========
</TABLE>
No dividends have been paid during the periods indicated above.
29
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF MARCH 31,
------------------------------------------
1998 1999 1999
--------------- ------------- ------------
HK$ HK$ US$
<S> <C> <C> <C>
Amounts in accordance with Hong Kong
GAAP Total assets ........................... 127,186,261 222,204,385 28,671,533
Total shareholders' equity (deficit) ......... (3,112,250) 23,042,477 2,973,223
Amounts in accordance with US GAAP
Total assets ................................ 126,578,854 221,500,707 28,580,736
Total shareholders' equity (deficit) (See
note 4) .................................... (3,719,657) 22,271,842 2,873,786
<CAPTION>
AS OF PRO FORMA AS ADJUSTED
SEPTEMBER 30, (SEE NOTES (2) TO (4))
-------------------------- -------------------------
1999 1999 1999 1999
------------- ------------ ------------- -----------
HK$ US$ HK$ US$
<S> <C> <C> <C> <C>
Amounts in accordance with Hong Kong
GAAP Total assets ........................... 250,863,477 32,369,480 310,150,977 40,019,481
Total shareholders' equity (deficit) ......... 112,943,445 14,573,348 172,230,945 22,223,348
Amounts in accordance with US GAAP
Total assets ................................ 244,772,677 31,583,571 304,060,177 39,233,571
Total shareholders' equity (deficit) (See
note 4) .................................... 106,818,833 13,783,076 166,106,333 21,433,075
</TABLE>
- ---------------
(1) Adjusted to give effect to a 999-for-one stock split effected in August
1999.
(2) Adjusted to give effect to the net proceeds from the sale of 2,000,000
common shares and 2,000,000 warrants in this offering after deducting the
underwriting discounts and commissions and estimated offering expenses.
The estimated net proceeds are assumed to be included in cash balances.
(3) It is assumed that there has been no exercise of the warrants offered
hereby, the over-allotment option, the underwriter warrants or stock
options outstanding.
(4) The US GAAP pro forma as adjusted stockholders' equity amount at September
30, 1999 includes deferred compensation expense of US$ 2,125,000,
representing US$ 850,000 of future consulting services to be provided by
the consultants and US$ 1,275,000 of additional compensation arising from
the fair value of the common stock, valued by the directors at US$ 2.50
per share, issued to the consultants on April 2, 1999. This amount will be
expensed commencing the first quarter of fiscal 2000.
(5) As of September 30, 1998 and September 30, 1999, Shanghai Chingchu had a
total of HK$ 123.5 million and HK$ 82.9 million, respectively, of
outstanding mortgage loans subject to performance guarantees. Shanghai
Chingchu has agreed to secure the obligations of CALIFORNIA GARDENS home
purchasers to make repayment to the mortgagees of their homes. The
performance guarantees provide that upon default by a home purchaser of
its obligation to repay the mortgage installments for three consecutive
months, the relevant mortgage bank may require Shanghai Chingchu to pay
the outstanding mortgage principal, together with accrued interest,
subject to transferring all its rights and interests in the mortgaged
property to Shanghai Chingchu. As of September 30, 1999, Shanghai Chingchu
has not been required to make any payment under these performance
guarantees.
30
<PAGE>
KEY OPERATING DATA:
The following tables set forth key operating data for the Company as of
September 30, 1999:
a) Revenue recognized for the sale of homes in California Gardens:
FISCAL YEAR ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
------------------ --------------------
1998 1999 1998 1999
------- -------- -------- ---------
(IN HK$ MILLIONS)
Phase 1 .......... 73.92 35.26 31.95 0.23
Phase 2 .......... -- 234.66 69.83 22.71
Phase 2A ......... -- -- -- --
Phase 3 .......... -- -- -- 92.68
Phase 4 .......... -- -- -- --
----- ------ ----- -----
73.92 269.92 101.78 115.62
===== ====== ====== ======
Under Hong Kong GAAP, we recognize revenue from the sale of homes on a
percentage of completion basis. The tables below, however, provide information
based upon the purchase price of units for which a sales purchase agreement has
been executed and we have received at least 90% of the purchase price, plus the
amount of deposits, or booking fees received by us for units which have not
been purchased.
a) Total revenue:
NUMBER OF UNITS TOTAL SALES VALUE
--------------- -----------------
HK$'000
Purchased 1,444 493,206
Booked 572 214,559
Total 2,016 707,765
b) During the six months ended September 30, 1999, the Company received a
total of HK$ 10.5 million in booking fees while no booking fees were owed
to us by home buyers during that period. As of September 30, 1999, the
average booking fee taken by the Company was HK$ 18,700. As of September
30, 1999, the average unit price of HK$ 341,000 for homes sold is comprised
of a HK$ 18,700 booking fee and HK$ 322,300 for the balance of the home
price.
/bullet/ Booking fees are the refundable deposits from potential home buyers
which reserve a person's right to purchase a home at a later date
until the Company has started construction and secured the requisite
pre-sales permits from the relevant land administration bureau. The
term "sold" refers to the signing of a sales and purchase agreement
and the receipt of 90% of all sales proceeds.
c) When a home buyer has paid 30% of the total purchase price (inclusive of
the booking fee), the home buyer is eligible to sign a pre-sales agreement.
When signing a pre-sales agreement, a home buyer must specify the method of
paying the remaining 70%, which generally can be made through one or more
of the following options:
1. Mortgage;
2. Public housing fund;
3. A mixture of mortgage and public housing fund; or
4. Installment.
For settlement methods one, two, or three, the balance of the purchase
price is required to be paid within two months from the date of signing the
pre-sales agreement. If a home buyer elects to pay the balance of the
purchase price in installments, 90% of the purchase price is required to
31
<PAGE>
be paid within two months from the date of signing the pre-sales agreement
and the remaining 10% is required to be paid on delivery of the home unit.
Regardless of the method of settlement selected, at least 90% of the total
purchase consideration is required to be settled within 2 months from the
date of signing the pre-sales agreements. It is at the date of signing the
pre-sales agreement that a home unit is considered to be "purchased" by a
home buyer because a condition of sales under the percentage of completion
method is established. Revenue will therefore be recognized in accordance
with the percentage of completion method of accounting.
The following table sets forth information as to the timing of payment of
the purchase price balance by home buyers who paid a booking fee:
A--represents: the home buyers who made the timely payment of 90% of the
purchase price, i.e. within 2 months from the date of signing the
pre-sales agreement.
B--represents: the home buyers who were late in paying 90% of the purchase
price, but paid the 90% of the purchase price as at September 30, 1999.
C--represents: the home buyers who are currently late in their payment of
90% of the purchase price, but have paid a portion of the amount due,
the booking fee excepted.
D--represents: the home buyers whose purchase price balance is not
currently due.
<TABLE>
<CAPTION>
PHASE 1 PHASE 2 PHASE 3 TOTAL
------------------------- ------------------------ ------------------------ -----------------------
NUMBER NUMBER NUMBER NUMBER
CATEGORY OF UNITS PERCENTAGE OF UNITS PERCENTAGE OF UNITS PERCENTAGE OF UNITS PERCENTAGE
- -------- ----------- ------------ ---------- ------------ ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
A 75 20.55% 203 27.25% 72 21.56% 350 24.24%
B 278 76.16% 495 66.44% 107 32.04% 880 60.94%
C 12 3.29% 33 4.43% 92 27.54% 137 9.49%
D -- 0.00% 14 1.88% 63 18.86% 77 5.33%
Total 365 100.00% 745 100.00% 334 100.00% 1,444 100.00%
</TABLE>
Delays may be caused for the following reasons:
1. Mortgages are new financial products in China and the bankers
providing such facilities to new home buyers are unfamiliar with the
procedure.
2. The Public Housing Fund does not have sufficient money to fund the
borrowing because of the high demand.
3. The delay was caused by home buyers' personal reasons.
d) Status of payment for homes purchased as at September 30, 1999:
NUMBER OF TOTAL
UNITS SALES VALUE AMOUNT PAID AMOUNT OWING
--------- ----------- ----------- ------------
HK$'000 HK$'000 HK$'000
Phase 1 365 109,402 108,060 1,342
Phase 2 745 257,376 247,051 10,325
Total 1,110 366,778 355,111 11,667
Phase 3 334 126,428 86,452 39,976
Total 1,444 493,206 441,563 51,643
Total sales value is based on the full purchase price of the home
purchased. As at September 30, 1999, Phases 1 and 2 have been constructed
and are currently ready for delivery or have been delivered.
32
<PAGE>
The following table sets forth a categorical analysis of the status of
payment of homes as at September 30, 1999:
PHASE 1 PHASE 2 PHASE 3 TOTAL
--------- --------- --------- --------
CATEGORY HK$'000 HK$'000 HK$'000 HK$'000
- -------- --------- --------- --------- --------
A -- -- 980 980 (note below)
B -- 262 938 1,200 (note below)
C 1,342 6,893 21,550 29,785
D -- 3,170 16,508 19,678
Total 1,342 10,325 39,976 51,643
Note:
These represent the remaining 10% of the purchase price
required to be paid upon the delivery of the home unit.
e) The number of homes completed but not sold as of September 30, 1999 is
as follows:
NUMBER OF NUMBER OF NUMBER OF
HOMES COMPLETED HOMES SOLD HOMES NOT SOLD
Phase 1 365 365 0
Phase 2 752 745 7
1,117 1,110 7
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations is based upon and should be read in conjunction with our
consolidated financial statements and their related notes included in this
prospectus. In particular, you should note that our financial statements have
been prepared in conformity with Hong Kong GAAP, which differs in certain
material respects from US GAAP. Please see note 16 to our consolidated
financial statements for a description of these differences.
OVERVIEW
Shanghai Chingchu commenced construction of Phase 1 of the CALIFORNIA
GARDENS project in June 1997. Home sales in Phase 1 began in September 1997,
and home sales in Phase 2 began in July 1998, in each case after obtaining a
pre-sales certificate from the Shanghai House and Land Administration Bureau.
Construction of Phase 3 reached a preliminary stage at the end of March 1999,
and Shanghai Chingchu began selling units in this Phase in April 1999.
The following tables set forth information relating to homes delivered to
buyers, the aggregate purchase price under new sales contracts, and sales
backlog for the fiscal years ended March 31, 1998 and 1999 and the six months
ended September 30, 1998 and 1999 (HK$ in thousands):
<TABLE>
<CAPTION>
HOMES DELIVERED
----------------------------------------------------------
FISCAL YEAR ENDED MARCH 31,
----------------------------------------------------------
1998 1999
--------------------------- ----------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE
HOMES SALES PRICE HOMES SALES PRICE
----------- ------------- ----------- --------------
<S> <C> <C> <C> <C>
CALIFORNIA GARDENS
Phase 1 ......... -- -- 365 HK$ 109,171
Phase 2 ......... -- -- -- --
Phase 3 ......... -- -- -- --
Phase 4 ......... -- -- -- --
-- ----------- --- --------------
Total ........... -- -- 365 HK$ 109,171
== =========== === ==============
</TABLE>
<TABLE>
<CAPTION>
HOMES DELIVERED
---------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1998 1999
------------------------------- -----------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE
HOMES SALES PRICE HOMES SALES PRICE
----------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
CALIFORNIA GARDENS
Phase 1 .......... 355 HK$ 105,935 -- HK$ 231
Phase 2 .......... -- -- 745 HK$ 257,376
Phase 2A ......... -- -- -- --
Phase 3 .......... -- -- -- --
Phase 4 .......... -- -- -- --
--- ------------ --- --------------
Total ............ 355 HK$ 105,935 745 HK$ 257,607
=== ============ === ==============
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NEW SALES CONTRACTS
---------------------------------------------------------------
FISCAL YEAR ENDED MARCH 31,
---------------------------------------------------------------
1998 1999
------------------------------- -----------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE
HOMES SALES PRICE HOMES SALES PRICE
----------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
CALIFORNIA GARDENS
Phase 1 ......... 344 HK$ 101,071 21 HK$ 8,100
Phase 2 ......... -- -- 713 HK$ 245,129
Phase 3 ......... -- -- -- --
Phase 4 ......... -- -- -- --
--- ------------ --- --------------
Total ........... 344 HK$ 101,071 734 HK$ 253,229
=== ============ === ==============
</TABLE>
<TABLE>
<CAPTION>
NEW SALES CONTRACTS
-----------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------
1998 1999
------------------------------- -------------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE
HOMES SALES PRICE HOMES SALES PRICE
----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
CALIFORNIA GARDENS
Phase 1 .......... 11 HK$ 4,794 -- HK$ 231*
Phase 2 .......... 555 HK$ 189,434 32 HK$ 12,247
Phase 2A ......... -- -- -- --
Phase 3 .......... -- -- 334 HK$ 126,428
Phase 4 .......... -- -- -- --
--- ------------ --- ------------
Total ............ 566 HK$ 194,228 366 HK$ 138,906
=== ============ === ============
</TABLE>
<TABLE>
<CAPTION>
HOMES BACKLOG
------------------------------------------------------------
FISCAL YEAR ENDED MARCH 31,
------------------------------------------------------------
1998 1999
------------------------------- --------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE
HOMES SALES PRICE HOMES SALES PRICE
----------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
CALIFORNIA GARDENS
Phase 1 ......... 16 HK$ 4,704 2 HK$ 690
Phase 2 ......... 348 HK$ 119,350 6 HK$ 2,217
Phase 3 ......... -- -- 391 HK$ 149,939
Phase 4 ......... -- -- 293 HK$ 105,129
--- ------------ --- -----------
Total ........... 364 HK$ 124,054 692 HK$ 257,975
=== ============ === ===========
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
HOMES BACKLOG
---------------------------------------------------------------
SIX MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------
1998 1999
------------------------------- -----------------------------
NUMBER OF AGGREGATE NUMBER OF AGGREGATE
HOMES SALES PRICE HOMES SALES PRICE
----------- ----------------- ----------- ---------------
<S> <C> <C> <C> <C>
CALIFORNIA GARDENS
Phase 1 .......... 4 HK$ 1,230 -- --
Phase 2 .......... 62 HK$ 21,175 2 HK$ 878
Phase 2A ......... -- -- 12 HK$ 6,967
Phase 3 .......... 300 HK$ 113,207 45 HK$ 18,185
Phase 4 .......... -- -- 513 HK$ 188,529
--- ------------ --- --------------
Total ............ 366 HK$ 135,612 572 HK$ 214,559
=== ============ === ==============
</TABLE>
- ----------------
* During the six months ended June 30, 1999, homes were exchanged in and
between Phases I and II by the home buyers. The amount shown represents the
total price differences of the exchanges.
Home buyers pay an average booking fee of HK$ 18,700 per house and may
cancel their purchase with a full refund at any time before they sign a sales
contract. The sales contract is signed upon the completion of foundation. The
booking fee is included in our backlog upon receipt. We estimate that the
average period between the execution of a sales contract for a home and
delivery of that home is approximately 12 to 15 months.
Under Hong Kong GAAP, we recognize revenue from the sale of homes on a
percentage of completion basis. This accounting basis differs, however, from
the accounting basis we used when we calculated aggregate sales prices in the
tables above. In those tables, we indicate the full amount of the purchase
price of each home upon the execution and delivery of a sales contract.
Revenues recognized under the percentage of completion basis with respect to
the sale of our homes in the several Phases of the CALIFORNIA GARDENS project
for the periods indicated are as follows:
FISCAL YEAR ENDED SIX MONTHS ENDED
MARCH 31, SEPTEMBER 30,
------------------ --------------------
1998 1999 1998 1999
------- -------- -------- ---------
(IN HK$ MILLIONS)
CALIFORNIA GARDENS
Phase 1 .......... 73.92 35.26 31.95 0.23
Phase 2 .......... -- 234.66 69.83 22.71
Phase 2A ......... -- -- -- --
Phase 3 .......... -- -- -- 92.68
Phase 4 .......... -- -- -- --
----- ------ ----- -----
73.92 269.92 101.78 115.62
===== ====== ====== ======
As of September 30, 1999 our backlog increased 58.09% (or 56.28% based on
bookings) to HK$ 215 million (572 bookings) from HK$ 136 million (366 bookings)
as of September 30, 1998.
On April 2, 1999, we entered into management service agreements with
Messrs. Stein, Haft and Kallan and Silver Pacific Trading Ltd., under which
they agreed to provide advice and assistance to us concerning our business
strategy and corporate activities. Please refer to "Management--Management
Service Agreements" on page 80 for a description of the terms of these
management service agreements.
After this offering, we will continue to develop and sell homes at the
CALIFORNIA GARDENS project and seek to develop and market similar residential
communities in other principal cities in China. Please refer to the section
"About Our Company--Our Business Strategy" on pages 61 and 62 for the details
of our business strategy.
36
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SIX MONTHS ENDED SEPTEMBER
30, 1998.
Our revenues from home sales for the six months ended September 30, 1999
increased 13.60% to HK$ 115.62 million from HK$ 101.78 million for the six
months ended September 30, 1998. The average selling price of homes delivered
increased 16.11% to HK$ 346,000 per unit from HK$ 298,000 per unit as a result
of increased demand for our homes. We believe our increase in revenues and
homes delivered resulted primarily from higher levels of awareness of our
CALIFORNIA GARDENS project among potential Shanghai home buyers during 1999,
and because of the continued development of our marketing and sales efforts.
Cost of home sales for the six months ended September 30, 1999 increased
approximately 12.41% to HK$ 90.85 million from HK$ 80.82 million for the six
months ended September 30, 1998. This increase is primarily due to the related
increase in home sales revenues. The cost of home sales as a percentage of home
sales for the six months ended September 30, 1999 decreased to 78.58% from
79.41% for the six months ended September 30, 1998 as a result of the sale of a
lower percentage of larger units, which provide lower profit margins than sales
of our mid-sized and smaller units. As of September 30, 1998 and 1999, for
homes under construction, the amount of revenue recognized, costs incurred and
estimated costs to completion are as follows:
SEPTEMBER 30,
--------------------------
1998 1999
------------ -----------
(IN HK$ MILLIONS)
Revenue recognized ......... HK$ 101.78 HK$ 115.62
Cost incurred .............. HK$ 80.82 HK$ 90.85
Estimated costs to
completion ................. HK$ 77.98 HK$ 21.86
Our selling, marketing, general and administrative ("SG&A") expenses for
the six months ended September 30, 1999 increased approximately 10.40% to
HK$ 8.07 million from HK$ 7.31 million for the six months ended September 30,
1998. This increase is primarily a result of variable selling costs associated
with the greater number of homes marketed and delivered to buyers. The
significant components of our SG&A expenses during these periods were (a) wages
and employee benefits, which represented approximately 13.40% and 10.42% of our
total SG&A expenses in the six month periods ended September 30, 1998 and 1999,
respectively, (b) travel and entertainment expenses related to increasing our
market exposure and establishing and enhancing relationships with third parties
such as contractors, design firms and public relations, which represented
approximately 37.63% and 35.37% of our total SG&A expenses in the six month
periods ended September 30, 1998 and 1999, respectively, and (c) advertising
expenses, which represented approximately 20.61% and 19.95% of our total SG&A
expenses in the six month periods ended September 30, 1998 and 1999,
respectively. Overall, SG&A expenses as a percentage of total revenues
decreased to 6.96% in the six months ended September 30, 1999 from 7.15% in the
six months ended September 30, 1998, primarily due to economies of scale.
As a result of the foregoing, income before income taxes and minority
interest for the six months ended September 30, 1999 increased 24.84% to
HK$ 15.23 million from HK$ 12.20 million for the six months ended September 30,
1998.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO FISCAL YEAR ENDED MARCH 31,
1998.
Our revenues from home sales for fiscal 1999 increased 265.15% to
HK$ 269.92 million from HK$ 73.92 million for fiscal 1998. The increase of
revenues resulted primarily from higher levels of awareness among potential
Shanghai home buyers during 1999, and because of the continued development of
our marketing and sales efforts. As of March 31, 1998 and 1999, for homes under
construction, the amount of revenue recognized, the amount of costs incurred
and the estimated costs to completion are as follows:
37
<PAGE>
MARCH 31,
-------------------------
1998 1999
----------- -----------
(IN HK$ MILLIONS)
Revenue recognized ......... HK$ 73.92 HK$ 269.92
Cost incurred .............. HK$ 67.10 HK$ 208.68
Estimated costs to
completion ................. HK$ 18.64 HK$ 6.98
Cost of home sales for fiscal 1999 increased approximately 211.0% to
HK$ 208.68 million from HK$ 67.10 million for fiscal 1998. This increase is
primarily due to the related increase in home sales revenues. The cost of home
sales as a percentage of home sales decreased to 77.31% for fiscal 1999 from
90.78% for fiscal 1998 as a result of higher selling prices and lower
construction costs of Phase 2 as compared to that of Phase 1. In fiscal 1999,
86.94% of our revenues came from the sale of homes in Phase 2. The average
selling price for homes in Phase 2 was RMB 2,418 per square meter, which was
10.77% higher than the average selling price in Phase 1. The average cost per
home in Phase 2 was RMB 1,711 per square meter, which was 5.73% lower than the
average cost per home in Phase 1.
Our SG&A expenses during fiscal 1999, increased approximately 28.87% to
HK$ 13.48 million from HK$ 10.46 million for fiscal 1998. This increase was
primarily a result of variable selling costs associated with the greater number
of homes marketed and delivered to buyers. The significant components of our
SG&A expenses during these periods were (a) wages and employee benefits, which
represented approximately 6.03% and 14.89% of our total SG&A expenses in fiscal
1998 and 1999, respectively, (b) travel and entertainment expenses related to
increasing our market exposure and establishing and enhancing relationships
with third parties such as contractors, design firms and public relations,
which represented approximately 32.48% and 32.34% of our total SG&A expenses in
fiscal 1998 and 1999, respectively, and (c) advertising expenses, which
represented approximately 34.87% and 21.28% of our total SG&A expenses in
fiscal 1998 and 1999, respectively. SG&A expenses as a percentage of total
revenues decreased to 4.98% in fiscal 1999 from 14.09% in fiscal 1998,
primarily due to economies of scale.
As a result of the foregoing, income before income taxes and minority
interests in fiscal 1999 increased to HK$ 42.36 million from a loss of HK$ 4.81
million for fiscal 1998.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1997
No comparison of results of operations for the fiscal year ended March
31, 1998 to the fiscal year ended March 31, 1997 has been provided because the
operations of CALIFORNIA GARDENS began in May 1997. We had SG&A expenses of
HK$ 10,609 during fiscal 1997.
38
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
General
Our financing needs depend upon our construction volume, cost of sales
and land activities in regard to future developments. Prior to this offering,
our most significant sources of funds were loans from our principal
shareholder, Far East Consortium, of which HK$ 74 million was converted to
common shares in April 1999. Additionally, at September 30, 1999, we had
outstanding homebuilding borrowings of approximately HK$ 43.15 million. We
believe that funds generated from operations and expected borrowing
availability under existing and future bank credit facilities will be
sufficient to fund our working capital requirements during fiscal 2000. For a
further description of our borrowings, see note 9 to our consolidated financial
statements. At January 1, 2000 we had the following loans outstanding:
<TABLE>
<CAPTION>
AMOUNT ANNUAL
OUTSTANDING INTEREST MATURITY
LENDER HK$ (MILLION) RATE DATES
- ----------------------------------------------- --------------- ---------- -------------
<S> <C> <C> <C>
Industrial & Commercial Bank of China ......... 7.48 6.138% January 2000
Construction Bank of China .................... 3.74 6.435% January 2000
Industrial & Commercial Bank of China ......... 18.71 6.435% May 2000
Bank of Shanghai .............................. 4.68 6.435% July 2000
Po Shan Bank .................................. 10.53 10.500% July 2002
</TABLE>
Funds borrowed under these facilities were generally used for land
acquisition, start-up operations, and the building of homes, as well as for
working capital and other general corporate purposes. We have no additional
fund availability under these credit facilities. After this offering, we intend
to fund our cash needs through funds generated from operations, and, if
necessary, future equity or debt offerings or additional bank borrowings.
Further, we intend to seek extensions of the maturity dates of our existing
credit facilities, although no assurance can be given that we will be able to
do so on commercially acceptable terms or at all. If we are unable to obtain
additional financing, our development plans will be materially curtailed until
such time, if any, as we are able to obtain such financing.
DEBT SERVICE
Scheduled and estimated maturities of our borrowings after the recent
extension of maturity dates of our credit facilities are approximately
HK$ 11.22 million during fiscal 2000, approximately HK$ 23.39 million in fiscal
2001 and approximately HK$ 10.53 million in fiscal 2003. We believe that we
will fund the maturities of debt and required expenditures relating to our
developments primarily with cash flow from operations and existing credit
lines, new or renewed credit lines or term loans or through the sale of equity
or debt. See note 9 to our consolidated financial statements.
CASH FLOWS
We experienced a decrease in cash flows during fiscal 1999 of HK$ 10.83
million from fiscal 1998 primarily due to less cash provided by financing
activities. The decrease was partially offset by less cash used in operating
activities and used in investing activities. Cash flows during the six months
ended September 30, 1999 decreased by HK$ 4.92 million from the six months
ended September 30, 1998. This is primarily the result of a decrease in cash
flows generating operating activities. Cash flows required by operating
activities decreased by HK$ 22.61 million in fiscal 1999 from fiscal 1998, and
by HK$ 6.59 million in the six months ended September 30, 1999 from the six
months ended September 30, 1998, primarily due to higher sales. Cash flows
required by investing activities decreased by HK$ 19.83 million in fiscal 1999
from fiscal 1998, and decreased by HK$ 0.41 million in the six months ended
September 30, 1999 from the six months ended September 30, 1998, primarily due
to reduction on land acquisition for public utilities usages. Cash flows from
financing activities decreased by HK$ 53.27 million in fiscal 1999 from fiscal
1998, and increased by HK$ 1.26 million in the six months ended September 30,
1999 from the six months ended
39
<PAGE>
September 30, 1998, primarily due to a reduction of funding from Far East
Consortium.
INTEREST RATES
Our business is sensitive to fluctuations in interest rates. Overall
housing demand is adversely affected by increases in interest rates. If
mortgage interest rates increase significantly, this may negatively impact the
ability of a home buyer to secure adequate financing. Higher interest rates may
adversely affect our revenues, gross margins and net income. According to the
State Statistical Bureau, Monthly Bulletin of Statistics--China, Beijing, as of
March 31, 1997, 1998 and 1999, China's lending interest rate was 10.08%, 7.98%
and 6.93%, respectively. According to that same source, as of September 30,
1998 and 1999, China's lending interest rate was 6.93% and 5.85%, respectively.
INFLATION
We believe that the Company, as well as the homebuilding industry in
general, may be adversely affected during periods of high inflation, primarily
because of higher land and construction costs. In addition, higher mortgage
interest rates may significantly affect the affordability of permanent mortgage
financing to prospective purchasers. Inflation also increases interest costs
and costs of labor and materials. We attempt to pass through any increases in
costs through increased home selling prices and, to date, inflation has not had
a material impact on our operating results. However, there is no assurance that
inflation will not have a material adverse impact on our business in the
future. According to the State Statistical Bureau, Monthly Bulletin of
Statistics--China, Beijing, as of March 31, 1997, 1998 and 1999, China's
inflation rate was 4.00%, 0.70% and -1.80%, respectively. According to the same
source, as of September 30, 1998 and June 30, 1999, China's inflation rate was
- -1.50% and -2.68%, respectively.
OUR YEAR 2000 STATE OF READINESS
With respect to our information technology and other systems, our
business of developing real property in China does not involve production lines
or technically or electronically-controlled operations that possess embedded
technology or microcontrollers. Our information technology systems relate only
to management and financial control software. Because we recently acquired new
systems to perform these functions, and have received Year 2000 compliance
representations from our software vendors, we do not believe that there are
material Year 2000 issues with respect to our information technology systems.
Furthermore, we have not experienced any adverse effects to date from Year 2000
issues. Notwithstanding the above, we have taken steps to address potential
Year 2000 issues.
We plan to install and operate a portion of our information technology
systems after the Year 2000. With respect to our sales management and financial
accounting software, on October 18, 1999 we received a Year 2000 testing report
conducted by the China Software Testing Center from our financial and
accounting software systems developer, Shenzhen Kingdee Software Tech Co. Ltd.,
which confirmed that our financial accounting software is Year 2000 compliant.
We currently conduct business with a number of third parties including
local government authorities, contractors and financial institutions. We rely
on local government authorities in connection with the alienation of land,
provision of external infrastructure and the supply of water, electricity, gas
and general security to the housing projects developed by the Company. We also
hire contractors from time to time in connection with the development of our
housing projects in China. Financial institutions provide financial support for
the development of our projects in the form of bridge loans and short term
financings. The Chinese government and financial institutions are fully alert
of the potential problems relating to Year 2000 issues. These entities have
been running internal tests to prevent potential Year 2000 issues. We have
contacted each of our major third party vendors and service providers such as
the banks, governmental departments, and the electric, gas, telephone and water
departments. We have been assured by each that all necessary precautions have
been taken to ensure Year 2000 compliance.
We have not used any independent verification processes to assure the
reliability of their risks.
40
<PAGE>
THE COSTS TO ADDRESS OUR YEAR 2000 ISSUES
We estimate no costs related to fixing Year 2000 issues. Our
construction machinery and tools do not contain any embedded technology. We
believe that there will be no cost to replacing non-compliant information
technology systems of embedded technology systems. To date, the cost incurred
by the Company in connection with Year 2000 compliance issues is not material.
We have incurred no material costs from our employees who devote time in
connection with inquiries addressed to third parties regarding their Year 2000
compliance.
The funds used to identify assessed and remediate potential Year 2000
costs have been derived from our administrative and salary expenses.
THE RISKS OF OUR YEAR 2000 ISSUES
We estimate that the greatest risk to our activities arising out of Year
2000 disruptions would be those caused by disruptions in the information
technology systems of our third party suppliers and government agencies. In
addition, we have not deferred any information technology projects because of
Year 2000 issues.
OUR YEAR 2000 CONTINGENCY PLAN
In order to prepare for Year 2000 related disruptions of our business,
we have devised a plan pursuant to which all personnel is required to maintain
full back-up documentation of their records. In the event of Year 2000-related
disruptions, we are confident that it can regenerate such records in the event
of any such disruption.
41
<PAGE>
OVERVIEW OF THE LEGAL FRAMEWORK
REGULATING CHINA'S REAL ESTATE MARKET
GENERAL
Private land ownership in China was abolished in the 1950s and was
replaced by a centrally planned and managed land resources allocation system,
which legally prohibited the transfer or lease of land in China. With China's
economy moving towards a more liberalized market-oriented system, reforms have
been introduced in its property sector. Under land reform legislation, while
the transfer of land ownership is still restricted, "land use rights" may be
granted, transferred, leased or mortgaged in accordance with stipulated legal
procedures and requirements.
NATIONAL LEGISLATION
GENERAL
In 1988, the Seventh National People's Congress passed an amendment to
the constitution of China which paved the way for reforms of the legal regime
governing the use of land and transfer of land use rights. In 1990, the State
Council enacted the "Provisional Regulations of China Concerning the Grant and
Assignment of the Right to Use State Land in Urban Areas," which are generally
referred to as the "Urban Land Regulations." The Urban Land Regulations
formalized the process of the grant and transfer of land use rights for
consideration. Under this system, the State retains the ultimate ownership of
the land. However, the right to use the land can be granted by the State and
local governments in its capacity as land owner for a maximum period of 70
years for residential development, upon the payment to the State of a land
premium for the grant of the land use right. As a result of these reforms,
local and foreign companies, enterprises, other economic organizations and
individuals may apply for and be granted land use rights. The Urban Land
Regulations provide that the right to use land may be granted by agreement with
the land grant authority, by invitation for bids or by auction and that a land
grant contract should be entered into upon the grant of a land use right.
Subject to compliance with the terms of a land grant contract, a holder of land
use rights may exercise substantially the same rights as a land owner during
the grant term, including holding, leasing, transferring, mortgaging and
developing the land for sale. Upon expiration of the term of grant, renewal is
possible subject to the payment of a new land premium and execution of a new
land grant contract. If the term of grant is not renewed, the land use rights
and the ownership of any homes or buildings on the land will become the
property of the government without compensation.
RECENT DEVELOPMENTS
Upon becoming the Premier of China in March 1998, Zhu Rongji renewed
efforts for structural economic reform by announcing, among other initiatives,
a new housing reform program. The program directs employers to stop
distributing free housing to employees beginning July 1, 1998 (which was
deferred until January 1999) and instead to increase cash wages so that
employees can buy housing or pay higher rents. According to a bulletin
distributed by the U.S. Department of State in April 1999, the principal
policies of this new housing initiative are as follows:
/bullet/ ESTABLISHING A NEW URBAN HOUSING SYSTEM ADAPTED TO THE
"SOCIALIST MARKET ECONOMIC SYSTEM" AND THE SPECIFIC NATIONAL
SITUATION OF CHINA. The principal element of this policy involves the
termination of employee housing benefits and an increase in cash
wages to encourage home ownership. Historically, employees of the
government and State-owned enterprises received a small salary and a
generous benefits package, including low rent or free housing. Under
the new policy, wages are expected to increase and a cash housing
allowance will be provided or a provident fund will be established
for employees. Employees are able to use the cash allowance to pay
rent or make mortgage payments. The fund would serve primarily to
assist individuals in securing loans to purchase homes.
/bullet/ CREATING A MULTI-LEVEL HOUSING SUPPLY SYSTEM. A multi-level
housing supply
42
<PAGE>
system has been introduced to accommodate the needs of families of
different income levels. This system is designed to gradually abolish
subsidized, or "welfare" housing, establish settlement and low margin
housing for low income families and define commercial housing for
middle and high income families.
/bullet/ EXPANDING THE SCOPE OF HOME FINANCING. Under the new policy,
commercial banks in all cities can issue individual mortgage loans
for the purchase of government-directed and sanctioned housing. The
People's Bank of China has reduced its interest rates, and a number
of foreign banks have obtained the necessary licenses to conduct
retail banking operations in China. We expect this to result in a
more competitive mortgage market which will benefit new home buyers.
In order to ensure the effectiveness of housing loans, efforts will
be made to improve the housing property rights mortgage registration
system. In June 1998, the government announced a Personal Housing
Loan Management Regulation, which addressed different aspects of
personal housing loans.
/bullet/ IMPROVING THE REGULATION OF THE HOUSING MARKET. New regulations
have been, and are being developed to insure the stability and safety
of China's housing reforms and programs.
LOCAL LEGISLATION
While the Urban Land Regulations set out a general framework for
transactions governing land use rights, regulations adopted by local
governments control specific transactions within their respective
jurisdictions. Local regulations contain provisions and have implemented
procedures which differ from the national legislation. National land
authorities, however, take the position that any inconsistencies should be
resolved in favor of the national legislation.
U.S.-CHINA HOUSING INITIATIVE
On July 1, 1998 the day China's housing reform program was implemented,
President Clinton visited a housing site in Shanghai to demonstrate U.S.
support for China's home ownership program. The President announced the
establishment of a U.S.- China housing initiative at that time, including the
formation of a U.S.- China Residential Building Council of which we have been
invited to be a member.
The housing initiative will address finance and construction issues and
is intended to support China's social reform efforts by providing
sector-specific guidance and cooperation to China as it pursues housing reform
measures.
ACQUISITION OF LAND USE RIGHTS
GRANT
The grant of land use rights from the State is often referred to as the
"first tier market" by Chinese developers. Under the law of the People's
Republic of China on the Administration of Urban Real Estate (the "Urban Real
Estate Law"), land use rights may be granted by way of auction, invitation of
tenders or by agreement between the State and the land user. It requires that
the prices of land granted by way of agreement must not be below the minimum
land premium set by the State. Beijing, Guangzhou and Shanghai have already
issued formulae for calculating land premium, with reference to location,
transportation and infrastructure. These formulae are expected to be reviewed
periodically in order to reflect the market supply and demand. Local
governments at or above the county level may grant land use rights. Their scope
of authority varies in accordance with their position in the administrative
hierarchy. Central government approval must be obtained for any grant of any
arable land which is designated as "basic cropland" by the State, other arable
land over 35 acres and non-arable land over 70 acres.
In the case of a grant by agreement, the local land bureau will provide
information on the land and the basic terms upon which land use rights will be
granted. Once the terms have been agreed on, a grant contract will be signed by
the local land bureau and the land user. Normally, land use rules will be
attached to the grant contract. A deposit is normally required to be paid and a
time schedule will be specified for the payment of the balance of the land
premium. Upon payment of the land premium and subject to the other requirements
of the
43
<PAGE>
local land bureau, a State Land Use Rights Certificate will be issued to the
land user.
A land bureau setting out the terms of the grant can also send
invitation of tenders, and bidders are asked to submit sealed bids together
with the payment of a security deposit. A bid evaluation committee formed by
the land bureau is responsible for opening the bids and deciding on the
successful bidder who shall then sign the grant contract with the land bureau
and pay the balance of the land premium before obtaining the State Land Use
Rights Certificate and effecting registration.
In an auction, the grant is simply awarded to the highest bidder. The
land bureau will then sign a grant contract and the usual registration
requirements have to be complied with.
Several local governments have stipulated standard terms for inclusion
in grant contracts. For example, the standard form grant contracts promulgated
by the State Land Bureau list the following items for inclusion in grant
contracts:
/bullet/ manner of payment of land premium;
/bullet/ use of land;
/bullet/ building restrictions: site coverage, total gross floor area
and height limitations;
/bullet/ construction of public facilities;
/bullet/ easement and repair rights to be reserved by the government;
/bullet/ submission of building plans and approval;
/bullet/ deadline for completion of construction;
/bullet/ repair obligations;
/bullet/ responsibility for obtaining supply of utilities; and
/bullet/ restrictions against alienation before payment of land premium
and completion of prescribed development.
If a land user wishes to change the specified use of the land after the
execution of a grant contract, then approval must first be obtained from the
land bureau and the urban planning department and a new grant contract may have
to be signed where the land premium will be adjusted.
If the land user fails to develop and invest in the land within the
period of time specified in the grant contract, the land bureau has the right
to impose various penalties ranging from fines to withdrawal of the grant
without consideration.
ASSIGNMENT FROM CURRENT LAND USERS
In addition to a direct grant from the government, an investor may also
acquire land use rights by entering into an assignment contract with an
existing land user who holds granted land use rights or by entering into a
joint development agreement with such a land user. Local Chinese entities very
often enjoy the right to use land allocated by the State without payment of any
consideration. This type of land use right is generally referred to as
"allocated land use right." The Urban Land Regulations state that assignments
or mortgages of allocated land use rights in urban areas and any buildings or
attachments situated on that land are subject to the approval of the relevant
land and real estate departments. The conditions for approval include the
following:
/bullet/ the existing land user must be an individual or a company,
enterprise or other economic organization;
/bullet/ the existing land user must hold a State Land Use Rights
Certificate and the relevant real estate ownership certificates for
the buildings and attachments;
/bullet/ a formal grant contract must be entered into with the relevant
land department; and
/bullet/ the land premium in respect of the land payable and the grant
contract must be paid while payment may be made from the proceeds of
development.
The assignment or joint development is subject to terms and conditions
specified in the land use rights grant contract. For housing construction
projects, Chinese law requires that at least 25% of total construction costs
44
<PAGE>
(excluding land premium costs) be expended and the construction schedule and
date of completion and delivery of the project have been determined before
assignment can take place. A higher minimum construction and investment fee may
be provided in land use rights grant contracts made between the local land
administration bureau and the land user. All rights and obligations of the
current holder under a land use rights grant contract will be transferred
contemporaneously to the assignee of the land use rights. The relevant local
government has the right to acquire the land use rights to be assigned if the
assignment price is obviously lower than the market price. Relevant local
governments may also acquire the land use rights from a land user in the event
of redevelopment of the area under a revised town planning. The land user will
then be compensated for the loss of his land use rights.
LEASING
The Urban Land Regulations and the Urban Real Estate Law both permit
leasing of granted land use rights and the buildings or homes situated on the
land. Leasing of properties situated in urban areas is governed by the Measures
for the Administration of Leasing of Urban Real Estate, which were promulgated
by China's Ministry of Construction in June 1995. These regulations permit
property owners to lease their properties to others for residential or
commercial uses except as otherwise prohibited by relevant laws. Parties to a
property lease transaction are required to enter into a lease contract that
should specify all of the terms of the lease arrangement as required by
statute, and to register the contract with the local real property authorities.
Local governments may impose rent control. Subject to the consent of the
landlord, a tenant may assign or sublease the leased property to a sub-tenant.
REGISTRATION OF REAL ESTATE INTERESTS
Real estate registries have been established in all cities in China. In
most cities, there are separate registries for land use rights and buildings.
However, in Shenzen, Shanghai, Guangdong and some other major cities, the two
registries have been combined. In places where there are separate registries,
the holder of a land use right will be issued a Real Estate Ownership
Certificate for its "ownership" of the property and a Land Use Rights
Certificate for its land use rights of the underlying property. The holder of a
land use right who is issued a "Real Estate Ownership Certificate" holds the
land use rights and owns the property erected on the land. In the other places
where registries have been combined, the holder of a land use right will be
issued only a Land and Real Estate Certificate. All entities and individuals
must register all their lawful state-owned land use rights and rights to own
and use of collectively-owned land as well as other rights in respect of land.
Further, the mortgage of a land use right must be registered in the land
registration departments. Duly registered land interests which are legally
protected constitute notice to all other persons of the interests of the
registrant.
PRE-SALE
The sale of interests in buildings under construction but which have not
been completed is permitted subject to the fulfillment of the requirements set
forth in the Measures for the Administration of the Pre-Sale of Urban Commodity
Premises, promulgated by China's Ministry of Construction and effective from
January 1, 1995 (the "Pre-Sale Measures"). In addition, most of the major
cities in China have promulgated local regulations governing pre-sales of
commodity premises. According to the Pre-Sale Measures, a developer must obtain
a Pre-Sale Permit before it may proceed to sell the uncompleted commodity
units. To qualify for the Pre-Sale Permit, the following conditions must be
satisfied:
/bullet/ the land premium has been paid in full and a State Land Use
Rights Certificate has been obtained;
/bullet/ a Construction Works Planning Permit is held;
/bullet/ at least 25% of the total investment for the project
development and construction of the units under pre-sale must be
paid; and
/bullet/ the construction schedule and the date of project completion
have been determined.
45
<PAGE>
In addition, the developer is required to execute pre-sale contracts in the
form approved by the local land and real estate administration authorities with
the purchaser, and must also file and register the executed pre-sale contracts
with the local land and real estate administration authorities. The proceeds
from the pre-sale of the commodity units may only be used for funding the
relevant construction works.
Pre-sales conducted outside China are generally subject to approval by
the local government in which the property is situated.
DESIGN AND CONSTRUCTION
A Chinese design institute must be engaged for the design of a foreign
investment property project in China to facilitate compliance with local
regulations concerning urban planning, architectural design and fire safety.
Foreign contractors are generally required to work together with a
Chinese construction unit on construction projects. Foreign contractors are
also required to obtain a qualification certificate to engage in project
construction work.
LICENSING OF FOREIGN INVESTMENT IN PROPERTY DEVELOPMENT; INVESTMENT STRUCTURE
The Urban Land Regulations state that foreign entities may acquire land
use rights in China unless the law otherwise provides. However, in order to
develop the land acquired, foreign investment enterprises, in the form of
equity or co-operative joint ventures or wholly foreign-owned enterprises, need
to be established. Establishment of a foreign investment enterprise engaged in
property development, commonly referred to as a "development company", is
subject to approval by the relevant departments of China's government in
accordance with the following procedure. First, the Chinese party to a joint
venture project or the foreign investor (in the case of a wholly foreign-owned
project) will submit a project proposal to the local planning commission for
project proposal approval. If the local planning commission considers the
proposed property development project to be consistent with the prevailing
national and local economic plans, it will grant a project proposal approval to
the applicant. The State Development and Planning Commission has been given the
authority to regularly promulgate guidelines for direction of foreign
investment.
Once the project proposal has been approved, the Chinese party and the
foreign investor may proceed to prepare a joint feasibility study report that
reflects their assessment of the overall economic viability of the proposed
development company. At the same time, the parties may proceed to negotiate and
execute the joint venture contract and articles of association for the
establishment of a development company. In the case of a wholly foreign-owned
project, the foreign investor may then prepare and sign the articles of
association. The joint feasibility study report, the joint venture contract
and/or articles of association will then be submitted to the local foreign
economic and trade commission for approval. If the local foreign economic and
trade commission finds the application documents to be in compliance with
Chinese law, it will issue an approval certificate for the establishment of the
development company. With this approval certificate, the foreign investor
and/or the Chinese party can apply to the local administration for industry and
commerce for a foreign investment enterprise business license for the
development company.
Upon the issuance of the business license, the development company is
established as a Chinese legal person and is licensed to engage in property
development activities as described in the business license. Under the
Regulations for the Administration of Real Estate Development Enterprises,
promulgated by China's Ministry of Construction and effective from December 1,
1993, all property development companies, including foreign investment
enterprises, are also required to apply for a property development enterprise
qualification certificate from the local construction commission. The
qualification certificates are classified into grade 1 to grade 5 based upon
the type of business enterprise created. We have been accorded a grade 3
standard by the local construction commission. Sole ownerships, joint ventures,
and co-operations are generally referred to as grade 3 enterprises. A grade 3
enterprise is not disadvantageous.
46
<PAGE>
Property development projects in China are generally divided into
so-called "single projects" and "large tract development projects." In single
projects, buildings are constructed on a plot of land and the individual units
in the buildings are sold to purchasers. Large tract development projects
involve comprehensive development and construction after procurement of land
use rights: the land is leveled and facilities for water, electricity and heat
supply, roads, communications, etc. are constructed, thus forming an area for
industrial or other use. Thereafter, the developer either assigns the land use
rights or further develops the land for sale or leasing.
MORTGAGES
The grant of mortgages in China is governed by the Security Law of China
and by the laws regulating real estate. Under the Security Law, any mortgage
agreement or security agreement must include various specified provisions. If
land use rights are mortgaged, buildings erected on the mortgaged land at the
time the mortgage agreement is signed will also be subject to the mortgage. If
buildings are built on the mortgaged land after the mortgage agreement has been
signed, the buildings will not be subject to the pre-existing mortgage.
Under Chinese law, if there is an existing mortgage of the land use
rights, the Company, as a mortgagor, cannot pre-sell or assign it to a buyer
until and unless the mortgage on the land concerned has been relinquished. In
the case of a foreclosure proceeding on the mortgage by the mortgagee, there
are no consequences to the buyer whose land use rights are not included in the
mortgage.
The validity of a mortgage depends on, among other things, the validity
of the main contract, and whether the mortgagor has the certificates of
property ownership and/or certificates of land use rights obtained by grant or
assignment for value. Registration with appropriate authorities is also
necessary to make a mortgage effective. If a loan is not duly repaid, the
mortgagee may foreclose or sell the collateral by auction where the mortgagor
and mortgagee have reached an agreement in this respect. In the absence of such
an agreement, the mortgagee will have to bring an action before a competent
court in China in order to enforce its rights under the mortgage agreement.
Our mortgages are for land use rights and the structures built thereon.
Under the terms of our mortgage agreements, if a mortgagor defaults, a
mortgagee may repossess the land use right as well as the structure built
thereon. If we choose to mortgage our land use rights as well as the structures
thereon, then we will not be able to sell the land use right or any of the
structures to potential buyers unless the consent of the mortgagee is obtained.
If we choose to sell the land use rights as well as the structures and the
buyer chooses to later mortgage them, then we no longer have any responsibility
with respect to that land or any of the buildings thereon.
Under special circumstances, the Chinese government may, in the needs of
public interest, repossess land or structures on land. In this situation, the
Chinese government will pay compensation taking into account the remaining term
of the land use rights, as well as the development and use of the land and the
structures on the land. See "Financing for our Home Purchasers" and "Mortgages"
on page 67 of this prospectus.
FOREIGN EXCHANGE CONTROL IMPLICATIONS FOR FOREIGN INVESTORS IN CHINA
China's government imposes control over the convertibility of Renminbi
into foreign currencies. Under the current unified floating exchange rate
system, the PBOC publishes a daily exchange rate for Renminbi (the "PBOC
Exchange Rate") based on the previous day's dealings in the inter-bank foreign
exchange market. Financial institutions authorized to deal in foreign currency
may enter into foreign exchange transactions at exchange rates within an
authorized range above or below the PBOC Exchange Rate according to market
conditions.
Pursuant to the Foreign Exchange Control Regulations issued by the State
Council on April 1, 1996 and the Administration of Settlement, Sale and Payment
of Foreign Exchange Regulations which came into effect on July 1, 1996
regarding foreign exchange control (the "Regulations"), conversion of Renminbi
into foreign exchange by foreign
47
<PAGE>
investment enterprises for current account items, including the distribution of
dividends and profits to foreign investors of joint ventures, is permissible.
Foreign investment enterprises are permitted to remit foreign exchange from
their foreign exchange bank account in China on the basis of, inter alia, the
terms of the relevant joint venture contracts and the board resolutions
declaring the distribution of the dividend and payment of profits. Conversion
of Renminbi into foreign currencies and remittance of foreign currencies for
capital account items, including direct investment, loans, security investment,
is still subject to the approval of the State Administration of Foreign
Exchange ("SAFE") in each such transaction. On January 14, 1997, the State
Council amended the Foreign Exchange Control Regulations and added, among other
things, an important provision, as Article 5 provides that the State shall not
impose restrictions on recurring international payments and transfers.
Under the Regulations, foreign investment enterprises are required to
open and maintain separate foreign exchange accounts for different types of
foreign exchange transactions, and the permitted scope of receipts and
expenditures for such accounts is limited to the type of foreign exchange
transactions designated for such accounts. In addition, foreign investment
enterprises may only buy, sell and/or remit foreign currencies at those banks
authorized to conduct foreign exchange business upon the production of valid
commercial documents and, in the case of capital account item transactions,
document approval from the SAFE.
Currently, foreign investment enterprises are required to apply to SAFE
for "foreign exchange registration certificates for foreign investment
enterprises." With such foreign exchange registration certificates (which are
granted to foreign investment enterprises, upon fulfilling specified conditions
and which are subject to review and renewal by SAFE on an annual basis) or with
the foreign exchange sales notices from the SAFE (which are obtained on a
transaction-by-transaction basis), FIEs may enter into foreign exchange
transactions at banks authorized to conduct foreign exchange business to obtain
foreign exchange for their needs.
48
<PAGE>
OVERVIEW OF CHINA'S ECONOMY
GEOGRAPHY AND POPULATION
The People's Republic of China was founded on October 1, 1949. Its
capital is Beijing. China is situated in the eastern part of Asia and borders
Russia, Mongolia, Kazakhstan and Kyrgyzstan to the north, Tajikistan,
Afghanistan, Pakistan, India, Nepal and Bhutan to the west, Myanmar, Laos and
Vietnam to the south, and North Korea and the Pacific Ocean to the east. China
extends approximately 3,400 miles from north to south and 3,200 miles from east
to west, occupying a territory of approximately 3.7 million square miles, or
one-fifteenth of the world's total land area. In terms of land mass, China is
the third largest country in the world.
China has a widely varied topography, with mountain ranges and highlands
located generally in the west and plains and river basins located generally in
the east. There are three principal river basin systems in eastern China: the
Yellow River in the north, the Yangtze River in central China and the Pearl
River in the south, each of which supports intensive agricultural, industrial
and transportation activities. As of the end of 1997, total arable land in
China was 234.5 million acres (approximately 9.9% of the total area), while
forest areas accounted for 317.8 million acres (approximately 13.4% of the
total area).
China extends over tropical, subtropical, temperate and arctic zones;
however, most of the country's land mass and population are located in the
temperate zone.
China's total population increased from approximately 542 million in
1949 to approximately 1,236.3 million at the end of 1997 and 1,248.1 million at
the end of 1998, representing approximately one-fifth of the world's population
and making China the world's most populous country. Since 1949, there has been
a significant increase in the urban population of China from 10.6% of the total
population in 1949 to 20.4% of the total population as of the end of 1998. The
increase in China's population has created demands on its economy that have
been difficult to satisfy in such areas as housing, education, public
transportation and employment. In order to control population growth, China's
government has adopted a policy of family planning and encourages each couple
to have only one child. This policy has resulted in the annual rate of
population growth declining from 3.3% in 1963 (the highest annual growth rate
since 1949) to 0.953% in 1998. In 1997, people under 20 years of age
represented 33.1% of the total population of China, people from 20 to 39 years
of age represented 34.8%, people from 40 to 59 years of age represented 21.5%,
and people of 60 years of age and older represented 10.6% of the total
population of China. The average age of China's population is expected to
increase as a result of the reduction in the population growth rate and an
increase in the average life expectancy (70 years in 1997 compared to 36 years
in 1949) resulting from improved medical care and other factors.
ECONOMIC OVERVIEW
Since 1978, China has made great efforts to steer away from a centrally
planned economy toward a market economy. China's economy is managed in part
through a series of five-year economic and social development plans (each, a
"Five-Year Plan") formulated by the State Council and approved by the National
People's Congress ("NPC"). Each Five-Year Plan sets overall agricultural,
industrial, financial and other economic and social development targets.
Although the Central Government plans provide the framework for overall
economic development, Local Governments have considerable autonomy with respect
to the development of a number of sectors.
Historically, China has had an agrarian economy. Since the establishment
of the People's Republic of China in 1949, China's government has fostered
growth in the industrial and construction sectors as well as enhanced the
continued vitality of the agriculture sector. More recently, the service sector
has experienced substantial growth.
The major participants in China's economy (which, in part, overlap) are:
enterprises wholly-owned by the people of China ("State-owned enterprises");
collective enterprises owned by local communities and groups ("collectively-
owned enterprises"); businesses owned by
49
<PAGE>
private individuals ("privately-owned enterprises") which are generally
comprised of individually owned service providers that operate in both rural
and urban areas; joint stock companies and companies which are 25% or more
owned by foreign individuals or foreign companies and cooperative joint
ventures between Chinese and foreign companies or individuals
("foreign-invested enterprises"). In 1997, State-owned enterprises accounted
for approximately 25.5% of China's total industrial gross output value;
collectively-owned enterprises accounted for approximately 38.1%;
privately-owned enterprises accounted for approximately 17.9%; and joint stock
companies and foreign-invested enterprises together accounted for approximately
18.4% of such total industrial gross output value in 1997.
The fastest growing sectors of the economy have been joint stock
companies and foreign-invested enterprises. Privately-owned enterprises and
collectively-owned enterprises have also been growing rapidly. Although
increasing in absolute terms, industrial gross output value contributed by
State-owned enterprises has been declining in percentage terms due to the more
rapid growth of the other enterprises. State-owned enterprises, however, employ
a significant portion of China's urban labor force, and consequently continue
to enjoy significant financial support from China's government.
China's government has adopted macroeconomic means to regulate and
direct economic activities, including adjustment and control of interest rates,
reserve requirements for banks, money supply, credit lending guidelines for
commercial banks, tax incentives and rebates, and the adoption of industry
guidelines by the State Development Planning Commission for related industries
rather than imperative State plans.
NINTH FIVE-YEAR PLAN (1996-2000) AND 1999 ECONOMIC OBJECTIVES
On March 17, 1996, the NPC approved the Ninth Five-Year Plan (1996-2000)
and the long-term program for economic and social development up to the year
2010. The major objectives of the Ninth Five Year Plan include quadrupling the
per capita GNP by the year 2000 over that of 1980, accelerating the
establishment of a modern enterprise system and completing the initial
establishment of a market-oriented economic system. The Ninth Five-Year Plan
promotes the following policies:
/bullet/ rapid development of the national economy (while pursuing
appropriate policies to limit inflationary pressures);
/bullet/ economic changes aimed at improving efficiency;
/bullet/ coordinated developments in science, technology and education;
/bullet/ development of agriculture;
/bullet/ reform of State-owned enterprises;
/bullet/ development of international economic relations;
/bullet/ management of the economy through further development of
macroeconomic means; and
/bullet/ balanced development of regional economies while narrowing the
gap in development between different regions of China.
In March 1999, the Second Plenary Session of the Ninth NPC approved the
main economic development targets for 1999 proposed by the State Council, which
included:
/bullet/ achieving a GDP growth rate of approximately 7%;
/bullet/ keeping the inflation rate below 2%;
/bullet/ increasing trade volume while maintaining the balance of
imports and exports; and
/bullet/ limiting the urban unemployment rate to 3.5%.
To meet these targets, the State Council has called for continued
implementation of an active fiscal policy to stimulate domestic consumption,
facilitation of agricultural development, increased investment in
infrastructure, further reform of State-owned enterprises, increased exports
and more effective utilization of foreign investments, and strengthening of
China's
50
<PAGE>
financial system and China's government's macroeconomic adjustment of and
control measures for the economy. The foregoing objectives, goals and targets
were designed by China's government based on its assumptions and estimates of
future events and developments and other factors, including, without
limitation, the state of economic and social developments in China and in
significant regional and Western economies. Therefore, such objectives, goals
and targets are subject to various uncertainties beyond China's control and
could be adjusted by China's government if actual developments materially
deviate from such assumptions and estimates.
ECONOMIC REFORMS
China's economic policy of opening to the outside world and its economic
reform programs were formally adopted by the National Party Congress in
December 1978. Principal reforms that have been implemented since the adoption
of the general reform program in 1978 include rural reforms, State-owned
enterprise reform, social security system reforms, price reforms, fiscal and
tax reforms, monetary and financial sector reforms and foreign trade reforms
and housing reforms. In 1993 the NPC incorporated the concept of a "socialist
market economy" into the Constitution. Overall, the reform programs aim to
transform China's centrally planned economy into a market-oriented economy with
an effective system of macroeconomic management, a modern enterprise system, a
modern financial system and an equitable system of income distribution and
social security.
On November 14, 1993, the Central Committee of the Communist Party of
China (the "CPC"), the governing political party in China, reaffirmed its
commitment to China's economic reforms through the adoption of the "Decision of
the CPC Central Committee on Issues Concerning the Establishment of a Socialist
Market Economy" (the "Decision on Economic Structure"). These reforms include:
/bullet/ reducing China's government's administrative control over the
economy in favor of management of the economy using macroeconomic
monetary and fiscal tools;
/bullet/ introducing further competition in the labor market;
/bullet/ promoting further corporatization of State-owned enterprises
and reducing the involvement of China's government in the management
of such enterprises;
/bullet/ permitting the prices of more goods and services to be
determined by market forces;
/bullet/ expanding financing activities in the form of stocks and bonds;
/bullet/ developing an auction system in which the public can bid for
commercial land-use rights;
/bullet/ comprehensively revising the taxation system;
/bullet/ separating the policy-lending activities from the
commercial-lending activities of China's major State-owned banks in
order to develop such banks into commercial banks; and
/bullet/ permitting deposit and loan interest rates to float freely
within a range.
On January 1, 1994, as part of the implementation of the Decision on
Economic Structure, several new tax regulations came into effect that were
designed to improve uniformity, simplicity and fairness in the taxation system
and to readjust the fiscal relationships between China's government and
State-owned enterprises and between the Central and Local Governments. On
January 1, 1994, China's government also established a managed floating-rate
system for the Renminbi, which became convertible for current account items by
the end of 1996. During 1994, China's government set up three policy banks,
further separating the policy-lending activities from the commercial-lending
activities of the major State-owned banks in China. In January 1995, China's
Labor Law went into effect, providing operating guidance on employment
contracts, compensation, work-place safety and labor disputes and other
employment related matters. In March 1995, the Law on the People's Bank of
China (the "PBOC Law") was promulgated, enhancing the People's Bank of China's
authority, as the
51
<PAGE>
central bank of China, under the guidance of the State Council, to enforce
monetary policies, stabilize currency exchange rates and supervise and manage
banks and other financial institutions. In April 1997, China established a
monetary policy committee headed by the People's Bank of China Governor and
consisting of top officials of several government agencies. The committee meets
regularly to discuss major monetary issues and make recommendations concerning
China's monetary policy.
In September 1997, the 15th National Party Congress of the CPC
reconfirmed its commitment to further reform China's economy, especially with
respect to the State-owned enterprises, by permitting public shareholding,
mergers and acquisitions and other market-driven mechanisms. The National Party
Congress also encouraged the development of privately-owned enterprises by
stating that privately-owned enterprises formed an important component of the
national economy. At its Second Plenary Session in March 1999, the Ninth NPC
amended the Constitution to expressly provide that private and other non-public
forms of economic enterprise are an important part of China's socialist market
economy.
HOUSING REFORMS
China's government has adopted a series of housing reforms with the
objective of establishing a viable and affordable housing market, gradually
relieving China's government and State-owned enterprises from the
responsibility to provide public housing. For example, China's government and
many State-owned enterprises have substantially raised rentals for
accommodation provided to their employees to reflect market prices in order to
reduce rental subsidies and obtain additional revenues to finance maintenance
and new construction. China's government has also initiated a variety of joint
development programs for commercial properties with State-owned enterprises,
financial institutions and foreign investors. Other housing reform measures
which are still in the experimental stage include requiring every enterprise
and institution to establish a housing fund and encouraging the purchase of
public housing units by the existing tenants by providing governmental grants,
loans and other financial assistance. During 1998, China's government
encouraged residential housing development to stimulate the nation's economy
and mobilize individual savings. Since the end of 1998, housing allocation in
urban areas have been conducted only through sales and the traditional means of
housing allocation has been discontinued. In 1998, commercial banks increased
their residential mortgage loans to approximately Renminbi 100 billion, almost
three times as much as in 1997. The People's Bank of China promulgated the
Rules on Residential Mortgages in May 1998, which specify the requirements and
procedures for individuals to borrow money to purchase residential housing. Due
to China's large population, migration of rural residents to urban areas and
continued shortages of financial and other resources, we expect that housing
reform may be a long and difficult process. We, however, believe that the
continued steady growth of the economy and the success of China's government's
reform programs in other areas will enable it to continue to make substantial
progress in housing reforms.
PRICE REFORMS
An important element of China's government's reform programs is price
reform, which commenced in 1979 when China's government raised agricultural
prices substantially and raised prices for textile products and certain raw
materials moderately. In 1985, China's government eliminated State-mandated
prices on agricultural products except for cotton and a limited number of
staples (the price and distribution of which are still subject to overall
Chinese government control), and has permitted an increasing number of raw
materials and industrial products to be sold at market prices. In December
1997, the NPC promulgated China's first Price Law, which came into effect on
May 1, 1998. Pursuant to such law, the prices for most goods and services are
determined by the market, except for a very limited range of prices which will
continue to be set by Chinese government agencies or under State price
guidelines. This latter category generally consists of goods that are deemed
critical for the development of the national economy and for people's daily
life, goods made of raw materials of limited supply and key public utilities
and public facilities. Currently
52
<PAGE>
prices for over 95% of consumer products and 90% of production materials and
agricultural produce in China are determined by market forces.
MONETARY AND FINANCIAL SECTOR REFORMS
China is continuing to reform its financial system. The main goals of
the current financial sector reforms are to:
/bullet/ establish a financial supervisory responsibility system with
different regulators overseeing the banking, securities, insurance
and trust industries;
/bullet/ speed up reforms of State-owned commercial banks;
/bullet/ effectively utilize policy banks to implement State industrial
development policies, and
/bullet/ establish a legal framework by which to orderly regulate
China's financial industry.
The steps the Central Government is taking to realize these goals
include:
/bullet/ establishing a central banking system modeled after the Federal
Reserve System in the United States, with the People's Bank of China
as the central bank to supervise the banking industry and regulate
banking activities;
/bullet/ implementing the new asset quality and management system at all
financial institutions;
/bullet/ strengthening the risk management capability of financial
institutions; and
/bullet/ gradually opening up China's financial market to foreign
capital.
With the promulgation of the PBOC Law in March 1995, the central bank's
authority to manage monetary policy and supervise and manage financial
institutions has been strengthened. In an effort to minimize local interference
in the policy implementation process, as of January 1, 1999, nine regional
branches of the People's Bank of China were established, replacing the more
than 30 provincial or municipal branches of the People's Bank of China existing
prior to January 1, 1999.
With the establishment of three policy banks in 1994, China has started
to separate the policy and commercial lending functions of its four State-owned
specialized banks (also known as "State-owned commercial banks"). This, over
time, is intended to result in the full transformation of these and other
State-owned banks into banks operating on a commercial basis. In addition,
China has allowed several other experiments: the establishment of a Sino-foreign
equity joint-venture investment bank; the operation of several Renminbi-related
businesses (such as participation in the interbank market for the Renminbi and
in trading and repurchase transactions involving Renminbi-denominated bonds) by
several foreign bank branches in Pudong of Shanghai and Shenzhen of Guangdong
Province; the operation of several foreign insurance companies in Shanghai and
Guangzhou; and the development of urban cooperative banks. A unified national
interbank money market went into operation with the establishment of the
National Unified Interbank Loan Trading System on January 3, 1996. As one of
the macroeconomic measures, the People's Bank of China began on January 1, 1998
to supervise the banking industry through asset/liability ratio management and
other risk management instead of the credit ceiling system imposed on State-
owned commercial banks in the past.
In addition, the People's Bank of China has allowed financial
institutions that are no longer commercially viable and have become insolvent
due to poor management to go bankrupt or be consolidated. In keeping with this
policy, in October 1998, the People's Bank of China shut down Guangdong
International Trust & Investment Corporation ("GITIC"), a local financial
institution wholly owned by the Government of Guangdong Province, due to
GITIC's inability to repay its debt obligations. To effectively manage
financial risk and deal with distressed financial assets, China's government
established China Cinda Asset Management Corporation ("Cinda Asset Management")
in April 1999 to acquire, manage and dispose of distressed financial assets of
financial institutions. Operations of Cinda Asset Management are subject to the
supervision of the People's Bank of China. In addition, the
53
<PAGE>
People's Bank of China is currently studying the feasibility of establishing
deposit insurance companies for China's State-owned financial entities.
MAJOR ECONOMIC INDICATORS
Over the past few years, China experienced significant economic growth
stimulated by the government's continued implementation of the economic reform
policies initiated in 1978. Between 1993 and 1998, the annual average growth of
China's GDP was 9.86%. During the same period, the annual average growth of per
capita disposable income was 6% in urban areas and that of per capita net
income was 5.4% in rural areas.
The following table sets forth selected annual data regarding China
economy for the period from 1993 through 1998:
MAJOR ECONOMIC INDICATORS
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
GDP (in billions of Renminbi)(1)(3) .............. 3,463.4 4,675.9 5,847.8 6,788.5 7,477.2 7,955.3
GDP Percentage increase from prior year .......... 13.5 12.6 10.5 9.6 8.8 7.8
Population (in millions) ......................... 1,185.2 1,198.5 1,211.2 1,223.9 1,236.3 1,248.1
Per Capita Gross Domestic Product
("GDP") (in Renminbi) ........................... 2,939.0 3,923.0 4,854.0 5,576.0 6,079.0 6,404.0
Per Capital GDP percentage increase from
prior year ...................................... 12.2 11.4 9.3 8.4 7.6 6.7
Exports (in billions of US$)...................... 91.7 121.0 148.8 151.1 182.7 183.8
Imports (in billions of US$)...................... 104.0 115.6 132.1 138.8 142.4 140.2
Current Account Balance (in billions
of US$) (year end)............................... (11.9) (7.7) 1.6 7.2 29.7
Foreign Exchange Reserves (in billions
of US$).......................................... 21.2 51.6 73.6 105.0 139.0 145.0
Total Industrial Gross Output Value
(in Billions of Renminbi)(2) .................... 4,840.2 7,017.6 9,189.4 9,959.5 11,373.3 11,969.3
Total Agricultural Gross Output Value
(in billions of Renminbi)(2) .................... 1,099.5 1,575.0 2,034.1 2,342.8 2,458.8 2,510.3
Rate of Inflation(3) ............................. 13.2% 21.7% 14.8% 6.1% 0.8% (2.6)%
</TABLE>
- -----------------------------------
(1) The total GDP of 1998 was Renminbi 7,955.3 billion, representing an
increase of 7.8% over 1997.
(2) Calculated at current prices.
(3) In 1998, the inflation rate was negative 2.6% as compared with 1997.
SOURCES: China China Statistical Yearbooks, 1996 to 1998, State Statistical
Bureau of China; Outlook of China's Finance, 1998, the PBOC. A
Statistical Survey of China 1999, State Statistical Bureau of China.
China has been striving to balance economic growth and inflation. Rapid
expansion, its effects on structural weaknesses in the economy and the
resulting high inflation, prompted the Government to use macroeconomic
adjustment and control measures beginning in 1993. Such measures helped reverse
the trend of rising inflation and an overheated economy. The inflation rate
declined to 14.8% in 1995 and 6.1% in 1996, while GDP growth remained at
moderate rates of 10.5% in 1995 and 9.6% in 1996. In 1997, the inflation rate
declined to 0.8% while GDP growth was 8.8%.
In 1998, the GDP growth rate was 7.8% while the inflation rate was
negative 2.6%, each as compared with 1997. The deflationary trend and slower
GDP growth resulted partly from China's macroeconomic adjustment and control
measures adopted in 1993, partly from the weakening of China's traditional
Asian export markets as a result of the Asian financial crisis and partly from
weak domestic consumption caused by a slower increase of individual income and
a decrease in consumer confidence. To stimulate the economy and consumption,
China's government has taken a number of measures, including increasing
investment in
54
<PAGE>
infrastructure and other areas, increasing the tax rebate rates for certain
exported goods, lowering interest rates, granting exemptions to certain
businesses from customs tariffs and import-related value added taxes ("VATs")
and opening more areas to foreign investment.
Foreign capital inflows, including foreign loans, foreign direct
investment and other foreign investments increased from US$ 39.0 billion in
1993 to US$ 64.4 billion in 1997, representing an increase of 17.5% over 1996.
During 1998, foreign capital inflows amounted to US$58.9 billion, a decrease of
8.5% as compared with 1997; foreign direct investment, in terms of contracted
amounts, totalled US$ 52.1 billion or a 2.21% increase over 1997, and in terms
of actual disbursements, totalled US$ 45.6 billion, representing an increase of
0.67% over 1997.
The aggregate of total imports and exports increased from US$ 195.7
billion in 1993 to US$ 325.1 billion in 1997. In 1998, according to customs
statistics, total imports and exports were US$ 323.9 billion. China's exports
in 1998 increased modestly by 0.5% to US$ 183.8 billion and its imports
decreased by 1.5% to US$ 140.2 billion, each as compared with 1997. This effect
on imports and exports resulted in part from the Asian financial crisis which
has adversely affected China's traditional export markets in Asia. China's
export markets in Asia accounted for approximately 60% of China's total exports
in 1997.
Net exports of goods and services in 1997 accounted for 3.6% of China's
GDP calculated on the basis of expenditure approach. Resident consumption and
fixed asset investments in 1997 accounted for more than 80% of China's GDP
(calculated on the basis of expenditure approach).
China has one of the highest rates of savings in the world as measured
as a percentage of GDP. The rates of savings were 41.7%, 41.8%, 41.0%, 39.5%
and 40.1% in 1993, 1994, 1995, 1996 and 1997, respectively. By such measure,
China's rate of savings is higher than other countries with high rates of
savings such as Japan. We believe that this high rate of savings, which has
remained at comparable levels over many years, provides the basis for China to
further develop its domestic capital resources available to various fixed asset
investments, which will in turn assist in stimulating domestic consumption.
We believe that 2000 will be a challenging year for China in light of
the ongoing Asian financial crisis as well as domestic problems, including
increased unemployment, weak domestic consumption and the effects of natural
disasters in 1998. Further economic distress of other Asian countries may
continue to have a negative impact on exports from and foreign investment in
China. However, China's government has taken measures to stimulate economic
growth and alleviate deflationary pressure. Such measures include increasing
investment in fixed assets, opening new industrial sectors to foreign
investment, accelerating tax rebates for exported goods from many industries,
and granting exemptions from customs tariffs and import-related VATs on
technology and equipment imports by foreign investors for investment projects.
At the same time, China's government has accelerated the reform of China's
monetary system, the financial system, taxation and public finance.
RECENT DEVELOPMENTS REGARDING CHINA'S ENTRY INTO THE WORLD TRADE ORGANIZATION
China seeks to enter the World Trade Organization or WTO at the earliest
possible date. Since 1986, the Government has taken a series of measures to
modify its foreign exchange and trade regulations to conform with international
practices. On January 1, 1994, the Chinese government abolished the dual
foreign exchange rate system which had the effect of subsidizing imports as a
result of the difference between the official exchange rate and market exchange
rate. China's government has indicated its commitment to reduce its import and
export licensing requirements and making its international trade regulations
more consistent and transparent. On December 31, 1995, China lifted non-tariff
controls such as import quotas and licenses on 176 import items. China's
government has also lowered tariff levels for various goods a number of times
in 1992, 1993 and more recently in April 1996, October 1997 and January 1999.
In April 1996, China's government reduced the general level of import tariffs
from 36% to 23% for 4,994 import items. In October 1997, China's government
reduced the general level of import tariffs from 23% to
55
<PAGE>
17% for more than 4,800 import items. Effective January 1, 1999, China's
government has further reduced the general level of import tariffs by 8% to 78%
for more than 1,000 import items. China's government has indicated its
commitment to protecting intellectual property rights and, in recent years, has
adopted regulations protecting ownership of copyrights, computer software and
trademarks, and has entered into international agreements committing itself to
further protection of such rights and enforcement of such regulations. Demands
made by several countries, some of which are not trade related, have impeded
China's entry into the WTO.
On November 15, 1999, U.S. and Chinese trade negotiators reached an
agreement regarding China's entry into the WTO. The U.S. agreed to support
China's application for membership in the WTO as well as grant it permanent
trading rights, rather than renew those rights annually. In exchange for these
items, China has agreed to reduce tariffs by more than 5% as well as eliminate
many trade barriers for U.S. companies in various industries. These industries
include telecommunications, internet, distribution, services, entertainment,
banking/financial services, automobile manufacturing, farm products, and
textiles. The U.S. Congress, however, must still approve the granting of
permanent trading status to China.
We expect that, whether in connection with China's eventual entry into
the WTO or for other reasons, tariff and non-tariff barriers on various
imported goods and services will be subject to further reductions. These
reductions could increase competition for domestic entities from foreign
entities providing goods and services in China.
56
<PAGE>
CHINA'S REAL ESTATE MARKET
The promulgation of the Urban Land Regulations in 1990 marked the
beginning of the development of a real estate market in China. Between 1991 and
1997, the real estate market experienced significant growth. From 1991 to 1997,
the total floor area of commodity properties sold increased at an annual
compound growth rate of approximately 19.95%, the floor area of commodity
properties sold for residential purposes in China increased at an annual
compound growth rate of approximately 19.17% and the floor area of commodity
properties purchased by individuals in China increased at an annual compound
growth rate of approximately 33.45%.
During that same period, the sale value of commodity properties
increased at an annual compound growth rate of approximately 40.11%, and the
sale value of commodity properties sold for residential purposes in China
increased at an annual compound growth rate of approximately 37.57%. The
following two tables show (a) the total floor area of commodity properties sold
in China and the floor area of commodity properties sold for residential
purposes in China during the period from 1991 to 1997 and (b) the sale value of
commodity property in China and the sale value of commodity property sold for
residential purposes in China during the period from 1991 to 1997:
THE TOTAL FLOOR AREA OF COMMODITY PROPERTIES SOLD AND
FLOOR AREA OF COMMODITY PROPERTIES SOLD FOR RESIDENTIAL PURPOSES
<TABLE>
<CAPTION>
FLOOR AREA FLOOR AREA
TOTAL FLOOR AREA OF COMMODITY OF COMMODITY PROPERTIES
OF COMMODITY PROPERTIES SOLD FOR RESIDENTIAL PURPOSES
PROPERTIES SOLD FOR RESIDENTIAL PURPOSES PURCHASED BY INDIVIDUALS
YEAR (10,000 SQUARE METERS) (10,000 SQUARE METERS) (10,000 SQUARE METERS)
- -------------- ------------------------ -------------------------- -------------------------
<S> <C> <C> <C>
1991 ......... 3025.46 2745.17 926.55
1992 ......... 4288.86 3812.21 1456.01
1993 ......... 6687.91 6035.19 2943.39
1994 ......... 7230.35 6118.03 3344.53
1995 ......... 7905.94 6787.03 3344.81
1996 ......... 7900.41 6898.46 3666.82
1997 ......... 9010.17 7864.30 5233.72
</TABLE>
[GRAPHIC OMITTED]
- ----------------
SOURCE: CHINA STATISTICAL YEARBOOK 1998
57
<PAGE>
THE SALE VALUE OF COMMODITY PROPERTIES AND
THE SALE VALUE OF COMMODITY PROPERTIES SOLD FOR RESIDENTIAL PURPOSES
SALE VALUE
SALE VALUE OF COMMODITY PROPERTIES
OF COMMODITY PROPERTIES SOLD FOR RESIDENTIAL PURPOSES
YEAR (RENMINBI 10,000) (RENMINBI 10,000)
- -------------- ------------------------- ------------------------------
1991 ......... 2,378,597 2,075,979
1992 ......... 4,265,938 3,798,493
1993 ......... 8,637,141 7,291,913
1994 ......... 10,184,950 7,305,208
1995 ......... 12,577,269 10,240,705
1996 ......... 14,271,292 11,069,006
1997 ......... 17,994,763 14,075,553
[GRAPHIC OMITTED]
- -----------------------------------
SOURCE: CHINA STATISTICAL YEARBOOK 1998
You can see from these charts that the most significant period of growth
in China's real estate market occurred between 1992 and 1993. The total floor
area of commodity properties sold in China increased by approximately 41.7% in
1992 over that in 1991 and by approximately 55.9% in 1993 over that in 1992.
The sale value of commodity properties sold in China also increased by
approximately 79.3% in 1992 over that in 1991 and by approximately 102.5% in
1993 over that in 1992. This period of significant growth in China's real
estate market coincided with the acceleration of the pace of reforms in China
in 1992 after Deng Xiaoping's call for faster economic development during his
visit to the southern region of China. The fast pace of economic growth which
began in 1992 led to overheating of the economy and escalation of inflation in
China in 1993. In response, China's government instituted a series of austerity
measures in the second half of 1993 intended to combat inflation and to improve
its control over the economy, including increasing supervision over the banking
system and raising interest rates. China's government also introduced measures
to curb speculative investments in the real estate market.
An important factor in the development of the residential real estate
market is the abandonment of the welfare-style housing system which allowed
state workers to rent government-allocated houses at a very low rate. Under the
reforms spearheaded by Premier Zhu
58
<PAGE>
Rongji, state workers--who still account for the majority of workers in
industry--are required to buy their own homes. The deadline for implementing
the policy shift was first set at June 1998 but was later postponed to the end
of the year. Prior to the deadline, workers were given the chance to buy their
homes at a discount price of approximately Renminbi 1,450 (US$ 175) per square
meter. The reforms saw the advent of a new participant next to the
institutional investors in the Chinese housing market: the individual buyer.
The reform of the welfare housing system was accomplished by the launch of
three groups of projects for economy housing in 1997 and a plan for low-cost
housing announced in March 1999. The projects account together for a total
construction of 452 million square meters.
Other factors that are expected to influence the future development of
the real estate market are the easing of the rate of inflation since 1995 and
the repeated cuts in the borrowing and lending rates of financial institutions
introduced by the People's Bank of China, the central bank. The latest
across-the-board cut was announced on June 9, 1999--the seventh such cut since
May 1996. In addition, there have been indications that China's government may
ease the restrictions on the banking sector's ability to create credit. We
believe that the easing of austerity measures following the "soft landing" of
the overheated economy in 1997 will be beneficial to the real estate market
even though it is unlikely that the growth achieved in the real estate market
in the near future will match that experienced in the early 1990s. Other
measures taken to boost the real estate market include new regulations that
allow for the resale of public housing.
SHANGHAI
Located on the east coast of China and at the mouth of Yangtze River,
Shanghai covers an area of 6,341 sq. km. and is one of the most populous cities
in China with a population of over 14.57 million in 1997. Shanghai is an
important industrial, commercial, trade and financial center of China. From
1993 to 1997 the GDP of Shanghai grew at an annual compound rate of 24.69% per
annum. The following table shows the year-end population and GDP figures for
Shanghai for 1991 to 1997:
YEAR-END POPULATION GDP
YEAR (1,000 PERSONS) (RENMINBI BILLION)
- -------------------- --------------------- -------------------
1991 ............. 12,872 89.37
1992 ............. 12,894 111.43
1993 ............. 12,947 151.16
1994 ............. 12,988 197.19
1995 ............. 13,014 246.26
1996 ............. 13,044 290.22
1997 ............. 13,055 336.02
- -----------------------------------
SOURCE: 1998 STATISTICAL YEARBOOK OF SHANGHAI
Shanghai is considered to be one of the cities with the highest standard
of living in China with per capita income of approximately Renminbi 8,438.89 in
1997.
Following the implementation of the austerity measures in late 1993, the
growth rate of the GDP in Shanghai decreased from 17.85% in 1996 to 15.78% in
1997. However, the sales value of commodity properties increased from
approximately Renminbi 18,348 million in 1996 to approximately Renminbi 21,332
million in 1997, representing an increase of 16.2%. The floor area sold also
increased from approximately 5.7 million square meters in 1996 to 6.9 million
square meters in 1997, representing an increase of 21%.
In the first quarter of 1999, the average selling price of high-grade
residential properties located in prime areas such as Changing District and
Jingan District was in a range of US$ 1,350 to US$ 2,000 per square meters.
In August 1996, the Shanghai municipal government approved measures
stated in Document Hu Fu Fa (1996) No. 30 aimed at activating the secondary and
tertiary real estate markets, at developing the real estate market and at
increasing the contribution of income derived from the real estate market to
the GDP
59
<PAGE>
of Shanghai. The measures included reduction of the levy on property
transactions, reduction of tax on rental income, a temporary exemption from the
standard automobile license fee and measures designed to enlarge banks'
mortgage businesses.
We believe that Shanghai will continue to be an important trade,
financial and industrial center in China. In addition, given its large
population, relative affluence and the policy of the Shanghai municipal
government to develop the real estate market, we believe that there will be
continued demand for quality residential and commercial properties in Shanghai.
60
<PAGE>
ABOUT OUR COMPANY
GENERAL
New China Homes is a holding company which presently conducts business
through its 98.2%-owned subsidiary, Shanghai Chingchu. Shanghai Chingchu was
founded in 1997 to become a leading developer of large, planned residential
communities in China's rapidly emerging private home building market. Through
Shanghai Chingchu we design, develop, construct, market and sell spacious,
high-quality, affordable homes in planned residential communities, which are
targeted at Chinese middle income families. We target development sites which
are within commuting distance to China's principal population centers.
OUR CALIFORNIA GARDENS PROJECT
In May 1997, Shanghai Chingchu began construction of our first planned
residential community, called CALIFORNIA GARDENS. CALIFORNIA GARDENS is located
on a 350-acre site just inside the northwestern corner of the outer ring road
surrounding the city of Shanghai. This development includes a projected 4,485
townhouses (configured in rows of 6-13 contiguous homes) and 1,280 apartments,
representing a total of approximately 10 million square feet.
The homes in CALIFORNIA GARDENS provide average floor space of
approximately 1,600 square feet, and feature front yards (convertible to
carports) and back yards. The apartments will provide an average floor space of
approximately 1,000 square feet and will have available parking facilities.
CALIFORNIA GARDENS is situated close to one of Shanghai's main motor
transportation arteries and is located within eight miles of the city center.
This location is in the rapidly expanding Shanghai urban area. When completed,
CALIFORNIA GARDENS will include kindergartens, primary and high schools with
full sports facilities, swimming pools, a meeting and conference facility, a
24-hour medical clinic, as well as a motel, retail shopping, restaurants and a
country club.
As of September 30, 1999, Shanghai Chingchu had completed the
construction of, and delivered to its customers, 1,110 homes. Shanghai Chingchu
is developing and marketing its homes at CALIFORNIA GARDENS in five phases
consisting of a specified number of homes. Phase 1, consists of 365 homes. Each
Phase 1 home has been sold. The construction of Phase 2, consisting of a total
of a total of 752 homes which are being offered in two sub-divisions, was
completed in June 1999, and as of September 1999, Shanghai Chingchu has
delivered 745 homes in that Phase. Phase 2A will consist of 74 semi-detached
home units. Phase 2A is currently in its initial planning stage. Phase 3,
consisting of 416 homes under construction, was completed at the end of 1999.
Phase 4, consisting of a total of 1,070 homes which are being offered in two
sub-divisions, is currently accepting deposits or "booking fees." Construction
of homes in the first sub-division of Phase 4 is scheduled to commence in late
January 2000, and construction of homes in the second sub-division of Phase 4
is scheduled to commence in June 2000. Shanghai Chingchu presently has land use
rights only for Phases 1, 2, 2A, 3 and one of the sub-divisions in Phase 4.
Shanghai Chingchu anticipates that its CALIFORNIA GARDENS development will be
completed in 2003.
AWARDS
We have received various awards for the CALIFORNIA GARDENS project
including the SHANGHAI HOME OF THE YEAR award, the 1997 GOLDEN HARVEST
CUP--FINEST HOUSING DESIGN award, the 1997 SHANGHAI REAL ESTATE CONSUMERS'
EXHIBITION--MOST DISTINCTIVE HOUSING PROJECT award, the 1998 SHANGHAI REAL
ESTATE EXPO--MOST RECOMMENDED HOUSING PROJECT award, the 1999 SHANGHAI CITY
BEST PROPERTY MANAGEMENT award, and the BAOSHAN DISTRICT, SHANGHAI, BEST
PROPERTY MANAGEMENT award.
OUR BUSINESS STRATEGY
Our objective is to complete the development and sale of homes at the
CALIFORNIA GARDENS project and to develop and market similar residential
communities in other principal cities in China. Key elements of our business
strategy include:
/bullet/ FOCUSING ON KEY URBAN MARKETS IN CHINA FOR THE DEVELOPMENT OF
RESIDENTIAL
61
<PAGE>
COMMUNITIES. We believe that the size and growth potential of key
Chinese commercial centers coupled with the ongoing liberalization of
the real estate markets offer us considerable growth opportunities.
We intend to construct additional residential communities within
reasonable commuting distance to Shanghai and other key Chinese
population centers that have:
/bullet/ A population of more than five million where the economic
development and infrastructure are established;
/bullet/ a significant level of unsatisfied demand for high quality,
yet affordable homes;
/bullet/ a regulatory environment which encourages the development of
our residential communities, in terms of enabling us to
obtain necessary permits and approvals to engage in our
business without undue difficulty or expense, and encourages
individual home ownership through the use of subsidies or
otherwise; and
/bullet/ available real estate development rights at attractive
prices.
/bullet/ TARGETING THE EMERGING CHINESE MIDDLE-INCOME CLASS AS HOME
BUYERS. Our target market is the rapidly growing Chinese middle
income population. China's home builders have traditionally targeted
the upper and lower income market, and largely ignored the
middle-income class. Because of banking reforms permitting wider
availability of home mortgage loans and the positive effects of
China's economic reforms, we believe that the home building market
for the middle-income class represents substantial growth
opportunities for us.
/bullet/ PROVIDING SUBSTANTIAL BENEFITS TO HOME BUYERS. We believe that
our residential communities provide the following benefits to home
buyers:
/bullet/ affordable living space to support large families, which
frequently include three generations--
grandparents, parents and children;
/bullet/ amenities within or adjacent to residential communities,
which may include schools, shopping centers, athletic
facilities, retail shops, medical facilities, motel and
country club facilities;
/bullet/ the ability to live in an environment of similar families who
have also chosen to live in a planned residential community,
and whose values tend to closely parallel those of the home
buyer;
/bullet/ living within close proximity to public transportation to
city centers; and
/bullet/ quality building management services including security,
landscape and maintenance.
/bullet/ CONTINUING OUR COMMITMENT TO QUALITY LEADERSHIP. We seek to
construct homes having a high quality of construction and
workmanship. Because of our emphasis on quality home construction,
our CALIFORNIA GARDENS project received the SHANGHAI HOME OF THE YEAR
AWARD in 1997.
/bullet/ ENTERING MARKETS EARLY. We will continue to enter markets early
where we can acquire land use rights at reasonable prices and develop
residential communities in key commercial centers. We have
successfully implemented this strategy in Shanghai, where we are one
of the first home builders to construct a residential community
targeted at middle income families. We believe that early entry into
markets will continue to enable us to establish ourselves in these
markets before the onset of widespread competition.
PROJECT DESIGN
A team of Australian architects with extensive experience in developing
large-scale residential communities designed CALIFORNIA GARDENS. CALIFORNIA
GARDENS was the winner of
62
<PAGE>
the prestigious SHANGHAI HOME OF THE YEAR award. We choose our design teams
based upon their reputation, the quality of their work, their expertise and
their experience. Our design team works with local Chinese design institutes,
who prepare all required construction documentation. We also have an in-house
design team, which is headed by our chief architect and staffed with seven
architects and engineers. Our in-house design team is responsible for
refinement of designs, monitoring the design process and providing conceptual
design ideas to the independent design team that we have engaged. During the
design and construction stages, we may modify design layouts to meet changing
market demands and construction work requirements.
SITE SELECTION AND PROJECT APPRAISAL
We believe that securing a good location is a major factor in the
success of a property development project. We consider the following factors
when we evaluate our property development sites:
/bullet/ size of land;
/bullet/ geographic location;
/bullet/ potential financial return;
/bullet/ potential market demand for the development;
/bullet/ our existing property portfolio and available resources;
/bullet/ land cost, affordability and potential financial return;
/bullet/ overall market situation and opportunities;
/bullet/ access to city centers;
/bullet/ geological conditions;
/bullet/ demolition and resettlement costs; and
/bullet/ infrastructure support.
During the site selection process, we will evaluate and research the political,
economic and social situation of the relevant region, the market demand for and
potential returns from a proposed project and the funding and manpower
requirements. Once we have selected a site, we formulate a comprehensive
development plan.
DEVELOPMENT AND CONSTRUCTION
We act as the general contractor for the construction of our residential
developments. Our employees monitor the construction of each project,
participate in all material design and building decisions, coordinate the
activities of subcontractors and suppliers, subject their work to quality and
cost controls and monitor compliance with zoning and building codes. The
selection of our subcontractors is conducted through a competitive process, and
several subcontractors are invited to participate. The main criteria for
selecting subcontractors are cost, qualifications, the quality of completed
projects and of work done, if any, on our existing or prior projects. Once the
selection process is completed, we will normally negotiate a fixed price
contract with the contractor which includes terms relating to time for
completion of construction, quality of materials used and warranty periods.
We do not maintain significant inventories of construction materials
except for work in process, materials for homes under construction and a
limited amount of other construction materials. Generally, the construction
materials used in our operations are readily available from numerous sources.
QUALITY CONTROL
We place great emphasis on the quality of our development projects and
implement strict quality control procedures at different construction stages to
ensure that the work done by our contractors meets our standards and
requirements and those of the relevant governmental authorities.
We impose strict quality control on our home building materials. Our
on-site management team conducts regular quality inspections of the
construction work. When a particular section of construction work is completed,
our on-site management team will inspect the work to ensure that the work is in
compliance with our quality standards and the
63
<PAGE>
relevant governmental regulations. We require our contractors to promptly
remedy all defects, and we then make a further inspection of their work.
PROJECT MANAGEMENT
Our project management is undertaken by a team of architects, engineers,
project managers and other support staff. The project management team is
responsible for the overall management of all of our development projects. For
each project, there is a team responsible for the day-to-day management.
Project management covers all major stages of a development project, as
follows:
/bullet/ FEASIBILITY STUDY. Conducting a detailed geological study and
market study, formulating a master timetable, and preparing
preliminary proposals for the type and class of property to be
constructed;
/bullet/ DESIGN. Completing a preliminary design layout and obtaining
approvals from relevant authorities, commencing site preparation,
selecting construction materials, modifying the design layout,
producing a construction blue-print and establishing a construction
management team;
/bullet/ CONSTRUCTION. Obtaining, evaluating and selecting contractor
bids, finalizing the design layout and construction blue-print,
monitoring construction progress compared to our timetable and
introducing and implementing quality and cost control procedures; and
/bullet/ COMPLETION. Establishing a property management team, submitting
a completion and inspection report to the governmental authorities,
obtaining required government approvals and settling payments.
OTHER PROJECTS
Our future developments will seek to apply the successful techniques of
the CALIFORNIA GARDENS community, and we will target several of China's largest
cities. A listing of those cities follows, including their approximate city
population:
CITY
CITY POPULATION
- ---------------------- -----------
Chongqing ............ 15,200,000
Shanghai ............. 14,500,000
Beijing .............. 10,700,000
Chengdu .............. 9,700,000
Tianjin .............. 8,900,000
Shijiazhuang ......... 8,600,000
Wuhan ................ 7,100,000
Qingdao .............. 6,800,000
Shenyang ............. 6,700,000
Changchun ............ 6,700,000
Xian ................. 6,500,000
Guangzhou ............ 6,500,000
Our principal target region for our next development is Beijing. We
believe that Beijing will be the site of one of China's largest middle income
housing booms, as there is presently a significant shortage of affordable
residential housing for this segment of the population. This housing shortfall
is projected to intensify with the continuing shift to privatized housing, and
Beijing already enjoys the lowest vacancy rate for recently built homes.
Additionally, the Beijing city government has set a target of 140 square feet
of living space for each individual, and the present level is approximately 90
square feet. The Beijing government expects the population of Beijing to
quickly rise from its present level to about 15,000,000 people, which will
create the need for more than 500 million square feet of living area, which can
represent more than 500,000 new homes.
We are currently conducting research with regard to a number of
additional potential development sites in cities other than Beijing, including
Chongqing, Chengdu, Tianjin, and Shenyang. Our goal is to develop a California
Gardens-type planned community in several or all of these cities.
COMPETITION
The residential real estate market in China is subject to intense
competition. Over the last decade, a large number of property developers have
expanded their operations into China. These include a number of leading Hong
Kong and Asian real estate development and investment groups, many of whom have
greater financial, managerial, marketing and other resources than us.
Residential property developers compete not only for home buyers,
64
<PAGE>
but also for desirable properties, raw materials and skilled subcontractors. We
also compete for residential sales with individual sales of existing homes in
the secondary market and available rental housing. We also expect that
continued economic development of China will be accompanied by further property
development and expansion. We believe that our principal competitive strengths
are as follows:
/bullet/ the extensive experience and in-depth knowledge of our
management team in the Chinese and Asian real estate markets;
/bullet/ our emphasis on developing high-quality residential properties
for middle income families;
/bullet/ our marketing and sales strategies and techniques;
/bullet/ our relationship with Far East Consortium, including the
experience and relationships developed by our management team in the
course of developing properties on behalf of Far East Consortium
before joining New China Homes;
/bullet/ our focus on development projects which are compatible with
China's policies of encouraging private home ownership and shifting
away from a system of subsidized housing;
/bullet/ our targeted locations in major and populous cities;
/bullet/ our project management team, which effectively and actively
controls every stage of the development of our projects; and
/bullet/ our close working relationships with local business partners in
China.
OUR HISTORY AND DEVELOPMENT
New China Homes was incorporated in the Cayman Islands in January 1999.
In February 1999, Far East Consortium, the principal shareholder of New China
Homes, transferred to New China Homes all of the outstanding share capital of
Far East Consortium China Investments Limited, a Hong Kong company. Far East
Consortium China Investments Limited holds 98.2% of the registered capital of
Shanghai Chingchu Property Development Company Limited, a Sino-foreign equity
joint venture which is developing our CALIFORNIA GARDENS project. A diagram of
our company structure after this offering appears below:
[GRAPHIC OMITTED]
Following this offering, Far East Consortium will own approximately 77% of
our outstanding common shares.
OUR RELATIONSHIP WITH FAR EAST CONSORTIUM
As indicated above, following this offering our company will continue to
be principally owned by Far East Consortium, a Cayman Islands company whose
shares have been publicly-traded and listed on the Hong Kong Stock Exchange
since 1971. Far East Consortium has holdings in real estate development
projects, hotels, manufacturing companies and other companies engaged in
business throughout Southeast Asia, China, Australia and North America. Prior
to the development of the CALIFORNIA GARDENS project
65
<PAGE>
in Shanghai, Far East Consortium has had over 5 years of experience in
developing similar types of projects in Malaysia. To date, all funding for our
business activities has been provided by Far East Consortium. After this
offering, Far East Consortium will continue to own approximately 77% of our
outstanding common shares.
In the foreseeable future, we anticipate that all of Far East
Consortium's residential development activities in China will be conducted
through New China Homes. We have entered into a non-competition agreement with
Far East Consortium under which Far East Consortium has agreed that it will
not, and that its subsidiaries and affiliated companies will not, directly or
indirectly, invest in, participate in, be engaged in or have an interest in any
property transaction involving a residential property development in China
(excluding Hong Kong). The principal points of this agreement are as follows:
/bullet/ Far East Consortium may not compete with us in the residential
development market in China (excluding Hong Kong); and
/bullet/ All residential property development project opportunities
identified by Far East Consortium must first be presented to, and
rejected by, our Board of Directors before Far East Consortium may
proceed with such projects.
This non-competition agreement will continue in effect until the
earliest to occur of:
/bullet/ The time that Far East Consortium's ownership percentage in New
China Homes falls below 25%;
/bullet/ The mutual written agreement between us and Far East Consortium
to terminate the non-competition agreement; or
/bullet/ The securities of New China Homes shall cease to be listed on
the NASDAQ National Market or another national securities exchange.
SALES AND MARKETING
Our target market is Chinese middle income families in key urban markets
who want to become home owners in a planned community. The principal purchasers
of units in the CALIFORNIA GARDENS project are from the middle class sector. We
classify a typical family income of 4,000-5,000 RMB (HK$ 3,752-4,692 or
US$ 483-604) per month as middle income earners. We believe that families
earning this income will be able to purchase our houses costing approximately
300,000-400,000 RMB (HK$ 281,520 - 375,361 or US$ 36,241 - 48,322), through a
down payment of 30% or approximately 112,212 RMB (HK$ 105,300 or US$ 13,552)
with the balance financed by a bank mortgage having a repayment period ranging
from 10-20 years, resulting in a monthly payment of between 1,000-2,000 RMB
(HK$ 940-1,880 or US$ 121-242).
For each development project, our sales and marketing division forms a
special team to handle the related sales and marketing activities. Subject to
market conditions, we seek to pre-sell our development projects at an early
stage. We also arrange with one or more banks to provide mortgage loan
facilities to home purchasers for up to 70% of the home purchase price,
substantially all of which is guaranteed by New China Homes until the homes are
delivered to the buyers. In the case of CALIFORNIA GARDENS, Shanghai Chingchu
established relationships with banks to provide mortgage loans to customers
prior to the launch of each phase. For Phase 1, mortgages for 365 homes were
provided by the Construction Bank. For Phase 2, mortgages for 752 homes were
provided by the Construction Bank and the Commercial Bank. For Phase 3, the
Shanghai Bank and the Pudong Development Bank have been added as lenders. Our
sales and marketing strategy involves the following key elements:
/bullet/ offering a financing package for home buyers which
pre-qualifies home buyers for a 70% mortgage with only a small down
payment (booking fee), which is typically no more than HK$ 18,700
(US$ 2,407 or RMB 19,927), and the balance of the purchase price paid
before delivery of the home;
/bullet/ advertising through various media, including national and
regional television networks, radio, newspapers, magazines, posters,
billboards and advertising pamphlets to reach potential purchasers;
66
<PAGE>
/bullet/ generating newspaper publicity and television coverage
providing wide visibility;
/bullet/ using sales literature and brochures which describe our
projects and our company; and
/bullet/ operating sales centers in high-traffic downtown areas and
on-site, with billboard advertising visible to large numbers of city
residents.
Shanghai Chingchu has established a high level of visibility in Shanghai
for our CALIFORNIA GARDENS project, and it has received a substantial amount of
local media coverage. We also believe that local awareness of CALIFORNIA
GARDENS has been facilitated through "word of mouth." Sales of our homes are
normally made at our sales centers situated either in the city center or at our
development site. Our sales staff consists of 15 people.
We have established a policy of contributing 1% of all sales revenues to
a sales commission fund, which is distributed among our employees, with the
sales staff receiving a significant proportion of the fund.
PRE-SALE OF OUR HOMES
We normally seek to pre-sell homes in the several phases in our
developments as early as possible, subject to market conditions and regulatory
constraints. Pre-sales occur when units of a project are sold while the project
is still under construction. Under Chinese law, pre-sale is only permitted if a
pre-sale permit has been granted by the relevant land administration bureau to
the project which is still under construction. Pre-selling allows us to begin
marketing our development before we would otherwise be able to do so, and
shorten the time during which we have market exposure for the construction and
other expenses of our developments. Pre-sales also allow us to improve our
working capital management by accelerating our cash inflow and to minimize
market risks associated with our development projects.
In a pre-sale, the first step is that the home buyer pays an initial
booking fee. The home buyer then pays 30% of the purchase price less the
booking fee upon the execution of a Sales and Purchase Agreement. The remaining
70% must be paid within 60 days although, in most instances, it is paid by the
bank providing the mortgage financing upon execution of the Sales and Purchase
Agreement.
FINANCING FOR OUR HOME PURCHASERS
As part of our pre-sale activities, we may arrange for commercial banks
to provide purchaser financing in the sale of our developments. Unlike mortgage
financing in the United States, banks will typically look to the developer and
the planned development to determine whether to make a commitment to provide
purchaser mortgages. However, the banks retain the right to approve or reject
mortgages on an individual basis based upon the perceived credit-worthiness of
the home purchaser and other factors that it considers appropriate. Shanghai
Chingchu guarantees a customer's mortgage until the home is handed over to the
customer. As of September 30, 1999, the outstanding amount of unpaid mortgage
loans made to purchasers of homes in CALIFORNIA GARDENS was approximately
HK$ 123.49 million (US$ 15.90 million or RMB 131.60 million). There have been
no payment defaults on any of these mortgage loans. Approximately 70% of our
home buyers obtain financing at an average amount of HK$ 194,530 (US$ 25,043 or
RMB 207,299).
MORTGAGES
Our mortgages are for land use rights and the structures built thereon.
Under the terms of our mortgage agreements, if a mortgagor defaults, a
mortgagee may repossess the land use right as well as the structure built
thereon. If we choose to mortgage our land use rights as well as the structures
thereon, then we will not be able to sell the land use right or any of the
structures to potential buyers unless the consent of the mortgagee is obtained.
If we choose to sell the land use rights as well as the structures and the
buyer chooses to later mortgage them, then we no longer have any responsibility
with respect to that land or any of the buildings thereon.
Under special circumstances, the Chinese government may, in the needs of
public interest, repossess land or structures on land. In this
67
<PAGE>
situation, the Chinese government will pay compensation taking into account the
remaining term of the land use rights, as well as the development and use of
the land and the structures on the land.
PROJECT FINANCE
We have financed, through Shanghai Chingchu, the development of our
CALIFORNIA GARDENS project to date through loans provided by Far East
Consortium which were converted to common shares in April 1999. Following this
offering, we intend to finance our development projects with proceeds from this
offering, bank borrowings, proceeds from the pre-sale of portions of our
development projects, credits provided by our contractors and through our
internally generated funds. Because each development project will require a
substantial amount of capital to finance its construction cost, it is our
policy to carefully control the timing of the launch of each of our development
projects and the phases of these projects.
PROPERTY MANAGEMENT SERVICES
We may provide property management services at California Gardens, and
we intend to be able to provide these services at our other developments. These
services include garbage collection, security, maintenance services, bus
transportation to and from local, mass transit locations and landscaping. These
services are currently being provided to the residents of California Gardens by
an unrelated company at an average monthly fee of US$ 24 per unit. These fees
are likely to increase over time, subject to regulatory approval.
The US$ 24 monthly maintenance service fee does not cover the costs of
major repairs, which may include significant work required to repair or replace
a roof or facade. A one-year warranty is provided to the residents of
CALIFORNIA GARDENS to cover the costs of these major repairs. Residents of
CALIFORNIA GARDENS must also contribute an average of US$ 430 per home to a
sinking fund prior to taking occupancy of their homes. We anticipate that the
sinking fund will be adequate to cover the costs of these major repairs. To the
extent that repair costs exceed the amount within the sinking fund during the
warranty period, it will be our obligation to pay for the necessary repairs. It
will become the responsibility of the CALIFORNIA GARDENS Residents Association
to seek further payment from unit owners for major repairs to the extent that
the cost of any major repair exceeds the amount in the sinking fund and
following the expiration of the warranty period.
INSURANCE
We carry the following types of insurance:
/bullet/ public liability insurance covering all of our vacant sites
which have been delivered but at which we have not commenced
construction; and
/bullet/ public liability insurance and contractors' risk insurance for
developments under construction.
We believe that our insurance limits and policy specifications are consistent
with industry practice in China.
FUTURE PLANS AND PROSPECTS
Our long-term business objective is to become a leading developer of
large, planned residential communities at prime locations within major cities
in China. Our management will, therefore, be devoting significant efforts to
identifying and securing further suitable locations for future expansion. We
are actively considering a site in Beijing for our next residential
development. We believe that, with continued economic growth and the
improvement in living standards in China, there will be sustained demand for
quality and well-managed residential developments which have well-equipped
ancillary facilities.
FACILITIES
Our principal executive offices are currently located at 16/F Far East
Consortium Building, 121 Des Voeux Road, Central, Hong Kong. We are leasing our
principal executive offices from Far East Consortium at an annual rental of
US$ 12,000. The lease matures in three years. Our offices in the United States
are located at 44 East 67 Street, New York, New York 10021.
We conduct our operations for the CALIFORNIA GARDENS project from a
2,000 square foot facility adjacent to the project.
68
<PAGE>
MANAGEMENT INFORMATION SYSTEMS
We have used manual operating systems since our inception. However, we
are now upgrading all of our management information systems to keep pace with
the development of our company. Currently, we have implemented new sales
management and financial accounting modules into our management information
system. Our new management information system will also include the following
modules:
/bullet/ Project Management;
/bullet/ Property Management; and
/bullet/ other supporting and system functions, including Marketing
Management.
These modules are all scheduled to go "on line" in a sequential manner,
between January 2000 and March 2000.
EMPLOYEES
As of September 30, 1999, we had 78 full-time employees, including 20 employees
in construction operations and 9 managers and 49 administrative employees. We
have not experienced any labor-related work stoppage. We consider the relations
with our employees to be good.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings, nor are there any
material legal proceedings pending with respect to any of our properties. We
also are not aware of any legal proceedings contemplated by any governmental
authorities involving either us or our property. None of our directors,
officers, or affiliates is an adverse party in any legal proceedings involving
New China Homes or its subsidiaries, or has an interest in any such proceeding
which is adverse to New China Homes or its subsidiaries.
69
<PAGE>
TAXATION
The following is a summary of the tax laws of China, the Cayman Islands
and the United States which are material to our business and are relevant to
the purchase, ownership or sale of your common shares. This summary does not
take into account or discuss the tax laws of any jurisdiction other than China,
the Cayman Islands or the United States. We recommend that you consult with
your own professional advisers if you have any doubt as to the tax implications
of purchasing, holding or disposing your common shares.
The following statements disclose the material tax consequences relating
to your purchase of our common shares. This discussion, however, is not
intended to be exhaustive or to be a complete statement of the relevant laws.
It is based on the laws in force as of the date of this prospectus and subject
to any changes in law occurring after that date, which changes could be made on
a retroactive basis.
TAXATION IN CHINA RELEVANT TO THE COMPANY
INCOME TAX
Any foreign investment enterprise, which may be in the form of any
equity joint venture, co-operative joint venture or wholly foreign-owned
enterprise, carrying on business in China will be subject to China Foreign
Investment Enterprise and Foreign Enterprise Income Tax Law.
Foreign investment enterprises which have their head offices in China
are regarded as Chinese residents for income tax purposes and all income from
sources both within and outside China is subject to income tax in China. This
tax is levied on net income and operating costs and expenses may be deducted in
the calculation of the taxable income. Moreover, foreign investment enterprises
may, when paying tax on their consolidated income, deduct from the tax payable
the income tax that they have paid outside China on income derived from sources
outside China subject to limitations imposed by the relevant tax law. Foreign
investment enterprises, including enterprises involved in property development
in China, are therefore generally required to pay income tax at a flat rate of
30% plus a local income tax rate of 3%, on their taxable income. However,
foreign investment enterprises established and carrying on the business of
property development in Special Economic Zones of China ("SEZs") are entitled
to be taxed at a reduced rate of 15% on income derived from property
development within the SEZs. We currently have no income other than from
sources in China.
The profits or dividends received by us from a foreign investment
enterprise are free from income tax in our hands, since profits of foreign
investment enterprises remitted from China enjoy total exemption from income
tax. We currently have no income from any foreign investment enterprises.
Chinese-sourced income directly received by foreign companies which do
not have a legal establishment in China, including gains from the transfer of
property, is subject to an income tax of 20% which is collected on a
withholding basis. Gains derived from the transfer of property, such as
building structures, attached facilities and land use rights located in China
are deemed to be Chinese-sourced income. The 20% "withholding tax" is reduced
to 10% if the income is received from sources in the SEZs, the Economic and
Technological Development Zones or the Old Districts in the 14 Coastal Port
Cities. However, as a property developer established in China, we are not
subject to this tax.
BUSINESS TAX
Chinese business tax is payable in respect of certain business
activities in China as set out in the Provisional Regulations of People's
Republic of China Concerning Business Tax. The activities to which the business
tax applies include construction, leases and sales of real estate properties in
China. The tax is a turnover tax charged on gross revenue. No deduction of the
tax incurred on purchased services or materials is allowed. However, deductions
from gross revenue are allowed for subcontracting fees paid among the
transportation, tourism and construction industries. The rate of business tax
payable by our property sale and leasing business is 5% multiplied by the
proceeds from the sale of our real estate/immovable properties in China.
70
<PAGE>
LAND APPRECIATION TAX
Land appreciation tax is applicable to those entities or individuals
upon the transfer of land use rights and its attachment where a gain is
generated. This tax is calculated based on the appreciated portion of the real
estate property. The applicable marginal tax rate progresses from 30% to 60%
based on the ratio of appreciated portion to the original cost. A full
exemption is available for individual owners that assign their personal
residence of five years or more. For personal residence of more than three
years but less than five years, a 50 percent reduction of the land appreciation
tax is available.
For property developers, an additional 20% of deductible expenses may be
further deducted in the calculation of land appreciation amount. Deductible
expenses include the land use right fee incurred and other costs associated
with acquiring such right, costs associated with property development, such as
a removal fee, construction cost, basic infrastructure cost, and indirect
development cost, as well as sales expenses, management expenses and finance
expenses. Land appreciation tax is assessed on a completion basis. Net profit
is assessed after the completion of each phase to derive the tax liability.
REGISTRATION FEES
There are several registration procedures a house buyer has to go
through to complete the home buying process. Each involves a small fee payable
by the home buyer, including a stamp duty of 0.05% of the purchasing price, a
transfer fee of 0.5% of the house price and a deed tax of 3% of the purchasing
price. Paying these fees secure the proper registration of the real estate
title to the purchaser and thus is borne entirely by the home buyers and has no
effect on us.
PERSONAL TAX REBATE
Shanghai has adopted a personal income tax rebate program. Commencing
from June 1, 1998, qualified home buyers may use the purchase amount of their
commodity residence units to offset their individual taxable income for five
consecutive years. This tax rebate program requires the taxpayer to first pay
off their income tax without considering the effect of the rebate program based
on their total taxable income. The designated taxation department then refunds
the rebatable portion of individual income tax to the qualified home buyers.
The maximum amount of the taxable income that can be offset may not exceed the
net amount paid by the home buyer in the purchase or exchange of commodity
residence units, inclusive of mortgage loan interest.
URBAN REAL ESTATE TAX
Foreign investment enterprises engaged in the development of and
investment in real estate in China are required to pay urban real estate tax on
land and buildings owned by them in urban areas in China. The tax is charged at
a rate of 1.2% based on the original value of the property discounted by 10% to
30%. If no original value is available, the tax chargeable is determined by the
relevant local tax authorities with reference to the value of the other
properties of a similar nature. Where the property is rented, the tax may be
charged at a rate of 12% of the rental income received in respect of such
property, depending on local regulations. We understand this tax will soon be
replaced by a real estate tax which is of a similar nature and is currently
paid by domestic Chinese companies.
LAND USE FEES
According to local government regulations and provisions specified in
the contract for the grant of state-owned land use rights, land users may be
required to pay for using the state-owned land in the form of land use fees.
URBAN LAND USE TAX
Urban land use tax is charged to residential, agricultural and business
land users. The land use tax rate is determined based on the land area involved
and is assessed by the local tax authorities on an annual basis. This tax is
currently not applicable to foreign investment enterprises.
STAMP DUTY
Persons who have executed or received dutiable documents within China
are subject to stamp tax. Dutiable documents include contracts or documents of
a contractual nature, for the
71
<PAGE>
sale of goods, the undertaking of processing work, the contracting of
construction and engineering projects, the lease of property, and technology,
as well as transfer of property. A stamp tax by each party to the stampable
documents at the rate of 0.05% is payable in respect of transfer of properties
based on the contractual price of the property transferred and at the rate of
0.1% of the total amount of rent in respect of the leasing of properties.
TAXATION IN THE CAYMAN ISLANDS
The Cayman Islands currently levy no taxes on individuals or companies
based upon profits, income, gains or appreciations and there is no taxation in
the nature of inheritance tax or estate duty. There are no other taxes levied
by the Government of the Cayman Islands except stamp duties which may be
applicable, from time to time, on instruments executed in or brought within the
jurisdiction of the Cayman Islands. The Cayman Islands is not party to any
double tax treaties.
UNITED STATES FEDERAL INCOME TAXATION
The following discussion addresses the material United States federal
income tax consequences of the ownership of common shares held as a capital
asset by a "U.S. Investor." A "U.S. Investor" means a person who is any of the
following:
/bullet/ a citizen or resident of the United States;
/bullet/ a corporation or partnership created or organized in or under
the laws of the United States or any political subdivision thereof;
/bullet/ an estate the income of which is subject to U.S. federal income
taxation regardless of its source;
/bullet/ a trust that is subject to the supervision of a court within
the United States and the control of one or more U.S. persons; or
/bullet/ a trust that had a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person.
The summary does not address the United States federal income tax
treatment of the following types of investors:
/bullet/ life insurance companies;
/bullet/ tax-exempt investors;
/bullet/ banks;
/bullet/ broker-dealers;
/bullet/ U.S. investors who own or that hold 10% or more of our voting
shares;
/bullet/ investors who hold our common shares as part of straddles,
hedging, integrated or conversion transaction; and
/bullet/ persons whose "functional currency" is not the U.S. dollar.
Each type of investor listed above may be subject to tax rules that
differ significantly from those summarized below. You are advised to consult
your own tax adviser with respect to your particular circumstances and with
respect to the effects of state, local or foreign tax laws to which you may be
subject.
DIVIDENDS. Subject to the discussion in Passive Foreign Investment
Company Status below, in the event that a U.S. Investor receives a distribution
other than pro rata distributions of common shares or rights with respect to
common shares, on the common shares, such U.S. Investor will be required to
include the distribution in gross income as a taxable dividend to the extent
such distribution is paid from current or accumulated earnings and profits of
the Company as determined for United States federal income tax purposes.
Distributions in excess of the current and accumulated earnings and profits of
the Company will first be treated, for United States federal income tax
purposes, as a nontaxable return on capital to the extent of the U.S.
Investor's basis in the common shares and thereafter as gain from the sale or
exchange of a capital asset. Dividends paid by the Company will not be eligible
for the corporate dividends received deduction. The amount of any distribution
of property other than cash will be the fair market value of such property on
the date of distribution.
Dividends will constitute foreign source income for foreign tax credit
limitation purposes. The limitation on foreign taxes
72
<PAGE>
eligible for credit is calculated separately with respect to specific classes
of income. For this purpose, dividends distributed by the Company with respect
to common shares will be "passive income" or "financial services income."
Special rules apply to individuals whose foreign source income during the
taxable year consists entirely of "qualified passive income" and whose
creditable foreign taxes paid or accrued during the taxable year do not exceed
$300 ($600 in the case of a joint return). Further, in particular
circumstances, a U.S. Investor that (i) has held common shares for less than a
specified minimum period during which it is not protected from risk of loss,
(ii) is obligated to make payments related to the dividends or (iii) holds the
common shares in arrangements in which the U.S. Investor's expected economic
profit, after non-U.S. taxes, is insubstantial will not be allowed a foreign
tax credit for foreign taxes imposed or dividends paid on common shares.
DISPOSITION OF SHARES. Subject to the discussion on Passive Foreign
Investment Company Status below, gain or loss realized by a U.S. Investor on
the sale or other disposition of the common shares will be subject to United
States federal income tax as capital gain or loss in an amount equal to the
difference between such U.S. Investor's basis in the common shares and the
amount realized on the disposition. Such capital gain or loss will be long-term
capital gain or loss if the U.S. Investor has held the common shares for more
than one year at the time of the sale or exchange. Gain or loss realized by a
U.S. Investor will be treated as U.S. source gain or loss U.S. foreign tax
credit purposes.
PASSIVE FOREIGN INVESTMENT COMPANY STATUS. We may be a passive foreign
investment company (a "PFIC") for our 2000 taxable year or for future taxable
years. We will be classified as a PFIC if, after the application of "look
through" rules, either (1) 75% or more of the gross income of the Company in a
taxable year is passive income, or (2) the average percentage of assets by
value of the Company in a taxable year which produce or are held for the
production of passive income (which includes cash) is at least 50%. The
determination of whether or not we are a PFIC will be made annually based upon
the composition of our income and assets, including goodwill, from time to
time. In calculating goodwill, we will value our total assets based on our
total market value determined using the then share trading price of our common
shares and will make a number of assumptions regarding the amount of this value
allocable to goodwill. Because the determination of goodwill will be based on
the price of our shares, it is subject to change. We believe our valuation
approach is reasonable. However, it is possible that the Internal Revenue
Service will challenge the valuation of our goodwill, which may result in us
being classified as PFIC. In addition, the composition of our income and assets
will be affected by the extent to which we spend the cash we have raised (which
is a passive asset for purposes of the PFIC asset test discussed above) on
acquisitions and capital expenditures. We intend, however, to use the proceeds
of this offering and conduct our business activities in an effort to reduce the
risk of our classification as a PFIC.
Because the PFIC determination is made at the end of each taxable year,
we cannot determine in advance whether we will be considered a PFIC for the
2000 taxable year or for any future taxable year. If we become a PFIC at any
time, we will notify all U.S. Investors who have been at any time a record
shareholder by mail within 60 days of the end of our taxable year ending
December 31.
Special U.S. tax rules apply to U.S. Investors of interest in a PFIC.
Subject to the discussion of the mark-to-market election and Qualified Electing
Fund election below, if we were a PFIC for any taxable year during which a U.S.
Investor held common shares, such U.S. Investor would be subject to special tax
rules regardless of whether the common shares continue to constitute stock in a
PFIC with respect to:
/bullet/ any "excess distribution" by us to the U.S. Investor, which
means any distributions received by the U.S. Investor on the common
shares in a taxable year that are greater than 125% of the average
annual distributions received by the U.S. Investor in the three
preceding taxable years, or the U.S. Investor's holding period for
the common shares, if shorter; and
73
<PAGE>
/bullet/ any gain realized on the sale or other disposition, including a
pledge, of common shares.
Under these special tax rules:
/bullet/ the excess distribution or gain would be allocated ratably over
the U.S. Investor's holding period for the common shares;
/bullet/ the amount allocated to the current taxable year and any
taxable year prior to the first taxable year in which the Company is
a PFIC would be treated as ordinary income;
/bullet/ the amount allocated to each of the other years would be taxed
as ordinary income at the highest tax rate in effect for that year;
and
/bullet/ the interest charge applicable to underpayments of tax would be
imposed with respect to the resulting tax attributable to each prior
year in which the Company was a PFIC to recover the deemed benefit
from the deferred payment of the tax attributable to each year.
If the Company is a PFIC in any year, a U.S. Investor would be required
to make an annual return on Internal Revenue Service Form 8621 regarding
distributions received with respect to the common shares and any gain realized
on the disposition of the common shares.
Under the Tax Legislation enacted in 1997, a U.S. Investor of a PFIC is
allowed to make a mark-to-market election with respect to the stock of the
PFIC, provided that such stock is "marketable" within the meaning of the Code.
The common shares will be "marketable" as long as it remains listed on Nasdaq.
If the election is made a U.S. Investor would be required to mark-to-market the
stock each taxable year and recognize ordinary gain for any increase in market
value for such taxable year and would be allowed to recognize an ordinary loss
for any decrease in such market value to the extent of prior gain. The adjusted
basis in the stock of the PFIC would be adjusted to reflect such gain or loss.
The mark-to-market election will be effective for the taxable year for which
the election is made and all subsequent taxable years, unless the common shares
cease to be regularly traded on a designated exchange or the IRS consents to
the revocation of the election.
Alternatively, a U.S. Investor can make an election to include annually
its pro rata share of a PFICs earnings and net capital gains currently in
income each year. This election is referred to as a "Qualified Electing Fund"
or "QEF" election. To make a QEF election you will need to have an annual
information statement from the PFIC setting forth the earnings and capital
gains for the year. If we were to become a PFIC, we would supply the PFIC
annual information statement to any shareholder or former shareholder who
requests it. In general, a U.S. Investor must make a QEF election on or before
the due date for filing its income tax return for the first year to which the
QEF election will apply. Under temporary U.S. treasury regulations effective
January 2, 1998, U.S. Investors will be permitted to make retroactive elections
in particular circumstances, including if the U.S. Investor had a reasonable
belief that the foreign corporation was not a PFIC and filed a protective
election. As discussed above, we will notify U.S. Investor if we become a PFIC
within 60 days of the end of our taxable year ending on December 31. This
notice should provide U.S. Investors with a calendar tax year with sufficient
time to make the QEF election. However, U.S. Investors (in particular those
with a tax year other than the calendar year) should consult their own tax
advisors as to the consequences of making a protective QEF election or other
consequences of the QEF election.
If we are a PFIC in any year, you should consult with your tax adviser
as to whether to make a mark-to-market or QEF election.
INFORMATION REPORTING AND BACKUP WITHHOLDING. Dividends paid in the
United States may be subject to the information reporting requirements of the
U.S. Internal Revenue Code of 1986, as amended (the "Code"). Under existing
regulations, such dividends are not subject to backup withholding. Under
proposed regulations, however, such dividends are subject to backup withholding
at the rate of 31% unless the holder provides a taxpayer identification number
on a properly
74
<PAGE>
completed Form W-9 or otherwise establishes an exemption. Any amounts withheld
under the backup withholding rules from a payment to a U.S. Investor will be
refunded or credited against such U.S. Investor's U.S. federal income tax
liability, if any, provided that the required information is furnished to the
Internal Revenue Service.
75
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees are as follows:
NAME AGE POSITION
- ------------------------ --- -----------------------------------------------
Charles H. Stein 71 Chairman of the Board of Directors
Michael Chi Ning O'Young 55 President, Chief Executive Officer and Director
Jay M. Haft 64 Director
Margaret Chiu 41 Director
Denny Chi Hing Chan 36 Director and Treasurer
Trevor John Bedford 65 Director
Veronica O'Young 56 Senior Vice President--Marketing & Sales
Mark L. Kallan 54 Senior Vice President--Investor Relations
Li Wan Cai 46 Vice President--Property Management
Henry Chen 47 Vice President--Property Advertising
Gao Yang Zhi 39 Vice President--Engineering
William Chi Yuen Kuan 36 Secretary
CHARLES H. STEIN has served as Chairman of the Board of Directors since
July 1999. From January 1996 until November 1999, Mr. Stein served as Chairman
of CCA Companies Inc. (NASDAQ). From June 1990 until December 1996, Mr. Stein
was a private investor and consultant. From 1994 until June 1996, Mr. Stein
served as Special Trade Representative to Europe for the state of Florida. From
1984 to 1989, Mr. Stein was the President and Chief Executive Officer of
Nighthawk Resources, an oil, natural gas and gold mining company listed on the
Vancouver Stock Exchange. Mr. Stein was Chairman and CEO of Hardwicke Companies
Inc., which employed several thousand people worldwide, and which built,
developed, or operated more than 50 restaurants (Tavern on the Green, Maxwell's
Plum and others), health spas, theme parks in North America, Europe and Asia
(including Great Adventure in New Jersey), and duty-free shops from 1970 to
1984. Mr. Stein served as President and Chief Executive Officer of Kitchens of
Sara Lee, the world's largest bakery from 1962 to 1967. He was also a Director,
Member of the Executive Committee, and a Vice President of Consolidated Foods,
the parent company of Sara Lee, and one of the top 30 companies of the Fortune
500 from 1962 to 1967. Mr. Stein has also served as Director or advisor to a
wide range of American and International public companies including: General
Host Corporation (NYSE), Ward Foods (NYSE), Consolidated Foods Corporation
(NYSE), Goldfleld Corp. (AMEX), Tokyu Corporation, Land Development Division
(Tokyo Stock Exchange) and Watney Mann, Ltd. (London Stock Exchange), a
British-based brewer and hotel company. He was also president of Benihana of
Tokyo, an international restaurant chain from 1973 to 1978. Originally, Mr.
Stein pioneered the concept of fresh orange juice in "milk-type" cartons when
he developed unique and innovative packaging and presentation of other chilled
and frozen citrus products. He started his business in Florida and then sold it
to Kraft Foods. Subsequently, he served for nine years as a division manager
with several thousand employees, and was one of five senior executives
reporting to the CEO of Kraft from 1953 to 1962. Mr. Stein has served as a
Governor of the American Bakers Association, a member of the Grocery
Manufacturers Association, and a past member of the Young Presidents'
Organization (Y.P.O.).
MICHAEL CHI NING O'YOUNG has served as President and Chief Executive
Officer of the Company since July 1999. He has served as Managing Director of
Far East Consortium since June 1996. From 1992 to 1996, he was a
76
<PAGE>
Senior Partner at O'Young Partners, a property consultant firm. From 1993 to
1996, he was the project management consultant to Far East Consortium's
Malaysian office. He served as Joint Managing Director of Meinhardt Partners,
an international engineering consultancy firm from 1981 to 1992. Mr. O'Young
has over 25 years experience in engineering consultancy and project management,
both in Australia and Southeast Asia. He was responsible for the structural
design of some of the more prestigious buildings, such as the High Court of
Australia, QVB in Sydney and Telecom Central in Singapore. Upon the
incorporation of Shanghai Chingchu, he was appointed Chief Executive Officer.
He was primarily responsible for the initiation and establishment of New China
Homes and its business, and is in charge of its day to day operations as
President and Chief Executive Officer. Mr. O'Young holds a Bachelor of
Engineering degree from the University of N.S.W., Australia.
JAY M. HAFT has served as a Director of the Company since August 1999.
He has served as a Managing General Partner of Gen Am "1" Venture fund, an
international venture capital fund since 1998. He has served as Chairman of the
Board of NCT Group, Inc, and as Vice-Chairman of Decap Group, Inc. Mr. Haft has
been of counsel to Parker Duryee Rosoff & Haft, in New York since 1994. He was
previously a senior corporate partner of that firm from 1989 to 1994, and
before that, a founding partner of Wofsey, Certilman, Haft, et al. from 1966 to
1989. He is a strategic consultant for growth stage companies. He is active in
international corporate finance, mergers and acquisitions, as well as in the
representation of emerging growth companies. He has actively participated in
strategic planning for many high-tech companies, leading medical technology
companies and technical product service and marketing companies. Mr. Haft is
also a Director of numerous public and private corporations, including Robotic
Vision Systems, Inc. (NASDAQ), NCT Group, Inc. (OTC), Thrift Management, Inc.
(OTC), Oryx Technologies, Corp. (NASDAQ Small Cap), Encore Medical Corporation
(NASDAQ), PC Service Source, Inc. (NASDAQ), and Dusa Pharmaceuticals Inc.
(NASDAQ). He is a graduate of Yale College and Yale Law School. He is currently
treasurer of the Miami City Ballet, a trustee of Florida International
University and a former member of the Florida State Commission for Government
Accountability to the People.
MARGARET CHIU has served as a Director of the Company since July 1999.
She has served as a Director of Far East Holdings International Limited since
December, 1995. She has also served as a director of Far East Hotel and
Entertainment Ltd. since April 1989. For the past five years, Ms. Chiu has
served as a management consultant for the Sung Dynasty City theme park in Hong
Kong and the Tang Dynasty theme park in Singapore. Ms. Chiu holds a L.L.B.
Degree from the University of Buckingham, U.K. and has extensive experience in
the entertainment, television and motion picture business in Hong Kong, China
and overseas.
DENNY CHI HING CHAN has served as a Director of the Company since July
1999. He has served as the Group Chief Accountant for Far East Consortium since
October 1990. He is responsible for the Group's financial and accounting
functions. He has extensive experience in accounting and auditing of Hong Kong
listed companies.
TREVOR JOHN BEDFORD has served as a Director of the Company since
January 2000. He is currently the Governor of the Royal Grammar school, High
Wycombe in the United Kingdom. Mr. Bedford also currently serves as Chairman
and/or Director of eight companies located in the United Kingdom, Europe, the
United States, Malaysia and Australia. These companies include Leisure
Development Holdings S.A., Royal Oak Hotel, Winsford, Industrial Development
Holdings Ltd., Aviata Resources Inc., Far East Consortium International, Ltd.,
Northrock Group of Companies, Fortune Oil (OTC bb foreign), and Hanson Green.
Mr. Bedford is the former Chairman and Chief Executive Officer of the Hong Kong
Land Group which was the second largest public company in Hong Kong and the
largest property group in the world. Mr. Bedford also served as a member of the
board of directors of the Hong Kong bank, Hong Kong Electric Holdings and the
Hong Kong Telephone Company. He also served as the Commandant of the Royal Hong
Kong Auxillary Police Force, an honorary
77
<PAGE>
appointment by the Governor of Hong Kong. Mr. Bedford was also made a member of
the British Empire in 1972. Mr. Bedford was educated in India from 1939-1946
and later at the Colchester Royal Grammar School.
VERONICA O'YOUNG has served as Senior Vice-President--Marketing and
Sales of the Company since February 1999. From April 1997 until joining the
Company, she served as Executive Director of Shanghai Chingchu Property
Development Co. Ltd. From 1981 to 1997, she served as senior subtitler,
journalist, producer for TV Australia. She is of Chinese origin with Australian
citizenship, and has served as a journalist and presenter for the Australian
Special Broadcasting Services for over 15 years. As President of the Australian
Chinese Writer's Association, she has been involved in cultural exchanges
between Australia and China for many years, and she was included in the 1997
edition of "World Famous Overseas Chinese." In 1997, Ms. O'Young published a
book and won the "Distinguished Chinese Writer" award in China. She is
responsible for the advertising and promotion of New China Homes projects in
Shanghai, and has won the 1998 "Most Successful Advertising Personnel" award in
Shanghai. Ms. O'Young is married to Michael O'Young, our President and Chief
Executive Officer.
MARK L. KALLAN has served as Senior Vice-President - Investor Relations
of the Company since August 1999. He served as Senior Vice President of CCA
Companies Incorporated (NASDAQ) from 1996 to 1998 and was previously Chairman
and Chief Executive Officer of Helbros Watches Inc., from 1982 to 1992, a major
American wristwatch manufacturer and distributor. Mr. Kallan was a self employed
marketing consultant between September 1994 and January 1996. During 1996, Mr.
Kallan served as a Director of CCA Companies Incorporated. Before that, Mr.
Kallan held Senior Account Management positions at several of America's leading
advertising agencies, including divisions of William Esty, Young & Rubicam, and
N.W. Ayer from 1972 to 1984. Mr. Kallan served as Executive Vice President of
Professional Technical Symposia, Inc., and Project Marketing Corporation, an
American marketing consulting organization from 1969 to 1972. He has served as
consultant and advisor to emerging companies in the United States, United
Kingdom, and Europe. He was responsible for a wide variety of advertising
accounts which included American Telephone & Telegraph (AT&T), MGM, Polydor,
Philips, and JVC, as well as a variety of consumer and specialty products,
hotels and convention centers, and travel trade publications.
WILLIAM CHI YUEN KUAN has served as Company Secretary since February
1999. From June 1998 until joining the Company, he served as Secretary of Far
East Consortium. He served as a secretarial executive for Messrs. Woo, Kwan,
Lee & Lo, a leading legal firm in Hong Kong, from March 1994 to April 1998. He
served as an Assistant Accountant for Hong Kong Telecoms Limited from January
1992 to February 1994. He received a higher certificate in company
secretaryship and administration from the Hong Kong Polytechnic University and
is currently an associate member of The Institute of Chartered Secretaries and
Administrators and The Hong Kong Institute of Company Secretaries. He has over
10 years accounting experience in various multinational corporations in Hong
Kong.
KEY EMPLOYEES
LI WAN CAI has served as Vice President--Property Management of the
Company since February 1999. From June 1998 until joining the Company, he served
as Deputy General Manager of Shanghai Chingchu Property Development Co. Ltd. and
Shanghai Chingchu Property Management. From March 1993 to May 1998, he served as
an assistant to the general manager of Vanke Property Development Co. From
January 1987 to February 1993, he served as the Director of the President's
Office for East China Normal University. Mr. Cai holds a Master of Arts degree
from East China Normal University and a Bachelor of Arts degree from Liao Ning
University.
HENRY CHEN has served as Vice-President--Property Advertising of the
Company since February 1999. From 1997 until joining the Company, he served as
Deputy General Manager of Shanghai Chingchu. From 1995 to 1997, he served as
General Manager of Asian-Australian Culture and Technology
78
<PAGE>
International Promotions. He served as Deputy Chief Editor of the Australian
Chinese Herald from 1991 to 1994. Mr. Chen holds a Master of Arts degree from
the Australian School of Film, Television & Radio.
GAO YANG ZHI has served as Vice-President-Engineering of the Company since
February 1999. From June 1998 until joining the Company, he served as
Vice-President - Engineering of Shanghai Chingchu. Before joining New China
Homes, he was Vice President of Shenzhen University Design Institute from March
1995 to March 1998. Between August 1994 and March 1995, Mr. Gao was a design
engineer with the Shenzhen University Design Institute. He is a Chinese
national and is an honor graduate of Tung Zhi University, Shanghai. Mr. Gao is
in charge of the day to day operations of the engineering department.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three committees - the Audit
Committee, the Compensation Committee and the Pricing Committee. These
committees have the responsibilities and authority described below.
AUDIT COMMITTEE. Our Audit Committee has the following
responsibilities:
/bullet/ recommending the selection of our independent public accountants;
/bullet/ reviewing and approving the scope of our independent public
accountants' audit activity and extent of non-audit services;
/bullet/ reviewing with management and our independent public accountants the
adequacy of our accounting system and the effectiveness of our
internal audit plan and activities;
/bullet/ reviewing with management and the independent public accountants our
financial statements and exercising general oversight of our financial
reporting process; and
/bullet/ reviewing our litigation and other legal matters that may affect our
financial condition, and monitoring compliance with our business
ethics and other policies.
The members of our Audit Committee are Mr. Haft, Ms. Chiu and Mr.
Bedford.
COMPENSATION COMMITTEE. Our Compensation Committee has the following
responsibilities:
/bullet/ establishing the salary rates of our officers and employees;
/bullet/ examining periodically our compensation structure; and
/bullet/ supervising our welfare and pension plans and compensation plans.
The members of our Compensation Committee are Messrs. Stein, Haft, Chan
and Ms. Chiu.
PRICING COMMITTEE. Our Pricing Committee has the following
responsibilities:
/bullet/ determining the price at which the securities are to be sold to the
public;
/bullet/ determining the number of shares to be sold to the public; and
/bullet/ determining the underwriting discount to be established pursuant to
the Underwriting Agreement.
The members of our Pricing Committee are Mr. Stein and Mr. Haft.
DIRECTOR COMPENSATION
Each outside director will be paid an annual fee of $36,000 and
reimbursed for travel expenses incurred for each Board meeting attended.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
We will obtain on behalf of our Directors and officers who are residents
of the United States directors' and officers' liability insurance prior to the
completion of this offering.
DIRECTOR REMOVAL
As a condition to the underwriting agreement, we agreed that the current
members of our Board of Directors may not be removed,
79
<PAGE>
other than for cause, until April 30, 2002. In this context, the term "cause"
means:
(a) The engaging by the director in fraudulent conduct, as evidenced by
a final judgment, order or decree of a court or administrative agency of
competent jurisdiction, whether civil, criminal administrative or
investigative, which a majority of the remaining directors reasonably determine
has or would have a material adverse impact on the Company in the conduct of
the Company's business;
(b) Conviction of the director of a criminal offense which would be a
felony in the United States of America, as evidenced by a binding judgment,
order or decree of a court of competent jurisdiction, which a majority of the
remaining directors reasonably determine has or could have a material adverse
impact on the Company in the conduct of the Company's business; or
(c) Willful refusal by the director to perform the director's lawful
duties or responsibilities.
EXECUTIVE COMPENSATION
During 1998, none of our executive officers were compensated at an
annual rate of more than $100,000.
EMPLOYMENT AGREEMENTS
Michael O'Young, our President and Chief Executive Officer, is a party
to a five-year employment agreement with us providing for a base salary of
$250,000 per annum and an annual bonus of up to 1% of the net after tax profits
of the Company, payable at the discretion of the Board.
MANAGEMENT SERVICE AGREEMENTS
Since 1998, Messrs. Stein, Haft and Kallan and Silver Pacific Trading
Ltd. have been serving us as strategic advisors. On April 2, 1999, we
formalized these relationships by entering into three-year Management Service
Agreements with Messrs. Stein, Haft and Kallan and Silver Pacific Trading Ltd.
Under these agreements, Messrs. Stein, Haft and Kallan and Silver Pacific
Trading Ltd. have agreed to provide advice and assistance concerning our
business strategy and corporate activities. Among the services that these
advisors will provide are the following:
/bullet/ developing and evaluating potential acquisitions and other business
opportunities;
/bullet/ providing financial, marketing and business advice on particular land
development and home building projects;
/bullet/ working with our management to monitor our financial affairs and
initiating and maintaining relationships with potential financing
sources including commercial banks and investment banking firms;
/bullet/ providing advice in all areas involving the execution of our business
plan; and
/bullet/ coordinating our relationships with our accountants, attorneys and
other professionals.
In anticipation of the continued relationship that we will have with
Messrs. Stein, Haft and Kallan, on April 2, 1999 we paid US$ 175,000 to Mr.
Stein, US$ 200,000 to Mr. Haft, US$ 75,000 to Mr. Kallan and US$ 400,000 to
Silver Pacific Trading Ltd. These payments were used to purchase an aggregate
of 850 of our common shares at $1,000 per share. As a result of the 999-for-one
stock split effected in August 1999, Mr. Stein received an additional 174,825
common shares, Mr. Haft received an additional 199,800 common shares, Mr.
Kallan received an additional 74,925 common shares and Silver Pacific Trading
Ltd. received an additional 399,600 common shares. We may not cancel or redeem
these shares if this offering is not completed for any reason. However, Messrs.
Stein, Haft and Kallan and Silver Pacific Trading Ltd., as well as all of our
other shareholders, have agreed with us that 25% of their common shares will be
canceled if our net income is less than US$ 10 million in the one-year period
commencing on the first day of the month following the closing of this
offering, and 25% of these common shares will be canceled if our net income is
less than US$ 20 million in the following one-year period.
On September 2, 1999, Denny Chan, a Director and our Treasurer, was
quoted in an article appearing in the SOUTH CHINA MORNING
80
<PAGE>
POST. Mr. Chan's comments were related to the Company's Management Services
Agreements, in which he stated only that 25% of the common shares owned by our
current shareholders would be cancelled if the Company's net income is less
than US$ 10 million (approximately HK$ 80 million) in the one-year period
commencing the first month following the closing of the offering. This Article
incorrectly reported that Mr. Chan had projected that the Company would have
net profits of US$ 10 million in fiscal 2000 as we make no assurances as to the
future profitability of the Company.
1999 STOCK OPTION PLAN
New China Homes has adopted a 1999 Stock Option and Restricted Stock
Purchase Plan (the "Option Plan") conditioned upon the shareholders of Far East
Consortium approving the terms of the Option Plan and subject to any comments
to the Option Plan by the Hong Kong Stock Exchange. It is intended that options
to purchase an aggregate of 600,000 common shares will be granted under the
Option Plan. The purpose of the Option Plan is to attract and retain qualified
personnel, to provide additional incentives to our employees, officers and
advisors and to promote the success of our business. The Option Plan is
administered by the Compensation Committee of the Board. The Compensation
Committee has complete discretion to determine which eligible individuals are
to receive option grants, the number of shares subject to each such grant, the
status of any granted option as either an incentive stock option or a
non-statutory option, the vesting schedule to be in effect for the option grant
and the maximum term for which any granted option is to remain outstanding.
Each option granted under the Option Plan will have a maximum term of
ten years, subject to earlier termination following the optionee's cessation of
service with New China Homes. Options granted under the Option Plan may be
exercised only for fully vested common shares. The exercise price of incentive
stock options and non-statutory stock option granted under the Option Plan must
be at least 100% and 85% of the fair market value of the stock subject to the
option on the date of grant, respectively (or 110% with respect to incentive
stock options granted to holders of more than 10% of the voting power of the
Company's outstanding common shares). The Board or the Compensation Committee
has the authority to determine the fair market value of the shares. The
purchase price is payable immediately upon the exercise of the option. Such
payment may be made in cash, in outstanding common shares held by the
participant, through a promissory note payable in installments over a period of
years or any combination of the foregoing. The maximum number of common shares
subject to the Options granted to a single person shall not exceed 25% of the
total number of common shares subject to the Options granted under the Option
Plan. Each Option, other than a restricted stock award, shall not be
transferable, otherwise than by will or the laws of descent and distribution.
Each Option, other than a restricted stock award, during lifetime shall only be
exercisable by the grantee. If a grantee of an Option, other than a restricted
stock award, leaves the service of the Company or any of its subsidiaries for
any reason other than "for cause," death, or disability, the unexercised
portion of the Option, other than a restricted stock award, may only be
exercised within three months after the date on which the grantee ceased to be
so employed, and only to the extent that the grantee could have otherwise
exercised such Option, other than a restricted stock award, as of the date on
which he ceased to be so employed. If a grantee of an Option, other than a
restricted stock award, ceases to be an employee of the Company or any of its
subsidiaries by reason of death, the unexercised portion of the Option may only
be exercised within one year after the date of the grantee's death, and only to
the extent that the grantee could have otherwise exercised the Option, other
than a restricted stock award, at the time of his death. In such case, the
Option, other than a restricted stock award, may be exercised by the executor
or administrator or by any person or persons who shall have acquired the
Option, other than a restricted stock award, from the grantee's estate. If a
grantee of an Option, other than a restricted stock award, ceases to be an
employee of the Company or any of its subsidiaries as a result of termination
of employment "for cause" or if a grantee terminates his employment for any
reason other than as a result of his death or disability, the unexercised
portion of his Option, other than a restricted stock award, may only be
exercised within one month after the date on which the
81
<PAGE>
grantee ceased to be so employed, and only to the extent that the grantee could
have otherwise exercised such Option, other than a restricted stock award, as
of the date which he ceased to be so employed. If a grantee of an Option, other
than a restricted stock award, ceases to be an employee of the Company or any
of its subsidiaries by reason of a disability, the unexercised portion of his
Option, other than a restricted stock award, may only be exercised within one
year after the date on which the grantee ceased to be so employed, and only to
the extent that the grantee could have otherwise exercised such Option, other
than a restricted stock award, as of the date which he ceased to be so
employed.
The Company's board of directors shall make adjustments to the number of
common shares (and the Option price per share) subject to the unexercised
portion of any outstanding Option (to the nearest possible full share) held by
the grantees in the case that the Company's outstanding common shares are
increased, decreased or exchanged for a different number or kind of shares or
other securities through a reorganization, merger or consolidation.
If there is any capital reorganization or reclassification of the
capital stock of the Company or consolidation or merger of the Company with
another entity, or sale of substantially all of the Company's assets, and the
holders of the common shares become entitled to receive stock, securities or
assets in exchange for the common shares, such shares may be issued or payable
with respect to or in exchange for a number of outstanding shares of the common
stock equal to the number of common shares immediately theretofore so
receivable had such reorganization, reclassification, merger or sale not taken
place. In the event of an offer being made to the Company's shareholders for
the acquisition of all or substantially all of its common shares or a proposed
transaction for the acquisition of substantially all of the Company's assets,
notwithstanding the aforementioned (but only if expressly provided in any
option agreement), the Company's board of directors may cancel any outstanding
Options, and pay or deliver to each holder thereof an amount in cash or
securities having a value equal to the product of the number of common shares
that the holder has become entitled to purchase (and has not purchased) as
devised by a specified formula.
The Board may amend or modify the Option Plan at any time, provided that
no such amendment or modification may adversely affect the rights and
obligations of the participants with respect to their outstanding options or
vested common shares without their consent. In addition, no amendment of the
Option Plan may be made without the approval of our shareholders to: (A) modify
the class of individuals eligible for participation; (B) increase the number of
common shares available for issuance, except in the event of material changes
to the Company's capital structure; or (C) extend the term of the Option Plan.
Options granted under the Option Plan will be uniquely structured to
provide incentives to achieve our financial goals and enhance shareholder
value. In general, options granted under the Option Plan will vest ratably over
a four year period commencing one year from the date of grant.
82
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS INVOLVING OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS
Messrs. Stein and Haft, who are directors, Mr. Kallan, who is an
executive officer, and Silver Pacific Trading Ltd., which is a principal
shareholder of New China Homes, have been rendering management services to us
since 1998. On April 2, 1999, Messrs. Stein, Haft and Kallan and Silver Pacific
Trading Ltd. entered into Management Service Agreements with us in which they
agreed to continue to provide management services to us until April 2, 2002.
See "Management - Management Service Agreements" on page 80 of this prospectus.
Far East Consortium, our principal shareholder, has entered into a
non-competition agreement with us under which it agreed not to compete with us
in the residential property development business in China (excluding Hong
Kong). In addition, prior to this offering our operations have been financed by
advances from Far East Consortium. As of March 31, 1999, the aggregate amount
of these advances was US$ 9,795,997. In April 1999, we issued 9,549 common
shares to Far East Consortium in exchange for the reduction of US$ 9,549,000 of
indebtedness. As of September 30, 1999, the aggregate amount of advances from
Far East Consortium was reduced to US$ 209,004. As a result of a 999-for-one
stock split effected in August 1999, we issued an additional 9,540,450 shares
to Far East Consortium. See Notes 1 and 10 to our consolidated financial
statements.
* * *
Following this offering, we will not enter into any material transaction
with officers or directors, or their family members, without the approval of a
majority of the directors who do not have an interest in such transaction.
83
<PAGE>
SECURITY OWNERSHIP OF BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of the date of this prospectus,
information which is known by us with respect to the ownership of common shares
as to:
/bullet/ all persons who are expected to be the beneficial owners of 5% or more
of the outstanding common shares upon consummation of the offering;
/bullet/ each director and each person who has consented to be named as a
director (the "named directors");
/bullet/ each Named Executive Officer; and
/bullet/ all executive officers and directors of New China Homes as a group.
No beneficial owners of the Company own any shares of Far East
Consortium. Deacon Te Ken Chiu and David Chiu, each own more than 10% of Far
East Consortium.
Unless otherwise indicated, each of the following persons may be deemed
to have sole voting and dispositive power with respect to such shares.
Information set forth in the table with respect to beneficial ownership of the
common shares has been provided to New China Homes by such holders.
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING
COMMON SHARES
----------------------------
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP BEFORE
NAME AND ADDRESS OF BENEFICIAL OWNER OF COMMON SHARES OFFERING AFTER OFFERING
- ------------------------------------------------------------------ ------------------------ ---------- ---------------
<S> <C> <C> <C>
Far East Consortium International Limited
16/F Far East Consortium Building,
121 Des Voeux Road, Central
Hong Kong ........................................................ 9,550,000 91.83% 77.02%
Silver Pacific Trading Ltd.
14th Floor
Fung House
19-20 Connaught Road, Central
Hong Kong ........................................................ 400,000 3.85 3.23
Charles H. Stein Trust
5345 Pine Tree Drive
Miami, Beach, FL 33140 ........................................... 175,000 1.68 1.41
Jay M. Haft
1001 Brickell Bay Drive
9th Floor
Miami, FL 33131 .................................................. 200,000 1.92 1.61
Mark L. Kallan
19999 Backnine Drive
Boca Raton, FL 33498 ............................................. 75,000 * *
All executive officers and directors a group (3 persons) ......... 450,000 4.32% 3.62%
<FN>
- ----------------
* Beneficially owns less than 1% of the outstanding common shares.
</FN>
</TABLE>
84
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
Our authorized share capital consists of 50,000,000 common shares,
US$ 1.00 par value, and 5,000,000 preferred shares, US$ 1.00 par value. As of
the date hereof, there are 10,400,000 common shares issued and outstanding. No
preferred shares have been issued.
The following is a summary of our capital shares and the material
provisions of our organizational documents.
COMMON SHARES
All common shares have one vote on all matters to be voted upon by the
shareholders. Subject to preferences that may be applicable to any outstanding
preferred share, the holders of common shares are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board out
of funds legally available under Cayman Islands law. Holders of common shares
have no preemptive, conversion or other registration or subscription rights.
There are no redemption or sinking fund provisions available to the common
shares. In the event of liquidation, dissolution or winding up of New China
Homes, the holders of common shares are entitled to share ratably in all assets
remaining after payment of liabilities, subject to the prior distribution
rights of preferred shares, if any, then outstanding. See "Differences in
Corporate Law" on pages 87-90 of this prospectus.
All the shareholders have agreed with that up to 50% of their common
shares will be canceled if we do not reach specified net income targets as more
fully described in the section of this prospectus entitled "Management Service
Agreements" on page 80.
PREFERRED SHARES
The Board has the authority without further vote or action by the
shareholders to issue up to 5,000,000 preferred shares in one or more series
and to fix the number of preferred shares constituting any such series, the
voting powers, designations, preferences and relative participation, optional
or other special rights and qualifications, limitations or restrictions
thereof, including the dividend rights and dividend rate, terms of redemption
(including sinking fund provisions), redemption price or prices, and conversion
rights and liquidation preferences of the preferred shares constituting any
series. The issuance of preferred shares by the Board could adversely effect
the rights of the holders of common shares. For example, such issuance could
result in a class of securities outstanding that would have preferences with
respect to voting rights and dividends, and in liquidation, over the common
shares, and could (upon conversion or otherwise) enjoy all of the rights of the
common shares.
The authority possessed by the Board to issue preferred shares could
potentially be used to discourage attempts by others to obtain control of New
China Homes through merger, tender offer, proxy contest or otherwise by making
such attempts more difficult to achieve or more costly. The Board may issue
preferred shares with voting or conversion rights that could adversely affect
the voting power of the holders of common shares. There are no agreements or
understandings for the issuance of preferred shares and the Board has no
present intention to issue preferred shares. We have agreed for three years
from the date of this offering not to issue any preferred shares without the
underwriter's consent.
WARRANTS
The following is a brief summary of the provisions of the warrants.
EXERCISE PRICE AND TERMS. Each warrant entitles the holder thereof to
purchase, at any time from the effective date of this offering through the
fifth anniversary of the effective date, one common share at a price of
US$ 5.75 per share, after which date the warrants will expire, subject to
adjustment in accordance with the anti-dilution and other provisions referred
to below.
The holder of a warrant may exercise such warrant by surrendering the
certificate representing the Warrant to the Transfer and Warrant Agent, with
the subscription form on the reverse side of such certificate properly
85
<PAGE>
completed and executed, together with payment of the exercise price. The
warrants may be exercised at any time in whole or in part at the applicable
exercise price until expiration of the warrants five years from the effective
date. No fractional shares will be issued upon the exercise of the warrants.
The warrants are subject to redemption by New China Homes, at the option
of New China Homes, at US$ .25 per warrant, upon 30 days' prior written notice,
if the closing bid price, as reported on the Nasdaq National Market, or the
closing sale price, as reported on a national or regional securities exchange,
as applicable, of the common shares for 30 consecutive trading days ending
within ten days of the notice of redemption of the warrants averages in excess
of US$ 10.00 per share, subject to adjustment. We are required to maintain an
effective registration statement with respect to the common shares underlying
the warrants before redemption of the warrants. Before the first anniversary of
the effective date, the warrants will not be redeemable by us without the
written consent of the underwriters. In the event we exercise the right to
redeem the warrants, such warrants will be exercisable until the close of
business on the date for redemption fixed in such notice. If any warrant called
for redemption is not exercised by such time, it will cease to be exercisable
and the holder will be entitled only to the redemption price. Redemption of the
warrants could force the warrant holders either to (i) exercise the warrants
and pay the exercise price thereof at a time when it may be less advantageous
economically to do so, or (ii) accept the redemption price in consideration for
cancellation of the warrant, which could be substantially less than the market
value thereof at the time of redemption.
The exercise price of the warrants bears no relation to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
We have authorized and reserved for issuance a sufficient number of
common shares to permit the exercise of all warrants to be issued in this
offering. All common shares issued upon exercise of the warrants, if exercised
in accordance with their terms, will be fully paid and non-assessable.
ADJUSTMENTS. The exercise price and the number of common shares
purchasable upon exercise of the warrants are subject to adjustment upon the
occurrence of events such as stock dividends, stock splits, combinations or
reclassification of our common shares, or sale by New China Homes of common
shares (or other securities convertible into or exercisable for common shares)
at a price per share or share equivalent below the then-applicable exercise
price of the warrants or the then-current market price of the common shares.
Additionally, an adjustment would be made in the event of a reclassification or
exchange of common shares, consolidation or merger of New China Homes with or
into another corporation, or sale of all or substantially all of the assets of
New China Homes, in order to enable warrant holders to acquire the kind and
number of common shares or other securities or property receivable in such
event by a holder of that number of common shares that would have been issued
upon exercise of the warrant immediately before such event. No adjustments will
be made until the cumulative adjustments in the exercise price per share amount
to US$ .10 or more. No adjustment to the exercise price of the common shares
subject to the warrants will be made for dividends (other than share
dividends), if any, paid on the common shares or upon exercise of the warrants,
the underwriter warrants or any other options or warrants outstanding as of the
date of this prospectus.
TRANSFER, EXCHANGE AND EXERCISE. The warrants are in registered form
and may be presented to the Transfer and Warrant Agent for transfer, exchange
or exercise at any time before their expiration date five years from the
effective date, at which time the warrants become wholly void and of no value.
If a market for the warrants develops, the holder may sell the warrants instead
of exercising them. There can be no assurance, however, that a market for the
warrants will develop or continue. If we are unable to qualify for sale in
particular states the common shares underlying the warrants, holders of the
warrants residing in such states and desiring to exercise the warrants will
have no choice but to sell such warrants or allow them to expire.
86
<PAGE>
WARRANT HOLDER NOT A SHAREHOLDER. The warrants do not confer upon
holders any dividend, voting, preemptive or any other rights as shareholders of
New China Homes.
UNDERWRITER WARRANTS
We issued to the managing underwriter and/or persons related to the
managing underwriter, for nominal consideration, the common shares underwriter
warrants to purchase up to 200,000 common shares (the "Underlying Shares") and
the warrant underwriter warrants to purchase up to 200,000 warrants (the
"Underwriter Underlying Warrants"). The common shares underwriter warrants, the
warrant underwriter warrants and the Underwriter Underlying Warrants are
sometimes referred to in this prospectus as the "Underwriter Warrants." The
common shares underwriter warrants and the warrant underwriter warrants are
exercisable for a five-year period commencing on the effective date. The
initial exercise price of each common shares underwriter warrant is $8.25 per
Underlying Share. The initial exercise price of each warrant underwriter
warrant is $0.20625 per Underwriter Underlying Warrant. Each Underwriter
Underlying Warrant is exercisable for a five-year period commencing on the
effective date to purchase one share of the common shares at an exercise price
of $9.4875 per share of common shares. The underwriter warrants are restricted
from sale, transfer, assignment, or hypothecation for a period of twelve months
from the effective date by the holder, except (1) to officers of the managing
underwriter and members of the selling group and officers and partners thereof;
(2) by will; or (3) by operation of law.
The common shares underwriter warrants and the warrant underwriter
warrants contain provisions providing for appropriate adjustment in the event
of any merger, consolidation, recapitalization, reclassification, stock
dividend, stock split or similar transaction. The underwriter warrants contain
net issuance provisions permitting the holders thereof to elect to exercise the
underwriter warrants in whole or in part and instruct us to withhold from the
securities issuable upon exercise, a number of securities, valued at the
current fair market value on the date of exercise, to pay the exercise price.
Such net exercise provision has the effect of requiring us to issue common
shares without a corresponding increase in capital. A net exercise of the
underwriter warrants will have the same dilutive effect on interests of our
shareholders as will a cash exercise. The underwriter warrants do not entitle
the holders thereof to any rights as a shareholder of New China Homes until the
underwriter warrants are exercised and common shares are purchased thereunder.
The underwriter warrants and the securities issuable thereunder may not
be offered for sale except in compliance with the applicable provisions of the
Securities Act. We have agreed that if we shall cause a post-effective
amendment, a new registration statement, or similar offering document to be
filed with the SEC, the holders shall have the right, for 7 years from the
effective date, to include in such registration statement or offering statement
the underwriter warrants and/or the securities issuable upon their exercise at
no expense to the holders. Additionally, we have agreed that, upon request by
the holders of 50% or more of the underwriter warrants during the period
commencing one year from the effective date and expiring four years thereafter,
we will, under specified circumstances, register the underwriter warrants
and/or any of the securities issuable upon their exercise. Our Board of
Directors is neither staggered nor classified.
DIFFERENCES IN CORPORATE LAW
The Companies Law (1998 Revision) is modeled after that of England but
does not follow recent United Kingdom statutory enactments and differs from
laws applicable to United States corporations and their shareholders. Set forth
below is a summary of the significant differences between the provisions of the
Companies Law (1998 Revision) applicable to New China Homes and the laws
applicable to New China Homes and the laws applicable to companies incorporated
in the United States and their shareholders.
MERGERS AND SIMILAR ARRANGEMENTS. Cayman Islands law does not provide for
mergers as that expression is understood under United States corporate law.
However, there are statutory provisions that facilitate the reconstruction and
amalgamation of companies,
87
<PAGE>
provided that the arrangement in question is approved by a majority in number
of each class of shareholders and creditors with whom the arrangement is to be
made, and who must in addition represent three-fourths in value of each such
class of shareholders or creditors, as the case may be, that are present and
voting either in person or by proxy at a meeting, or meetings convened for that
purpose. The convening of the meetings and subsequently the arrangement must be
sanctioned by the Grand Court of the Cayman Islands. While a dissenting
shareholder would have the right to express to the court the view that the
transaction ought not to be approved, the court can be expected to approve the
arrangement if it satisfies itself that:
/bullet/ the statutory provisions as to majority vote have been complied
with;
/bullet/ the shareholders have been fairly represented at the meeting in
question;
/bullet/ the arrangement is such as a businessman would reasonably
approve; and
/bullet/ the arrangement is not one that would more properly be
sanctioned under some other provision of the Companies Law (1998
Revision).
When a take-over offer is made and accepted by holders of 90% of the
shares within four months, the offeror may, within a two month period, require
the holders of the remaining shares to transfer such shares on the terms of the
offer. An objection can be made to the Grand Court of the Cayman Islands but
this is unlikely to succeed unless there is evidence of fraud, bad faith or
collusion.
If the arrangement and reconstruction is thus approved, the dissenting
shareholder would have no rights comparable to appraisal rights, which would
otherwise ordinarily be available to dissenting shareholders of United States
corporations, providing rights to receive payment in cash for the judicially
determined value of the shares.
SHAREHOLDERS' SUITS. Our Cayman Island's counsel is not aware of any
reported class action or derivative action having been brought in a Cayman
Islands court. In principle, the Company itself will normally be the proper
plaintiff and a derivative action may not be brought by a minority shareholder.
However, based on English authorities, which would in all likelihood be of
persuasive authority in the Cayman Islands, exceptions to the foregoing
principle apply in circumstances in which:
/bullet/ a company is acting or proposing to act illegally or ultra
vires;
/bullet/ the act complained of, although not ultra vires, could be
effected only if authorized by more than a simple majority vote;
/bullet/ the individual rights of the plaintiff shareholder have been
infringed or are about to be infringed; or
/bullet/ those who control the company are perpetrating a "fraud on the
minority".
ISSUES REQUIRING ORDINARY RESOLUTIONS. The following actions in respect
of exempted companies incorporated under the Companies Law are required by the
Companies Law to be passed by "ordinary resolution" (simple majority):
/bullet/ the alteration of conditions of the memorandum of association
in respect of share capital (Section 13(1));
/bullet/ the power of a company to issue shares at a discount (Section
35(1)(a));
/bullet/ if the Articles of Association do not authorise the manner of
purchase, the manner of purchase on redemption or repurchase of
shares (Section 37(d));
/bullet/ power to direct where an inspector's report be sent (Section
67(3));
/bullet/ to wind up the company voluntarily under the Companies Law
(Section 132(a));
/bullet/ appointment of liquidator of voluntary winding up and
sanctioning of the continuance of powers of directors following the
appointment of a liquidator (Section 136);
/bullet/ disposal of company books, accounts and documents on a
voluntary winding up (Section 158); and
88
<PAGE>
/bullet/ registration of a company by continuation (Section 219(2)).
ISSUES FOR WHICH CAYMAN ISLANDS LAW REQUIRES APPROVAL BY A SUPER
MAJORITY OF VOTES BY SHAREHOLDERS. The following actions in respect of exempted
companies incorporated under the Companies Law are required by the Companies
Law to be passed by "special resolution" (as such phrase is defined in the Law
and varied by the articles of association of each such company):
/bullet/ the alteration of the memorandum of association (Section 10);
/bullet/ the reduction of share capital (Section 14);
/bullet/ the alteration or addition to the articles of association
(Section 24);
/bullet/ the changing of the name of the company (Section 31);
/bullet/ the adoption and effect of Articles of Association (Section
25(2));
/bullet/ the appointment, pursuant to the provisions of Sections 64 to
68, of an inspector to examine the affairs of the company (Section
67);
/bullet/ requiring the court to wind up the company under the Law
(Section 94);
/bullet/ to wind the company up voluntarily under the Law (Section
132(b));
/bullet/ to, inter alia, delegate to creditors the power to appoint a
liquidator in a voluntary winding up, filling any vacancy among
liquidators and entry into arrangements in respect of a liquidator's
powers in a voluntary winding up (Section 138);
/bullet/ to sanction arrangements between a company being voluntarily
wound up and its creditors (Section 139);
/bullet/ the sanctioning of any general scheme of liquidation proposed
by a liquidator (Section 163);
/bullet/ the sanctioning of any compromise proposed by a liquidator
(Section 164);
/bullet/ the sanctioning of certain other matters proposed by a
liquidator of the Law (Section 165); and
/bullet/ the making of amendments to Memorandum and Articles of
Association upon registration by way of continuation (Section 221).
With respect to the "super majority percentage" under Cayman Islands law
for the purposes of passing special resolutions, Section 60 of the Companies
Law provides that a resolution is a special resolution when:
(a) "it has been passed by a majority of not less than two-thirds (or
such greater number as may be specified in the articles of
association of the company) of such members as, being entitled to
do so, vote in person or, whether proxies are allowed, by proxy
at a general meeting of which notice specifying the intention to
propose the resolution as a special resolution has been duly
given; or
(b) if so authorised by its articles of association, it has been
approved in writing by all of the members entitled to vote at a
general meeting of the company in one or more instruments each
signed by one or more of the members aforesaid, and the
effective date of the special resolution so adopted shall be the
date on which the instrument or the last of such instruments, if
more than one, is executed."
In relation to whether there are matters which require approval by a
majority of shareholders in excess of two thirds, Section 86(2) of the
Companies Law requires that where a members meeting has been convened by the
court to approve a court sanctioned compromise or arrangement between a company
and its members (or of a class of member, as the case may be) a majority in
number of the members representing seventy-five percent in value of the members
(or of a class of member, as the case may be) must approve such compromise or
arrangement. Additionally Section 88(1) of the Law requires that in certain
circumstances the power to
89
<PAGE>
acquire shares of dissentient shareholders may be given where approved by the
holders of not less than ninety percent in value of the shares affected.
INDEMNIFICATION. Cayman Islands law does not (other than as set forth
hereafter) limit the extent to which a company's organizational documents may
provide for indemnification of officers and directors, except to the extent any
such provision may be held by the Cayman Islands courts to be contrary to
public policy, such as to provide indemnification against civil fraud or the
consequences of committing a crime. Our organizational documents provide for
indemnification of officers and directors for losses, damages, costs and
expenses incurred in their capacities as such, except if they acted in a
willfully negligent manner or defaulted in any action against them.
Insofar as indemnification or liability arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
INSPECTION OF BOOKS AND RECORDS. Holders of our common shares will have
no general right under Cayman Islands law to inspect or obtain copies of our
list of shareholders or our corporate records. However, we will provide our
shareholders with annual audited financial statements.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common shares and redeemable
common share purchase warrants is Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004.
90
<PAGE>
ENFORCEABILITY OF CIVIL LIABILITIES AND
CERTAIN FOREIGN ISSUER CONSIDERATIONS
New China Homes is a Cayman Islands company. We are incorporated in the
Cayman Islands because of the following benefits associated with being a Cayman
Islands company:
/bullet/ political and economic stability;
/bullet/ an effective judicial system;
/bullet/ a favorable tax system;
/bullet/ the absence of exchange control or currency restrictions; and
/bullet/ the availability of professional and support services.
However, the Cayman Islands has a less developed body of securities laws
as compared to the United States and provides protections for investors to a
lesser extent. In addition, Cayman Islands companies do not have standing to
sue before the federal courts of the United States.
A substantial majority of our assets are located outside the United
States. In addition, a majority of our directors and officers are nationals
and/or residents of countries other than the United States, and all or a
substantial portion of our or such persons' assets are located outside the
United States. As a result, it may be difficult for you to effect service of
process within the United States upon us or such persons or to enforce against
them or against us, judgment obtained in United States courts, including
judgments predicated upon the civil liability provisions of the securities laws
of the United States or any state thereof. We have appointed CT Corporation
System, 1633 Broadway, New York, New York 10019, as our agent for service of
process in the United States.
Our legal counsel has advised us that there is uncertainty as to whether
the courts of the Cayman Islands or China would (1) 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 (2) be competent to hear original
actions brought in each respective jurisdiction, against us or such persons
predicated upon the securities laws of the United States or any state thereof.
Our legal counsel has advised us that the recognition and enforcement of
foreign judgments are provided for in China Civil Procedures Law. A Chinese
court may recognize and enforce foreign judgments based on treaties between
China and the country where the judgment is made, or if reciprocity exits
between the jurisdictions.
Our legal counsel has further advised us that a final and conclusive
judgment in federal or state courts of the United States under which a sum of
money is payable, other than a sum payable in respect of taxes, fines,
penalties or similar charges, may be subject to enforcement proceedings as a
debt in the Courts of the Cayman Islands under the common law doctrine of
obligation.
There are no treaties between China or the Cayman Islands and the United
States providing for the reciprocal enforcement of foreign judgments. However,
the courts of China and the Cayman Islands may accept a foreign judgment as
evidence of a debt due. An action may be commenced in China or the Cayman
Islands for recovery of this debt. A Cayman Islands court will only accept a
foreign judgment as evidence of a debt due, if:
/bullet/ the judgment is for a settled amount in a civil matter;
/bullet/ the judgment is final and conclusive and has not been stayed or
satisfied in full;
/bullet/ the judgment is not directly or indirectly for the payment of
foreign taxes, penalties, fines or charges of a like nature (in this
regard, a Cayman Islands court is unlikely to accept a judgment of an
amount obtained by doubling, trebling or otherwise multiplying a sum
assessed as compensation for the loss or damages sustained by the
person in whose favor the judgment was given);
/bullet/ the judgment was not obtained by actual or constructive fraud
or duress;
91
<PAGE>
/bullet/ the foreign court has taken jurisdiction on grounds that are
recognized by common law rules as to conflict of laws in the Cayman
Islands;
/bullet/ the proceedings in which the judgment was obtained were not
contrary to natural justice (i.e., the concept of fair adjudication);
/bullet/ the proceedings in which the judgment was obtained, the
judgment itself and the enforcement of the judgment are not contrary
to the public policy of the Cayman Islands;
/bullet/ the person against whom the judgment is given is subject to the
jurisdiction of the Cayman Islands courts; and
/bullet/ the judgment is not on a claim for contribution in respect of
damages awarded by a judgment that does not satisfy the foregoing.
In addition, a Chinese court will only accept a foreign judgment as
evidence of a debt due if it concludes, after reviewing the judgment in
accordance with the international treaties concluded or acceded to by China or
with the principle of reciprocity, that the judgment does not contradict with
the basic principles of the Chinese law and does not violate any state
sovereignty, security and social and public interests of China.
Enforcement of a foreign judgment in the Cayman Islands or China may
also be limited or otherwise affected by applicable bankruptcy, insolvency,
liquidation, arrangement, moratorium or similar laws relating to or affecting
creditors' rights generally and will be subject to a statutory limitation of
time within which proceedings may be brought.
92
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, we will have outstanding 12,400,000
common shares (12,700,000 common shares if the managing underwriter's
over-allotment option is exercised in full). Of these shares, the 2,000,000
common shares (2,300,000 shares if the managing underwriter's over-allotment
option is exercised in full) sold in the offering will be freely tradable in
the public market without restriction or limitation under the Securities Act,
except for any common shares held by an "affiliate" (as defined in the
Securities Act) of New China Homes. The 10,400,000 common shares held by our
existing shareholders immediately before the offering will be "restricted
securities" within the meaning of Rule 144.
In addition, we will or may issue in the future preferred shares,
additional warrants or common shares.
In addition, all existing beneficial owners of common shares who hold an
aggregate of 10,400,000 common shares, have entered into lock-up agreements
with the underwriters. These persons have agreed not to offer, sell, contract
to sell, grant any option with respect to, pledge, hypothecate or otherwise
dispose of, any common shares owned by them until the date occurring two years
after the date of this prospectus without the prior written consent of the
underwriter. All such 10,400,000 common shares will become available for sale
two years after the date of this prospectus upon expiration of these lock-up
agreements, subject to compliance with Rule 144 promulgated under the
Securities Act.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least one year, common shares that have not been registered under the
Securities Act or that were acquired from an "affiliate" of New China Homes is
entitled to sell within any three-month period the number of common shares that
does not exceed the greater of (i) one percent of the number of the then
outstanding shares or (ii) the average weekly reported trading volume of the
common shares during the four calendar weeks preceding the sale. Sales under
Rule 144 are also subject to notice requirements and to the availability of
current public information about New China Homes and must be made in
unsolicited brokers' transactions or to a market maker. A person (or persons
whose shares are aggregated) who is not an "affiliate" of New China Homes under
the Securities Act during the three months preceding a sale and who has
beneficially owned such shares for at least two years is entitled to sell such
shares under Rule 144(k) without regard to the information, volume, manner of
sale and notice provisions of such Rule.
Before this offering, there has been no active trading market for our
common shares. No predictions can be made of the effect, if any, that market
sales of common shares or the availability of such common shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
significant amounts of common shares could adversely affect the prevailing
market price of common shares, as well as impair our ability to raise capital
through the issuance of additional equity securities.
93
<PAGE>
UNDERWRITING
Barron Chase Securities, Inc., the managing underwriter, and Starr
Securities, Inc. have agreed to purchase from us, subject to the terms and
conditions of the underwriting agreement, an aggregate of 2,000,000 common
shares and 2,000,000 common share purchase warrants as follow:
NUMBER OF NUMBER OF
UNDERWRITER SHARES WARRANTS
- ------------------------------------------ --------- ---------
Barron Chase Securities, Inc. ......... 1,900,000 1,900,000
Starr Securities, Inc. ................ 100,000 100,000
--------- ---------
Total ............................... 2,000,000 2,000,000
========= =========
These securities are offered by the underwriters subject to prior sale,
when, as and if delivered to and accepted by the underwriters and subject to
approval of legal matters by counsel and other conditions. The underwriters are
committed to purchase all of the securities offered by this prospectus, if any
are purchased (other than those covered by the over-allotment option described
below).
We have been advised by the underwriters that the underwriters propose
to offer the common shares and warrants to the public at the offering prices
indicated on the cover page of this prospectus. The underwriters may allow
concessions, in its discretion, to selected dealers who are members of the
National Association of Securities Dealers, Inc. ("NASD") and who agree to sell
these securities in conformity with the NASD's Conduct Rules. These concessions
will not exceed the amount of the underwriting discount that the underwriter is
to receive.
We have granted to Barron Chase an over-allotment option, exercisable for
45 days from the date on which the SEC declares the registration statement filed
with the SEC for this offering to be effective, to purchase up to an additional
300,000 common shares and an additional 300,000 warrants at the respective
public offering prices less the underwriting discounts indicated on the cover
page of this prospectus. Barron Chase may exercise this option only to cover
over-allotments in the sale of the securities being offered by this prospectus.
Our officers and directors may introduce the underwriters to persons to
consider this offering and to purchase the common shares or the warrants either
through the underwriters or through participating dealers. In this connection,
no securities have been reserved for those purchases and officers and directors
will not receive any commissions or any other compensation.
We have agreed to pay to the underwriters a commission of 10% of the
gross proceeds of this offering, including the gross proceeds from the sale of
its over-allotment option, if exercised. We have also agreed to pay to Barron
Chase a non-accountable expense allowance of 3% of the gross proceeds of this
offering including proceeds from any securities purchased upon exercise of its
over-allotment option. We have already paid to Barron Chase $50,000 of this
non-accountable expense allowance. Barron Chase is responsible for its expenses
in excess of the non-accountable expense allowance. To the extent that the
expenses of Barron Chase are less than the amount of the non-accountable
expense allowance received, such excess shall be deemed to be additional
compensation to Barron Chase. Barron Chase has informed us that it does not
expect sales to discretionary accounts to exceed 5% of the total number of
securities that we are offering.
We have agreed to engage Barron Chase as a financial advisor at a fee of
$51,000, which is payable to it on the Closing Date. Under the terms of a
financial advisory agreement, Barron Chase has agreed to provide, at our
request, advice concerning potential merger and acquisition and financing
proposals, whether by public financing or otherwise. We have also agreed that
if we participate in any transaction which Barron Chase has introduced in
writing to us during a period of five years after the closing of this offering,
and which is consummated after the Closing, or if we retain the services of
Barron Chase in connection with
94
<PAGE>
any such transaction, then we will pay for Barron Chase's services an amount
equal to 5% of up to one million dollars of value paid or received in the
transaction, 4% of the next million of such value, 3% of the next million of
such value, 2% of the next million of such value, and 1% of the next million
dollars of such value above $4,000,000.
The holders of all of our currently outstanding securities have agreed
that for a period of 24 months from the date of this prospectus they will not
offer for sale, or otherwise dispose of the securities beneficially owned by
them.
In addition, all of our shareholders have agreed with us that:
/bullet/ 25% of their common shares will be canceled if our net income
is less than US$ 10 million in the one-year period commencing on the
first day of the month following the closing of this offering; and
/bullet/ 25% of their common shares will be canceled if our net income
is less than US$ 20 million in the following one-year period.
We have also agreed with the managing underwriter that the current
members of our Board of Directors may not be removed, other than for cause,
until April 30, 2002. In this context, the term "cause" means:
(a) The engaging by the director in fraudulent conduct, as evidenced by
a final judgment, order or decree of a court or administrative agency of
competent jurisdiction, whether civil, criminal administrative or
investigative, which a majority of the remaining directors reasonably determine
has or would have a material adverse impact on the Company in the conduct of
the Company's business;
(b) Conviction of the director of a criminal offense which would be a
felony in the United States of America, as evidenced by a binding judgment,
order or decree of a court of competent jurisdiction, which a majority of the
remaining directors reasonably determine has or could have a material adverse
impact on the Company in the conduct of the Company's business; or
(c) Willful refusal by the director to perform the Board member's
lawful duties or responsibilities.
Before this offering, there has been no public market for our common
shares or warrants. Consequently, the initial public offering prices for these
securities and the terms and exercise price of the warrants have been
determined by negotiation between us and the underwriters. Among the factors
considered in determining the public offering prices were the history of, and
the prospects for, our business, an assessment of our management, our past and
present operations, our development and the general condition of the securities
market at the time of this offering. The initial public offering prices do not
necessarily bear any relationship to our assets, book value, earnings, or other
established criteria of value. The trading prices of our securities are subject
to change as a result of market conditions and other factors, and we cannot
assure you that a public market for our common shares or warrants will develop
after this offering, or if a public market in fact develops, that it will be
sustained, or that the common shares or the warrants can be resold at any time
at the offering or any other price. See "Risk Factors" beginning on page 14.
Upon the closing of this offering, we will issue to the managing
underwriter and/or persons related to the managing underwriter, for nominal
consideration, the warrants to purchase up to 200,000 common shares and
warrants to purchase up to 200,000 warrants. We refer to these warrants as
"underwriter warrants." These underwriter warrants may be exercised by the
holders during the five-year period commencing the date that the SEC declares
our registration statement to be effective. These underwriter warrants may be
exercised at a price of $8.25 per common share and $0.20625 per warrant, which
is 165% of the initial public offering price of our common shares and warrants.
Each Underwriter Underlying Warrant will be exercisable for a five-year period
commencing on the Effective Date to purchase one share of common shares at an
exercise price of $9.4875 per common share. The underwriter warrants may not be
sold, transferred, assigned or hypothecated for a period of twelve months from
the effective date of our registration statement by the holder, except (1) to
officers of the underwriter and members of the selling
95
<PAGE>
group and their officers and partners; (2) by will; or (3) by operation of law.
The underwriter warrants contain provisions providing for appropriate
adjustment in the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, stock split or similar transaction. The
holders of the underwriter warrants may also elect to exercise them without
paying cash upon exercise, by instructing us to withhold from the securities
issuable upon exercise a number of securities, valued at the current fair
market value on the date of exercise, to pay the exercise. This "cashless"
exercise provision has the effect of requiring us to issue common shares
without a corresponding increase in capital, and will have the same dilutive
effect on the interests of our shareholders as a cash exercise.
The underwriter warrants and the securities issuable upon their exercise
may not be offered for sale except in compliance with the applicable provisions
of the Securities Act. We have agreed that if we cause a post-effective
amendment, a new registration statement, or similar offering document to be
filed with the SEC during the seven-year period following the effective date of
our registration statement, the holders of the underwriter warrants may request
us to include in such registration statement or offering statement their
underwriter warrants and/or the securities issuable upon their exercise at no
expense to the holders. Additionally, we have agreed that, upon request by the
holders of 50% or more of the underwriter warrants during the period commencing
one year from the effective date of our registration statement and expiring
four years thereafter, we will, under specified circumstances, register the
underwriter warrants and/or any of the securities issuable upon their exercise.
To facilitate the offering of the common shares and warrants, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the common shares and warrants. Specifically, the
underwriters may overallot in connection with the offering, creating a short
position in the common shares and warrants for its own account. In addition, to
cover over-allotments or to stabilize the price of the common shares and
warrants, the underwriters may bid for, and purchase, common shares and
warrants in the open market. Finally, the underwriters may reclaim selling
concessions allowed to a dealer for distributing the common shares and warrants
in the offering, if the underwriters purchases previously distributed common
shares or warrants in transactions to cover the underwriters' short position in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common shares and warrants above
independent market levels. The underwriters are not required to engage in these
activities, and may end any of these activities at any time.
We have agreed to indemnify the underwriters against any costs or
liabilities incurred by the underwriters by reason of misstatements or
omissions to state material facts in connection with the statements made in our
registration statement and this prospectus. The underwriters have in turn
agreed to indemnify us against any costs or liabilities by reason of
misstatements or omissions to state material facts in connection with the
statements made in the registration statement and this prospectus, based on
information relating to the underwriters and furnished in writing by the
underwriters. To the extent that these provisions may purport to provide
exculpation from possible liabilities arising under the federal securities
laws, in the opinion of the Commission, such indemnification is contrary to
public and therefore unenforceable.
96
<PAGE>
EXPERTS
The consolidated financial statements of New China Homes as of March 31,
1998 and 1999 and for each of the three years ended in the period ending March
31, 1999 included in this prospectus have been audited by Deloitte Touche
Tohmatsu, independent auditors, 26th Floor, Wing On Centre, 111 Connaught Road
Central, Hong Kong, as stated in their report appearing herein, and are
included in reliance upon the authority of such firm upon their authority as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the common shares and warrants offered by this
prospectus will be passed upon for us by Baker & McKenzie, 1200 Brickell
Avenue, Suite 1900, Miami, Florida 33131. Legal matters in connection with the
offering will be passed upon for the Underwriter by David A. Carter, P.A., 2300
Glades Road, Suite 210--West Tower, Boca Raton, Florida 33431.
The due organization and good standing of the Company in the Cayman
Islands law will be passed upon for us by Walkers, P.O. Box 265GT, Walker
House, Grand Cayman, Cayman Islands. Legal matters as to Chinese law will be
passed upon for us by the Tian Da Law Office, Business Office Rooms No.
1206-1207, Block A, Kuntai Building, Chaowai Dai Street, Beijing, the Peoples
Republic of China. In rendering their opinion, Baker & McKenzie, Miami, Florida
may rely as to matters of Cayman Islands law on the opinion of Walkers.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form F-1 under the Securities Act with respect to the common
shares offered hereby. This prospectus, which forms a part of the registration
statement, does not contain all of the information set forth in the
registration statement, and the exhibits and schedules thereto.
You should refer to the registration statement for further information.
Statements contained in this prospectus as to the contents of any contract or
other document that is filed as an exhibit to the registration statement are
not necessarily complete, and each such statement is qualified in all respects
by reference to the full text of such contract or document.
Upon declaration by the Securities and Exchange Commission of the
effectiveness of the registration statement, we will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended. Under the Exchange Act, we will be required
to file reports and other information with the Securities and Exchange
Commission. Specifically, we will be required to file annually a Form 20-F no
later than six months after the close of our fiscal year, which is March 31.
Copies of the registration statement, its accompanying exhibits, as well as
such reports and other information, when so filed, may be inspected without
charge and may be obtained at prescribed rates at the public reference
facilities maintained by the Securities and Exchange Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Securities and Exchange Commission located at Seven World Trade
Center, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. The public may obtain information
regarding the Washington, D.C. Public Reference Room by calling the Securities
and Exchange Commission at 1-800-SEC-0330. As a foreign private issuer, we are
exempt from the rules under the Exchange act prescribing the furnishing and
content of proxy statements, and officers, directors and principal shareholders
are exempt from the reporting and
97
<PAGE>
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act.
Currently, the financial statements have been prepared in accordance
with Hong Kong GAAP and have been reconciled to U.S. GAAP.
We will furnish our shareholders with annual reports, which will include
a review of operations and annual audited consolidated financial statements
prepared in conformity with Hong Kong GAAP. We intend, although we are not
obligated to do so due to our status as a foreign private issuer, to furnish
our shareholders with quarterly reports by mail with the assistance of a
corporate services provider which will include unaudited interim financial
information prepared in conformity with Hong Kong GAAP for each of the first
three quarters of each fiscal year following the end of each such quarter. We
may discontinue providing quarterly reports at any time without prior notice to
our shareholders.
98
<PAGE>
NEW CHINA HOMES, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent auditors' report ............................................................. F-2
Consolidated statements of operations for the years ended March 31, 1997, 1998 and 1999
and the six-months ended September 30, 1998 and 1999 (unaudited) ........................ F-3
Consolidated balance sheets at March 31, 1998 and 1999 and September 30, 1999
(unaudited) ............................................................................. F-4
Consolidated statements of cash flows for the years ended March 31, 1997, 1998 and 1999
and the six-months ended September 30, 1998 and 1999 (unaudited) ........................ F-5 - F-6
Consolidated statements of changes in stockholder's equity for the years ended March 31,
1997, 1998, 1999 and the six-months ended September 30, 1999 (unaudited) ................ F-7
Notes to consolidated financial statements ............................................... F-8 - F-24
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
New China Homes, Ltd.
We have audited the accompanying consolidated balance sheets of New China
Homes, Ltd. and subsidiaries as of March 31, 1998 and 1999 and the related
consolidated statements of operations, cash flows and changes in stockholder's
equity for each of the three years in the period ended March 31, 1999, all
expressed in Hong Kong dollars. 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 auditing standards generally
accepted in Hong Kong which do not differ in any material respects from those
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of New China Homes, Ltd. and its
subsidiaries as of March 31, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1999 in conformity with accounting principles generally accepted in Hong Kong
(which differ in certain material respects from accounting principles generally
accepted in the United States of America--see note 16).
Deloitte Touche Tohmatsu
Hong Kong
July 15, 1999 except for notes 1 and 15 as to which the date is August 10, 1999
F-2
<PAGE>
NEW CHINA HOMES, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------- ----------------------------------------
1997 1998 1999 1999 1998 1999 1999
------------ --------------- ------------- ------------ ------------- ------------- ------------
HK$ HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Home sales ..................... -- 73,915,682 269,918,839 34,828,238 101,776,018 115,620,847 14,918,819
Interest income ................ -- 175,476 305,006 39,355 111,441 109,225 14,093
Other income ................... -- 106,726 606,383 78,243 410,280 216,222 27,900
------ ---------- ----------- ---------- ----------- ----------- ----------
Total revenues .................. -- 74,197,884 270,830,228 34,945,836 102,297,739 115,946,294 14,960,812
------ ---------- ----------- ---------- ----------- ----------- ----------
Cost and expenses:
Cost of home sales ............. -- 67,101,107 208,682,091 26,926,721 80,822,729 90,849,838 11,722,560
Selling, general and
Administrative
Expenses ..................... 10,609 10,457,371 13,481,984 1,739,611 7,312,656 8,071,682 1,041,507
Interest expense ............... -- 1,451,955 6,306,527 813,746 1,962,622 1,799,258 232,162
------ ---------- ----------- ---------- ----------- ----------- ----------
Total cost and expenses ......... 10,609 79,010,433 228,470,602 29,480,078 90,098,007 100,720,778 12,996,229
------ ---------- ----------- ---------- ----------- ----------- ----------
(Loss) income before minority
interests and income taxes ..... (10,609) (4,812,549) 42,359,626 5,465,758 12,199,732 15,225,516 1,964,583
Income taxes (note 5) ........... -- (1,131,674) 15,706,408 2,026,633 4,553,762 5,708,190 736,541
------- ---------- ----------- ---------- ----------- ----------- ----------
(Loss) income before
minority interests ............. (10,609) (3,680,875) 26,653,218 3,439,125 7,645,970 9,517,326 1,228,042
Minority interests .............. -- (41,358) 570,569 73,622 162,990 208,608 26,917
------- ---------- ----------- ---------- ----------- ----------- ----------
Net (loss) income ............... (10,609) (3,639,517) 26,082,649 3,365,503 7,482,980 9,308,718 1,201,125
======= ========== =========== ========== =========== =========== ==========
(Loss) earnings per share--
basic .......................... (10.61) (3,639.52) 26,082.65 3,365.50 7,482.98 0.90 0.12
======= ========== =========== ========== =========== =========== ==========
Weighted average number of
shares--basic .................. 1,000 1,000 1,000 1,000 1,000 10,400,000 10,400,000
======= ========== =========== ========== =========== =========== ==========
Pro Forma earnings per
share--basic (unaudited) ....... 2.51 0.32
=========== ==========
Pro Forma shares used in
computing net earnings
per share ...................... 10,400,000 10,400,000
=========== ==========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
NEW CHINA HOMES, LTD.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------------ SEPTEMBER 30,
1998 1999 1999 1999
--------------- ------------- ------------ ---------------------------
HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ......................... 13,012,737 15,197,211 1,960,930 25,832,617 3,333,241
Restricted cash (note 7) .......................... 4,982,793 4,140,889 534,308 5,363,807 692,104
Land and lots under development and
completed homes (note 4) ......................... 75,311,455 133,561,687 17,233,766 120,118,939 15,499,218
Plant, equipment and construction-in-progress,
net (note 8) ..................................... 25,374,633 35,959,160 4,639,891 47,440,614 6,121,369
Trade and other accounts receivable ............... 4,134,705 23,454,080 3,026,333 33,411,895 4,311,212
Due from related parties (note 10) ................ 836,470 3,022,109 389,950 2,658,921 343,087
Deferred income taxes (note 5) .................... 1,132,732 -- -- -- --
Other prepaid taxes (note 6) ...................... -- 2,151,544 277,619 2,151,544 277,619
Advances to suppliers ............................. -- 825,031 106,456 -- --
Deferred compensation costs ....................... -- -- -- 5,489,583 708,333
Deferred offering costs ........................... -- 848,789 109,521 4,157,332 536,430
Prepaid expenses and other assets ................. 1,494,158 2,340,207 301,962 3,637,008 469,291
Pre-operating expenditure, at cost less
accumulated amortization of 1998:
HK$ 117,944 and 1999: HK$ 202,900................. 906,578 703,678 90,797 601,217 77,576
---------- ----------- ---------- ----------- ----------
Total assets ...................................... 127,186,261 222,204,385 28,671,533 250,863,477 32,369,480
----------- ----------- ---------- ----------- ----------
LIABILITIES AND STOCKHOLDER'S
EQUITY (DEFICIT)
Liabilities:
Bank borrowings (note 9) ......................... -- 35,004,677 4,516,733 43,148,601 5,567,561
Due to related parties (note 10) ................. 104,838,828 96,335,274 12,430,358 28,065,690 3,621,379
Customer deposits ................................ 12,682,845 16,770,925 2,163,990 11,994,889 1,547,728
Trade accounts payable and
accrued expenses ............................... 11,813,788 31,733,485 4,094,643 28,796,584 3,715,688
Income taxes payable ............................. -- 10,491,689 1,353,766 14,573,917 1,880,505
Deferred income taxes (note 5) ................... -- 4,081,987 526,708 5,707,949 736,510
Other taxes payable .............................. 120,417 2,959,951 381,929 3,639,874 469,661
----------- ----------- ---------- ----------- ----------
Total liabilities ................................. 129,455,878 197,377,988 25,468,127 135,927,504 17,539,032
Minority interests ................................ 842,633 1,783,920 230,183 1,992,528 257,100
Commitments and contingencies (note 11)
Stockholder's equity (deficit):
Common shares US$1 par value, authorized
50,000 shares, issued and fully paid 1,000
shares at March 31, 1998 and 1999 and
authorized 50,000,000 shares, issued and
fully paid 10,400,000 shares (unaudited) at
September 30, 1999 ............................. 7,750 7,750 1,000 80,600,000 10,400,000
Preferred shares US$1 par value, none
authorized, issued and fully paid at
March 31, 1998 and 1999 and authorized
5,000,000 shares, none issued and fully paid
(unaudited) at September 30, 1999 .............. -- -- -- -- --
(Accumulated loss) retained earnings ............. (3,117,851) 22,964,798 2,963,200 32,273,516 4,164,325
Cumulative translation adjustment ................ (2,149) 69,929 9,023 69,929 9,023
----------- ----------- ---------- ----------- ----------
Total stockholder's (deficit) equity .............. (3,112,250) 23,042,477 2,973,223 112,943,445 14,573,348
----------- ----------- ---------- ----------- ----------
Total liabilities and stockholder's equity ........ 127,186,261 222,204,385 28,671,533 250,863,477 32,369,480
=========== =========== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
NEW CHINA HOMES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------------------
1997 1998 1999 1999
--------------- --------------- ---------------- ---------------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ............................ (10,609) (3,639,517) 26,082,649 3,365,503
Adjustments to reconcile net (loss)
income to net cash used in
operating activities:
Depreciation ................................ -- 131,518 588,228 75,900
Minority interests .......................... -- (41,358) 570,569 73,622
Amortization of deferred
Compensation costs ......................... -- -- -- --
Amortization of pre-operating
Expenditure ................................ -- 117,944 202,900 26,181
Deferred income taxes ....................... -- (1,131,674) 5,214,719 672,867
Changes in operating assets and
liabilities:
Land and lots under Development
and completed Homes ......................... -- (75,311,455) (58,250,232) (7,516,158)
Trade and other accounts
Receivable .................................. -- (4,134,705) (19,319,375) (2,492,822)
Other prepaid taxes .......................... -- -- (2,151,544) (277,619)
Advances to suppliers ........................ -- -- (825,031) (106,456)
Prepaid expenses and other Assets ............ (6,426,876) 4,943,211 (773,971) (99,867)
Customer deposits ............................ -- 12,682,845 4,088,080 527,494
Trade accounts payable and
Accrued expenses ............................ -- 11,807,788 19,919,697 2,570,283
Due to related parties ....................... -- 20,459,065 (61,904) (7,988)
Income taxes payable ......................... -- -- 10,491,689 1,353,766
Other taxes payable .......................... -- 120,417 2,839,534 366,392
---------- ----------- ----------- ----------
Net cash (used in) provided by
operating activities ......................... (6,437,485) (33,995,921) (11,383,992) (1,468,902)
---------- ----------- ----------- ----------
Cash flows from investing activities:
Purchase of plant, equipment
and expenditure on
construction-in-progress .................... -- (25,506,151) (11,172,755) (1,441,646)
Placing of restricted cash ................... -- (4,978,136) (3,814,712) (492,221)
Receipt of restricted cash ................... -- -- 4,656,616 600,854
Advances to related parties .................. -- (835,688) (2,185,639) (282,018)
Repayment from related Parties ............... -- -- -- --
Pre-operating expenditure .................... -- (1,024,522) -- --
---------- ----------- ----------- ----------
Net cash used in investing activities ......... -- (32,344,497) (12,516,490) (1,615,031)
---------- ----------- ----------- ----------
Cash flows from financing activities:
Increase in short-term bank
Borrowings .................................. -- -- 53,713,751 6,930,806
Repayment of short-term bank
Borrowings .................................. -- -- (18,709,074) (2,414,074)
Advances from related parties ................ 6,429,307 78,469,164 19,541,922 2,521,538
Repayment to related parties ................. -- -- (27,983,572) (3,610,783)
Deferred offering costs incurred ............. -- -- (848,789) (109,521)
Contribution from minority
Shareholder ................................. -- 883,991 370,718 47,835
---------- ----------- ----------- ----------
Net cash provided by financing
activities ................................... 6,429,307 79,353,155 26,084,956 3,365,801
---------- ----------- ----------- ----------
Net (decrease) increase in cash
And cash equivalents ......................... (8,178) 13,012,737 2,184,474 281,868
Cash and cash equivalents,
Beginning of year/period ..................... 8,178 -- 13,012,737 1,679,062
---------- ----------- ----------- ----------
Cash and cash equivalents,
end Of year/period ........................... -- 13,012,737 15,197,211 1,960,930
========== =========== =========== ==========
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
1998 1999 1999
--------------- --------------- ---------------
HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ............................ 7,482,980 9,308,718 1,201,125
Adjustments to reconcile net (loss)
income to net cash used in
operating activities:
Depreciation ................................ 274,341 328,854 42,433
Minority interests .......................... 162,990 208,608 26,917
Amortization of deferred
Compensation costs ......................... -- 1,097,917 141,667
Amortization of pre-operating
Expenditure ................................ 100,436 102,461 13,221
Deferred income taxes ....................... -- 1,625,962 209,801
Changes in operating assets and
liabilities:
Land and lots under Development
and completed Homes ......................... (4,852,445) 13,442,748 1,734,548
Trade and other accounts
Receivable .................................. (6,188,385) (9,957,815) (1,284,879)
Other prepaid taxes .......................... -- -- --
Advances to suppliers ........................ -- 825,031 106,456
Prepaid expenses and other Assets ............ (1,719,319) (1,296,801) (167,329)
Customer deposits ............................ (123,588) (4,776,036) (616,263)
Trade accounts payable and
Accrued expenses ............................ 11,937,616 (2,936,901) (378,955)
Due to related parties ....................... 5,668,451 (1,504,078) (194,075)
Income taxes payable ......................... 4,553,761 4,082,228 526,739
Other taxes payable .......................... 520,712 679,923 87,732
---------- ---------- ----------
Net cash (used in) provided by
operating activities ......................... 17,817,550 11,230,819 1,449,138
---------- ---------- ----------
Cash flows from investing activities:
Purchase of plant, equipment
and expenditure on
construction-in-progress .................... (8,718,869) (11,810,308) (1,523,911)
Placing of restricted cash ................... (3,307,666) (7,433,424) (959,152)
Receipt of restricted cash ................... 1,133,837 6,210,506 801,356
Advances to related parties .................. (2,187,942) (661,443) (85,347)
Repayment from related Parties ............... -- 1,024,631 132,210
Pre-operating expenditure .................... -- -- --
---------- ----------- ----------
Net cash used in investing activities ......... (13,080,640) (12,670,038) (1,634,844)
----------- ----------- ----------
Cash flows from financing activities:
Increase in short-term bank
Borrowings .................................. 30,327,409 39,289,055 5,069,556
Repayment of short-term bank
Borrowings .................................. (18,709,074) (31,145,131) (4,018,727)
Advances from related parties ................ 9,116,579 11,580,469 1,494,254
Repayment to related parties ................. (10,289,991) (4,341,225) (560,158)
Deferred offering costs incurred ............. -- (3,308,543) (426,909)
Contribution from minority
Shareholder ................................. 370,718 -- --
----------- ----------- ----------
Net cash provided by financing
activities ................................... 10,815,641 12,074,625 1,558,016
----------- ----------- ----------
Net (decrease) increase in cash
And cash equivalents ......................... 15,552,551 10,635,406 1,372,311
Cash and cash equivalents,
Beginning of year/period ..................... 13,012,737 15,197,211 1,960,930
----------- ----------- ----------
Cash and cash equivalents,
end Of year/period ........................... 28,565,288 25,832,617 3,333,241
=========== =========== ==========
</TABLE>
F-5
<PAGE>
NEW CHINA HOMES, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS--continued
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------
1997 1998 1999 1999
------- --------------- --------------- ---------------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year/period for:
Income taxes ....................... -- -- -- --
===== ========== ========== ==========
Interest ........................... -- 4,908,060 8,627,850 1,113,271
Interest capitalized ............... -- (4,908,060) (8,627,850) (1,113,271)
----- ---------- ---------- ----------
Interest (net of amount
Capitalized) ...................... -- -- -- --
===== ========== ========== ==========
Non cash transactions:
Conversion of payable to holding
Company to common shares
(note 1) .......................... -- -- -- --
===== ========== ========== ==========
Conversion of compensation Payable
to consultants to common shares
(note 1) .......................... -- -- -- --
===== ========== ========== ==========
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
1998 1999 1999
--------------- --------------- ------------
HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year/period for:
Income taxes ....................... -- -- --
========== ========== ========
Interest ........................... 4,505,409 1,548,228 199,771
Interest capitalized ............... (4,505,409) (1,548,228) (199,771)
---------- ---------- --------
Interest (net of amount
Capitalized) ...................... -- -- --
========== ========== ========
Non cash transactions:
Conversion of payable to holding
Company to common shares
(note 1) .......................... -- 74,004,750 9,549,000
========== ========== =========
Conversion of compensation Payable
to consultants to common shares
(note 1) .......................... -- 6,587,500 850,000
========== ========== =========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
NEW CHINA HOMES, LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S (DEFICIT) EQUITY
<TABLE>
<CAPTION>
(ACCUMULATED
COMMON SHARES CUMULATIVE LOSS) TOTAL
----------------------------- TRANSLATION RETAINED STOCKHOLDER'S
SHARES AMOUNT ADJUSTMENT EARNINGS (DEFICIT) EQUITY
------------- --------------- ------------- --------------- -----------------
HK$ HK$ HK$ HK$
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1996 .......... 1,000 7,750 -- 532,275 540,025
Net loss .......................... -- -- -- (10,609) (10,609)
---------- ---------- ------ ---------- -----------
Balance at March 31, 1997 ......... 1,000 7,750 -- 521,666 529,416
Net loss .......................... -- -- -- (3,639,517) (3,639,517)
Translation adjustment ............ -- -- (2,149) -- (2,149)
---------- ---------- ------ ---------- -----------
Balance at March 31, 1998 ......... 1,000 7,750 (2,149) (3,117,851) (3,112,250)
Net income ........................ -- -- -- 26,082,649 26,082,649
Translation adjustment ............ -- -- 72,078 -- 72,078
---------- ---------- ------ ---------- -----------
Balance at March 31, 1999 ......... 1,000 7,750 69,929 22,964,798 23,042,477
(Unaudited)
Issue of shares (adjusted for
stock split) ..................... 10,399,000 80,592,250 -- -- 80,592,250
Net income ........................ -- -- -- 9,308,718 9,308,718
---------- ---------- ------ ---------- -----------
Balance at September 30, 1999 ..... 10,400,000 80,600,000 69,929 32,273,516 112,943,445
========== ========== ====== ========== ===========
US$ equivalent--balance at
March 31, 1999 ................... US$ 1,000 US$ 9,023 US$ 2,963,200 US$ 2,973,223
============= ========= ============= ==============
US$ equivalent--balance at
September 30, 1999 (unaudited) ... US$10,400,000 US$ 9,023 US$ 4,164,325 US$ 14,573,348
============= ========= ============= ==============
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
New China Homes, Ltd. (the "Company") was incorporated in the Cayman
Islands on January 6, 1999 as a wholly owned subsidiary of Far East Consortium
Limited ("Far East").
On February 23, 1999, Far East transferred all its shares in its wholly
owned subsidiary, Far East Consortium China Investments Limited, to the Company
for a consideration of HK$ 600,000. This was satisfied by an inter-company loan
from the shareholder to the Company. The transfer of shares has been accounted
for as a reorganization of entities under common control similar to a pooling
of interests. The accompanying financial statements include the consolidated
results of operations and financial position of the Company and its
subsidiaries for all periods presented.
The Company operates through a subsidiary incorporated in the Hong Kong
Special Administrative Region ("Hong Kong") of the People's Republic of China
("China") and a subsidiary in Shanghai, China. At March 31, 1999 the Company
was wholly owned by Far East. Its ultimate holding company is Far East
Consortium International Limited ("Far East International"), a company
incorporated in the Cayman Islands and listed in Hong Kong.
At March 31, 1999, the Company had the following subsidiaries:
Shanghai Chingchu Property Development Company Limited ("Chingchu")
(incorporated in China)--98.2% owned by Far East Consortium China
Investments Limited and the remaining 1.8% owned by Shanghai Qilian Real
Estate Development General Company. Chingchu is registered as a
Sino-foreign equity joint venture with limited liability for a period of
70 years from April 24, 1997 to April 23, 2067.
Far East Consortium China Investments Limited (incorporated in Hong
Kong)--100% owned.
The Company, through its Hong Kong subsidiary, owns Chingchu which is
developing a property in Shanghai for the sale of residential housing in a
development known as Chingchu CALIFORNIA GARDENS. The Company is currently
dependent on this project for its earnings and its revenues and profitability
may be affected by a number of factors including local market conditions,
regulatory approvals, availability of financing to the Company and prospective
purchasers of the Chingchu's real estate.
The financial statements of the Company and its subsidiaries have been
prepared in accordance with accounting principles generally accepted in Hong
Kong ("HK GAAP") which differ from those used in the statutory accounts of its
subsidiary in China, which is prepared in accordance with the accounting
principles and the relevant financial regulations applicable to the joint
venture as established by the Ministry of Finance of China. The principal
adjustments made to conform the statutory accounts of Chingchu to HK GAAP are
as follows:
/bullet/ to recognize revenue on a percentage of completion basis and the
related cost of sales
/bullet/ to record deferred income taxes and business tax as a result of
the differences in revenue recognition
The dividends from the Company will be declared based on the profits
reported in the statutory financial statements of the subsidiaries. In the
statutory accounts of Chingchu, revenue is recognized under full accrual method
modified with pre-agreed profit level with local tax authorities. The
accumulated losses
F-8
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS--continued
as at March 31, 1998 and distributable retained earnings as at March 31, 1999
are approximately HK$ 14,409,000 and HK$ 5,617,000. The retained earnings as at
March 31, 1998 and the accumulated losses as at March 31, 1999 of the Company
and its Hong Kong subsidiary are HK$ 598,000 and HK$ 10,946,000, respectively.
On April 2, 1999, the Company entered into management service agreements
with four consultants for a three year period effective on that date. In
consideration these parties were paid a total of US$ 850,000 in cash which was
required under these agreements to be used in exchange for the issue of a total
of 850 shares at a price of US$ 1,000 per share, which were also issued on that
date. The consulting agreements establish net income thresholds for the first
and second years following the closing date of a proposed offering of the
Company's common shares and in each of these two years 25% of the shares are
subject to redemption and cancellation by the Company in the event the net
income thresholds are not met. On April 2, 1999 the Company also issued 9,549
shares at US$ 1,000 per share to Far East for cash of US$ 9,549,000, which has
been used to offset an equivalent amount of the payable to Far East.
In connection with the public offering of common shares by the Company, on
August 10, 1999 the Company effected a recapitalization whereby the common
shares and preferred shares authorized were increased to 50,000,000 and
5,000,000, respectively, from 50,000 common shares and no preferred shares,
respectively. The Company further allotted and credited as fully paid 9,540,450
common shares to Far East and a total of 849,150 common shares to the above
mentioned consultants at a par value of US$ 1.00 each by utilizing the
additional paid-in capital recorded in the April 1999 issues of shares and
US$ 999 from retained earnings. This stock split is reflected in the
accompanying financial statements for each period presented and earnings per
share has been computed after adjusting for the stock split. On the same date,
the Company changed its name from China Homes, Limited to New China Homes, Ltd.
2. RESTATEMENT
The Company has restated the accompanying financial statements to reflect
a mistake in calculating the construction cost of Chingchu CALIFORNIA GARDENS
as a result of the under accrual of certain infrastructure costs for Phase I at
March 31, 1998, which were originally recorded in the year ended March 31,
1999.
A summary of the impact of this restatement on stockholders' equity
(deficit) as of March 1998 and 1999 and earnings (loss) and earnings (loss) per
share for the years ended March 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
PREVIOUSLY REPORTED AS RESTATED
------------------------------------ ---------------------------------------
1998 1999 1999 1998 1999 1999
----------- ------------ ----------- --------------- ------------ ----------
HK$ HK$ US$ HK$ HK$ US$
<S> <C> <C> <C> <C> <C> <C>
Stockholder's equity (deficit) ....... 3,823,696 23,224,513 2,996,712 (3,112,250) 23,042,477 2,973,223
========= ========== ========= ========== ========== =========
Net income (loss) .................... 3,289,866 19,328,703 2,494,026 (3,639,517) 26,082,649 3,365,503
========= ========== ========= ========== ========== =========
Earnings (loss) per share--basic ..... 3,289.87 19,328.70 2,494.03 (3,639.52) 26,082.65 3,365.50
========= ========== ========= ========== ========== =========
</TABLE>
F-9
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATED FINANCIAL STATEMENTS -- The accompanying financial
statements have been prepared in conformity with accounting principles
generally accepted in Hong Kong ("HK GAAP") which differ in certain material
respects from accounting principles generally accepted in the United States
("US GAAP"). See Note 16.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the assets, liabilities, revenues and expenses of all subsidiaries. All
material intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents include cash on
hand, cash accounts, interest bearing savings accounts, and time certificates
of deposit with original maturity of three months or less.
LAND AND LOTS UNDER DEVELOPMENT AND COMPLETED HOMES -- Land and lots under
development and completed homes comprise land at cost, construction costs,
interest costs and attributable profit to date, less sales proceeds received
and receivable and provision for possible losses to write down to fair value.
The estimates utilized in calculating the fair value of land, lots under
development and completed homes requires significant judgment relating to the
level of sales prices, rate of new home sales, amount of marketing costs and
price discounts needed in order to stimulate sales, rate of increase in the
cost of building materials and labor, introduction of building code
modifications, and level of consumer confidence in the economy. Accordingly, it
is likely that changes in estimates will occur. During the years ended March
31, 1998 and 1999 and the three months ended September 30, 1999 (unaudited)
there were no provisions made for impairment of these assets.
Costs related to development of land or construction are capitalized. The
cost of land and construction are allocated to sales based on area methods such
as specific identification as allocation based on relative value is
impracticable. Construction costs include all subcontractors, direct material
and labor costs, and utility connection rights as well as indirect costs
related to subcontract or performance, such as indirect labor and supplies.
Indirect costs that do not clearly relate to development or construction,
including general and administrative expenses, are charged to expense as
incurred. Real estate taxes, insurance and interest are capitalized only during
the period in which activities necessary to get the property ready for its
intended use are in progress.
Completed homes are held for sale and stated at the lower of cost or fair
value less costs to sell and are reported net of valuation reserves.
PLANT, EQUIPMENT AND CONSTRUCTION-IN-PROGRESS -- Plant and equipment is
stated at cost. Depreciation and amortization is provided using the straight
line method based on the estimated useful lives of the plant and equipment,
after taking into account their residual value being 5 to 11 years. Assets held
under capital leases are depreciated over their estimated useful lives on the
same basis as owned assets. There were no assets held under capital leases for
any of the periods presented.
Construction-in-progress represent the common facilities of Chingchu
CALIFORNIA GARDENS which are currently under construction. These facilities
will be retained by the Company as fixed assets upon completion of the
construction. This includes interest arising from borrowings used to finance
these assets during the period of construction. Interest capitalized was nil in
1997, HK$ 631,218 in 1998 and HK$ 773,401 in 1999. The Company intends to
retain ownership of the common facilities and either operate them or eventually
sell the amenities. This has yet to be decided. The fair value of the amenities
was
F-10
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--continued
determined using an undiscounted cash flow model. Upon completion the common
facilities will be depreciated over a period of 15 years.
DEFERRED OFFERING COSTS -- Deferred offering costs represent expenses
incurred by the Company that are directly attributable to the Company's initial
public offering. These costs will be written off against the proceeds from the
offering.
DEFERRED COMPENSATION COSTS -- Deferred compensation costs represents
those costs paid to four consultants in respect of management service
agreements as discussed in note 1. These costs shall be recognized over the
periods of the service and any unearned portion shall be shown as an asset in
the balance sheet.
PRE-OPERATING EXPENDITURE -- Pre-operating expenditure represents those
costs incurred in the period prior to the commencement of the commercial
operation of a new business. Such expenses are deferred where they are directly
related to placing the new business into commercial operation, and to the
extent that they are expected to be recovered from future revenues. The
expenditure is expensed on a straight line basis, over a period of five years
from the date of commencement of full operations.
INCOME TAXES -- The charge for income taxes is based on the results for
the year as adjusted for items which are non-assessable or disallowed. Timing
differences arise from the recognition for tax purposes of certain items of
income and expense in a different accounting period from that in which they are
recognized in the financial statements. The tax effect of timing differences,
computed under the liability method, is recognized as deferred taxation in the
financial statements to the extent that it is probable a liability or asset
will crystalize in the foreseeable future.
ALLOWANCE FOR WARRANTIES -- Homes purchased are provided with a two-year
warranty against certain building defects as stipulated in China building
regulations. This is covered by a warranty from the contractors who have built
the homes. The Company does not record any warranty costs. A portion of the
amounts to be paid to the contractors is withheld by the Company to cover any
potential liability under this warranty. Historically, excess cash withheld by
the Company was adequate to cover the warranty liabilities.
RECOGNITION OF INCOME -- When homes are sold in advance of completion,
profit recognized is calculated under a percentage of completion method when
construction has progressed beyond the preliminary stage. The percentage used
is the proportion of construction cost incurred at the balance sheet date to
estimated total construction cost. Revenues recognized on this basis are
limited to the amount of sales proceeds received and receivable.
FOREIGN CURRENCY TRANSLATION -- The consolidated financial statements of
the Company are presented in Hong Kong dollars. The Company's principal
subsidiary conducts substantially all of its business in Renminbi.
Assets and liabilities denominated in currencies other than the Hong Kong
dollars are translated at year end exchange rates, while revenues and expenses
are translated at average exchange rates during the year. Gains or losses from
such foreign currency transactions are included in net income and amounted to
nil in 1997, a gain of HK$ 83,399 in 1998 and a loss of HK$ 33,306 in 1999.
On consolidation, the financial statements of the subsidiary in China are
translated from Renminbi, being its functional currency, into Hong Kong
dollars. Accordingly all assets and liabilities are translated at
F-11
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--continued
the exchange rate prevailing at the balance sheet date and all income and
expenditure items are translated at the average rates for each of the years.
Adjustments arising from translating the foreign currency financial statements
are reported as a separate component of stockholder's equity.
EARNINGS (LOSS) PER SHARE -- Earnings (loss) per share was computed based
on a weighted average number of shares outstanding of 1,000 in 1997, 1998 and
1999, after adjusting for the 999 for 1 stock split discussed in note 1. Basic
earnings (loss) per share for each period presented is equal to diluted
earnings per share.
PRO FORMA EARNINGS PER SHARE -- Pro Forma earnings per share have been
presented for the year ended March 31, 1999 computed by dividing the net income
by the number of shares outstanding after the increases in the issued share
capital in April 1999 after adjusting for the 999 to 1 stock split, both
discussed in note 1.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
BUSINESS RISK -- Any substantial change in economic conditions, interest
rates, currency exchange rates or significant price fluctuation related to the
real estate industry could affect the Company's operations and have a material
impact on the Company's business. In addition, the Company is subject to
competition from other entities engaged in the business of building homes
throughout China.
CONVENIENCE TRANSLATION INTO UNITED STATES DOLLARS -- The consolidated
financial statements of the Company are expressed in Hong Kong Dollars. The
translations of Hong Kong Dollar amounts into United States Dollars are for
convenience only and have been made at a rate of HK$ 7.75 to US$ 1, the
approximate rate of exchange on March 31, 1999. Such translations should not be
construed as representations that the Hong Kong Dollar amounts could be
converted into United States Dollars, at that rate or any other rate.
UNAUDITED INTERIM INFORMATION -- The financial information with respect to
the six-month periods ended September 30, 1998 and 1999 is unaudited. In the
opinion of management, such information contains all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of such periods. The results of operations for the six-month period
ended September 30, 1999 are not necessarily indicative of results to be
expected for the full year.
4. LAND AND LOTS UNDER DEVELOPMENT AND COMPLETED HOMES
In May 1997 the Company's subsidiary, Chingchu, commenced construction of
a residential community called Chingchu CALIFORNIA GARDENS on a site in
Shanghai, China. The project is being developed and sold on a phase basis and a
total of 7 phases are planned for development. The planned development period
spans from 1997 to 2002 during which approximately 8,000 units are to be
constructed in a planned area of about 1,334,000 square meters. As at March 31,
1999, the Company has obtained the land use rights which represent the legal
ownership of three plots of land for the development of Phases 1 through 3.
This represents approximately 423,048 square meters.
F-12
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
4. LAND AND LOTS UNDER DEVELOPMENT AND COMPLETED HOMES--continued
Sales of units in Phase 1 and Phase 2 commenced during the years ended
March 31, 1998 and 1999, respectively, after obtaining the pre-sales
certificates from the Shanghai House and Land Administration Bureau.
Construction of Phase 3 has reached a preliminary stage at March 31, 1999 and
the pre-sales certificate was obtained in April 1999.
At the balance sheet dates, land and lots under development and completed
homes comprised:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
------------------------------------------ ----------------------------------------
1998 1999 1999 1998 1999 1999
------------- -------------- ------------- ------------- ------------- ------------
HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Completed homes ............ -- 2,575,387 332,308 4,864,379 4,423,418 570,764
Land held under 70 years
lease, at cost ............ 58,617,735 97,142,881 12,534,565 76,590,529 62,936,046 8,120,780
Construction costs ......... 93,885,895 197,986,933 25,546,701 99,675,727 139,882,024 18,049,293
---------- ----------- ---------- ---------- ----------- ----------
152,503,630 297,705,201 38,413,574 181,130,635 207,241,488 26,740,837
Add: Attributable profit
recognized ................ 10,961,831 68,301,687 8,813,121 19,753,439 21,505,218 2,774,867
----------- ----------- ---------- ----------- ----------- ----------
163,465,461 366,006,888 47,226,695 200,884,074 228,746,706 29,515,704
Less: Sales proceeds
received and
Receivable ................ 88,154,006 232,445,201 29,992,929 120,720,174 108,627,767 14,016,486
----------- ----------- ---------- ----------- ----------- ----------
75,311,455 133,561,687 17,233,766 80,163,900 120,118,939 15,499,218
=========== =========== ========== =========== =========== ==========
</TABLE>
Included above are land and lots under development of HK$ 32,691,300
(1998: Nil) which have been pledged as security for short-term bank loans.
5. INCOME TAXES
CAYMAN ISLANDS:
The Company is not taxed in the Cayman Islands where it is incorporated.
HONG KONG:
The Company's subsidiary incorporated in Hong Kong is subject to Hong Kong
taxation on its activities conducted in Hong Kong. Under the current Hong Kong
laws, dividends and capital gains arising from the realization of investments
are not subject to income taxes and no withholding tax is imposed on payments
of dividends by Hong Kong incorporated subsidiaries to the Company.
CHINA:
Under the existing China tax regulations, the sale of real estate in
advance of completion is subject to provisional business tax and provisional
income tax. Provisional business tax amounted to nil in 1997, HK$ 4,197,038 in
1998 and HK$ 13,495,942 in 1999 calculated at 5% of the sales receivable.
Provisional
F-13
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
5. INCOME TAXES--continued
income tax is calculated at 33% of deemed profit which is based on 10% of
installments received. Upon the completion of the real estate, income tax will
be re-assessed and calculated at 33% of the actual taxable profit and, if any,
excessive provisional income tax will be refunded.
The components of (loss) income before minority interests and income taxes
are as follows:
<TABLE>
<CAPTION>
MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------- --------------------------------------------
1997 1998 1999 1999 1998 1999 1999
------------ --------------- --------------- ------------- --------------- --------------- ------------
HK$ HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
China ............. -- (3,429,316) 47,404,674 6,116,732 13,608,779 17,297,547 2,231,942
Hong Kong ......... (10,609) (1,383,233) (5,045,048) (650,974) (1,409,047) (2,072,031) (267,359)
------- ---------- ---------- --------- ---------- ---------- ---------
(10,609) (4,812,549) 42,359,626 5,465,758 12,199,732 15,225,516 1,964,583
======= ========== ========== ========= ========== ========== =========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
----------------------------------------------- ----------------------------------------
1997 1998 1999 1999 1998 1999 1999
------ --------------- ------------ ----------- ------------- ------------- ------------
HK$ HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
China:
Current .......... -- -- 10,491,689 1,353,766 4,553,762 4,082,228 526,739
Deferred ......... -- (1,131,674) 5,214,719 672,867 -- 1,625,962 209,802
-- ---------- ---------- --------- --------- --------- -------
-- (1,131,674) 15,706,408 2,026,633 4,553,762 5,708,190 736,541
== ========== ========== ========= ========= ========= =======
</TABLE>
A reconciliation between the provision for income taxes computed by
applying the China statutory tax rate of 33% for each period to income before
taxes and the actual provision for income taxes is as follows:
<TABLE>
<CAPTION>
MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------- ----------------------------------------
1997 1998 1999 1999 1998 1999 1999
----------- --------------- -------------- ------------- ------------- ------------- ------------
HK$ HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Standard income tax rate
applied to (loss) income
before income tax ......... (3,500) (1,588,141) 13,978,677 1,803,700 4,025,912 5,024,420 648,312
Effect of lower standard
income tax rate for Hong
Kong subsidiary ........... 1,750 228,233 857,658 110,665 239,538 352,245 45,451
Income not subject to
Taxation .................. -- (13,761) -- -- -- -- --
Interest expense not
Deductible in
Hong Kong ................. 1,750 239,573 912,193 117,702 335,836 153,283 19,779
Other ...................... -- 2,422 (42,120) (5,434) (47,524) 178,242 22,999
------ ---------- ---------- --------- --------- --------- -------
Income taxes ............... -- (1,131,674) 15,706,408 2,026,633 4,553,762 5,708,190 736,541
====== ========== ========== ========= ========= ========= =======
</TABLE>
F-14
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
5. INCOME TAXES--continued
Deferred income taxes represent the difference in recognition of income
under the percentage of completion method and the accounting treatment applied
for tax purposes in China. At March 31, 1999, the Hong Kong subsidiary and
Chingchu had no tax loss carryforwards for statutory tax reporting purposes.
The components of deferred income tax are as follows:
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------- SEPTEMBER 30,
1998 1999 1999 1999
----------- --------------- ------------- ---------------------------
HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Deferred tax asset (liability)
Difference in recognition of income Under the
percentage of completion method and the
accounting treatment applied for tax purposes
in China .................................... 1,132,732 (4,081,987) (526,708) 5,707,949 736,510
========= ========== ======== ========= =======
</TABLE>
6. OTHER PREPAID TAXES
<TABLE>
<CAPTION>
MARCH 31,
---------------------------- SEPTEMBER 30,
1998 1999 1999 1999
------ ----------- --------- ---------------------------
HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provisional land appreciation tax .. -- 2,151,544 277,619 2,151,544 277,619
== ========= ======= ========= =======
</TABLE>
In accordance with the Land Appreciation Tax Law all legal entities and
individuals receiving income from the transfer of state-owned land use rights
or buildings and their attached facilities are subject to land appreciation
tax.
Land appreciation tax is charged on the appreciated amount at the
applicable rate. The amount of appreciation is calculated on the basis of sales
proceeds received less deductible items. Deductible items include fees for land
use rights acquisition, development costs and expenses for new buildings and
facilities and other deductions as prescribed by the Ministry of Finance in
China. The applicable rates are progressive ranging from 30% to 60% depending
on the percentage of the appreciated amount over deductible costs.
In accordance with the Land Appreciation Tax Law, the Company, being a
taxpayer involved in real estate development, is entitled to an additional
deduction equal to 20% of the aggregate of land use rights acquisition costs
and land development costs, as defined in the law, in computing the land
appreciation tax.
In addition, as the Company sells ordinary standard residential
apartments, as defined in the relevant regulations, the Company is exempted
from land appreciation tax if the appreciated amount over the deductible cost
is less than 20%. However, if the amount of the appreciated amount exceeds the
deductible costs by more than 20%, the entire amount of the appreciation will
be subject to land appreciation tax as stated above.
F-15
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
7. RESTRICTED CASH
Chingchu has entered into agreements with certain banks in respect of
mortgage loans provided to house buyers of CALIFORNIA GARDENS. In accordance
with those agreements, Chingchu deposits either 10% of the consideration of the
properties sold and financed under the mortgage loans or between 10% and 20% of
the amount of financing provided as a guarantee for settlement of the mortgage
installments. Should mortgagors fail to pay mortgage installments the bank can
draw down the deposits up to the amount of mortgage installments not paid
during the period from the mortgage drawdown to the date of releasing such
guarantees. The guarantees will be released when the property title deeds are
passed to banks as security for the respective mortgage loans. At March 31,
1998 and 1999, deposits of HK$ 4,982,793 and HK$ 4,140,889, respectively, were
placed with banks to guarantee the above agreements.
8. PLANT, EQUIPMENT, AND CONSTRUCTION-IN-PROGRESS, NET
Plant, equipment and construction-in-progress consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------------- SEPTEMBER 30,
1998 1999 1999 1999
------------ ------------ ----------- ---------------------------
HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
At cost:
Construction-in-progress ............. 22,826,608 31,878,237 4,113,320 43,089,109 5,559,885
Machinery and equipment .............. -- 26,661 3,440 37,886 4,888
Furniture and fixtures ............... 1,011,402 1,232,241 158,999 1,277,212 164,802
Motor vehicles ....................... 1,113,172 2,726,968 351,867 3,197,721 412,609
Electric equipment ................... 555,092 814,922 105,151 887,409 114,504
---------- ---------- --------- ---------- ---------
Total ................................ 25,506,274 36,679,029 4,732,777 48,489,337 6,256,688
Less: Accumulated depreciation and
amortization ........................ 131,641 719,869 92,886 1,048,723 135,319
---------- ---------- --------- ---------- ---------
Net book value ....................... 25,374,633 35,959,160 4,639,891 47,440,614 6,121,369
========== ========== ========= ========== =========
</TABLE>
9. BANK BORROWINGS
These represent bank loans to Chingchu obtained from banks and at March
31, 1999 the weighted average interest rate on borrowings was 8.8%. At March
31, 1999, the Company and its subsidiaries did not have any unutilized
facilities. In September, 1999, the Company borrowed approximately HK$ 11.2
million under credit agreements entered into in that month.
At March 31, 1999 bank loans totalling HK$ 23,386,342, bearing interest at
6% to 7% per annum, have been guaranteed at no cost by the holding company of
the minority shareholder of Chingchu. The loans matured in the amounts of
HK$ 18,709,074 and HK$ 4,677,268 on May 6, 1999 and September 30, 1999,
respectively, and were subsequently extended to October and November, 1999,
respectively. The remaining bank loan of HK$ 11,618,335, which bears interest
at the US dollar prime lending rate plus 2% per annum, is denominated in United
States dollars (US$ 1,500,000) and is secured by the land use rights of
CALIFORNIA GARDENS and certain lots under development (see note 4). A
subsidiary of Far East has also guaranteed this loan at no cost to the Company.
This loan was revolving and repayable on July 31, 1999.
Subsequently, the bank loans of HK$ 18,709,074 and HK$ 11,618,335 were
further extended to May 15, 2000 and July 30, 2002, respectively (unaudited).
F-16
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
9. BANK BORROWINGS--continued
Total interest costs incurred, expensed and capitalized relating to bank
borrowings and advances from Far East as mentioned in note 10 (ii) to the
consolidated financial statements were:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------------------- SEPTEMBER 30,
1997 1998 1999 1999 1999
------ --------------- --------------- ------------ -----------------------------
HK$ HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Interest capitalized at beginning
of the year
Land and lots under development ....... -- -- 2,824,887 364,502 4,301,952 555,090
Completed homes ....................... -- -- -- -- 70,857 9,143
Construction-in-progress .............. -- -- 631,218 81,447 1,404,619 181,241
-- ---------- --------- ------- --------- -------
Total interest capitalization ......... -- -- 3,456,105 445,949 5,777,428 745,474
== ========== ========= ======= ========= =======
Interest capitalized at beginning
of the year ........................... -- -- 3,456,105 445,949 5,777,428 745,474
Plus interest incurred ................. -- 4,908,060 8,627,850 1,113,271 1,548,228 199,771
Less interest expensed as cost
of home sales ......................... -- (1,451,955) (6,306,527) (813,746) (1,799,258) (232,162)
-- ---------- ---------- --------- ---------- --------
Interest capitalized at end
of the year/period .................... -- 3,456,105 5,777,428 745,474 5,526,398 713,083
== ========== ========== ========= ========== ========
Interest capitalized at end
of the year/period
Land and lots under development ....... -- 2,824,887 4,301,952 555,090 3,785,528 488,455
Completed homes ....................... -- -- 70,857 9,143 127,033 16,391
Construction-in-progress .............. -- 631,218 1,404,619 181,241 1,613,837 208,237
-- ---------- ---------- --------- ---------- --------
Total interest capitalization ......... -- 3,456,105 5,777,428 745,474 5,526,398 713,083
== ========== ========== ========= ========== ========
</TABLE>
F-17
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
10. RELATED PARTY TRANSACTIONS
At the balance sheet dates the Company and its subsidiaries had balances
with the following parties:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------- SEPTEMBER 30,
1998 1999 1999 1999
NOTES ------------- ------------ ------------ ---------------------------
HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Due from related parties:
Subsidiaries of Far East
International ................... (i) -- 1,644,292 212,167 1,281,861 165,402
Parties related to the minority
shareholder of Chingchu ......... (i) 836,470 1,377,817 177,783 1,377,060 177,685
------- --------- ------- --------- -------
836,470 3,022,109 389,950 2,658,921 343,087
======= ========= ======= ========= =======
Due to related parties:
Far East .......................... (ii) 84,360,624 75,918,974 9,795,997 1,619,784 209,004
A subsidiary of Far East
International ................... (i) -- -- -- 1,920,962 247,866
Party related to the minority
shareholder of Chingchu ......... (iii) 20,478,204 20,416,300 2,634,361 18,912,222 2,440,287
Minority shareholder
of Chingchu ..................... (iv) -- -- -- 5,612,722 724,222
---------- ---------- --------- ---------- ---------
104,838,828 96,335,274 12,430,358 28,065,690 3,621,379
=========== ========== ========== ========== =========
<FN>
- ----------------
(i) The amounts due from related companies represent unsecured advances which are interest free and repayable on demand.
(ii) During the three years ended in the period ended March 31, 1999, the Company has been financed by advances from Far East
which have no specific repayment terms. Far East advanced HK$ 6,429,307 in 1997, HK$ 78,469,164 in 1998 and HK$ 19,506,948
in 1999 and was repaid HK$ 27,948,598 in 1999. On April 2, 1999, as explained in note 1, the Company issued shares to Far
East for cash of US$ 9,549,000 which was used to offset the payable to Far East, which amounted to US$ 9,795,997 at March
31, 1999. The Company was charged interest at Hong Kong dollar prime rate per annum by Far East in respect of advance for
these two years. The interest expense of HK$ 4,908,060 in 1998 and HK$ 7,292,626 in 1999, respectively, has been
capitalized and will be expensed along with the associated cost of sales as homes are sold.
(iii) At March 31, 1999, the amount due to the party related to the minority shareholder of Chingchu represented payables
for land fees and infrastructure costs amounting to HK$ 16,434,556 (1998: HK$ 10,046,773) and HK$ 3,981,744 (1998: HK$
10,431,431), respectively. Transactions in each year with this party, which are included in the land and construction
costs of Chingchu CALIFORNIA GARDENS, are as follows.
</FN>
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------------------- ----------------------------------------
1997 1998 1999 1999 1998 1999 1999
------ ------------ ------------ ----------- ------------- ------------- ------------
HK$ HK$ HK$ US$ HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Land fees and costs ............ -- 70,373,832 28,052,573 3,619,687 28,462,777 13,775,865 1,777,531
External infrastructure Costs .. -- 14,953,271 38,640,037 4,985,811 9,054,228 -- --
Penalty on late payment ........ -- -- 748,363 96,563 374,181 -- --
-- ---------- ---------- --------- ---------- ---------- ---------
-- 85,327,103 67,440,973 8,702,061 37,891,186 13,775,865 1,777,531
== ========== ========== ========= ========== ========== =========
<FN>
(iv) The amount due to minority shareholder of Chingchu represented unsecured advances at an interest rate of 6.44% per annum
and repayable on October 24, 1999 (unaudited).
</FN>
</TABLE>
The average amount due to party related to the minority shareholder during
the years ended March 31, 1998 and 1999 was HK$ 2,357,830 and HK$ 26,522,571,
respectively which represented
F-18
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
10. RELATED PARTY TRANSACTIONS--continued
RMB 2,520,520 and RMB 28,352,628, respectively, translated using an average
exchange rate of RMB 1.069 to HK$ 1. The party related to the minority
shareholder did not charge the Company any interest during the years ended
March 31, 1998 and 1999 except penalty for the delayed payment of land fees as
shown above.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company and its subsidiaries lease office and employee accommodation
under various operating leases which do not contain any renewal or escalation
clauses. Rental expense under operating leases was nil in 1997, HK$ 272,897 in
1998 and HK$ 293,078 in 1999. At March 31, 1999, the Company and its
subsidiaries were committed under operating leases requiring minimum rentals of
HK$ 130,145 during the year ending March 31, 2000.
CAPITAL EXPENDITURE
At March 31, 1999, the Company had contracted for expenditure of
approximately HK$ 221,000,000 in respect of land and lots under development
which is expected to be expended within the next two years. The Company has
authorized but not yet contracted for additional expenditure on Chingchu
CALIFORNIA GARDENS of approximately HK$ 215,000,000.
GUARANTEES
The Company has given guarantees in respects of mortgage loans provided to
the buyers of Chingchu CALIFORNIA GARDENS as disclosed in note 7 to the
financial statements. Included in the prepaid expenses and other assets as at
March 31, 1999 was the amount of HK$ 30,017 withdrawn by the banks in
accordance with the above guarantee. In the opinion of the directors, the
amount will be recovered when the title deeds of the property are transferred
to the buyers or the banks. All amounts that have been withdrawn by the banks
have been recovered. Historically, there have been no defaults associated with
the amounts withdrawn by banks.
At March 31, 1998 and 1999, the total amount of mortgages outstanding
which are subject to these guarantees was HK$ 31 million and HK$ 81 million,
respectively. At September 30, 1998 and 1999, the total amount of mortgages
outstanding which are subject to these guarantees was HK$ 124 million and
HK$ 83 million, respectively (unaudited).
PROVISIONAL TAX PAYMENTS
The Company has pre-sold part of the real estate development project and
has accrued the full amount of provisional foreign enterprises income tax on
the deemed profits arising from the pre-sales pursuant to the relevant tax
regulations. The Company, however, has not made installment payments on account
of the provisional tax liability based on the informal understanding that it
has reached with the competent tax authority allowing the installments to the
delayed until the project is completed. In the absence of such approval, the
Company may be liable for delinquent charges approximating HK$ 4,368,000
calculated at a daily rate of 0.2% on the unpaid amount at March 31, 1999.
F-19
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
12. EMPLOYEE BENEFITS
In accordance with local government regulations, Chingchu is required to
make contributions to a defined contribution retirement fund which is
administered by the Labour Bureau of the local government. Chingchu is required
to contribute 25.5% of the total salary. Chingchu has no obligation for the
pension payments or any post-retirement benefits beyond the annual
contributions described above. Chingchu contributions for the year ended March
31, 1997, 1998 and 1999 were approximately nil, HK$ 91,735 and HK$ 314,330,
respectively. The Company and its Hong Kong subsidiary have no other pension
plans or post-retirement obligations.
13. CONCENTRATION OF CREDIT RISK
The Company maintains its cash and cash equivalents with bank and
financial institutions in China. All sales are made to Chinese domestic home
buyers. As the Company does not have any major customers, it does not consider
itself exposed to significant credit risk with regards to collection of related
receivables. No credit losses have been recorded since commencement of
operation.
14. FAIR VALUE OF FINANCIAL STATEMENTS
The carrying amount of cash and cash equivalent, trade and other accounts
receivable, short-term bank borrowings, customer deposits, trade accounts
payable and accrued expenses and amounts due to/from related parties
approximate fair value because of the short maturities of these instruments.
There is no quoted market price for amounts due to/from related parties and
accordingly a reasonable estimate of their fair value could not be made without
incurring excessive costs.
15. STOCK OPTION PLAN
In August 1999, the Company adopted a 1999 Stock Option and Restricted
Stock Purchase Plan (the "Plan") conditioned upon the shareholders of Far East
approving the terms of the Plan and subject to the review of the Stock Exchange
of Hong Kong Limited. Under the Plan, the compensation committee of the board
of directors has complete discretion to determine which eligible individuals
are to receive option grants, the number of shares subject to each grant, the
status of any granted option, the vesting schedule to be in effect for the
option grant and maximum term for which any granted option is to remain
outstanding. Each option granted under the Plan has a maximum term of 10 years.
No options have been granted under the Plan.
F-20
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES
The Company's financial statements are prepared in accordance with HK
GAAP, which differs in certain significant respects from US GAAP. The
significant differences relate principally to the following items and the
adjustments necessary to restate net income and stockholder's equity in
accordance with US GAAP are shown in the tables set out below.
PRE-OPERATING EXPENDITURE
Under HK GAAP, expenses incurred prior to the commencement of new
operations are capitalized as deferred pre-operating expenditure and are
amortized on a straight line basis over a period of time when the related
operation commences on a commercial basis.
Under US GAAP, such expenses are written off to the statement of
operations when incurred.
DERIVATIVES
HK GAAP does not specifically cover derivatives other than forward
exchange contracts.
US GAAP has recently been amended by Statement of Financial Accounting
Standards ("FASB") No. 133 "Accounting for Derivative Instruments and Hedging
Activities" which broadly defines derivatives and requires them to be recorded
as assets or liabilities at fair value. For derivatives that are designated as
hedges of certain items, in certain circumstances any change in fair value is
recorded in other comprehensive income, in other circumstances in earnings for
the period. For derivatives that are not designated as hedges, any changes in
fair value will be reflected in earnings for the period. FASB 133 is not yet
mandatory and the Company has not yet evaluated the impact this would have on
the financial statements of the Company.
The Company does not currently use any derivative financial instruments to
manage its risks or obligations.
IMPAIRMENT OF LONG-LIVED ASSETS
Under HK GAAP, where in the opinion of the directors the recoverable
amounts of long-lived assets have declined below their carrying amounts,
provisions are made to write down the carrying amounts of such assets to their
recoverable amounts. Recoverable amounts are not determined using discounted
cash flows.
Under US GAAP, long-lived assets including land and lots under development
must be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. An
impairment loss is recognized if the expected future cash flows (undiscounted)
are less than the carrying amount of the assets. The impairment is measured
based on the fair value of the asset.
DEFERRED INCOME TAXES
Under HK GAAP, deferred taxation is provided in respect of the taxation
effect of all timing differences which are expected, with reasonable
probability, to crystalize in the foreseeable future, and is
F-21
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES--continued
calculated under the liability method. With respect to recognizing a deferred
tax asset related to prior operation losses, HK GAAP requires these deferred
tax assets to be probable of recovery in the foreseeable future, and requires
assurance beyond a reasonable doubt that taxable income will be generated in
the future.
US GAAP requires that all provision be made for the deferred tax effects
of all temporary differences as they arise, except that a valuation allowance
is provided on deferred tax assets to the extent that it is "more likely than
not" that such deferred tax assets will not be realized. Under US GAAP, "more
likely than not" is defined as a likelihood of more than 50 per cent.
STOCK-BASED COMPENSATION
Under HK GAAP, the granting of share options to employees does not require
the recognition of compensation expense.
Under US GAAP, in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" compensation expense is
recognized to the extent that the fair value of the equity instrument exceeds
the exercise price of the option granted at a defined measurement date, which
is generally the grant date unless certain conditions apply. Under FASB No. 123
"Accounting for Stock-Based Compensation", the Company may alternatively
compute compensation expense based on the fair value of the options granted.
Stock or options issued to non-employees for services is accounted for in
accordance with FASB No. 123.
COMPREHENSIVE INCOME
Under HK GAAP no display of total comprehensive income is required.
Under US GAAP total comprehensive income is required to be displayed for
all years in which an income statement is presented. Comprehensive income
comprises net income and other comprehensive income such as unrealized gains
and losses on securities and foreign currency translation adjustments. Under US
GAAP, total comprehensive income (loss) was a loss of HK$ 10,609 and
HK$ 4,248,505 for 1997 and 1998 respectively and total comprehensive income of
HK$ 24,643,670 for 1999.
NONMONETARY TRANSACTIONS
Under US GAAP, accounting for nonmonetary transactions is generally based
on the fair values of the assets or services provided. The estimated fair value
of services contributed to the Company by consultants in the year ended March
31, 1999 has been recorded as an expense and credited to additional paid-in
capital. HK GAAP would generally not record such an expense.
F-22
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES--continued
The following table summarizes the effect on net (loss) income of
differences between HK GAAP and US GAAP.
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------------
1997 1998 1999 1999
------------ --------------- --------------- -------------
HK$ HK$ HK$ US$
<S> <C> <C> <C> <C>
Net (loss) income as
reported ................... (10,609) (3,639,517) 26,082,649 3,365,503
US GAAP material
adjustments:
Deferred pre-operating
Expenditure .............. -- (1,023,675) -- --
Amortization of deferred
pre-operating
expenditure ................ -- 117,944 202,900 26,181
Contribution of services
by consultants credited
to additional paid-in
capital .................... -- -- (1,647,000) (212,516)
Additional compensation
expense to consultants
arising from fair value of
the common shares
credited to additional
paid-in capital ............ -- -- -- --
Additional deferred tax
credit (charge) due to
timing difference arising
from adjustment on
pre-operating
expenditure ................ -- 298,892 (66,957) (8,640)
------- ---------- ---------- ---------
Net (loss) income under
US GAAP .................... (10,609) (4,246,356) 24,571,592 3,170,528
======= ========== ========== =========
(Loss) earnings per share
under US GAAP .............. (10.61) (4,246.36) 24,571.59 3,170.53
======= ========== ========== =========
Pro Forma (loss) earnings
per share under
US GAAP .................... 2.36 0.30
========== =========
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1998 1999 1999
------------- --------------- ------------
HK$ HK$ US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net (loss) income as
reported ................... 7,482,980 9,308,718 1,201,125
US GAAP material
adjustments:
Deferred pre-operating
Expenditure .............. -- -- --
Amortization of deferred
pre-operating
expenditure ................ 100,436 102,461 13,221
Contribution of services
by consultants credited
to additional paid-in
capital .................... -- 274,478 35,417
Additional compensation
expense to consultants
arising from fair value of
the common shares
credited to additional
paid-in capital ............ -- (4,940,625) (637,500)
Additional deferred tax
credit (charge) due to
timing difference arising
from adjustment on
pre-operating
expenditure ................ (33,144) (33,812) (4,363)
--------- ---------- ---------
Net (loss) income under
US GAAP .................... 7,550,272 4,711,220 607,900
========= ========== =========
(Loss) earnings per share
under US GAAP .............. 7,550.27 0.45 0.06
========= ========== =========
Pro Forma (loss) earnings
per share under
US GAAP ....................
</TABLE>
F-23
<PAGE>
NEW CHINA HOMES, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
16. SUMMARY OF DIFFERENCES BETWEEN HONG KONG AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES--continued
The following table summarizes the effect on stockholder's equity
(deficit) of the differences between HK GAAP and US GAAP.
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------- SEPTEMBER 30,
1998 1999 1999 1999
--------------- -------------- ------------- -------------------------------
HK$ HK$ US$ HK$ US$
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Stockholder's equity (deficit) as reported (3,112,250) 23,042,477 2,973,223 112,943,445 14,573,348
US GAAP material adjustments:
Deferred pre-operating expenditure, net .. (906,578) (703,678) (90,797) (601,217) (77,576)
Additional deferred tax credit (charge)
due to timing difference arising
from adjustment on pre-operating
expenditure ............................ 299,171 (66,957) (8,640) (33,812) (4,363)
Contribution of services by consultants .. -- -- -- (5,489,583) (708,333)
---------- ---------- --------- ----------- ----------
Stockholder's equity (deficit) under
US GAAP .................................. (3,719,657) 22,271,842 2,873,786 106,818,833 13,783,076
---------- ---------- --------- ----------- ----------
</TABLE>
F-24
<PAGE>
[Pictures of the exterior and interior of homes in the California Gardens
development. Pictures of play areas for young children.]
"New China Homes First China Project: California Gardens in Shanghai."
"Each California Gardens three-level townhouse averages 1,600 square feet and
has its own parking/driveway area, as well as front and rear entrance and
terraces."
"Our homes provide spacious interiors and independent living area for
middle-income families, who are China's new and emerging consumer market."
"Schools have been constructed within the development (kindergarten, elementary,
and high schools) as well as amenities which include retail shops and country
club facilities."
<PAGE>
YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, COMMON SHARES AND WARRANTS ONLY IN JURISDICTIONS WHERE OFFERS AND SALES
ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS
OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF COMMON SHARES.
UNTIL APRIL 3, 2000, ALL DEALERS SELLING COMMON SHARES OR WARRANTS WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-----------------------------------
NEW CHINA HOMES, LTD.
2,000,000
COMMON SHARES
AND
2,000,000 REDEEMABLE
COMMON SHARES PURCHASE WARRANTS
-----------------------------------
PROSPECTUS
-----------------------------------
[BARRON CHASE SECURITIES LOGO]
7700 W. Camino Real
Boca Raton, Florida 33433
(561) 347-1200
Beverly Hills, California
Boca Raton, Florida
Boston, Massachusetts
Buffalo, New York
Chicago, Illinois
Clearwater, Florida
Edison, New Jersey
Eureka Springs, Arkansas
Fort Lauderdale, Florida
Hasbrouk Heights, New Jersey
La Jolla, California
New York, New York
Orlando, Florida
Rockville Centre, New York
Sarasota, Florida
Tampa, Florida
March 8, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
