XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number of shares and per share data)
1. Background information of
business and organization
Xinyuan Real Estate Limited (Xinyuan) was incorporated on January 27, 2006 as a privately
held company under the law of the Cayman Islands by Mr. Yong Zhang and his wife Ms. Yuyan Yang (collectively, the Zhang Family).
Henan Xinyuan Real Estate Co., Ltd (Henan Xinyuan) was incorporated on May 19, 1997 by the Zhang Family as a privately held company under the law of the Peoples Republic of China (the
PRC or China). Henan Xinyuan is principally engaged in the construction, development and sale of residential real estate units in Henan province of the PRC.
On March 16, 2006, Henan Xinyuan acquired an additional 20% interest in Henan Wanzhong Real Estate Co., Ltd. (Henan Wanzhong), which was
incorporated on February 6, 2005, from Ms. Yuyan Yang to bring its total interest therein to 100%.
Pursuant to a reorganization
plan (the Reorganization), Xinyuan incorporated Xinyuan Real Estate (China) Development Co., Ltd (the WFOE) with issued and fully subscribed share capital of US$5 million on April 10, 2006. On August 7, 2006, the
WFOE and the Zhang Family entered into an equity transfer agreement in which the Zhang Family transferred all of its equity interests in Henan Xinyuan to the WFOE, a wholly owned subsidiary of Xinyuan in exchange for US$1.25 million. Henan Xinyuan
registered the change of shareholders along with its amended articles of association with the local Administration of Industry and Commerce (AIC) on August 7, 2006. A new business license for Henan Xinyuan was issued on
August 10, 2006.
According to relevant PRC laws and regulations, an equity transfer is completed upon registration with the local AIC
and the issuance of a new business license. Therefore, the equity transfer of Henan Xinyuan from the Zhang Family to the WFOE was considered to be legally completed on August 10, 2006. The Reorganization, as well as the acquisition of the 20%
minority interest in Henan Wanzhong, were accounted for as a legal reorganization of entities under common control, in a manner similar to a pooling-of-interest. Accordingly, the accompanying consolidated financial statements have been prepared as
if the current corporate structure had been in existence throughout the periods presented. The assets and liabilities of the parties to the reorganization have been stated at their historical amounts in the consolidated financial statements. Cash
consideration paid by Xinyuan to the Zhang Family for the acquisition of equity interests in Henan Xinyuan and Henan Wanzhong is recorded as a distribution to shareholders. The financial statements for the years ended December 31, 2004 and 2005
have been restated, as appropriate, to reflect these transactions.
On August 25, 2006, the Company issued 18,483,240 Series A
convertible redeemable preference shares and one warrant to Blue Ridge China Partners, L.P. (Blue Ridge China) and 12,322,160 Series A convertible redeemable preference shares and one warrant to EI Fund II China, LLC (Equity
International) for US$15 million and US$10 million, respectively. After the preference shares subscription, Blue Ridge China and Equity International collectively owned 34% voting rights in the Company and obtained certain substantive
participating rights as defined in Emerging Issues Task Force (EITF) No. 96-16,
Investors Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders
Have Certain Approval or Veto Rights
. Because of these substantive participating rights, the Zhang Family is no longer considered the controlling shareholder of the Company starting August 25, 2006 for accounting purposes.
F-8
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
On August 30, 2006, Henan Xinyuan acquired a 100% equity interest in each of Henan Xinyuan
Property Management Co., Ltd. (Xinyuan Property Management), Henan Xinyuan Real Estate Agency Co., Ltd. (Xinyuan Agency), Zhengzhou Mingyuan Landscape Engineering Co., Ltd. (Mingyuan Landscape) and Zhengzhou
Xinyuan Computer Network Engineering Co., Ltd. (Xinyuan Network) (collectively, the Ancillary Companies) from the Zhang Family for a cash consideration of US$2.1 million. The terms of the acquisitions of the Ancillary
Companies were not finalized as part of the Reorganization. The acquisition was accounted for using the purchase method of accounting as the Zhang Family, subsequent to August 25, 2006, is deemed, for accounting purposes, no longer have control
over the Group due to the substantive participating rights of Blue Ridge China and Equity International. The acquired assets and liabilities of the Ancillary Companies were recorded at fair value on the acquisition date.
As discussed further in Note 19(b), on April 9, 2007, a second reorganization was transacted through an even exchange of securities. The exchange was
accounted for as an exchange of shares that lacks substance, in a manner similar to a pooling of interest. As a result of this share exchange, Xinyuan became the wholly owned subsidiary of Xinyuan Real Estate Co., Ltd. Accordingly, the accompanying
consolidated financial statements have been prepared as if the corporate structure, comprising Xinyuan Real Estate Co., Ltd. and Subsidiaries, subsequent to April 9, 2007 had been in existence throughout the periods presented.
The Companys subsidiaries and an equity investee are set out below:
|
|
|
|
|
|
|
|
|
|
Company name
|
|
Place
and date of
incorporation
|
|
Registered/
paid-up
capital
RMB000
|
|
Percentage of
equity directly
attributable to
the Group
|
|
|
Principal activities
|
Subsidiary companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WFOE*
|
|
The PRC
April
10, 2006
|
|
182,886
|
|
100
|
%
|
|
Investment holding company
|
|
|
|
|
|
Henan Xinyuan
|
|
The PRC
May 19,
1997
|
|
50,000
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Henan Wanzhong Real
Estate Co., Ltd.**
|
|
The PRC
February 6, 2005
|
|
10,000
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Qingdao Xinyuan Xingrui
Real Estate Co., Ltd.*
|
|
The PRC
February 9, 2006
|
|
10,000
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Shandong Xinyuan
Real Estate Co., Ltd.*
|
|
The PRC
June 2, 2006
|
|
20,000
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Henan Xinyuan Property
Management Co., Ltd.#
|
|
The PRC
December, 28 1998
|
|
3,000
|
|
100
|
%
|
|
Providing property management services
|
|
|
|
|
|
Henan Xinyuan Real
Estate Agency Co., Ltd.#
|
|
The PRC
November 6, 2005
|
|
1,000
|
|
100
|
%
|
|
Real estate sales, purchase and lease services
|
|
|
|
|
|
Zhengzhou Xinyuan Landscape
Engineering Co., Ltd.#
|
|
The PRC
February 17, 2004
|
|
1,000
|
|
100
|
%
|
|
Landscaping engineering and management
|
F-9
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
|
|
|
|
|
|
|
|
|
|
Company name
|
|
Place
and date of
incorporation
|
|
Registered/
paid-up
capital
RMB000
|
|
Percentage of
equity directly
attributable to
the Group
|
|
|
Principal activities
|
|
|
|
|
|
Subsidiary Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhengzhou Xinyuan
Computer Network
Engineering Co., Ltd.#
|
|
The PRC
May 26, 2004
|
|
2,000
|
|
100
|
%
|
|
Installation of intercom systems
|
|
|
|
|
|
Suzhou Xinyuan
Real Estate Co., Ltd.*
|
|
The PRC
November 24, 2006
|
|
50,000
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Anhui Xinyuan
Real Estate Co., Ltd.*
|
|
The PRC
December 7, 2006
|
|
20,000
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Beijing Xinyuan Jinhe
Investment & Development
Co., Ltd.##
|
|
The PRC
April 6, 2005
|
|
30,000
|
|
99
|
%
|
|
Investment
|
|
|
|
|
|
Equity investee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhengzhou Jiantou Xinyuan
Real Estate Co., Ltd.
(Jiantou Xinyuan)
|
|
The PRC
June 13, 2005
|
|
8,000
|
|
45
|
%
|
|
Real
estate development
|
#
|
|
These companies were acquired on 30 August 2006, for total consideration of US$2.1 million. See Note 8.
|
##
|
|
The company was liquidated during 2006.
|
*
|
|
Newly incorporated in 2006 by the Group.
|
**
|
|
The percentage of equity directly attributable to the Group was increased from 80% to 100% in 2006.
|
Except where otherwise indicated, equity holdings remained unchanged throughout the years ended December 31, 2004, 2005 and 2006.
2. Summary of significant accounting policies
(a) Basis of
presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (U.S. GAAP). Certain comparative figures have been reclassified to conform to 2006 presentation. The consolidated financial statements include the financial statements of the Company, its subsidiaries,
Variable Interest Entities for which the Company is the Primary Beneficiary (collectively, the Group). All inter-company transactions and balances between the Company and its subsidiaries have been eliminated upon consolidation.
Subsidiaries and other controlled entities are consolidated from the date on which control is transferred to the Group and cease to be
consolidated from the date on which control is transferred out of the Group. Where
F-10
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
there is a loss of control of a subsidiary or other controlled entity, the consolidated financial statements include the results for the part of the
reporting year during which the Group has control.
(b) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes, and disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, the selection of the useful lives of property and
equipment, provision necessary for contingent liabilities, fair values, revenue recognition, taxes, budgeted costs and other similar charges. Management believes that the estimates utilized in preparing its financial statements are reasonable and
prudent. Actual results could differ from these estimates.
(c) Fair value of financial instruments
Fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing parties. The Group
considers the carrying amount of cash, restricted cash, accounts receivable, advances to suppliers, other receivables, accounts payable, other payables and amounts due from/to shareholders, related parties and employees and bank loans to approximate
their fair values because of the short period of time between the origination of such instruments and their expected realization. The Group considers the carrying amount of bank loans to approximate their fair values based on the interest rates of
the instruments and the current market rate of interest.
For investments that are actively traded in organized financial markets, fair
value is determined by reference to market bid price at the close of business on the balance sheet date. For investments where there is no quoted market price, fair value is determined either:
(i) by reference to the current market value of another financial instrument which is substantially the same; or
(ii) is calculated based on the expected cash flows of the underlying net asset of the investment.
(d) Foreign currency translation
The Groups
financial information is presented in US dollars. The functional currency of the Company is US dollars. The functional currency of the Companys subsidiaries is Renminbi (RMB), the currency of the PRC. The financial statements of
the Companys subsidiaries have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standard (SFAS) No. 52,
Foreign Currency Translation
. The financial information is first
prepared in RMB and then is translated into U.S. dollars at year-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the
capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in shareholders equity.
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2004
|
|
2005
|
|
2006
|
Year end RMB: US$ exchange rate
|
|
8.2765
|
|
8.0702
|
|
7.8087
|
Average yearly RMB: US$ exchange rate
|
|
8.2766
|
|
8.1734
|
|
7.9721
|
F-11
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must
take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollars at the rates used in translation.
(e) Cash and cash equivalents
The Group considers all highly liquid investments with original
maturities of three months or less when purchased to be cash equivalents. The Group maintains bank accounts in the PRC and Hong Kong. The Group does not maintain any bank accounts in the United States. All PRC bank balances are denominated in
Renminbi (RMB). Hong Kong bank balances are denominated in U.S. dollar.
Cash includes cash on hand and demand deposits in accounts
maintained with state-owned and private banks within the PRC and Hong Kong. Total cash in banks at December 31, 2006 amounted to US$34,914,210 (2004: US$5,249,255; 2005: US$14,928,747), of which no deposits are covered by insurance. The Group
has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
(f) Restricted cash
The Group is required to maintain certain deposits with banks that provide mortgage loans to the Group (see Note 9) and the
Groups customers in order to purchase residential units from the Group (see Note 11). These balances are subject to withdrawal restrictions and totaled US$15,859,805 as of December 31, 2006 (2004: US$11,399,358; 2005: US$5,385,441). As of
December 31, 2006, a subsidiary of the Group held US$16,151,053 in a restricted cash account, representing funds from loans with an aggregate amount of US$22.4 million that had not been spent for construction. This account was designated to
finance permitted project development expenditures which are subject to approval by the lender. These deposits are not covered by insurance. The Group has not experienced any losses in such accounts and believes it is not exposed to any risks on its
cash in bank accounts.
(g) Real estate property development completed and under development
Real estate properties consist of finished residential unit sites and residential unit sites under development. The Group leases the land for the
residential unit sites under land use right leases with various terms from the PRC. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.
Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, engineering costs, are capitalized and allocated
to development projects by the specific identification method. Costs are allocated to specific units based on the ratio of the sales value of units to the estimated total sales value times the total project costs.
Costs of amenities transferred to buyers are allocated as common costs of the project that are allocated to specific units as a component of total
construction costs. For amenities retained by the Group, costs in excess of the related fair value of the amenity are also treated as common costs. Results of operation of amenities retained by the Group are included in current operating results.
Management evaluates the recoverability of its real estate developments taking into account of several factors including, but not limited
to, managements plans for future operations, prevailing market prices for similar properties and projected cash flows. There were no impairment losses for the years ended December 31, 2004, 2005 and 2006.
F-12
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(h) Revenue recognition
Real estate sales are reported in accordance with the provisions of SFAS No. 66,
Accounting for Sales of Real Estate
.
Revenue from the sales of development properties where the construction period is 12 months or less is recognized by the full accrual method at the time
of the closing of an individual unit sale. This occurs when title to or possession of the property are transferred to the buyer. A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all
consideration has been exchanged, (c) any permanent financing of which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed, (e) the seller does not have substantial continuing
involvement with the property, and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyers initial and continuing investment is adequate to demonstrate a commitment to pay for the property, and
the buyers receivable, if any, is not subject to future subordination. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method in which all costs are capitalized as incurred, and
payments received from the buyer are recorded as a deposit liability.
Revenue and profit from the sale of development properties where the
construction period is more than 12 months is recognized by the percentage-of-completion method on the sale of individual units when the following conditions are met:
a. Construction is beyond a preliminary stage.
b. The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit.
c. Sufficient units have already been sold to assure that the entire property will not revert to rental property.
d. Sales prices are collectible.
e. Aggregate sales proceeds and costs can be reasonably estimated.
If any of the above criteria is not
met, proceeds are accounted for as deposits until the criteria are met and/or the sale consummated.
Changes to total estimated contract
cost or losses, if any, are recognized in the period in which they are determined. Revenue recognized to date in excess of amounts received from customers is classified as current assets under Real Estate Property under development. Amounts received
from customers in excess of revenue recognized to date are classified as current liabilities under customer deposits. As of December 31, 2006, the amounts received from customers in excess of revenue recognized was US$18.5 million (2004 and 2005:
US$nil).
Any losses incurred or identified on real estate transaction are recognized in the period in which the transaction occurs.
Real estate lease income is recognized on a straight-line basis over the terms of the tenancy agreements. Business tax of 5% and
depreciation cost of the property are recorded as the cost of rental income.
Other revenue includes property management service fees of
US$373,216 (2004 and 2005: US$nil).
F-13
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(i) Accounts receivable
Accounts receivable consists of balances due from customers for the sale of residential units in the PRC. In cases where the customers deposit more than 50% of the total purchase price, the Group may defer the
remaining purchase price. These deferred balances are unsecured, bear no interest and are due within six months from the date of the sale.
Accounts receivable are reviewed periodically as to whether their carrying value has become impaired. The Group considers the assets to be impaired if the collectability of the balances become doubtful. As of December 31, 2004, 2005
and 2006, the allowance for doubtful debts was US$ nil.
(j) Other receivables
Other receivables consist of various cash advances to unrelated companies and individuals with which the Group has business relationships.
Other receivables are reviewed periodically as to whether their carrying value has become impaired. The Group considers the assets to be impaired if the
collectability of the balances become doubtful. As of December 31, 2006, the allowance for doubtful debts was US$ nil (2004: US$681,934; 2005:US$631,934).
(k) Advances to suppliers
Advances to suppliers consist of balances paid to contractors and vendors for services and
materials that have not been provided or received and generally relate to the development and construction of residential units in the PRC. As of December 31, 2006, the allowance for doubtful debts was US$ nil (2004:US$223,254; 2005:
US$223,254).
(l) Customer deposits
Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential unit prior to the
completion of the project. The lending institution will provide the funding to the Group upon the completion of the financing rather than the completion of the project. The Group receives these funds and recognizes them as a current liability until
the revenue can be recognized.
(m) Other payables
Other payables consist of balances for non-construction costs with unrelated companies and individuals with which the Group has business relationships. These amounts are unsecured, non-interest bearing and generally
are short term in nature.
(n) Real estate properties held for lease, net
Real estate properties held for lease are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Estimated useful lives of the real estate properties held for lease are 20 years.
F-14
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Major additions
and improvements to the real estate properties held for lease are capitalized.
(o) Property and equipment, net
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Estimated useful lives of the assets are as follows:
|
|
|
Buildings
|
|
20 years
|
Vehicles
|
|
5 years
|
Furniture and fixture
|
|
5 years
|
Maintenance, repairs and minor renewals are charged directly to expense as incurred unless such
expenditures extend the useful life or represent a betterment, in which case they are capitalized.
(p) Long-term investments
The Group accounts for long-term investments in equities as follows:
|
|
|
Where the Group has significant influence over the investee, the Group applies the equity method of accounting. The reporting dates and accounting policies of the
equity investees are the same as the Group. The investments in the equity investees are stated at cost, including the Groups share of the equity investees net gain or loss, less any impairment in value. The Group recognizes in its
consolidated statement of operations its share of the net income of the equity investees.
|
|
|
|
Where the Group has no significant influence, the investment is classified as other long-term investment and is carried under the cost method. Investment income is
recognized by the Group when the investee declares a dividend and the Group believes it is collectible. The Group periodically evaluates the carrying value of its investment under the cost method and any decline in value is included in impairment of
cost investment.
|
As of December 31, 2004, 2005 and 2006, the Group has investments in two companies in the PRC that
specialize in the real estate industry. The Group has 45% and 1.85% interests in them, respectively. For the 45% owned equity investee, the Group accounts for the investment under the equity method. Investment income or loss is recognized by the
Group periodically according to 45% of the total net profit or loss generated by the equity investee. For the 1.85% owned company, the Group does not exercise significant influence over it and the Group accounts for the investment under the cost
method. Investment income is recognized by the Group when the investee declares a dividend and the Group believes it is collectible.
(q) Impairment of
long-lived assets
The Group reviews its long-lived assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may no longer be recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the
assets and their eventual disposition. If the sum of the expected
F-15
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the fair value of the assets.
There was no impairment loss recognized for the long-lived assets for the years ended December 31, 2004, 2005 and 2006.
(r) Capitalized interest
The Group capitalizes interest as a component of building construction costs in accordance with SFAS No. 34,
Capitalization of Interest Cost
. Total interest cost incurred for the year ended December 31, 2006 amounted to US$2,209,340 (2004: US$1,302,126; 2005: US$1,725,090). Total interest cost capitalized as part of the construction
costs for the year ended December 31, 2006, amounted to US$1,482,299 (2004: US$481,977; 2005: US$890,621).
(s) Retirement benefits
Regulations in the PRC require the Group to contribute to a defined contribution retirement plan for all permanent employees. Pursuant to the
mandatory requirement from the local authority in the PRC, the retirement pension insurance, unemployment insurance, health insurance and housing fund were established for the employees during the term they are employed. For the year ended
December 31, 2006, the level of contribution to these funds was determined at 38% of the average employee salary determined by the Social Welfare Bureau. For the year ended December 31, 2004 and 2005, the level of contribution to these
funds was determined at 15.5% of monthly base salaries of the current employees. For the year ended December 31, 2006, the Group made contributions in the amount of US$406,060 (2004: US$150,388; 2005: US$236,162).
(t) Distribution of earnings and reserve fund
The
Companys ability to pay dividends is primarily dependent on the Company receiving distributions from its subsidiaries. The earnings reflected in the financial statements prepared in accordance with US GAAP differ from those reflected in
the statutory financial statements of the Companys subsidiaries.
In accordance with the PRC Company Law, the PRC subsidiaries are
required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory surplus reserve (the SSR) until such reserve reaches 50% of the registered capital of the
subsidiaries. Subject to certain restrictions set out in the PRC Company Law, the SSR may be distributed to stockholders in the form of share bonus issues to increase share capital, provided that the remaining balance after the capitalization is not
less than 25% of the registered capital.
Prior to January 1, 2006, according to the PRC Company Law, the PRC subsidiaries are
required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory public welfare fund (the PWF), which is a non-distributable reserve except in the event of
liquidation of the subsidiaries. The fund must be used for capital expenditure on staff welfare facilities. According to the PRC Company Law effective January 1, 2006, the PRC subsidiaries are not required to transfer their profit after tax to
the PWF.
For the year ended December 31, 2006, the subsidiaries appropriated reserve fund in the amount of US$363,014 (2004:
US$978,828; 2005: US$2,678,869).
F-16
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(u) Income taxes
The Group accounts for income tax using the liability method. Deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as unutilized net operating losses. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to
realize their benefits, or that future utilization is uncertain.
(v) Land Appreciation Tax (LAT)
In accordance with the relevant taxation laws for real estate companies of the provinces in which the subsidiaries operate in the PRC, the local tax
authorities levy LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, being the proceeds of sales of properties less deductible expenditures, including borrowings costs and all property development expenditures.
LAT is prepaid on customer deposits and is expensed when the related revenue is recognized, as explained at Note 2(l).
(w) Comprehensive income
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to
owners. The Groups only components of comprehensive income during the year ended December 31, 2004, 2005 and 2006 were net income and the foreign currency translation adjustment.
(x) Advertising expenses
Advertising costs are
expensed as incurred, or the first time the advertising takes place, in accordance with Statement of Position No. 93-7
Reporting on Advertising Costs
. For the year ended December 31, 2006, the Group recorded an
advertising expense of US$1,422,083 (2004: US$859,910; 2005: US$1,262,139).
(y) Leases
In accordance with SFAS No. 13,
Accounting for Leases
, leases are classified at the inception date as either a capital lease or
an operating lease. For the lessee, a lease is a capital lease if any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75%
of the propertys estimated remaining economic life or d) the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital
lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments are expensed as incurred.
The Group has no capital lease for any of the periods stated herein. For the year ended December 31, 2006, the Group recorded total rental
expense of US$127,895 (2004: US$12,821; 2005: US$56,950).
(z) Goodwill and intangible assets
Goodwill represents the excess of cost over the fair value of identifiable net assets of acquired businesses. SFAS No. 142
Goodwill and
Other Intangible Assets
requires that goodwill be tested for
F-17
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain
circumstances. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by
computing the future discounted cash flows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the Company performs the second step of the goodwill impairment test
to determine the amount of impairment loss. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit
goodwill. This implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it is less, the Company would then recognize an impairment loss.
Intangible assets represent property management rights acquired in a business combination and are recognized initially at fair value at the date of
acquisition. Property management rights represent contractual rights to provide management services to the owners of residential developments. Intangible assets are carried at cost less accumulated amortization. Amortization for the property
management rights is computed on a straight-line basis over the contract life of three years. For the year ended December 31, 2006, the Group recorded an amortization charge of US$113,833 (2004 and 2005: US$nil).
(aa) Property warranty
The Company and its
subsidiaries provide customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold as stipulated in the relevant sales contracts. The warranty period varies from two months to three
years, depending on different property components the warranty covers. The Group constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be incurred subsequent to the delivery of a property.
Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company constantly monitors the warranty reserve and makes adjustments to its pre-existing warranties, if any, in order to
reflect changes in trends and historical data as information becomes available. The Group may seek further recourse against its contractors or any related third parties if it can be proved that the faults are caused by them. In addition, the Group
also withholds up to 5% of the contract cost from subcontractors for periods of two to five years. These amounts are included in current liabilities, and are only paid to the extent that has been no warranty claim against the Group relating to the
work performed or materials supplied by the subcontractors. For the three years ended December 31, 2006, the Group had not recognized any warranty liability or incurred any warranty costs in excess of the amount retained from subcontractors.
(ab) Earnings per share
Earnings per
share is calculated in accordance with SFAS No. 128,
Earnings Per Share
. Basic earnings per share is computed by dividing net income attributable to holders of common shares by the weighted average number of common shares
outstanding during the period. Diluted earnings per ordinary share reflects the potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted into common shares. Convertible, redeemable
preference shares are included in the computation of diluted earnings per ordinary share on an if-converted basis, when the impact is dilutive. Contingent exercise price resets are accounted for in a manner similar to contingently
issuable shares. Ordinary share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive.
F-18
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(ac) Burnham Warrants
The Company has entered into an agreement with Burnham Securities (Burnham) to engage Burnham to render certain financial advisory and investment banking services to the Company in order to raise capital
through a private placement and subsequently in a public offering.
As part of the payment for Burnhams services rendered on the
issuance of preference shares to Blue Ridge China and Equity International, the Company granted Burnham and its designee warrants to acquire 1,853,172 common shares in total (Burnham Warrants), at US$0.81155 per share, exercisable
between August 25, 2006 and the earlier of August 25, 2011, or the date of an initial public offering or change in control of the Company. The warrants are non-transferable.
As the warrants over common shares, they have been recorded in additional paid in capital. In accordance with SFAS No. 123 (R),
Share based
payment
and EITF No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
, the Burnham Warrants are measured based on the
fair value of services rendered.
The cost of the transaction with Burnham was incurred solely for the purpose of the fund raising, and
offset against the proceeds from the preference shares issued.
(ad) Recent accounting pronouncements
In June 2006, the FASB issued Interpretation No. 48 (FIN 48),
Accounting for Uncertainty in Income Taxes-an interpretation of
FASB Statement No. 109
. FIN 48 clarifies the accounting for uncertainty in income taxes recognized by prescribing a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006 and is required to be adopted by the Group as of January 1, 2007. The Group is currently assessing the impact, if any, of this new standard on its financial statements.
In September 2006, the EITF issued EITF Issue No. 06-8,
Applicability of the Assessment of a Buyers Continuing Investment under SFAS
No. 66 for the Sale of Condominiums
(EITF 06-8). EITF 06-8 states that in assessing the collectibility of the sales price pursuant to paragraph 37(d) of SFAS 66, an entity should evaluate the adequacy of the buyers
initial and continuing investment to conclude that the sales price is collectible. If an entity is unable to meet the criteria of paragraph 37, including an assessment of collectibility using the initial and continuing investment tests described in
paragraphs 8-12 of SFAS 66, then the entity should apply the deposit method as described in paragraphs 65-67 of SFAS 66. EITF 06-8 is effective for fiscal years beginning after March 15, 2007. In November 2006, the FASB ratified the EITFs
recommendation. The application of the continuing investment criteria on the collectibility of the sales price will limit the Groups ability to recognize revenue and costs using the percentage of completion accounting method. Although the
Group will continue to evaluate the application of EITF 06-8, management does not foresee that the adoption will have a material impact on the revenue or costs reported under percentage of completion accounting in fiscal 2004-2006. The effect of a
change resulting from adoption of this consensus will be recognized as a cumulative-effect adjustment.
In September 2006, the FASB issued
SFAS No. 157
Fair Value Measurements
. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the
F-19
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The provisions are to be applied prospectively as of the beginning of the fiscal year in which SFAS No. 157 is initially applied, except as it pertains to a change in accounting principles related
to (i) large positions previously accounted for using a block discount and (ii) financial instruments (including derivatives and hybrids) that were initially measured at fair value using the transaction price in accordance with guidance in
footnote 3 of EITF No. 02-3 or similar guidance in SFAS No. 155
Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140
. For these transactions, differences between the
amounts recognized in the statement of financial position prior to the adoption of SFAS No. 157 and the amounts recognized after adoption should be accounted for as a cumulative-effect adjustment to the opening balance of retained earnings in
the year of adoption. The Group is currently assessing the impact, if any, of this new standard on its financial statements. However, management does not currently foresee that the adoption will have a material impact on the Groups results of
operations or financial position.
In February 2007, the FASB issued SFAS No.159,
The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No.115
. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair
value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Group is currently assessing the impact of this new standard on its financial
statements. However, management does not currently foresee that the adoption will have a material impact on the Groups results of operations or financial position.
In March 2007, the FASB EITF released Topic No. D-109,
Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued in the Form of a Share under FASB Statement
No. 133
. EITF Topic D-109 provides guidance on the determination of the nature of the host contract for a hybrid financial instrument (that is, whether the nature of the host contract is more akin to debt or to equity) issued in the
form of a share should be based on a consideration of economic characteristics and risks. The SEC believes that the consideration of the economic characteristics and risks of the host contract should be based on all the stated and implied
substantive terms and features of the hybrid financial instrument. EITF Topic D-109 is effective at the beginning of the first fiscal quarter beginning after June 15, 2007. Although the Group will continue to evaluate the application of EITF
Topic No. D-109, management does not currently foresee that the adoption will have a material impact on the Groups results of operations or financial position.
F-20
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
3. Real estate property development completed and under development
The following summarizes the components of real estate property completed and under development at December 31, 2004, 2005 and 2006:
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
US$
|
|
US$
|
|
US$
|
|
Development completed:
|
|
|
|
|
|
|
|
Zhengzhou Xinyuan Splendid 1A
|
|
1,000,341
|
|
631,543
|
|
847,804
|
|
Zhengzhou Xinyuan Splendid 3A3B3C
|
|
1,108,737
|
|
616,346
|
|
243,498
|
|
Zhengzhou Xinyuan Splendid Hao Jing Ge
|
|
1,863,672
|
|
486,826
|
|
|
|
Zhengzhou Xinyuan Splendid City Homestead
|
|
|
|
607,051
|
|
141,496
|
|
Zhengzhou City Family
|
|
|
|
|
|
3,204,531
|
|
Zhengzhou City Manor
|
|
|
|
|
|
16,716
|
|
Zhengzhou Xinyuan Splendid 2A
|
|
5,459
|
|
|
|
|
|
Zhengzhou Xinyuan Splendid 2B
|
|
149,828
|
|
|
|
|
|
Zhengzhou Xinyuan Splendid 2C
|
|
131,338
|
|
|
|
|
|
Zhengzhou Xinyuan Splendid 1B
|
|
189,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate property development completed
|
|
4,448,644
|
|
2,341,766
|
|
4,454,045
|
|
|
|
|
|
|
|
|
|
Under development:
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
Zhengzhou Xinyuan Splendid 3A3B3C
|
|
17,365,187
|
|
|
|
|
|
Zhengzhou Xinyuan Splendid City Homestead
|
|
6,901,253
|
|
|
|
|
|
Zhengzhou City Manor
|
|
14,250,149
|
|
25,361,964
|
|
|
|
Jinan City Family
|
|
|
|
|
|
14,520,670
|
|
Jinan Elegant Scenery
|
|
|
|
|
|
23,371,650
|
|
Suzhou Lake Splendid
|
|
|
|
|
|
35,977,718
|
|
Zhengzhou City Family
|
|
|
|
6,402,089
|
|
|
|
Zhengzhou Commercial Plaza
|
|
|
|
2,598,823
|
|
3,041,617
|
|
Hefei Wangjiang Garden
|
|
|
|
|
|
10,287,628
|
|
Zhengzhou Central Garden East
|
|
|
|
10,515,183
|
|
35,275,285
|
|
Zhengzhou Central Garden West
|
|
|
|
10,868,660
|
|
40,072,801
|
|
|
|
|
|
|
|
|
|
|
|
38,516,589
|
|
55,746,719
|
|
162,547,369
|
|
Profit recognized
|
|
|
|
|
|
19,427,999
|
|
Less: progress billings (see Note 11)
|
|
|
|
|
|
(94,356,103
|
)
|
|
|
|
|
|
|
|
|
Real estate property under developmentcurrent
|
|
38,516,589
|
|
55,746,719
|
|
87,619,265
|
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
|
Zhengzhou Longhai Road project
|
|
8,886,374
|
|
9,110,393
|
|
19,184,534
|
|
|
|
|
|
|
|
|
|
Real estate property under developmentnon-current
|
|
8,886,374
|
|
9,110,393
|
|
19,184,534
|
|
|
|
|
|
|
|
|
|
Total real estate property under development
|
|
47,402,963
|
|
64,857,112
|
|
106,803,799
|
|
|
|
|
|
|
|
|
|
Total real estate property development completed and under development
|
|
51,851,607
|
|
67,198,878
|
|
111,257,844
|
|
|
|
|
|
|
|
|
|
F-21
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
As of December 31, 2006, land use rights included in the real estate properties under
development totaled US$48,296,027 (2004: US$12,330,091; 2005: US$14,392,456).
As of December 31, 2006, partial payments for land use
rights included in the real estate properties under development totaled US$47,879,929 (2004: US$8,037,214; 2005: US$6,248,916).
As of
December 31, 2006, real estate properties under development with an aggregate net book value of US$33,427,697 (2004: US$27,322,212; 2005: US$27,608,254) were pledged as collateral for certain bank loans.
4. Real estate properties held for lease, net
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Zhengzhou Longhai Star Garden
|
|
1,123,757
|
|
|
1,152,484
|
|
|
1,191,079
|
|
Elementary school
|
|
2,322,431
|
|
|
2,486,425
|
|
|
2,726,937
|
|
Clubhouse
|
|
2,044,542
|
|
|
2,096,807
|
|
|
|
|
Zhengzhou Xinyuan Splendid 1A
|
|
|
|
|
40,037
|
|
|
41,378
|
|
Kindergarten
|
|
744,847
|
|
|
763,888
|
|
|
853,090
|
|
Parking facility
|
|
1,835,038
|
|
|
1,711,492
|
|
|
1,992,740
|
|
|
|
|
|
|
|
|
|
|
|
Total cost
|
|
8,070,615
|
|
|
8,251,133
|
|
|
6,805,224
|
|
|
|
|
|
Accumulated depreciation
|
|
(415,644
|
)
|
|
(842,704
|
)
|
|
(1,264,682
|
)
|
|
|
|
|
|
|
|
|
|
|
Real estate properties held for lease, net
|
|
7,654,971
|
|
|
7,408,429
|
|
|
5,540,542
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the year ended December 31, 2006 amounted to US$440,128 (2004:
US$252,143; 2005: US$411,177).
As of December 31, 2006, minimum future rental income on non-cancellable leases, in aggregate and for
each of the five succeeding fiscal years and thereafter are as follows:
|
|
|
Year
|
|
Amount
|
|
|
US$
|
2007
|
|
223,299
|
2008
|
|
174,039
|
2009
|
|
166,209
|
2010
|
|
155,468
|
2011
|
|
155,468
|
Thereafter
|
|
1,334,885
|
|
|
|
Total
|
|
2,209,368
|
|
|
|
F-22
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
5. Property and equipment, net
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Buildings and improvements
|
|
940,077
|
|
|
964,108
|
|
|
2,720,820
|
|
Vehicles
|
|
312,536
|
|
|
355,227
|
|
|
772,303
|
|
Furniture and fixtures
|
|
153,215
|
|
|
241,932
|
|
|
582,313
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,405,828
|
|
|
1,561,267
|
|
|
4,075,436
|
|
|
|
|
|
Accumulated depreciation
|
|
(330,900
|
)
|
|
(425,954
|
)
|
|
(606,414
|
)
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
1,074,928
|
|
|
1,135,313
|
|
|
3,469,022
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the year ended December 31, 2006 amounted to US$180,460 (2004:
US$123,278; 2005: US$135,176).
6. Other long-term investment
As of December 31, 2004, 2005 and 2006, other long-term investment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
Investee
|
|
Initial cost
|
|
Ownership
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
US$
|
|
|
|
|
US$
|
|
US$
|
|
US$
|
Henan Lianhe Real Estate Co., Ltd.
|
|
241,648
|
|
1.85
|
%
|
|
241,648
|
|
241,648
|
|
241,648
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2004, 2005 and 2006, the Group recognized no investment loss
or profit.
7. Interest in an equity investee
As of December 31, 2004, 2005 and 2006, interest in an equity investee consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Accounted
|
Investee
|
|
Initial cost
|
|
Ownership
|
|
|
December 31,
2004
|
|
December 31,
2005
|
|
December 31,
2006
|
|
|
US$
|
|
|
|
|
US$
|
|
US$
|
|
US$
|
Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd.
|
|
446,086
|
|
45
|
%
|
|
|
|
446,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, the investee incurred a loss of US$1,214,888. The
Groups share of loss of the equity investee was the amount necessary to reduce the investment to nil, or US$446,086.
F-23
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
Variable Interest Entity
In accordance with FIN 46 (R),
Consolidation of Variable Interest Entities
, Jiantou Xinyuan is a variable interest entity, as it has insufficient equity at risk. The Group is not considered as the
primary beneficiary, as it does not absorb the majority of Jiantou Xinyuans expected losses or residual returns.
Jiantou Xinyuan was
established as a joint venture corporation between the Group and an unrelated company in 2005. Its purpose is to undertake residential property development projects in Zhengzhou city, Henan province. As at December 31, 2006 it had one project
under construction and two projects under planning and had consolidated total assets of US$94.7 million.
The Groups maximum exposure
to loss is limited to its 45% equity investment and such loans as it may make from time to time to Jiantou Xinyuan (See Note 13(b)). As of December 31, 2006, its maximum exposure was US$7.7 million (2004: US$ nil; 2005: US$6.7 million).
Summarized consolidated balance sheet information of Jiantou Xinyuan is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
US$
|
|
US$
|
|
US$
|
|
Current assets
|
|
|
|
27,485,160
|
|
94,390,457
|
|
Non-current assets
|
|
|
|
1,983
|
|
263,524
|
|
Current liabilities
|
|
|
|
26,502,838
|
|
94,331,044
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
Venturers capital (deficit)
|
|
|
|
984,305
|
|
(211,768
|
)
|
|
|
|
|
|
|
|
|
Summarized consolidated statement of operations information of Jiantou Xinyuan is as follows:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
US$
|
|
US$
|
|
US$
|
Revenue
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
9,845
|
|
1,552,364
|
Loss from operations before minority interest
|
|
|
|
6,907
|
|
1,282,200
|
Net loss
|
|
|
|
6,907
|
|
1,214,888
|
|
|
|
|
|
|
|
F-24
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
8. Acquisitions
(a) The Ancillary Companies were acquired in August 2006. The purchase consideration was allocated as follows:
|
|
|
|
|
|
Fair value
on acquisition
date
|
|
|
|
US$
|
|
Cash and bank balances
|
|
512,792
|
|
Receivables
|
|
763,690
|
|
Inventories
|
|
401,586
|
|
Property and equipment, net
|
|
83,876
|
|
Other assets
|
|
43,033
|
|
Property management rights
|
|
1,024,498
|
|
Goodwill
|
|
1,105,408
|
|
Payables
|
|
(1,088,200
|
)
|
Customer deposits
|
|
(328,077
|
)
|
Payroll and welfare payable
|
|
(89,100
|
)
|
Deferred tax liabilities
|
|
(338,084
|
)
|
|
|
|
|
Total consideration
|
|
2,091,422
|
|
|
|
|
|
Had the acquisition taken place at the beginning of the year for 2005 and 2006, respectively, the
Groups net revenue, income before income taxes, net income and earnings per share for each year ended would have been as follows:
|
|
|
|
|
|
|
December 31,
|
|
|
2005
|
|
2006
|
|
|
US$
|
|
US$
|
|
|
Proforma
(Unaudited)
|
|
Proforma
(Unaudited)
|
Net revenue
|
|
62,460,178
|
|
143,071,057
|
Income before income taxes
|
|
14,728,230
|
|
26,673,637
|
Net income
|
|
9,494,252
|
|
15,958,694
|
Basic and diluted earnings per share
|
|
0.16
|
|
0.22
|
(a) The property management rights are amortized over the contract life of 3 years as follows:
|
|
|
Year
|
|
Amount
|
|
|
US$
|
2006
|
|
113,833
|
2007
|
|
341,499
|
2008
|
|
341,499
|
2009
|
|
227,667
|
|
|
|
Total
|
|
1,024,498
|
|
|
|
F-25
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(b) On March 16, 2006, the Group increased its existing ownership of Henan Wanzhong from 80% to
100% by acquiring the remaining 20% from Ms. Yuyan Yang for a cash consideration of US$0.22 million. As the Group and Henan Wanzhong were under common control at the time, the acquisition was accounted for in a manner similar to a
pooling-of-interest the effect of which had been taken to February 6, 2005, the day Henan Wanzhong was incorporated. Accordingly, no adjustment was made to the recorded book values of assets and liabilities transferred. The cash consideration
was recorded as a distribution to shareholders.
(c) The movement on goodwill and other intangible assets during the year was as follows:
|
|
|
|
|
|
|
|
Goodwill
|
|
Property
management
rights
|
|
|
|
US$
|
|
US$
|
|
Opening balance
|
|
|
|
|
|
Acquisitions
|
|
1,105,408
|
|
1,024,498
|
|
Amortization
|
|
|
|
(113,833
|
)
|
|
|
|
|
|
|
Closing balance
|
|
1,105,408
|
|
910,665
|
|
|
|
|
|
|
|
F-26
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
9. Short-term bank loans
Short term bank loans represent amounts due to various banks and are due on the dates indicated below. These loans generally can be renewed with the banks. Short term bank loans at December 31, 2004, 2005 and
2006 consisted of the following:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
US$
|
|
US$
|
|
US$
|
Loans from China Construction Bank,
|
|
|
|
|
|
|
Due September 29, 2007, at 6.51% per annum
|
|
|
|
|
|
1,920,934
|
Due December 21, 2007, at 6.42% per annum
|
|
|
|
|
|
3,201,557
|
Due April 8, 2006, at 6.3% per annum
|
|
|
|
991,301
|
|
|
Due Aug 26, 2005, at 6.23% per annum
|
|
3,624,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,624,720
|
|
991,301
|
|
5,122,491
|
|
|
|
|
|
|
|
Loans from Industrial and Commercial Bank of China,
|
|
|
|
|
|
|
Due December 31, 2007, at 7.344% per annum
|
|
|
|
|
|
9,604,672
|
Due December 25, 2006, at 6.14% per annum
|
|
|
|
4,956,507
|
|
|
Due March 23, 2006, at 6.42% per annum
|
|
|
|
1,363,039
|
|
|
Due June 23, 2006, at 6.42% per annum
|
|
|
|
1,363,040
|
|
|
Due Dec 23, 2005, at 7.14% per annum
|
|
1,751,948
|
|
|
|
|
Due Oct 28, 2005, at 7.25% per annum
|
|
3,624,721
|
|
|
|
|
Due Oct 28, 2005, at 7.25% per annum
|
|
604,120
|
|
|
|
|
Due Apr 20, 2005, at 6.04% per annum
|
|
3,624,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,605,510
|
|
7,682,586
|
|
9,604,672
|
|
|
|
|
|
|
|
Loans from China Communication Bank,
|
|
|
|
|
|
|
Due March 21, 2007, at 6.138% per annum
|
|
|
|
|
|
1,536,747
|
Due February 2, 2006, at 6.14% per annum
|
|
|
|
1,486,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,486,952
|
|
1,536,747
|
|
|
|
|
|
|
|
Loans from Shanghai Pudong Development Bank,
|
|
|
|
|
|
|
Due May 28, 2007, at 7.254% per annum
|
|
|
|
|
|
6,403,115
|
Due November 29, 2006, at 7.25% per annum
|
|
|
|
9,913,013
|
|
|
Due February 1, 2006, at 7.25% per annum
|
|
|
|
1,858,690
|
|
|
Due Sept 29, 2005, at 5.31% per annum
|
|
2,416,480
|
|
|
|
|
Due Mar 3, 2005, at 5.84% per annum
|
|
3,624,721
|
|
|
|
|
Due various dates before Sept 30, 2005
|
|
10,874,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,915,363
|
|
11,771,703
|
|
6,403,115
|
|
|
|
|
|
|
|
Loan from Bai Rui Trust Investment Co.,
|
|
|
|
|
|
|
Due May 22, 2006, at 12% per annum
|
|
|
|
2,478,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,478,253
|
|
|
|
|
|
|
|
|
|
Total short-term bank loans
|
|
30,145,593
|
|
24,410,795
|
|
22,667,025
|
|
|
|
|
|
|
|
F-27
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
As of December 31, 2006, the Groups short term bank loans are all denominated in RMB and
are secured by the Groups land use rights (included in real estate properties under development) with net book value of US$8,452,111 (2004: US$12,940,272; 2005: US$15,597,777), real estate properties under development with net book value of
US$12,924,924 (2004: US$20,575,239; 2005: US$22,141,569), 29 property certificates with net book value of US$1,536,747 (2004 and 2005: US$ nil), and certain deposits in the banks amounting to US$8,759,733 (2004: US$ 9,715,052; 2005: US$3,179,799) as
of December 31, 2006.
The weighted average interest rate on short-term bank loans as of December 31, 2006 was 7.05% (2004:
6.31%; 2005: 7.31%).
10. Long-term bank loans
Long-term bank loans as of December 31, 2004, 2005 and 2006 consisted of the following:
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
US$
|
|
US$
|
|
US$
|
Loan from Industrial and Commercial Bank of China,
|
|
|
|
|
|
|
Due December 18, 2008, at 6.93% per annum
|
|
|
|
|
|
12,806,229
|
|
|
|
|
Loans from China Construction Bank,
|
|
|
|
|
|
|
Due December 21, 2007, at 6.62% per annum
|
|
|
|
7,434,760
|
|
|
Due Apr 8, 2006, at 6.30% per annum
|
|
3,141,425
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term bank loans
|
|
3,141,425
|
|
7,434,760
|
|
12,806,229
|
|
|
|
|
|
|
|
As of December 31, 2006, the Groups long term bank loans are all denominated in RMB and
are secured by the Groups real estate properties under development with net book value of US$20,489,966 (2004: US$889,666; 2005: US$7,104,365) and real estate properties under development with net book value of US$20,502,773 (2004:
US$6,746,973; 2005: US$5,466,685) as of December 31, 2006.
The interest rates of these bank loans are adjustable based on the PBOC
prime rate in the range of 95% to 110%. The weighted average interest rate on long-term bank loans as of December 31, 2006 was 6.93% (2004: 6.30%; 2005: 6.62%).
11. Customer deposits
Customer deposits consist of amounts received from customers for the pre-sale
of residential units in the PRC.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
US$
|
|
US$
|
|
US$
|
|
Advances for real estate properties under development
|
|
31,023,639
|
|
43,834,021
|
|
119,888,088
|
|
Less: recognized as progress billings (see Note 3)
|
|
|
|
|
|
(94,356,103
|
)
|
|
|
|
|
|
|
|
|
Total net balance
|
|
31,023,639
|
|
43,834,021
|
|
25,531,985
|
|
|
|
|
|
|
|
|
|
F-28
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
Customer deposits are typically funded up to 80% by mortgage loans made by banks to the customers.
Until the customer obtains legal title to the property, the banks have a right to seek reimbursement from the Group for any defaults by the customers. The Group holds certain cash balances in restricted deposit accounts at the relevant banks (see
Note 2 (f)). The Group, in turn, has a right to withhold transfer of title to the customer until outstanding amounts are fully settled.
12. Income
taxes
(a) Corporate income tax (CIT)
As a Cayman Island resident company, the Company is not subject to income tax.
The PRC subsidiaries are
governed by the Income Tax Law of the PRC concerning Chinese limited liability companies. Under the Income Tax Laws of the PRC, the PRC subsidiaries are subject to an income tax at a statutory rate of 33% (30% state income taxes plus 3% local income
taxes) on income reported in the statutory financial statements after appropriate tax adjustments.
For the years ended December 31, 2004,
2005 and 2006, in accordance with the provisions of the PRC tax law, the local tax authority of Zhengzhou City concluded a deemed profit method is a better measure of income tax liability for companies in the real estate industry located in that
province, including the PRC subsidiaries. Under the deemed profit method, the local tax authority levies income tax based on 33% of an arbitrary deemed profit of 12% or 14% of total cash receipts of real estate property companies, rather than based
on 33% of statutory taxable income. The PRC subsidiaries in that province have filed their tax returns based on the deemed profit method. The local tax authority has confirmed verbally that it will apply the same deemed profit method for the year
ending December 31, 2007. The local tax authority is entitled to re-evaluate prior years income taxes assessed under the deemed profit method, upon receipt of audited accounts or upon completion of specific development projects, however, the
tax authority has not indicated if it will do so.
For subsidiaries located in Shandong, Jiangsu and Anhui provinces, Tax Regulation of the
State No. 31 applies. The tax authorities levy income tax on these subsidiaries at the rate of 33%. These subsidiaries, however, have not recognized any sales during the year.
Therefore, for the years ended December 31, 2004, 2005 and 2006, the PRC subsidiaries have provided for deferred taxation based on the 33% income tax
rate. Although the local tax authority of Zhengzhou City has not indicated that it will re-evaluate prior assessed years, the Group believes that the possibility exists for reinterpretation of the application of the tax regulations by higher tax
authorities in the PRC, potentially overturning the decision made by the local tax authority to apply the deemed profit method. Because of the uncertainty surrounding whether or not these tax years will be re-evaluated and the taxes adjusted, the
difference between the taxes due based on taxable income calculated according to PRC tax statutes and the taxes due based on the deemed profit method has been recorded as an additional receivable or payable and has been included with the temporary
differences. Management believes that if the local tax authority of Zhengzhou City or a higher tax authority were to re-evaluate any of these tax years, the PRC subsidiaries would be required to pay any additional taxes due, or would be entitled to
a refund for any taxes overpaid based on the difference between the amounts paid under the deemed profit method and the actual taxes due calculated based on the PRC tax statutes.
F-29
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
Income tax expense for the year ended December 31, 2004, 2005 and 2006 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2004
|
|
|
2005
|
|
2006
|
|
|
US$
|
|
|
US$
|
|
US$
|
Current:
|
|
|
|
|
|
|
|
CIT expense
|
|
2,011,679
|
|
|
2,949,813
|
|
6,193,562
|
LAT expense
|
|
10,070
|
|
|
418,491
|
|
2,003,020
|
|
|
|
|
Deferred tax expense
|
|
(69,604
|
)
|
|
1,879,505
|
|
2,520,756
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
1,952,145
|
|
|
5,247,809
|
|
10,717,338
|
|
|
|
|
|
|
|
|
The Groups income tax expense differs from the tax expense computed by applying the
statutory CIT rate of 33% for the years ended December 31, 2004, 2005 and 2006 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
CIT at rate of 33%
|
|
1,945,398
|
|
|
4,882,584
|
|
|
8,856,433
|
|
Tax effect of permanent differences
|
|
|
|
|
84,836
|
|
|
518,882
|
|
LAT expense
|
|
10,070
|
|
|
418,491
|
|
|
2,003,020
|
|
Tax effect of LAT
|
|
(3,323
|
)
|
|
(138,102
|
)
|
|
(660,997
|
)
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense
|
|
1,952,145
|
|
|
5,247,809
|
|
|
10,717,338
|
|
|
|
|
|
|
|
|
|
|
|
(b) Land Appreciation Tax (LAT)
Since January 1, 1994, LAT has been applicable at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an
exemption provided for the sales of ordinary residential properties if the appreciation values do not exceed certain thresholds specified in the relevant tax laws. However, prior to September 2004, the Groups local tax authority in Zhengzhou
city did not impose the regulation on real estate companies in its area of administration. Since September, 2004, the local tax authority has levied the LAT at the rate of 0.8% or 1.0% against total cash receipts from sales of real estate
properties, rather than according to the progressive rates. In early 2007, the national PRC tax authorities clarified the regulations to require the full payment of LAT in accordance with the progressive rates.
For the year ended December 31, 2006, based on the latest understanding of LAT regulations from tax authorities, the Group made additional LAT provision
of US$1,131,551 with respect to properties sold up to December 31, 2006 in accordance with the requirements set forth in the relevant PRC tax laws and regulations.
As of December 31, 2006 prepaid LAT balances of US$ nil were included in other deposits and prepayments (2004: US$134,411; 2005: US$284,028).
F-30
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(c) Deferred tax
The tax effects of temporary differences that give rise to the Groups net deferred tax assets and liabilities as of December 31, 2004, 2005 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Tax due under tax statutes versus tax due under deemed profit method
|
|
|
|
|
819,272
|
|
|
3,311,108
|
|
Real estate propertiesaccelerated deductions
|
|
1,829,034
|
|
|
1,674,219
|
|
|
1,460,020
|
|
Percentage of completion revenue
|
|
|
|
|
|
|
|
1,211,337
|
|
Property and equipment
|
|
280,273
|
|
|
284,874
|
|
|
297,297
|
|
Property management rights
|
|
|
|
|
|
|
|
300,520
|
|
Others
|
|
234,932
|
|
|
117,196
|
|
|
167,100
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
2,344,239
|
|
|
2,895,561
|
|
|
6,747,382
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Tax due under deemed profit method versus tax due under tax statutes
|
|
(1,517,880
|
)
|
|
|
|
|
(643,514
|
)
|
Doubtful debt allowances
|
|
(298,727
|
)
|
|
(321,062
|
)
|
|
(33,363
|
)
|
Accruals and provisions
|
|
(308,451
|
)
|
|
(289,431
|
)
|
|
(674,084
|
)
|
Others
|
|
(107,509
|
)
|
|
(267,002
|
)
|
|
(398,403
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
(2,232,567
|
)
|
|
(877,495
|
)
|
|
(1,749,364
|
)
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
111,672
|
|
|
2,018,066
|
|
|
4,998,018
|
|
Classified as current
|
|
|
|
|
|
|
|
(1,211,337
|
)
|
|
|
|
|
|
|
|
|
|
|
Long term deferred tax liabilities
|
|
111,672
|
|
|
2,018,066
|
|
|
3,786,681
|
|
|
|
|
|
|
|
|
|
|
|
For each PRC subsidiary, deferred tax assets have been netted against deferred tax liabilities as
the reversal of the underlying temporary differences is expected to occur in the same future periods.
Due to the nature of the deemed
profit method, all of the deferred tax assets and liabilities will reverse either if the tax years are re-evaluated and reassessed under tax statutes or the tax years are no longer open for tax review. In addition, certain deferred tax assets and
liabilities may reverse if actual margins fall below the deemed margin. Management currently does not expect actual margins will fall below the deemed margin. Therefore, all the deferred tax assets and liabilities have been classified as
non-current.
13. Related-party and employee transactions
(a) Due from shareholders
The balances represent cash advances to two shareholders from the Company for traveling expenses
and other expenses. The balances bear no interest and have no fixed payment terms.
In 2005, loans made to shareholders amounted to
US$428,218. The loans bear no interest and were due on December 31, 2005. All of the loans were settled prior to maturity.
F-31
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(b) Due from related parties
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
US$
|
|
US$
|
|
US$
|
Mingyuan Landscape
|
|
476,664
|
|
380,468
|
|
|
Jiantou Xinyuan
|
|
|
|
6,650,393
|
|
7,728,227
|
Xinyuan Property Management
|
|
687,283
|
|
523,484
|
|
|
Xinyuan Network
|
|
18
|
|
16
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,163,965
|
|
7,554,361
|
|
7,728,227
|
|
|
|
|
|
|
|
Jiantou Xinyuan is co-invested by a third party and the Group, and the Group holds 45% of total
shares of Jiantou Xinyuan (see Note 7). The balance represents the development cost of real estate paid on behalf of Jiantou Xinyuan, which carries interest of 6.138% per annum (2004: nil; 2005: 5.58%) and was repayable within one year.
As explained in Note 1, the Group acquired 100% interest in Mingyuan Landscape, Xinyuan Property Management and Xinyuan Network during
2006. The balances due to these companies have been eliminated upon consolidation.
In 2004, loans made to Mingyuan Landscape and Xinyuan
Property Management amounted to US$362,468 and US$483,290, respectively. The loans bear no interest and were due on December 31, 2005.
All
other amounts bear no interest and have no fixed payment terms.
(c) Due from employees
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
US$
|
|
US$
|
|
US$
|
Loans
|
|
799,491
|
|
158,732
|
|
|
Advances
|
|
175,021
|
|
275,230
|
|
313,807
|
|
|
|
|
|
|
|
Total
|
|
974,512
|
|
433,962
|
|
313,807
|
|
|
|
|
|
|
|
The loans were made in 2004 to the Groups top managerial staff and were due on December 31,
2005. The loans bear no interest.
For the year ended December 31, 2006, sales to employees amounted to US$ nil (2004: US$250,796;
2005: US$265,582). All of the sales were settled in cash and are not included in the balances above.
(d) Due to related parties
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
US$
|
|
US$
|
|
US$
|
Xinyuan Network
|
|
48,330
|
|
130,300
|
|
|
Xinyuan Property Management
|
|
518,841
|
|
890,010
|
|
|
Mingyuan Landscape
|
|
46,110
|
|
299,153
|
|
|
Jiantou Xinyuan
|
|
|
|
|
|
3,763,843
|
|
|
|
|
|
|
|
Total
|
|
613,281
|
|
1,319,463
|
|
3,763,843
|
|
|
|
|
|
|
|
F-32
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
As explained in Note 1, the Group acquired 100% interest in Mingyuan Landscape, Xinyuan Property
Management and Xinyuan Network on August 30, 2006. The balances due to these companies have been eliminated upon consolidation.
For
the period ended August 31, 2006, landscaping costs payable to Mingyuan Landscape and intercom service fee payable to Xinyuan Network amounted to US$707,908 and US$108,619 respectively.
For the year ended December 31, 2005, landscaping costs payable to Mingyuan Landscape and intercom service fee payable to Xinyuan Network amounted
to US$1,354,902 and US$223,071, respectively (2004: US$412,408 and US$ nil, respectively).
Jiantou Xinyuan is co-invested by a third party
and the Group, and the Group holds 45% of total shares of Jiantou Xinyuan (see Note 7). The balance represents the loan and interest payable to Jiantou Xinyuan. The loan in the amount of US$3,713,806 bears an interest at 6.44% per annum (2004
and 2005: nil) and is repayable in full on August 14, 2007.
All other amounts bear no interest and have no fixed payment terms.
(e) Due to employees:
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
US$
|
|
US$
|
|
US$
|
Total
|
|
1,910,329
|
|
213,093
|
|
25,612
|
|
|
|
|
|
|
|
Balance as of December 31, 2006 represents deposits from the sales offices management of
Xinyuan Agency.
Balances as of December 31, 2004 and 2005, represent various loans from the Groups staff for real estate
property development purposes. The loans bear various interest rates that are similar to short-term bank loan rates and have fixed payment terms.
(f)
Due to shareholders
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
US$
|
|
US$
|
|
US$
|
Blue Ridge China Partners, L.P.
|
|
|
|
|
|
21,000,000
|
EI Fund II China, LLC
|
|
|
|
|
|
14,000,000
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
35,000,000
|
|
|
|
|
|
|
|
The loans bear interest at 12.5% and are repayable in full on December 6, 2007. There is a
mandatory prepayment of the outstanding principal loan balance plus accrued and unpaid interest in the event the Company receives proceeds from debt financing in advance of the due date. If the principal amount and the interest are not paid on or
prior to December 6, 2007, the lenders have the right to covert all or any portion of the outstanding
F-33
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
principal amount and accrued interest into common shares based on a conversion ratio as determined by a multiple of 2007 consolidated net income over the
total number of common shares (on a fully diluted basis) and issuable common shares pursuant to this conversion.
(g) Others
For the year ended December 31, 2006, total directors remuneration paid amounted to US$46,979.
On April 16, 2005, Henan Xinyuan entered into a consulting agreement with a consulting company which is beneficially owned by Yong Cui, one of its
directors, to provide finance consulting services to the Group for a duration of 24 months. Total consulting fees paid in 2005 and 2006 under the agreement amounted to US$59,473. On December 27, 2006, Henan Xinyuan entered into a consulting
agreement with another consulting company which is beneficially owned by Yong Cui to provide similar finance consulting services to the Group, with an annual fee of US$30,735 starting from April 16, 2007. The agreement will expire on April 15, 2012,
and it can be terminated by written consent from both parties. The agreement contains provisions on confidentiality and non-competition.
14. Equity
(a) Convertible Redeemable Preference Shares
As disclosed in Note 1, the Company entered into a securities purchase agreement with Blue Ridge China and Equity International (collectively, the Investors) on August 25, 2006, whereby the Company
issued a total of 30,805,400 Series A convertible redeemable preference shares (Series A preference shares) with warrants for total cash proceeds of US$21,918,420, net of issuance costs of US$3,081,580. The Series A preference shares are
issued with warrants to purchase additional Series A preference shares. Other significant terms of the preference shares and warrants are outlined below:
Redemption
The Companys Series A convertible preference shares are redeemable, if not
previously converted, upon the earlier occurrence of the date on which Mr. Zhang ceases to serve in the capacity of Chairman or the fifth anniversary of the issuance date. Anytime thereafter, the holder may, by written notice given to the
Company require the Company to redeem any or all Series A convertible redeemable preference shares held.
The redemption price is
determined at a per share price in cash equal to the sum of the original issue price of US$0.81155 per share and an accreted annual amount of ten percent (10%) of the original issue price, compounded annually to the date of redemption.
Conversion
Each
Series A preference shares shall be convertible, upon issuance, into fully paid common shares at the option of the holder at an initial conversion ratio of 1 to 1. Each Series A preference shares shall be converted into fully paid common shares
automatically upon an initial public offering of the Group (IPO) or written approval by 75% of the Investors at a conversion ratio that is adjustable under certain circumstances as follows:
a) If the value of the common shares issuable upon conversion of the Series A preference shares in connection with the IPO of the Group
is less than an amount equal to two times the original
F-34
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
Series A issue price plus an accreted annual amount of 10% compounded annually to the date of completion of the IPO, the Company shall issue to the
preference shareholders a number of common shares equal to the amount of such shortfall divided by the price of common shares at IPO.
b) If the Company sub-divides the outstanding common shares or issues a share dividend on its outstanding common shares, the number of common shares issuable upon conversion of the Series A preference shares
immediately prior to such subdivision or the issuance of such share dividend shall be proportionately increased by the same ratio as the subdivision or dividend (with appropriate adjustments in the Series A conversion price). In case the Company
shall at any time combine its outstanding common shares, the number of common shares issuable upon conversion of the Series A preference shares immediately prior to such combination shall be proportionately decreased by the same ratio as the
combination.
Voting Rights
The Investors have voting rights that are equal to common shares on an as-converted basis. In addition, as mentioned in Note 1, the Investors have substantive participating rights, the most significant of which relate to approval of annual
plans and budgets and changes in existing management.
Dividends
The Series A preference shares shall rank senior to the common shares in all respects as to rights of payment and distribution (whether in cash, in kind
or in other property or securities), whether by way of dividend or upon a liquidation or otherwise. All such payments and distributions shall be made to the Series A convertible redeemable preference shares in full prior to dividend distributions to
ordinary shareholders.
Liquidation Preference
On a winding-up, the holders of Series A preference shares shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to holders of the Junior Shares
by reason of their ownership of such shares, for each Series A preference shares, the amount per share (the Series A Preference Amount) equal to two (2) times the sum of (x) US$0.81155, and (y) an accreted annual amount of
ten percent (10%) on the original Series A issue price, compounded annually from the date of issuance of such Series A preference shares to the date of payment hereunder.
After the payment in full has been made to the holders of Series A preference shares, the holders of the Series A preference shares shall be entitled to
share ratably in all remaining assets and funds to be distributed.
Measurement and Recording
The Series A preference shares were classified as mezzanine equity at gross proceeds net of issuance costs and are increased by period accretions using
the interest method at an annual rate of 10%, so that the carrying amount will equal to the redemption amount at the redemption date. At the issuance date of the Series A preference shares, the Group determined that there was no beneficial
conversion feature as a result of the effective conversion price being higher than the fair value per common share.
F-35
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
The carrying values of the preference shares are as follows:
|
|
|
|
|
|
Series A
|
|
|
|
US$
|
|
Issuance of preference shares
|
|
25,000,000
|
|
Issuance costs
|
|
(3,081,580
|
)
|
Warrant liability
|
|
(496,000
|
)
|
Burnham Warrants
|
|
(55,595
|
)
|
Accretion
|
|
942,301
|
|
|
|
|
|
BalanceDecember 31, 2006
|
|
22,309,126
|
|
|
|
|
|
Warrant terms, Measurement and Recording
The warrants issued together with the Series A preference shares entitle the holders to purchase more Series A preference shares at an exercise price of
US$0.01 per share if the Group fails to meet specified profit performance targets in 2007 and 2008. If cumulative net income for the two year period ending December 31, 2008, is less than US$80 million, the holders of the warrants are entitled
to purchase up to a maximum additional number of 3,987,009 fully paid Series A preference shares at an exercise price of US$0.01 per share. If cumulative net income for the two year period ending December 31, 2008, equals or exceeds US$80
million, or if the Company consummates a qualified initial public offering prior to March 31, 2008, then the warrants will expire without being exercised, as amended on August 28, 2007. See Subsequent Events Note 19(h). The warrants and Series A
Preference Shares are transferable in whole or in part, without charge to the holder. The holders of the warrants are not entitled to vote or receive dividend.
The warrants were allocated their full fair value from the basket issuance with the Series A preference shares and classified as a liability in accordance with FSP FAS 150-5
Issuers Accounting under FAS 150
for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable
on the basis that the issue faces a cash outflow to settle them on redemption. Changes in value from period to period are recognized through earnings.
Management assessed that the probability of the exercisability for the Series A preference share warrants was 10% and 5% on August 26, 2006 and December 31, 2006, respectively.
In the event that the warrants are exercised and additional Series A preference shares are issued, the total redemption amount in respect thereof is
limited to the exercise price of US$0.01 per share plus an accreted annual amount of ten percent (10%) of the exercise price, compounded annually, from the date of exercise to the date of redemption. The total impact on the redemption price of
the issued Series A convertible redeemable preference shares from the exercise of the warrants would be nominal since the Company is obligated to pay the holders upon redemption the exact amount received from the exercise of the warrants plus some
nominal interest accretion. With the exercise of the warrants being contingent upon certain events, the measurement date of a beneficial conversion feature will be on the date of exercise of the warrants.
(b) Common Shares
(i) As at
December 31, 2006, the Companys authorized share capital was 450 million common shares, par value US$0.0001 per share.
(ii) In March 2006, the Company issued 60,000,000 outstanding common shares to the Zhang Family for a consideration of US$6,000.
F-36
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(iii) In August 2006, the Company issued the Burnham Warrants as payment for services
rendered and recorded its fair value of US$55,595 as paid in capital.
(iv) Under the terms of the agreement, if any of the
Burnham Warrants remains unexercised upon termination, Mr. Zhang is entitled to purchase, within 60 days, the common shares underlying such remaining unexercised amount, at a purchase price of US$0.0001 per share. This benefit was valued at the time
of the issuance of the Burnham Warrants, and determined to be insignificant. The total cost is being amortized over the life of the Burnham Warrants. In November 2006, the Company issued 15,704,379 common shares for US$0.9551 per share, for total
cash proceeds of US$14,552,985, net of issuance cost. These shares were issued to Blue Ridge China (9,422,627 shares) and Equity International (6,281,752 shares), which, subsequent to the purchase, owned 12.4% and 8.3% of the Companys
outstanding common shares, respectively, as of December 31, 2006.
(v) Common shares at January 1 and
December 31, 2005 represent issued and paid up share capital of the Companys subsidiaries which were then held directly by the Zhang Family and to which pooling-of-interest accounting has been applied, as explained in Note 1.
The Company has certain restrictions on its ability to declare and pay dividends on its common shares and preference shares. No
dividends are paid on convertible notes and floating rate notes; however, restrictions inherent in these notes also restrict the ability to declare and pay dividends on common shares and preference shares. In addition, as disclosed in note 20,
under the PRC laws and regulations, the Companys PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The amounts restricted include
paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling US$78,730,297 as of December 31, 2006 (2005: US$6,367,285).
15. Earnings per share
Basic and diluted net earnings per share for each period presented are
calculated as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
US$
|
|
US$
|
|
US$
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
|
3,943,002
|
|
9,562,791
|
|
16,122,910
|
|
Accretion of Series A convertible redeemable preference shares
|
|
|
|
|
|
(942,301
|
)
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
3,943,002
|
|
9,562,791
|
|
15,180,609
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Number of shares outstanding, opening
|
|
60,000,000
|
|
60,000,000
|
|
60,000,000
|
|
Weighted average number of shares issued (15,704,379 shares)
|
|
|
|
|
|
1,807,079
|
|
Weighted average number of convertible redeemable preference shares
|
|
|
|
|
|
10,887,388
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstandingbasic and diluted
|
|
60,000,000
|
|
60,000,000
|
|
72,694,467
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
0.07
|
|
0.16
|
|
0.21
|
|
|
|
|
|
|
|
|
|
F-37
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
On August 25, 2006, the Company issued Series A convertible redeemable preference shares that
will convert automatically into common shares upon the completion of an IPO. Assuming the conversion had occurred on a hypothetical basis on January 1, 2006, the proforma basic and diluted earnings per share for the year ended
December 31, 2006 is calculated as follows:
|
|
|
|
|
Year ended December 31,
|
|
|
2006
|
|
|
US$
Proforma
(Unaudited,
Note 2)
|
Numerator:
|
|
|
Net income attributable to ordinary shareholders
|
|
15,180,609
|
Accretion of convertible redeemable preference shares
|
|
942,301
|
|
|
|
Net income for proforma basic and diluted earnings per share
|
|
16,122,910
|
|
|
|
Denominator:
|
|
|
Number of shares outstanding, opening
|
|
60,000,000
|
Weighted average number of shares issued (15,704,379 shares)
|
|
1,807,079
|
Conversion of preference shares to common shares (30,805,400 shares)
|
|
30,805,400
|
|
|
|
Weighted average number of shares outstandingproforma basic and diluted earnings per shares
|
|
92,612,479
|
|
|
|
Proforma basic and diluted earnings per share
|
|
0.17
|
|
|
|
The terms of the Series A preference shares allow the holders to receive additional common shares
if the value of the common shares upon conversion of the Series A preference shares in connection with an IPO is less than two times the original Series A preference shares issuance price of US$0.81155, plus an accreted amount of 10% compounded
annually to the date of completion of the IPO. The holders of the Series A preference shares shall receive common shares equal to the amount of the shortfall divided by the price of the common shares.
16. Segment reporting
The Group considers that each
of its individual property development is a discrete operating segment. The Group has aggregated its segments based on a provincial basis as property development projects undertaken within a segment have similar expected economic characteristics,
type of properties offering, customers and market, regulatory environment. The Groups reportable operating segments are comprised of the Henan Province, Shandong Province, Jiangsu Province and Anhui Province. Each geographic operating segment
is principally engaged in the construction and development of residential real estate units. All other category relates to investment holdings, property management services, installation of intercom systems, landscaping, engineering and
management, real estate sale, purchase and lease activities. The accounting policies of the various segments are the same as those described in Note 2, Summary of Significant Accounting Policies.
The Groups chief operating decision maker relies upon net sales, gross profit and net income when making decisions about allocating resources and
assessing performance of the Group. Net sales for geographic segments are generally based on the location of the project development. Net income for each segment includes net sales to third parties, related cost of sales and operating expenses
directly attributable to the segment.
F-38
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
No single customer accounted for more than 10% of net sales in 2004, 2005 and 2006.
Summary information by operating segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
Henan
|
|
|
Shandong
|
|
Jiangsu
|
|
Anhui
|
|
Others
|
|
Consolidated
|
|
|
|
US$
|
|
|
US$
|
|
US$
|
|
US$
|
|
US$
|
|
US$
|
|
Net real estate sales
|
|
35,320,585
|
|
|
|
|
|
|
|
|
|
|
35,320,585
|
|
Real estate lease income
|
|
143,908
|
|
|
|
|
|
|
|
|
|
|
143,908
|
|
Other revenue
|
|
168,017
|
|
|
|
|
|
|
|
|
|
|
168,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
35,632,510
|
|
|
|
|
|
|
|
|
|
|
35,632,510
|
|
|
|
|
|
|
|
|
Cost of real estate sales
|
|
(26,123,957
|
)
|
|
|
|
|
|
|
|
|
|
(26,123,957
|
)
|
Cost of real estate lease income
|
|
(252,143
|
)
|
|
|
|
|
|
|
|
|
|
(252,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
(26,376,100
|
)
|
|
|
|
|
|
|
|
|
|
(26,376,100
|
)
|
Gross profit
|
|
9,256,410
|
|
|
|
|
|
|
|
|
|
|
9,256,410
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(2,608,069
|
)
|
|
|
|
|
|
|
|
|
|
(2,608,069
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
6,648,341
|
|
|
|
|
|
|
|
|
|
|
6,648,341
|
|
|
|
|
|
|
|
|
Interest income
|
|
66,955
|
|
|
|
|
|
|
|
|
|
|
66,955
|
|
Interest expense
|
|
(820,149
|
)
|
|
|
|
|
|
|
|
|
|
(820,149
|
)
|
Share of loss in an equity investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
5,895,147
|
|
|
|
|
|
|
|
|
|
|
5,895,147
|
|
Income tax expense
|
|
(1,952,145
|
)
|
|
|
|
|
|
|
|
|
|
(1,952,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before minority interest
|
|
3,943,002
|
|
|
|
|
|
|
|
|
|
|
3,943,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
375,971
|
|
|
|
|
|
|
|
|
|
|
375,971
|
|
Capital expenditure
|
|
103,145
|
|
|
|
|
|
|
|
|
|
|
103,145
|
|
Investment in an equity investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
17,883,148
|
|
|
|
|
|
|
|
|
|
|
17,883,148
|
|
Total assets
|
|
83,004,341
|
|
|
|
|
|
|
|
|
|
|
83,004,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
Henan
|
|
|
Shandong
|
|
Jiangsu
|
|
Anhui
|
|
Others
|
|
|
Consolidated
|
|
|
|
US$
|
|
|
US$
|
|
US$
|
|
US$
|
|
US$
|
|
|
US$
|
|
Net real estate sales
|
|
61,769,436
|
|
|
|
|
|
|
|
|
|
|
|
61,769,436
|
|
Real estate lease income
|
|
132,127
|
|
|
|
|
|
|
|
|
|
|
|
132,127
|
|
Other revenue
|
|
39,498
|
|
|
|
|
|
|
|
|
989
|
|
|
40,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
61,941,061
|
|
|
|
|
|
|
|
|
989
|
|
|
61,942,050
|
|
|
|
|
|
|
|
|
Cost of real estate sales
|
|
(42,199,481
|
)
|
|
|
|
|
|
|
|
|
|
|
(42,199,481
|
)
|
Cost of real estate lease income
|
|
(432,848
|
)
|
|
|
|
|
|
|
|
|
|
|
(432,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
(42,632,329
|
)
|
|
|
|
|
|
|
|
|
|
|
(42,632,329
|
)
|
|
|
|
|
|
|
|
Gross profit
|
|
19,308,732
|
|
|
|
|
|
|
|
|
989
|
|
|
19,309,721
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(3,717,947
|
)
|
|
|
|
|
|
|
|
(152,596
|
)
|
|
(3,870,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
15,590,785
|
|
|
|
|
|
|
|
|
(151,607
|
)
|
|
15,439,178
|
|
|
|
|
|
|
|
|
Interest income
|
|
191,000
|
|
|
|
|
|
|
|
|
|
|
|
191,000
|
|
Interest expense
|
|
(834,469
|
)
|
|
|
|
|
|
|
|
|
|
|
(834,469
|
)
|
Share of loss in an equity investee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
14,947,316
|
|
|
|
|
|
|
|
|
(151,607
|
)
|
|
14,795,709
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
(5,247,809
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,247,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) before minority interest
|
|
9,699,507
|
|
|
|
|
|
|
|
|
(151,607
|
)
|
|
9,547,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
543,092
|
|
|
|
|
|
|
|
|
3,740
|
|
|
546,832
|
|
Capital expenditure
|
|
115,602
|
|
|
|
|
|
|
|
|
58,643
|
|
|
174,245
|
|
Investment in an equity investee
|
|
446,086
|
|
|
|
|
|
|
|
|
|
|
|
446,086
|
|
Total long-lived assets
|
|
18,289,471
|
|
|
|
|
|
|
|
|
55,605
|
|
|
18,345,076
|
|
Total assets
|
|
108,582,596
|
|
|
|
|
|
|
|
|
119,787
|
|
|
108,702,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
Henan
|
|
|
Shandong
|
|
|
Jiangsu
|
|
|
Anhui
|
|
|
Others
|
|
|
Consolidated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net real estate sales
|
|
141,577,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,577,738
|
|
Real estate lease income
|
|
204,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204,411
|
|
Other revenue
|
|
44,440
|
|
|
8,332
|
|
|
515
|
|
|
685
|
|
|
531,100
|
|
|
585,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers
|
|
141,826,589
|
|
|
8,332
|
|
|
515
|
|
|
685
|
|
|
531,100
|
|
|
142,367,221
|
|
|
|
|
|
|
|
|
Cost of real estate sales
|
|
(107,267,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,267,400
|
)
|
Cost of real estate lease income
|
|
(442,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(442,020
|
)
|
Other cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(486,307
|
)
|
|
(486,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
(107,709,420
|
)
|
|
|
|
|
|
|
|
|
|
|
(486,307
|
)
|
|
(108,195,727
|
)
|
|
|
|
|
|
|
|
Gross profit/(loss)
|
|
34,117,169
|
|
|
8,332
|
|
|
515
|
|
|
685
|
|
|
44,793
|
|
|
34,171,494
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(5,355,273
|
)
|
|
(589,632
|
)
|
|
(38,318
|
)
|
|
(35,420
|
)
|
|
(603,383
|
)
|
|
(6,622,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
28,761,896
|
|
|
(581,300
|
)
|
|
(37,803
|
)
|
|
(34,735
|
)
|
|
(558,590
|
)
|
|
27,549,468
|
|
|
|
|
|
|
|
|
Interest income
|
|
461,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
461,335
|
|
Interest expense
|
|
(727,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(727,041
|
)
|
Share of loss in an equity investee
|
|
(446,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(446,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
28,050,104
|
|
|
(581,300
|
)
|
|
(37,803
|
)
|
|
(34,735
|
)
|
|
(558,590
|
)
|
|
26,837,676
|
|
Income tax expense
|
|
(10,783,088
|
)
|
|
|
|
|
|
|
|
|
|
|
65,750
|
|
|
(10,717,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) before minority interest
|
|
17,267,016
|
|
|
(581,300
|
)
|
|
(37,803
|
)
|
|
(34,735
|
)
|
|
(492,840
|
)
|
|
16,120,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
603,279
|
|
|
10,741
|
|
|
|
|
|
|
|
|
120,401
|
|
|
734,421
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,105,408
|
|
|
1,105,408
|
|
Capital expenditure
|
|
1,178,931
|
|
|
155,928
|
|
|
83,176
|
|
|
103,266
|
|
|
19,573
|
|
|
1,540,874
|
|
Total long-lived assets
|
|
28,074,589
|
|
|
150,665
|
|
|
105,427
|
|
|
84,916
|
|
|
2,114,639
|
|
|
30,530,236
|
|
Total assets
|
|
88,023,519
|
|
|
60,066,158
|
|
|
36,228,682
|
|
|
10,575,543
|
|
|
10,061,870
|
|
|
204,955,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-41
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
17. Commitments and contingencies
The Group leases certain of its office properties under operating lease arrangements. Payments under operating leases are expensed on a straight-line
basis over the periods of their respective leases, and the terms of the leases do not contain rent escalation, or contingent rent, renewal, or purchase options. There are no restrictions placed upon the Group by entering into these leases.
Commitments
As of December 31,
2006, the Group has lease payments under non-cancellable leases falling due as follows:
|
|
|
|
|
Amount
|
|
|
US$
|
Due within 1 year
|
|
118,465
|
Due after 1 year, within 2 years
|
|
71,943
|
|
|
|
Total
|
|
190,408
|
|
|
|
As of December 31, 2006, the Group has outstanding commitments with respect to non-cancelable
construction contracts for real estate development and land use rights purchases as follows:
|
|
|
|
|
Amount
|
|
|
US$
|
Due within 1 year
|
|
54,354,422
|
|
|
|
Contingencies
On June 28, 2003, Henan Xinyuan was sued by Henan Jiantong Industrials Co., Ltd. (Jiantong), its former contractor. The lawsuit charged Henan Xinyuan with a total fine of US$102,287 for breach of
contract. However, on August 9, 2003, Henan Xinyuan countercharged Jiantong with false allegation that impaired Henan Xinyuans reputation and appealed for the withdrawal of investment capital from Jiantong. Total amount of the investment
capital to be withdrawn and reputation compensation sought is US$28,604. As of December 31, 2006, the final judgment from the court was still pending.
On September 16, 2004, Henan Xinyuan acquired an interest in a land site located at Longhai Middle Road, Zhengzhou City, Henan Province, the PRC, from Henan Park Property Co. Ltd. (Park Property) for
a total purchase price of US$21,636,124. As of December 31, 2006, total amount paid by way of deposit to the vendor was US$8,518,703. However, the vendor failed to transfer the land use right to Henan Xinyuan before the due date,
December 5, 2004. Therefore on April 5, 2005, Henan Xinyuan sued Henan Park Property Co., Ltd. for its failure to transfer the land use right to Henan Xinyuan. The court found the subject land had been mortgaged to Guangdong Development
Bank as security for a bank loan. To avoid the subject land being auctioned by the bank, Henan Xinyuan has paid US$7,389,194 to Guangdong Development Bank to discharge the mortgage. Pursuant to the final judgment of the court filed on
December 12, 2005, Park Property was ordered to transfer the land use right to Henan Xinyuan. Park Property appealed the court decision. As of November 10, 2006, the court has turned down the appeal of Park Property and rendered its final
verdict that Henan Xinyuan prevail. The court
F-42
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
then enforced the legal transfer of the subject land to Henan Xinyuan, which received the official land certificate in February 2007.
The remaining balance of the purchase price of US$5,728,227 was included in commitments due within one year.
Henan Xinyuan has incurred additional costs of US$3,986,579 in the process of registration of the land transfer. Further, Henan Xinyuan may be required
to settle the relocation and settlement costs of US$5,122,492 due to Park Propertys financial insolvency. Therefore, Henan Xinyuan may incur total estimated costs in addition to the purchase price up to US$10,244,983. As Park Property is
currently under liquidation procedures, any additional costs incurred by Henan Xinyuan may not be fully recoverable from Park Property.
On
March 14, 2006, Henan Xinyuan was sued by Henan Oriental Construction Company Limited, its former contractor, claiming payment of construction fees of US$225,940 and an amount of US$32,016 for breach of contract. As of December 31, 2006, the final
judgment from the court was still pending.
The PRC subsidiaries have complied with the requirements of their local authority to accrue for
retirement benefit contributions in respect of their employees (See Note 2 (s)). However payment of such accrued amount has not been sought by the regulatory bureau.
As at December 31, 2006, the Group provided guarantees of US$62,372,820 (2004: US$17,767,312; 2005: US$37,879,778), in favor of their customers in respect of mortgage loans granted by banks to such customers
for their purchases of the Groups properties where the underlying real estate ownership certificates can only be provided to the banks on a time delay manner due to administrative procedures in the PRC. Pursuant to the terms of the guarantees,
upon default in mortgage payments by these purchasers, the Group is responsible to repay the outstanding mortgage principals together with the accrued interest and penalty owed by the defaulted purchasers to the banks and the Group is entitled to
take over the legal titles and possession of the related properties. The Groups guarantee period starts from the dates of grant of the relevant mortgage loans and ends upon issuance of real estate ownership certificates which will generally be
available within six to twelve months after the purchasers take possession of the relevant properties.
The fair value of the guarantees is
not significant and the directors consider that in case of default in payments, the net realizable value of the related properties can cover the repayment of the outstanding mortgage principal together with the accrued interest and penalty and
therefore no provision has been made for the guarantees.
18. Concentration of risk
The Groups operations are conducted in the PRC. Accordingly, the Groups business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC economy.
The Groups
operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Groups results may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
F-43
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
The Group transacts part of its business in RMB, which is not freely convertible into foreign
currencies. On January 1, 1994, the PRC government abolished the dual rate system and introduced a single rate of exchange as quoted daily by the Peoples Bank of China (PBOC). However, the unification of the exchange rates
does not imply the RMB may be readily convertible into U.S. dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the PBOC or other banks authorized to buy and sell foreign currencies at the
exchange rates quoted by the PBOC. Approval of foreign currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers invoices, shipping documents and signed contracts.
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the US$. Under the new policy, the RMB is
permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in a 5.7% appreciation of the RMB against the US$ by December 31, 2006.
Additionally, the value of the RMB is subject to changes in central government policies and to international economic and political developments
affecting supply and demand in the PRC foreign exchange trading system market.
The Groups real estate projects are concentrated in
Henan province. Any negative events such as a slow down in the economy in Henan province might cause material loss to the Group and have a material adverse effect on the Groups financial condition and results of operations. The risk in this
respect is mitigated by the Group by expanding its operations outside of Henan province.
The Group sells to a wide range of customers. No
single customer accounted for a significant percentage of the revenue for the years ended December 31, 2004, 2005 and 2006.
19. Subsequent events
(a) The impact of the New Corporate Income Tax Law
During the 5th Session of the 10th National People's Congress, which was concluded on March 16, 2007, the PRC Corporate Income Tax Law (the New Corporate Income Tax Law) was approved and will become
effective on January 1, 2008. The New Corporate Income Tax Law introduces a wide range of changes which include, but are not limited to, the unification of the income tax rate for domestic-invested and foreign-invested enterprises at 25%. Since the
detailed implementation and administrative rules and regulations have not yet been announced, the financial impact of the New Corporate Income Tax Law to the Group cannot be reasonably estimated at this stage.
(b) Second Reorganization Plan
On March 26, 2007,
the Company was incorporated under the law of the Cayman Island. Pursuant to a one-for-one share exchange under the second reorganization plan, on April 9, 2007, the Company entered into a Share Exchange and Assumption Agreement with the Zhang
Family, Blue Ridge China and Equity International (collectively, the then-existing shareholders) and the Company, whereby:
(i) Mr. Yong Zhang and Ms. Yuyan Yang agreed to exchange their 48,000,000 and 12,000,000 common shares in Xinyuan, respectively, for an equivalent number of equal class of the Companys newly issued shares.
F-44
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(ii) Blue Ridge China agreed to exchange its 18,483,240 Series A convertible
redeemable preference shares and 9,422,627 common shares of the Company for an equivalent number of equal class of the Companys newly issued shares.
(iii) Equity International agreed to exchange its 12,322,160 Series A convertible redeemable preference shares and 6,281,752 common shares of the Xinyuan for an equivalent number of equal class of the Companys
newly issued shares.
(iv) The Companys Series A convertible redeemable preference shares are convertible, upon
issuance, into fully paid common shares of the Company at the option of the holder at an initial conversion ratio of 1 to 1. Each Series A convertible redeemable preference share shall be converted automatically upon completion of an IPO, subject to
certain adjustments set forth in the Companys memorandum and articles of association.
(v) Xinyuan cancelled the
Burnham Warrants issued to Burnham and its designee to purchase an aggregate of 1,853,172 common shares at US$0.81155 per share. The Company issued substantially similar warrants (the New Burnham Warrants) to Burnham and its designee.
The New Burnham Warrants will expire on the earlier of August 25, 2011 or the date of an IPO.
As a result of the share exchange, the
Company became the wholly-owned subsidiary of the Company on April 9, 2007 and as of that date, all the then-existing shareholders of Xinyuan became the shareholders of the Company.
On April 9, 2007, a Shareholders Agreement was entered into among the then-existing shareholders, the Parent, the Company, Burnham Securities and its
designee, Mr. Joel B. Gardner, to provide for certain arrangements with respect to restrictions on transfer of shares, election of directors, approval rights and registration rights.
(c) Convertible Subordinated Notes
On April 13, 2007, the Company issued 2% Convertible
Subordinated Notes due 2012 (the Convertible Notes) with an aggregate principal amount of US$25 million.
The Convertible Notes
are repayable on April 15, 2012. The Notes bear interest at 2% per annum, adjustable to 8% from October 15, 2009 to maturity, if a qualifying IPO does not occur prior to October 15, 2009. The interest is repayable on a
semi-annually basis on April 15 and October 15 each year. The Company shall pay interest on overdue principal, premium, if any, and interest at the rate of 4.0% per annum.
The holder shall have the right, at such holders option (i) at any time from and after a qualifying IPO and prior to April 9, 2012 and
(ii) if there has been no qualifying IPO prior to April 1, 2012 then from April 2, 2012 through April 6, 2012 (each, the Conversion Period), to convert the principal amount of the Convertible Notes, or any portion of
such principal amount which is a multiple of US$100,000, into fully paid and non-assessable common shares (as such shares shall then be constituted) at the conversion price in effect at such time.
In addition, if there are certain events, such as the Company granting its shareholders right to purchase common shares at a relatively low price, or
distributing large amount of dividend (exceeds 5% of the fair value of the common shares), the Convertible Notes may be surrendered for conversion at any time on and after the date that the Company gives notice to the holders of such transactions.
F-45
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
The conversion price is set at US$2.6049 per share at inception and is adjustable from time to time
for anti-dilutive purpose.
The Convertible Notes are subject to various restrictive covenants, including restrictions on the Groups
ability to incur additional debt or guarantees, make restricted payments, payment of dividends or distributions on capital stock, repurchase of capital stock, payment of subordinated indebtedness, make or repayment of intercompany loans or advances,
sales or transfers of properties or assets, sales of capital stock, enter into non-ordinary course business transactions, sales of assets, make investments, merge or consolidate with another company and engage in any business other than related
businesses.
(d) Senior Floating Rate Notes and Warrants
On April 13, 2007, the Company issued Senior Floating Notes due 2010 (the HY Notes) with an aggregate principal amount of US$75 million and detachable Warrants to subscribe for common shares, at an
issue price of 99.25%. The HY Notes bear interest at 6-month LIBOR (with the LIBOR rate reset semi-annually) plus 6.80%, payable semi-annually in arrears. The warrants issued together with the HY Notes entitle the holders to purchase common shares
equal to the quotient obtained by dividing two-fifths of the face value of the HY Notes by the warrant exercise price, which is equal to 80% of the price per common shares sold to public under a qualifying IPO.
The HY Notes shall be repurchased or redeemed by the Company in cash on the third anniversary of the issuance date at the price equal to 100% of the
principal amount, and if no qualifying IPO has occurred on or prior to the expiration of 30 months after their issuance, the repurchase price shall be equal to 112% of the principal amount plus accrued but unpaid interest. The maturity date of the
Warrants shall be the later of the expiration of three years from the issuance date and the expiration of six months following the qualifying IPO.
The HY Notes are subject to various restrictive covenants, including restrictions on the Groups ability to incur additional debt or guarantees, make restricted payments, payment of dividends or distributions on capital stock,
repurchase of capital stock, payment of subordinated indebtedness, make or repayment of intercompany loans or advances, sales or transfers of properties or assets, sales of capital stock, enter into non-ordinary course business transactions, sales
of assets, make investments, merge or consolidate with another company and engage in any business other than related businesses.
(e) Repayment of the
Shareholders Loans
The Company has fully settled the principal amount of the Shareholders Loans of US$35,000,000 provided
by Blue Ridge China and Equity International, together with all accrued and unpaid interest of US$1,552,329 (see Note 13 (f)) on April 19, 2007.
(f) Incorporation of new subsidiary
On June 12, 2007, the WFOE incorporated Xinyuan Real Estate (Chengdu) Co., Ltd. as a
foreign owned enterprise with limited liability, with issued and fully subscribed share capital of RMB100,000,000, for an operating term of 10 years.
F-46
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(g) Share Option Plan
On August 11, 2007, the Parent issued, under the 2007 Equity Incentive Plan (the Plan) grants of share options and restricted share awards to purchase up to 6,802,495 common shares to its employees,
directors and consultants, at an exercise price ranging from US$0.0001 to US$2.50. The objective of the Plan is to promote the interests of the Parent by enabling it to attract, retain and motivate key employees, directors and consultants
responsible for the success and growth of the Group by providing them with appropriate incentives and rewards and enabling them to participate in the growth of the Parent. These options have various vesting periods ranging from 4 to 60 months and
will expire no later than August 10, 2017.
The total amount of compensation expense, net of expected forfeitures, for the share options
and restricted share awards granted on August 11, 2007 was US$9,917,345, which will be amortized in the amount of US$2,320,927, US$3,678,698, US$1,819,642, US$1,709,143, US$241,200 and US$147,735 in 2007, 2008, 2009, 2010, 2011 and 2012,
respectively.
(h) Amended and Restated Warrants to Purchase Series A Convertible Preference Shares
On August 28, 2007, the Company amended its warrants issued to Blue Ridge China and Equity International in connection with the receipt by the holder of
Series A Convertible Preference Shares, par value of US$0.0001 per share. Under the amended agreement, if the Company consummates a qualified initial public offering prior to March 31, 2008, then the warrants will expire without being exercised.
(i) Waiver of Certain Conversion Rights of Series A Convertible Preference Shares (Unaudited)
On November 13, 2007, the holders of the Series A convertible preference shares agreed to waive the contingent conversion option. As such, the Series A
convertible preference shares will automatically convert at the time of a qualifying IPO on a 1 to 1 basis, subject to usual anti-dilution adjustments.
The modification is deemed to be substantive and will be treated as an extinguishment of the Series A convertible preference shares. Under EITF Topic D-42,
The Effect on the Calculation of Earnings per Share
for the Redemption or Induced Conversion of Preferred Stock
, the Company will recognize a dividend to the Series A convertible preferred shareholders, representing the difference between the fair value of the convertible preference shares
immediately after modification and the carrying value of the Series A convertible preference shares immediately prior to modification. This deemed dividend to the Series A shareholders will not affect the Companys net income or cash flows,
however, it will reduce the Companys net income attributable to ordinary shareholders and earnings per share (ADS) for the year ending December 31, 2007.
The Company has determined that on November 13, 2007, a 4% marketability discount be applied to the initial offering price of US$14.00 per ADS to arrive at a fair value of US$6.72 for each Series A convertible
preference share. In calculating the discount, the Company has taken into account the premium in the value of the Series A convertible preference shares relative to the common shares, and the residual price risk of the Series A preference
shareholders before the offering, and has assumed that the offering will be consummated prior to year end. The Company will also review the actual IPO issue price and account for the Series A convertible preference shares accordingly in its
financial statements for the year ending December 31, 2007. At this estimated fair value, the Company will record the modified Series A convertible preference shares at an amount of approximately US$207.0 million and the deemed dividend to the
Series A preference shareholders at approximately US$182.2 million, which will reduce the net income attributable to ordinary shareholders and retained earnings by the same amount of US$182.2 million.
F-47
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
20. Condensed financial information of the Company
Under the PRC laws and regulations, the Companys PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the
Company in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling US$78,730,297 as of
December 31, 2006.
Balance sheet
|
|
|
|
|
|
December 31, 2006
|
|
|
US$
|
ASSETS
|
|
|
|
|
|
Current assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
481,777
|
Due from shareholders
|
|
|
6,000
|
|
|
|
|
Total current assets
|
|
|
487,777
|
|
|
Investments in subsidiaries
|
|
|
104,989,082
|
|
|
|
|
TOTAL ASSETS
|
|
|
105,476,859
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
Current liabilities
|
|
|
|
Due to a subsidiary
|
|
|
953,812
|
Due to shareholders
|
|
|
35,000,000
|
|
|
|
|
Total current liabilities
|
|
|
35,953,812
|
Warrant liability of Series A convertible redeemable preference shares
|
|
|
631,000
|
|
|
|
|
Total liabilities
|
|
|
36,584,812
|
|
|
|
|
Preference shares
|
|
|
|
Preference shares, $0.0001 par value:
|
|
|
|
Authorized50,000,000 shares
|
|
|
|
Issued and outstanding30,805,400 shares
|
|
|
22,309,126
|
|
|
Shareholders equity
|
|
|
|
Common shares, $0.0001 par value:
|
|
|
|
Authorized450,000,000 shares
|
|
|
|
Issued and outstanding75,704,379 shares
|
|
|
7,570
|
Additional paid-in capital
|
|
|
17,264,455
|
Retained earnings
|
|
|
29,310,896
|
|
|
|
|
Total shareholders equity
|
|
|
46,582,921
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
105,476,859
|
|
|
|
|
F-48
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
Statement of operations
|
|
|
|
|
|
Year ended
December 31, 2006
|
|
|
|
US$
|
|
General and administrative expenses
|
|
(71,671
|
)
|
|
|
|
|
Operating loss
|
|
(71,671
|
)
|
|
|
Interest expense
|
|
(781
|
)
|
Other income
|
|
12
|
|
Equity in profit of subsidiaries, net (Note 20(a))
|
|
16,195,350
|
|
|
|
|
|
Income from operations before income taxes
|
|
16,122,910
|
|
|
|
Income taxes
|
|
|
|
|
|
|
|
Net income
|
|
16,122,910
|
|
|
|
Accretion of Series A convertible redeemable preference shares
|
|
(942,301
|
)
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
15,180,609
|
|
|
|
|
|
Statement of cash flows
|
|
|
|
|
|
Year ended
December 31, 2006
|
|
|
|
US$
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
16,122,910
|
|
|
|
Adjustment to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Equity in profit of subsidiaries, net
|
|
(16,195,350
|
)
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Due from shareholders
|
|
(6,000
|
)
|
Due to a subsidiary
|
|
953,812
|
|
|
|
|
|
Net cash provided by operating activities
|
|
875,372
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Investment in a subsidiary
|
|
(72,000,000
|
)
|
|
|
|
|
Net cash used in investing activities
|
|
(72,000,000
|
)
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from issuance of common shares
|
|
14,552,985
|
|
Proceeds from issuance of preference shares
|
|
22,053,420
|
|
Proceeds from shareholders loans
|
|
35,000,000
|
|
|
|
|
|
Net cash provided by financing activities
|
|
71,606,405
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
481,777
|
|
|
|
Cash and cash equivalents, at the beginning of year
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of year
|
|
481,777
|
|
|
|
|
|
F-49
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For the years ended December 31, 2004, 2005 and 2006
(All amounts stated in US$, except for number
of shares and per share data)
(a) Basis of presentation
In the Company-only financial statements, the Companys investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since inception. The Company-only financial statements
should be read in conjunction with the Companys consolidated financial statements.
The Company records its investment in its
subsidiaries under the equity method of accounting as prescribed in APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common Stock
. Such investment is presented on the balance sheet as Investment in
subsidiaries and share of the subsidiaries profit or loss as Equity in profit (loss) of subsidiary company on the statements of operations.
The subsidiaries did not pay any dividend to the Company for the periods presented.
Certain information
and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.
(b) Related party balances
For the year ended December 31, 2006, a subsidiary of the Company
paid issuance costs of preference and common shares and other operating expenses amounting to US$953,812 on behalf of the Company.
At
December 31, 2006, the amount due to shareholders represented the shareholders loans which bear an interest rate of 12.5% and are repayable in full on December 6, 2007 (see Note 13 (f)).
(c) Commitments
The Company does not have
significant commitments or long-term obligations as of the year presented.
F-50
Xinyuan Real Estate Co., Ltd. and Subsidiaries
As of December 31, 2006 and September 30, 2007 (unaudited) and for the nine months ended September 30, 2006 (unaudited) and 2007
(unaudited)
CONTENTS
F-51
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2006 and September 30, 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
As of
December 31,
2006
|
|
As of
September 30,
2007
|
|
Proforma
shareholders
equity as of
September 30, 2007
|
|
|
|
|
US$
(Audited)
|
|
US$
(Unaudited)
|
|
US$
(Unaudited,
Note 2)
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
34,914,210
|
|
106,410,499
|
|
|
Restricted cash
|
|
|
|
32,010,858
|
|
41,916,247
|
|
|
Accounts receivable
|
|
|
|
202,875
|
|
2,678,128
|
|
|
Other receivables
|
|
|
|
1,289,601
|
|
1,404,605
|
|
|
Other deposits and prepayments
|
|
|
|
2,932,534
|
|
7,652,375
|
|
|
Advances to suppliers
|
|
|
|
2,628,914
|
|
2,155,867
|
|
|
Inventories
|
|
|
|
252,253
|
|
335,780
|
|
|
Real estate property development completed
|
|
3
|
|
4,454,045
|
|
2,434,660
|
|
|
Real estate property under development
|
|
3
|
|
87,619,265
|
|
255,094,233
|
|
|
Due from shareholders
|
|
15
|
|
40,934
|
|
6,807
|
|
|
Due from related parties
|
|
15
|
|
7,728,227
|
|
6,055,173
|
|
|
Due from employees
|
|
15
|
|
313,807
|
|
660,142
|
|
|
Other current assets
|
|
|
|
38,013
|
|
1,771,159
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
174,425,536
|
|
428,575,675
|
|
|
|
|
|
|
|
|
|
|
|
Real estate property under development
|
|
3
|
|
19,184,534
|
|
53,614,884
|
|
|
Real estate properties held for lease, net
|
|
4
|
|
5,540,542
|
|
5,779,934
|
|
|
Property and equipment, net
|
|
5
|
|
3,469,022
|
|
4,639,455
|
|
|
Other long-term investment
|
|
6
|
|
241,648
|
|
241,648
|
|
|
Interests in an equity investee
|
|
7
|
|
|
|
5,970,558
|
|
|
Goodwill
|
|
|
|
1,105,408
|
|
1,105,408
|
|
|
Property management rights
|
|
|
|
910,665
|
|
654,540
|
|
|
Other assets
|
|
|
|
78,417
|
|
4,434,428
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
204,955,772
|
|
505,016,530
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-52
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited)
(All amounts stated in US$, except for number of
shares data)
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
As of
December 31,
2006
|
|
As of
September 30,
2007
|
|
Proforma
shareholders
equity as of
September 30, 2007
|
|
|
|
|
US$
(Audited)
|
|
US$
(Unaudited)
|
|
US$
(Unaudited,
Note 2)
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
|
13,280,910
|
|
32,046,071
|
|
|
Short-term bank loans
|
|
9
|
|
22,667,025
|
|
29,690,579
|
|
|
Customer deposits
|
|
12
|
|
25,531,985
|
|
44,202,436
|
|
|
Income tax payable
|
|
|
|
7,104,573
|
|
4,632,064
|
|
|
Deferred tax liabilities
|
|
13
|
|
1,211,337
|
|
3,825,631
|
|
|
Other payables and accrued liabilities
|
|
|
|
10,056,978
|
|
14,485,572
|
|
|
Payroll and welfare payable
|
|
|
|
197,552
|
|
2,272,560
|
|
|
Due to related parties
|
|
15
|
|
3,763,843
|
|
324,077
|
|
|
Due to employees
|
|
15
|
|
25,612
|
|
38,586
|
|
|
Due to shareholders
|
|
15
|
|
35,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
118,839,815
|
|
131,517,576
|
|
|
|
|
|
|
|
|
|
|
|
Long-term bank loans
|
|
10
|
|
12,806,229
|
|
139,998,402
|
|
|
Warrant Liabilities
|
|
11
|
|
631,000
|
|
14,176,000
|
|
|
Deferred tax liabilities
|
|
13
|
|
3,786,681
|
|
2,996,952
|
|
|
Unrecognized tax benefits
|
|
13
|
|
|
|
11,765,394
|
|
|
Other long-term debt
|
|
11
|
|
|
|
93,363,919
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
136,063,725
|
|
393,818,243
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
19
|
|
|
|
|
|
|
Preference shares
|
|
|
|
|
|
|
|
|
Preference shares, US $0.0001 par value:
|
|
|
|
|
|
|
|
|
Authorized50,000,000 shares
|
|
|
|
|
|
|
|
|
Issued and outstanding30,805,400 shares for 2007 (2006: 30,805,400) with aggregate amount of liquidation preference of US$ 55,417,066
|
|
16
|
|
22,309,126
|
|
24,441,243
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Common shares, US $ 0.0001 par value:
|
|
|
|
|
|
|
|
|
Authorized500,000,000 shares
|
|
|
|
|
|
|
|
|
Issued and outstanding75,704,379 shares for 2007 (2006: 75,704,379 shares); 106,509,779 shares for proforma (unaudited)
|
|
16
|
|
7,570
|
|
7,570
|
|
10,651
|
Additional paid-in capital
|
|
|
|
17,264,455
|
|
17,180,691
|
|
41,618,853
|
Statutory reserves
|
|
|
|
4,066,854
|
|
4,066,854
|
|
4,066,854
|
Retained earnings
|
|
|
|
23,679,944
|
|
57,477,278
|
|
57,477,278
|
Accumulated other comprehensive earnings
|
|
|
|
1,564,098
|
|
8,024,651
|
|
8,024,651
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
|
46,582,921
|
|
86,757,044
|
|
111,198,287
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
204,955,772
|
|
505,016,530
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-53
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the nine months ended September 30, 2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30
|
|
|
|
Notes
|
|
2006
|
|
|
2007
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Real estate sales, net of sales taxes of US$5,772,055 in 2006 and US$ 12,692,177 in 2007, respectively
|
|
|
|
99,341,045
|
|
|
215,908,277
|
|
Real estate lease income
|
|
|
|
171,150
|
|
|
165,514
|
|
Other revenue
|
|
|
|
142,871
|
|
|
2,226,950
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
99,655,066
|
|
|
218,300,741
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Cost of real estate sales
|
|
|
|
(75,100,616
|
)
|
|
(145,031,411
|
)
|
Cost of real estate lease income
|
|
|
|
(347,341
|
)
|
|
(319,750
|
)
|
Other costs
|
|
|
|
(164,543
|
)
|
|
(1,638,620
|
)
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
|
(75,612,500
|
)
|
|
(146,989,781
|
)
|
|
|
|
|
Gross profit
|
|
|
|
24,042,566
|
|
|
71,310,960
|
|
Selling and distribution expenses
|
|
|
|
(1,876,122
|
)
|
|
(5,956,676
|
)
|
General and administrative expenses
|
|
|
|
(2,095,888
|
)
|
|
(7,735,949
|
)
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
20,070,556
|
|
|
57,618,335
|
|
|
|
|
|
Interest income
|
|
|
|
124,451
|
|
|
735,376
|
|
Interest expense
|
|
|
|
(307,239
|
)
|
|
(1,438,602
|
)
|
Share of income (loss) in an equity investee
|
|
7
|
|
(446,086
|
)
|
|
5,819,734
|
|
Change in fair value of warrant liabilities
|
|
|
|
|
|
|
(6,186,000
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
|
19,441,682
|
|
|
56,548,843
|
|
|
|
|
|
Income taxes
|
|
13
|
|
(6,948,592
|
)
|
|
(20,584,150
|
)
|
|
|
|
|
|
|
|
|
|
Net income before minority interest
|
|
|
|
12,493,090
|
|
|
35,964,693
|
|
|
|
|
|
Minority interest
|
|
|
|
2,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
12,495,313
|
|
|
35,964,693
|
|
|
|
|
|
Accretion of Series A convertible redeemable preference shares
|
|
|
|
(235,575
|
)
|
|
(2,167,359
|
)
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
|
|
12,259,738
|
|
|
33,797,334
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
17
|
|
0.19
|
|
|
0.32
|
|
Diluted
|
|
17
|
|
0.19
|
|
|
0.30
|
|
|
|
|
|
Shares used in computation:
|
|
|
|
|
|
|
|
|
Basic
|
|
17
|
|
63,038,341
|
|
|
106,509,779
|
|
Diluted
|
|
17
|
|
63,038,341
|
|
|
114,268,871
|
|
|
|
|
|
Proforma earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
17
|
|
|
|
|
0.34
|
|
Diluted
|
|
17
|
|
|
|
|
0.30
|
|
|
|
|
|
Proforma shares used in computation
|
|
|
|
|
|
|
|
|
Basic
|
|
17
|
|
|
|
|
106,531,892
|
|
Diluted
|
|
17
|
|
|
|
|
114,333,967
|
|
The accompanying notes are an integral part of these financial statements.
F-54
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
|
|
|
|
|
|
|
|
|
Nine months ended September 30
|
|
|
|
2006
|
|
|
2007
|
|
|
|
US$
|
|
|
US$
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
12,495,313
|
|
|
35,964,693
|
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
699,735
|
|
|
1,326,320
|
|
Accretion of long-term debt
|
|
|
|
|
1,265,808
|
|
Changes in unrecognized tax benefit
|
|
|
|
|
8,810,065
|
|
Deferred tax expense
|
|
2,425,299
|
|
|
4,320,681
|
|
Share of (earnings) loss in an equity interest
|
|
446,086
|
|
|
(5,819,734
|
)
|
Minority interests share of earnings of a subsidiary
|
|
(2,223
|
)
|
|
|
|
Changes in fair value of warrant liabilities
|
|
|
|
|
6,186,000
|
|
Changes in fair value of embedded derivatives, net of amount capitalized
|
|
|
|
|
(4,500,340
|
)
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
844,410
|
|
|
(2,417,298
|
)
|
Real estate property development completed
|
|
752,406
|
|
|
2,151,614
|
|
Real estate property under development
|
|
5,857,367
|
|
|
(189,269,644
|
)
|
Inventories
|
|
55,056
|
|
|
(72,034
|
)
|
Advances to suppliers
|
|
(1,855,933
|
)
|
|
565,637
|
|
Other receivables
|
|
(435,431
|
)
|
|
(62,563
|
)
|
Other deposits and prepayments
|
|
(2,567,750
|
)
|
|
(4,588,331
|
)
|
Other current assets
|
|
313,453
|
|
|
(1,651,957
|
)
|
Other assets
|
|
(914,788
|
)
|
|
(99,751
|
)
|
Accounts payable
|
|
(3,916,298
|
)
|
|
17,869,393
|
|
Customer deposits
|
|
(19,980,402
|
)
|
|
17,300,519
|
|
Income tax payable
|
|
1,633,485
|
|
|
(2,692,176
|
)
|
Other payables and accrued liabilities
|
|
6,257,680
|
|
|
3,972,757
|
|
Payroll and welfare payable
|
|
105,524
|
|
|
2,025,348
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
2,212,989
|
|
|
(109,414,993
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Acquisition of subsidiaries, net of cash acquired
|
|
(1,578,630
|
)
|
|
|
|
Proceeds from disposal of investment
|
|
111,521
|
|
|
|
|
Improvement of properties held for lease
|
|
(25,972
|
)
|
|
(279,625
|
)
|
Purchase of property and equipment
|
|
(418,449
|
)
|
|
(1,335,272
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(1,911,530
|
)
|
|
(1,614,897
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preference shares
|
|
22,580,100
|
|
|
|
|
Distribution paid to shareholders
|
|
(1,476,461
|
)
|
|
|
|
Increase of restricted cash
|
|
(10,852,505
|
)
|
|
(8,461,024
|
)
|
Repayments of short-term bank loans
|
|
(14,414,506
|
)
|
|
(11,348,961
|
)
|
Proceeds from short-term bank loans
|
|
5,050,432
|
|
|
17,349,561
|
|
Repayment of long-term bank loans
|
|
(3,540,405
|
)
|
|
(16,958,218
|
)
|
Proceeds from long-term bank loans
|
|
2,174,910
|
|
|
141,079,327
|
|
Repayment of shareholders loans
|
|
|
|
|
(35,000,000
|
)
|
Advances from shareholders
|
|
|
|
|
34,794
|
|
Proceeds from other long-term debts
|
|
|
|
|
100,000,000
|
|
Debt issuance cost
|
|
|
|
|
(5,063,176
|
)
|
Repayment from/(loan to) related parties
|
|
5,269,013
|
|
|
(1,576,905
|
)
|
Loan to employees
|
|
(387,241
|
)
|
|
(315,417
|
)
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
4,403,337
|
|
|
179,739,981
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
4,704,796
|
|
|
68,710,091
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
1,017,156
|
|
|
2,786,198
|
|
Cash and cash equivalents, at beginning of period
|
|
14,928,747
|
|
|
34,914,210
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, AT END OF PERIOD
|
|
20,650,699
|
|
|
106,410,499
|
|
|
|
|
|
|
|
|
SUPPLEMENTARY INFORMATION ON CASH FLOWS
|
|
|
|
|
|
|
Income taxes paid
|
|
3,938,154
|
|
|
10,731,622
|
|
|
|
|
|
|
|
|
Total interest paid
|
|
1,388,640
|
|
|
6,614,320
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-55
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY
For the nine months ended September 30, 2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
shares
|
|
Issued
ordinary
shares
at par
|
|
Additional
paid-in
capital
|
|
|
Statutory
reserves
|
|
Comprehensive
income
|
|
Accumulated
earnings
|
|
|
Accumulated
other
comprehensive
earnings
|
|
Total
|
|
|
|
|
|
US$
|
|
US$
|
|
|
US$
|
|
US$
|
|
US$
|
|
|
US$
|
|
US$
|
|
BALANCE AT JANUARY 1, 2006
|
|
60,000,000
|
|
6,000
|
|
2,657,445
|
|
|
3,703,840
|
|
|
|
10,338,810
|
|
|
293,654
|
|
16,999,749
|
|
Foreign currency translation gain, net of tax
|
|
|
|
|
|
|
|
|
|
|
1,000,212
|
|
|
|
|
1,000,212
|
|
1,000,212
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
12,495,313
|
|
12,495,313
|
|
|
|
|
12,495,313
|
|
Distribution paid to shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,476,461
|
)
|
|
|
|
(1,476,461
|
)
|
Accretion of Series A convertible redeemable preference shares
|
|
|
|
|
|
|
|
|
|
|
|
|
(235,575
|
)
|
|
|
|
(235,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT SEPTEMBER 30, 2006
|
|
60,000,000
|
|
6,000
|
|
2,657,445
|
|
|
3,703,840
|
|
13,495,525
|
|
21,122,087
|
|
|
1,293,866
|
|
28,783,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JANUARY 1, 2007
|
|
75,704,379
|
|
7,570
|
|
17,264,455
|
|
|
4,066,854
|
|
|
|
23,679,944
|
|
|
1,564,098
|
|
46,582,921
|
|
Foreign currency translation gain, net of tax
|
|
|
|
|
|
|
|
|
|
|
6,460,553
|
|
|
|
|
6,460,553
|
|
6,460,553
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
35,964,693
|
|
35,964,693
|
|
|
|
|
35,964,693
|
|
Accretion of Series A convertible redeemable preference shares
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,167,359
|
)
|
|
|
|
(2,167,359
|
)
|
Additional issuance costs
|
|
|
|
|
|
(83,764
|
)
|
|
|
|
|
|
|
|
|
|
|
(83,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT SEPTEMBER 30, 2007
|
|
75,704,379
|
|
7,570
|
|
17,180,691
|
|
|
4,066,854
|
|
42,425,246
|
|
57,477,278
|
|
|
8,024,651
|
|
86,757,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-56
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30, 2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
1. Background information of business and
organization
Xinyuan Real Estate Ltd. (Xinyuan) was incorporated on January 27, 2006 as a privately held company
under the law of the Cayman Islands by Mr. Yong Zhang and his wife, Ms. Yuyan Yang (collectively, the Zhang Family).
Xinyuan Real Estate Co., Ltd. (the Company) was incorporated on March 26, 2007 under the law of the Cayman Islands. Pursuant to a one-for-one share exchange under a reorganization plan, on April 9, 2007, the Company
entered into a Share Exchange and Assumption Agreement with the Zhang Family, Blue Ridge China Partners, L.P. (Blue Ridge China) and EI Fund II China, LLC (Equity International) (collectively, the then-existing
shareholders), whereby:
(i) Mr. Yong Zhang and Ms. Yuyan Yang agreed to exchange their 48,000,000 and
12,000,000 common shares in Xinyuan, respectively, for an equivalent number of equal class of the Companys newly issued shares.
(ii) Blue Ridge China agreed to exchange its 18,483,240 Series A convertible redeemable preference shares and 9,422,627 common shares of Xinyuan for an equivalent number of equal class of the Companys newly
issued shares.
(iii) Equity International agreed to exchange its 12,322,160 Series A convertible redeemable
preference shares and 6,281,752 common shares of Xinyuan for an equivalent number of equal class of the Companys newly issued shares.
(iv) The Companys Series A convertible redeemable preference shares are convertible, upon issuance, into fully paid common shares of the Company at the option of the holder at an initial conversion ratio of
1 to 1. Each Series A convertible redeemable preference share shall be converted automatically upon completion of an IPO, subject to certain adjustments set forth in the Companys memorandum and articles of association.
(v) Xinyuan cancelled the Burnham Warrants issued to Burnham and its designee to purchase an aggregate of 1,853,172 common shares at
US$0.81155 per share. The Company issued similar warrants (the New Burnham Warrants) to Burnham and its designee. The New Burnham Warrants will expire on the earlier of August 25, 2011 or the date of an IPO.
As a result of the share exchange, Xinyuan became the wholly-owned subsidiary of the Company on April 9, 2007 and as of that date all the
then-existing shareholders of Xinyuan became the shareholders of the Company. The above exchange was accounted for as an exchange that lacks substance, in a manner similar to a pooling-of-interest. Accordingly, the accompanying consolidated
financial statements have been prepared as if the current corporate structure had been in existence throughout the periods presented. The assets and liabilities of the parties to the reorganization have been stated at their historical amounts in the
consolidated financial statements.
On April 9, 2007, a Shareholder Agreement was entered into among the then-existing shareholders,
the Company, Xinyuan, Burnham Securities and its designee, Mr. Joel B. Gardner, to provide for certain arrangements with respect to restrictions on transfers of shares, election of directors, approval rights and registration rights.
F-57
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
Henan Xinyuan Real Estate Co., Ltd (Henan Xinyuan) was incorporated on May 19, 1997
by the Zhang Family as a privately held company under the law of the Peoples Republic of China (the PRC or China). Henan Xinyuan is principally engaged in the construction, development and sale of residential real
estate units in Henan province of the PRC.
On March 16, 2006, Henan Xinyuan acquired an additional 20% interest in Henan Wanzhong
Real Estate Co., Ltd. (Henan Wanzhong), which was incorporated on February 6, 2005, from Ms. Yuyan Yang to bring its total interest therein to 100%.
Pursuant to a reorganization plan (the Reorganization), Xinyuan incorporated Xinyuan Real Estate (China) Development Co., Ltd (the WFOE) with issued and fully subscribed share capital of US$5
million on April 10, 2006. On August 7, 2006, the WFOE and the Zhang Family entered into an equity transfer agreement in which the Zhang Family transferred all of its equity interests in Henan Xinyuan to the WFOE, a wholly owned subsidiary
of Xinyuan in exchange for US$1.25 million. Henan Xinyuan registered the change of shareholders along with its amended articles of association with the local Administration of Industry and Commerce (AIC) on August 7, 2006. A new
business license for Henan Xinyuan was issued on August 10, 2006.
According to relevant PRC laws and regulations, an equity transfer
is completed upon registration with the local AIC and the issuance of a new business license. Therefore, the equity transfer of Henan Xinyuan from the Zhang Family to the WFOE was considered to be legally completed on August 10, 2006. The
Reorganization, as well as the acquisition of the 20% minority interest in Henan Wanzhong, were accounted for as a legal reorganization of entities under common control, in a manner similar to a pooling-of-interest. Cash consideration paid by WFOE
to the Zhang Family for the acquisition of equity interests in Henan Xinyuan and Henan Wanzhong is recorded as a distribution to shareholders.
On August 25, 2006, Xinyuan issued 18,483,240 Series A convertible redeemable preference shares and one warrant to Blue Ridge China Partners, L.P. (Blue Ridge China) and 12,322,160 Series A convertible redeemable preference
shares and one warrant to EI Fund II China, LLC (Equity International) for US$15 million and US$10 million, respectively. After the preference shares subscription, Blue Ridge China and Equity International collectively owned 34% voting
rights in Xinyuan and obtained certain substantive participating rights as defined in Emerging Issues Task Force (EITF) No. 96-16,
Investors Accounting for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights
. Because of these substantive participating rights, the Zhang Family was no longer considered the controlling shareholder of Xinyuan starting
August 25, 2006 for accounting purposes. These substantive participating rights have been carried over to the Company.
On
August 30, 2006, Henan Xinyuan acquired a 100% equity interest in each of Henan Xinyuan Property Management Co., Ltd. (Xinyuan Property Management), Henan Xinyuan Real Estate Agency Co., Ltd. (Xinyuan Agency), Zhengzhou
Mingyuan Landscape Engineering Co., Ltd. (Mingyuan Landscape) and Zhengzhou Xinyuan Computer Network Engineering Co., Ltd. (Xinyuan Network) (collectively, the Ancillary Companies) from the Zhang Family for a cash
consideration of US$2.1 million. The terms of the acquisitions of the Ancillary Companies were not finalized as part of the Reorganization. The acquisition was accounted for using the purchase method of accounting as the Zhang Family, subsequent to
August 25, 2006, is deemed, for accounting purposes, to no longer have control over the Group due to the substantive participating rights of Blue Ridge China and Equity International. The acquired assets and liabilities of the Ancillary
Companies were recorded at fair value on the acquisition date.
F-58
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
The Companys subsidiaries and an equity investee are set out below:
|
|
|
|
|
|
|
|
|
|
|
|
Company name
|
|
Place
and date of
incorporation
|
|
Registered/
paid-up
capital
RMB 000
|
|
|
Percentage of
equity directly
attributable to
the Group
|
|
|
Principal activities
|
Subsidiary companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xinyuan Real Estate Limited
|
|
The Cayman Islands January 27, 2006
|
|
$
|
50,000
|
*
|
|
100
|
%
|
|
Investment holding company
|
|
|
|
|
|
WFOE
|
|
The PRC
April 10, 2006
|
|
|
565,940
|
|
|
100
|
%
|
|
Investment holding company
|
|
|
|
|
|
Henan Xinyuan
|
|
The PRC
May 19, 1997
|
|
|
50,000
|
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Henan Wanzhong Real Estate Co., Ltd. **
|
|
The PRC
February 6, 2005
|
|
|
10,000
|
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Qingdao Xinyuan Xingrui Real Estate Co., Ltd.
|
|
The PRC
February 9, 2006
|
|
|
10,000
|
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Shandong Xinyuan Real Estate Co., Ltd.
|
|
The PRC
June 2, 2006
|
|
|
80,000
|
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Henan Xinyuan Property Management Co., Ltd. #
|
|
The PRC
December 28 1998
|
|
|
5,000
|
|
|
100
|
%
|
|
Providing property management services
|
|
|
|
|
|
Henan Xinyuan Real Estate Agency Co., Ltd. #
|
|
The PRC
November 6, 2005
|
|
|
2,000
|
|
|
100
|
%
|
|
Real estate sales, purchase and lease services
|
|
|
|
|
|
Zhengzhou Xinyuan Landscape Engineering Co., Ltd. #
|
|
The PRC
February 17, 2004
|
|
|
2,000
|
|
|
100
|
%
|
|
Landscaping engineering and management
|
|
|
|
|
|
Zhengzhou Xinyuan Computer Network Engineering Co., Ltd. #
|
|
The PRC
May 26, 2004
|
|
|
2,000
|
|
|
100
|
%
|
|
Installation of intercom systems
|
|
|
|
|
|
Suzhou Xinyuan Real Estate Co., Ltd.
|
|
The PRC
November 24, 2006
|
|
|
200,000
|
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Anhui Xinyuan Real Estate Co., Ltd.
|
|
The PRC
December 7, 2006
|
|
|
50,000
|
|
|
100
|
%
|
|
Real estate development
|
F-59
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
|
|
|
|
|
|
|
|
|
|
Company name
|
|
Place
and date of
incorporation
|
|
Registered/
paid-up
capital
RMB 000
|
|
Percentage of
equity directly
attributable to
the Group
|
|
|
Principal activities
|
Subsidiary companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xinyuan Real Estate (Chengdu) Co., Ltd.
|
|
The PRC
June 12, 2007
|
|
100,000
|
|
100
|
%
|
|
Real estate development
|
|
|
|
|
|
Equity investee:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd. (Jiantou Xinyuan)
|
|
The PRC
June 13, 2005
|
|
8,000
|
|
45
|
%
|
|
Real estate development
|
**
|
|
The percentage of equity directly attributable to the Group was increased from 80% to 100% on March 16, 2006.
|
#
|
|
These companies were acquired on August 30, 2006, for total consideration of US$2.1 million.
|
Except where otherwise indicated, equity holdings remained unchanged throughout the nine months ended September 30, 2006 and 2007. Beijing Xinyuan
Jinhe Investment & Development Co., Ltd., an investment company 99% owned by Xinyuan, was liquidated in November 2006.
2. Summary of
significant accounting policies
(a) Basis of presentation and consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S.
GAAP). In the opinion of the Groups management, the accompanying unaudited interim consolidated financial statements contain all normal recurring adjustments necessary for a fair presentation of the Groups consolidated financial
statements for the nine months ended September 30, 2007 and 2006. The results of operations for the nine months ended September 30, 2007 are not necessarily indicative of results expected for the full year. The consolidated financial
statements include the financial statements of the Company, its subsidiaries, and Variable Interest Entities for which the Company is the Primary Beneficiary (collectively, the Group). All inter-company transactions and balances between
the Company and its subsidiaries have been eliminated upon consolidation.
Subsidiaries and other controlled entities are consolidated from
the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is a loss of control of a subsidiary or other controlled entity, the consolidated
financial statements include the results for the part of the reporting year during which the Group has control.
(b) Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and
F-60
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
accompanying notes, and disclosure of contingent liabilities at the date of the financial statements. Estimates are used for, but not limited to, the
selection of the useful lives of property and equipment, provision necessary for contingent liabilities, fair values, revenue recognition, taxes, budgeted costs and other similar charges. Management believes that the estimates utilized in preparing
its financial statements are reasonable and prudent. Actual results could differ from these estimates.
(c) Fair value of financial instruments
Fair value of financial instruments is the amount at which the instrument could be exchanged in a current transaction between willing
parties. The Group considers the carrying amount of cash, restricted cash, accounts receivable, advances to suppliers, other receivables, accounts payable, other payables and amounts due from/to shareholders, related parties and employees and bank
loans to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization. The Group considers the carrying amount of bank loans to approximate their fair values based on
the interest rates of the instruments and the current market rate of interest.
For investments that are actively traded in organized
financial markets, fair value is determined by reference to market bid price at the close of business on the balance sheet date. For investments where there is no quoted market price, fair value is determined either:
(i) by reference to the current market value of another financial instrument which is substantially the same; or
(ii) is calculated based on the expected cash flows of the underlying net asset of the investment.
(d) Foreign currency translation
The Groups
financial information is presented in US dollars. The functional currency of the Company is US dollars. The functional currency of the Companys subsidiaries is Renminbi (RMB), the currency of the PRC. The financial statements of
the Companys subsidiaries have been translated into U.S. dollars in accordance with Statement of Financial Accounting Standard (SFAS) No. 52,
Foreign Currency Translation
. The financial information is first
prepared in RMB and then is translated into U.S. dollars at period-end exchange rates as to assets and liabilities and average exchange rates as to revenue and expenses. Capital accounts are translated at their historical exchange rates when the
capital transactions occurred. The effects of foreign currency translation adjustments are included as a component of accumulated other comprehensive income in shareholders equity.
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
September 30,
|
|
|
|
2006
|
|
2007
|
Year/Period end RMB: US $ exchange rate
|
|
7.8087
|
|
7.9087
|
|
7.5108
|
Period average RMB: US$ exchange rate
|
|
7.9721
|
|
8.0079
|
|
7.6659
|
The RMB is not freely convertible into foreign currency and all foreign exchange transactions must
take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US dollars at the rates used in translation.
F-61
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
(e) Cash and cash equivalents
The Group considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. The Group maintains bank accounts in the PRC and Hong Kong. The Group does not
maintain any bank accounts in the United States. All PRC bank balances are denominated in RMB. Hong Kong bank balances are denominated in U.S. dollar.
Cash includes cash on hand and demand deposits in accounts maintained with state-owned and private banks within the PRC and Hong Kong. Total cash in banks at September 30, 2007 amounted to US$106,410,499 (2006:
US$34,914,210), of which no deposits are covered by insurance. The Group has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
(f) Restricted cash
The Group is required to
maintain certain deposits with banks that provide mortgage loans to the Group (see Note 9) and the Groups customers in order to purchase residential units from the Group (see Note 12). These balances are subject to withdrawal restrictions and
totaled US$9,236,376 as of September 30, 2007 (2006: US$15,859,805). As of September 30, 2007, the Group also held US$32,679,871 (2006:US$16,151,053) in its restricted cash accounts, representing funds received from loans, which were
designated to finance permitted project development expenditures that are subject to approval by the lender. These deposits are not covered by insurance. The Group has not experienced any losses in such accounts and believes it is not exposed to any
risks on its cash in bank accounts.
(g) Real estate property development completed and under development
Real estate properties consist of finished residential unit sites, commercial offices and residential unit sites under development. The Group leases the
land for the residential unit sites under land use right leases with various terms from the PRC. Real estate property development completed and real estate property under development are stated at the lower of cost or fair value.
Expenditures for land development, including cost of land use rights, deed tax, pre-development costs, and engineering costs, are capitalized and
allocated to development projects by the specific identification method. Costs are allocated to specific units within a project based on the ratio of the sales value of units to the estimated total sales value times the total project costs.
Costs of amenities transferred to buyers are allocated as common costs of the project that are allocated to specific units as a component
of total construction costs. For amenities retained by the Group, costs in excess of the related fair value of the amenity are also treated as common costs. Results of operations of amenities retained by the Group are included in current operating
results.
Management evaluates the recoverability of its real estate developments taking into account several factors including, but not
limited to, managements plans for future operations, prevailing market prices for similar properties and projected cash flows. There were no impairment losses for the nine months ended September 30, 2006 and 2007.
F-62
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
(h) Revenue recognition
Real estate sales are reported in accordance with the provisions of SFAS No. 66,
Accounting for Sales of Real Estate
.
Revenue from the sales of development properties where the construction period is 12 months or less is recognized by the full accrual method at the time
of the closing of an individual unit sale. This occurs when title to or possession of the property is transferred to the buyer. A sale is not considered consummated until (a) the parties are bound by the terms of a contract, (b) all
consideration has been exchanged, (c) any permanent financing of which the seller is responsible has been arranged, (d) all conditions precedent to closing have been performed, (e) the seller does not have substantial continuing
involvement with the property, and (f) the usual risks and rewards of ownership have been transferred to the buyer. Further, the buyers initial and continuing investment is adequate to demonstrate a commitment to pay for the property, and
the buyers receivable, if any, is not subject to future subordination. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method in which all costs are capitalized as incurred, and
payments received from the buyer are recorded as a deposit liability.
Revenue and profit from the sale of development properties where the
construction period is more than 12 months is recognized by the percentage-of-completion method on the sale of individual units when the following conditions are met:
a. Construction is beyond a preliminary stage.
b. The buyer is committed to the extent of being unable to require a refund except for non-delivery of the unit.
c. Sufficient units have already been sold to assure that the entire property will not revert to rental property.
d. Sales prices are collectible.
e. Aggregate sales proceeds and costs can be reasonably estimated.
If any of the above criteria is not
met, proceeds are accounted for as deposits until the criteria are met and/or the sale consummated.
The effect of changes to total
estimated contract cost or revenues, if any, are recognized in the period in which they are determined. Revenue recognized to date in excess of amounts received from customers is classified as current assets under real estate property under
development. Amounts received from customers in excess of revenue recognized to date are classified as current liabilities under customer deposits. As of December 31, 2006 and September 30, 2007, the amounts received from customers in
excess of revenues recognized were US$18.5 million and US$38.7 million, respectively.
Any losses incurred or forecast to occur on
real estate transaction are recognized in the period in which the loss is first anticipated.
F-63
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
Real estate lease income is recognized on a straight-line basis over the terms of the tenancy
agreements. Business tax of 5% and depreciation cost of the property are recorded as the cost of rental income.
Other revenue mainly
includes property management service fees of US$1,430,377 for the nine months ended September 30, 2007 (2006: US$93,505).
(i) Accounts receivable
Accounts receivable consists of balances due from customers for the sale of residential units in the PRC. In cases where the customers
deposit more than 50% of the total purchase price, the Group may defer the remaining purchase price. These deferred balances are unsecured, bear no interest and are due within six months from the date of the sale.
Accounts receivable are reviewed periodically as to whether their carrying value has become impaired. The Group considers the assets to be impaired if
the collectability of the balances become doubtful. As of December 31, 2006 and September 30, 2007, the allowance for doubtful debts was US$ nil.
(j) Other receivables
Other receivables consist of various cash advances to unrelated companies and individuals with which
the Group has business relationships.
Other receivables are reviewed periodically as to whether their carrying value has become impaired.
The Group considers the assets to be impaired if the collectability of the balances becomes doubtful. As of December 31, 2006 and September 30, 2007, the allowance for doubtful debts was US$ nil.
(k) Advances to suppliers
Advances to suppliers
consist of balances paid to contractors and vendors for services and materials that have not been provided or received and generally relate to the development and construction of residential units in the PRC. Advances to suppliers are reviewed
periodically to determine whether their carrying value has become impaired. The Group considers the assets to be impaired if the collectability of the services and materials become doubtful. As of December 31, 2006 and September 30, 2007,
the allowance for doubtful debts was US$nil.
(l) Customer deposits
Customer deposits consist of amounts received from customers relating to the sale of residential units in the PRC. In the PRC, customers will generally obtain permanent financing for the purchase of their residential
unit prior to the completion of the project. The lending institution will provide the funding to the Group upon the completion of the financing rather than the completion of the project. The Group receives these funds and recognizes them as a
current liability until the revenue can be recognized.
(m) Other payables
Other payables consist of balances for non-construction costs with unrelated companies and individuals with which the Group has business relationships.
These amounts are unsecured, non-interest bearing and generally are short term in nature.
F-64
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
(n) Real estate properties held for lease, net
Real estate properties held for lease are recorded at cost less accumulated depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Estimated useful lives of the real estate properties held for lease are 20 years.
Maintenance,
repairs and minor renewals are charged directly to expenses as incurred. Major additions and improvements to the real estate properties held for lease are capitalized.
(o) Property and equipment, net
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of the assets are as follows:
|
|
|
Buildings
|
|
20 years
|
Vehicles
|
|
5 years
|
Furniture and fixture
|
|
5 years
|
Maintenance, repairs and minor renewals are charged directly to expense as incurred unless such
expenditures extend the useful life or represent a betterment, in which case they are capitalized.
(p) Long-term investments
The Group accounts for long-term investments in equities as follows:
|
|
|
Where the Group has significant influence over the investee, the Group applies the equity method of accounting. The reporting dates and accounting policies of the
equity investees are the same as the Group. The investments in the equity investees are stated at cost, including the Groups share of the equity investees net gain or loss, less any impairment in value. The Group recognizes in its
consolidated statement of operations its share of the net income of the equity investees.
|
|
|
|
Where the Group has no significant influence, the investment is classified as other long-term investment and is carried under the cost method. Investment income is
recognized by the Group when the investee declares a dividend and the Group believes it is collectible. The Group periodically evaluates the carrying value of its investment under the cost method and any decline in value is included in impairment of
cost investment.
|
As of December 31, 2006 and September 30, 2007, the Group has investments in two companies in
the PRC that specialize in the real estate industry. The Group has 45% and 1.85% interests in them, respectively. For the 45% owned equity investee, the Group accounts for the investment under the equity method. Investment income or loss is
recognized by the Group periodically according to 45% of the total net profit or loss generated by the equity investee. For the 1.85% owned company, the Group does not exercise significant influence over it and the Group accounts for the investment
under the cost method. Investment income is recognized by the Group when the investee declares a dividend and the Group believes it is collectible.
F-65
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
(q) Impairment of long-lived assets
The Group reviews its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may no longer be
recoverable. When these events occur, the Group measures impairment by comparing the carrying value of the long-lived assets to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual
disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Group would recognize an impairment loss based on the fair value of the assets. There was no impairment loss recognized for the
long-lived assets for the nine months ended September 30, 2006 and 2007.
(r) Capitalized interest
The Group capitalizes interest as a component of building construction costs in accordance with SFAS No. 34,
Capitalization of Interest
Cost
.
As a result of the total interest costs capitalized during the period, the interest expense for the nine months ended
September 30 was as follows:
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
US$
|
|
|
US$
|
|
Change in fair value of embedded derivative on Convertible Subordinated Notes
|
|
|
|
|
(2,482,000
|
)
|
Accretion of discount from embedded derivative on Convertible Subordinated Notes
|
|
|
|
|
235,934
|
|
Change in fair value of embedded derivative on Senior Floating Rate Notes
|
|
|
|
|
(3,422,000
|
)
|
Accretion of discount arising from embedded derivative on Senior Floating Rate Notes
|
|
|
|
|
555,584
|
|
Amortization of issuance cost related to other long term debt
|
|
|
|
|
741,535
|
|
Accretion of discount arising from warrants on Senior Floating Rate Notes
|
|
|
|
|
1,137,919
|
|
Interest on bank loans
|
|
1,362,574
|
|
|
12,748,183
|
|
|
|
|
|
|
|
|
Total interest costs
|
|
1,362,574
|
|
|
9,515,155
|
|
|
|
|
Less: total interest costs capitalized
|
|
(1,055,335
|
)
|
|
(8,076,553
|
)
|
|
|
|
|
|
|
|
Interest expense, net
|
|
307,239
|
|
|
1,438,602
|
|
|
|
|
|
|
|
|
(s) Retirement benefits
Regulations in the PRC require the Group to contribute to a defined contribution retirement plan for all permanent employees. Pursuant to the mandatory requirement from the local authority in the PRC, the retirement
pension insurance, unemployment insurance, health insurance and housing fund were established for the employees during the term they are employed. For the nine months ended September 30, 2006 and 2007 the level of contribution to these funds
for each employee was determined at 38% of their average salary determined by the Social Welfare Bureau. For the nine months ended September 30, 2007, the Group recorded expenses in the amount of US$1,084,181 (2006: US$309,255)
F-66
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
(t) Distribution of earnings and reserve fund
The Companys ability to pay dividends is primarily dependent on the Company receiving distributions from its subsidiaries. The earnings reflected
in the financial statements prepared in accordance with US GAAP differ from those reflected in the statutory financial statements of the Companys subsidiaries.
In accordance with the PRC Company Law, the PRC subsidiaries are required to transfer 10% of their profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory surplus
reserve (the SSR) until such reserve reaches 50% of the registered capital of the subsidiaries.
Subject to certain
restrictions set out in the PRC Company Law, the SSR may be distributed to stockholders in the form of share bonus issues to increase share capital, provided that the remaining balance after the capitalization is not less than 25% of the registered
capital.
Prior to January 1, 2006, according to the PRC Company Law, the PRC subsidiaries are required to transfer 10% of their
profit after tax, as determined in accordance with PRC accounting standards and regulations, to the statutory public welfare fund (the PWF), which is a non-distributable reserve except in the event of liquidation of the subsidiaries. The
fund must be used for capital expenditure on staff welfare facilities. According to the PRC Company Law effective January 1, 2006, the PRC subsidiaries are not required to transfer their profit after tax to the PWF.
(u) Income taxes
The Group accounts for income tax
using the liability method. Deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as
unutilized net operating losses. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future utilization is uncertain.
On January 1, 2007, the Group adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
(FIN 48). There was no cumulative effect of the adoption of FIN 48 to beginning retained earnings. Interest and
penalties arising from underpayment of income taxes shall be recognized according to the relevant tax law. The amount of interest expense to be recognized shall be computed by applying the applicable statutory rate of interest to the difference
between the tax position recognized and the amount previously taken or expected to be taken in a tax return. Interest recognized in accordance with this Interpretation is classified in the financial statements as interest expense, while penalties
recognized in accordance with this Interpretation are classified in the financial statements as other expenses. Please refer to Note (13), Income Taxes for additional information relating to the adoption of FIN 48 and its impact on the
current period financial results.
In accordance with the provisions of FIN 48, the Group recognizes in its financial statements the impact
of a tax position if a tax returns position or future tax position is more likely than not to prevail (defined as a likelihood of more than fifty percent of being sustained upon audit, based on the technical merits of the tax
position). Tax positions that meet the more likely than not threshold are measured (using a probability weighted approach) at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon
settlement. The Groups estimated liability for unrecognized tax benefits is periodically assessed
F-67
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
for adequacy and may be affected by changing interpretations of laws, rulings by tax authorities, certain changes and/or developments with respect to audits,
and expiration of the statute of limitations. The outcome for a particular audit cannot be determined with certainty prior to the conclusion of the audit and, in some cases, appeal or litigation process. The actual benefits ultimately realized may
differ from the Groups estimates. As each audit is concluded, adjustments, if any, are appropriately recorded in the Groups financial statements. Additionally, in future periods, changes in facts, circumstances, and new information may
require the Group to adjust the recognition and measurement estimates with regard to individual tax positions. Changes in recognition and measurement estimates are recognized in the period in which the changes occur.
Prior to the adoption of FIN 48, the Group applied Statement of Financial Accounting Standards (SFAS) No.5,
Accounting for
Contingencies
, to assess and provide for potential income tax exposures. In accordance with SFAS No.5, the Group maintained reserves for tax contingencies based on reasonable estimates of the tax liabilities, interest, and penalties (if
any) that may result from such audits. FIN 48 substantially changes the applicable accounting model and is likely to cause greater volatility in the income statements and effective tax rates as more items are recognized and/or derecognized
discretely within income tax expense.
(v) Land Appreciation Tax (LAT)
In accordance with the relevant taxation laws for real estate companies of the provinces in which the subsidiaries operate in the PRC, the local tax
authorities levy LAT based on progressive rates ranging from 30% to 60% on the appreciation of land value, being the proceeds of sales of properties less deductible expenditures, including borrowing costs and all property development expenditures.
LAT is prepaid on customer deposits and is expensed when the related revenue is recognized, as explained at Note 2 (l).
(w) Comprehensive income
Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to
owners. The Groups only components of comprehensive income during the nine months ended September 30, 2006 and 2007 were net income and the foreign currency translation adjustment.
(x) Advertising expenses
Advertising costs are
expensed as incurred, or the first time the advertising takes place, in accordance with Statement of Position No. 93-7
Reporting on Advertising
Costs. For the nine months ended September 30, 2007, the Group recorded an
advertising expense of US$2,262,443 (2006: US$910,342).
(y) Leases
In accordance with SFAS No. 13,
Accounting for Leases
, leases are classified at the inception date as either a capital lease or an operating lease. For the lessee, a lease is a capital lease if
any of the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is at least 75% of the propertys estimated remaining economic life or d)
the present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A capital lease is accounted for as if there was an
F-68
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein
rental payments are expensed as incurred.
The Group has no capital leases for any of the periods stated herein. For the nine months ended
September 30, 2007 the Group recorded total rental expense of US$236,479 (2006: US$45,879).
(z) Goodwill and intangible assets
Goodwill represents the excess of cost over the fair value of identifiable net assets of acquired businesses. SFAS No. 142
Goodwill and
Other Intangible Assets
requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. The
performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. Fair value is primarily determined by computing the
future discounted cash flows expected to be generated by the reporting unit. If the carrying value exceeds the fair value, goodwill may be impaired. If this occurs, the Company performs the second step of the goodwill impairment test to determine
the amount of impairment loss. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. This
implied fair value is then compared with the carrying amount of the reporting unit goodwill, and if it is less, the Company would then recognize an impairment loss.
Intangible assets represent property management rights acquired in a business combination and are recognized initially at fair value at the date of acquisition.
Property management rights represent contractual rights to provide management services to the owners of residential developments. Intangible assets are
carried at cost less accumulated amortization. Amortization for the property management rights is computed on a straight-line basis over the contract life of three years. For the nine months ended September 30, 2007, the Group
recorded an amortization charge of US$256,125 (2006: US$28,458).
The property management rights are amortized over the contract life of 3
years. Remaining amortization are as follows:
|
|
|
Year
|
|
Amount
|
|
|
US$
|
2007
|
|
85,374
|
2008
|
|
341,499
|
2009
|
|
227,667
|
|
|
|
Total
|
|
654,540
|
|
|
|
F-69
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
The balances of goodwill and tangible assets as of September 30, 2007 and December 31, 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
September 30, 2007
|
|
|
|
Goodwill
|
|
Property
management
rights
|
|
|
Goodwill
|
|
Property
management
rights
|
|
|
|
US$
|
|
US$
|
|
|
US$
|
|
US$
|
|
Cost
|
|
1,105,408
|
|
1,024,498
|
|
|
1,105,408
|
|
1,024,498
|
|
Accumulated amortization
|
|
|
|
(113,833
|
)
|
|
|
|
(369,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Closing balance
|
|
1,105,408
|
|
910,665
|
|
|
1,105,408
|
|
654,540
|
|
|
|
|
|
|
|
|
|
|
|
|
(aa) Property warranty
The Company and its subsidiaries provide customers with warranties which cover major defects of building structure and certain fittings and facilities of properties sold as stipulated in the relevant sales contracts.
The warranty period varies from two months to three years, depending on different property components the warranty covers. The Group constantly estimates potential costs for materials and labor with regard to warranty-type claims expected to be
incurred subsequent to the delivery of a property. Reserves are determined based on historical data and trends with respect to similar property types and geographical areas. The Company constantly monitors the warranty reserve and makes adjustments
to its pre-existing warranties, if any, in order to reflect changes in trends and historical data as information becomes available. The Group may seek further recourse against its contractors or any related third parties if it can be proved that the
faults are caused by them. In addition, the Group also withholds up to 5% of the contract cost from sub-contractors for periods of 2 to 5 years. These amounts are included in current liabilities, and are only paid to the extent that has been no
warranty claim against the Group relating to the work performed or materials supplied by the subcontractors. For the three years ended December 31, 2006 and the nine months ended September 30, 2007, the Group had not recognized any
warranty liability or incurred any warranty costs in excess of the amount retained from subcontractors.
(ab) Earnings per share
Earnings per share is calculated in accordance with SFAS No. 128,
Earnings Per Share
. Basic earnings per share is computed by
dividing net income attributable to holders of common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per ordinary share reflects the potential dilution that could occur if securities or other
contracts to issue common shares were exercised or converted into common shares. Convertible, redeemable preference shares are included in both basic and diluted earnings per ordinary share computations as they are considered participating
securities. Contingent exercise price resets are accounted for in a manner similar to contingently issuable shares.
Ordinary share
equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive.
(ac) Burnham Warrants
The Company has entered into an agreement with Burnham Securities (Burnham) to engage Burnham to render certain financial
advisory and investment banking services to the Company in order to raise capital through a private placement and subsequently in a public offering.
F-70
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
As part of the payment for Burnhams services rendered on the issuance of preference shares to
Blue Ridge China and Equity International, the Company granted Burnham and its designee warrants to acquire 1,853,172 common shares in total (Burnham Warrants), at US$0.81155 per share, exercisable between August 25, 2006 and the
earlier of August 25, 2011, or the date of an initial public offering or change in control of the Company. The warrants are non-transferable.
As the warrants are over common shares, they have been recorded in additional paid in capital. In accordance with SFAS No. 123 (R),
Share based payment
and EITF No. 96-18,
Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
, the Burnham Warrants are measured based on the fair value of services rendered.
The cost of the transaction with Burnham was incurred solely for the purpose of the fund raising, and offset against the proceeds from the preference
shares issued.
(ad) Unaudited proforma shareholders equity
If an initial public offering (IPO) is completed, all of the Series A convertible redeemable preference shares (see Note 16) outstanding will automatically convert into 30,805,400 common shares, based on
the number of Series A convertible redeemable preference shares outstanding at September 30, 2007. The terms of the Series A preference shares allow the holders to receive additional common shares if the value of the common shares upon
conversion of the Series A preference shares in connection with an IPO is less than two times the original Series A preference shares issuance price of US$0.81155, plus an accreted amount of 10% compounded annually to the date of completion of the
IPO. The holders of the Series A preference shares shall receive common shares equal to the amount of the shortfall divided by the price of the common shares. Unaudited proforma shareholders equity, as adjusted for the assumed conversion of
the Series A convertible redeemable preference shares, is set forth in the consolidated balance sheets.
(ae) Convertible Subordinated Notes
On April 13, 2007, the Company issued 2% Convertible Subordinated Notes due 2012 (the Convertible Note) with an
aggregate principal amount of US$25 million. The holder shall have the right, at such holders option (i) at any time from and after a qualifying initial public offering (IPO) and prior to April 9, 2012 and (ii) if
there has been no qualifying IPO prior to April 1, 2012 then from April 2, 2012 through April 6, 2012 (each, the Conversion Period), to convert the principal amount of the Convertible Notes, or any portion of such
principal amount which is a multiple of US$100,000, into fully paid and non-assessable common shares (as such shares shall then be constituted) at the conversion price in effect at such time.
Given that the Convertible Note is debt in its legal form and is not a derivative in its entirety, it is not considered a financial instrument within the
scope of SFAS No. 150
Accounting for Financial Instrument with Characteristics of Both Liabilities and Equity.
In addition, since the Convertible Note provides that holder with an option to convert into a fixed number of
shares for which the ability to exercise the option is based on the passage of time or a contingent event (in this case, an IPO), it meets the definition of a conventional convertible instrument and has been classified as a liability.
F-71
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
According to the terms of the Convertible Note, the Note bears interest at 2% per annum, but is
subject to increase to 8% if a Qualifying IPO does not occur prior to October 15, 2009, from and including October 15, 2009 to maturity. Hence, the contingent interest is indexed to the Qualifying IPO, which is not considered clearly and
closely related to the economic characteristics of the debt host. Accordingly, the contingent interest feature is considered an embedded derivative that has been bifurcated from the Convertible Note and valued separately. The contingent interest is
initially recorded as a derivative liability associated with long-term debt at fair value of US$2,543,000. The fair value at September 30, 2007 was US$61,000, with the resulting change in fair value recognized in current earnings, net of amount
capitalized.
The Convertible Note, net of the contingent interest feature, is accreted to its face amount at maturity using the effective
interest method. If there is a Qualifying IPO prior to April 2, 2012, the debt amount, including any unamortized debt discount on the Convertible Note will be immediately credited to equity upon conversion.
(af) Senior Floating Rate Notes and Warrants
On
April 13, 2007, the Company issued Senior Floating Rate Notes due 2010 (the FRN) with a par value of US$100,000 with an aggregate principal amount of US$75 million and detachable warrants to subscribe for common shares (the FRN
Warrants).
Given that the FRN are debt in its legal form, it has been classified as other long-term debt. According to EITF No.
00-19,
Accounting for Derivative financial Instruments Indexed to, and Potentially Settled in a Company
s Own Stock
(EIFF 00-19), the portion of the proceeds of debt securities issued with detachable
stock purchase warrants that is allocable to the warrants are accounted for as a derivative liability associated with other long-term debt. The allocation is based on the relative fair value of the two securities at time of issuance. Any resulting
discount or premium on the debt securities is accounted for as such.
FRNs
According to the terms of the FRN, it shall be repurchased or redeemed by the Company in cash on the third anniversary of the issuance date at the price
equal to 100% of the principal amount, and if no qualifying IPO has occurred on or prior to the expiration of 30 months after their issuance, the repurchase price shall be equal to 112% of the principal amount plus accrued but unpaid interest.
Hence, the additional premium is indexed to the Qualifying IPO, which is not considered clearly and closely related to the economic characteristics of the debt host. Accordingly, the premium is considered an embedded derivative that has been
bifurcated from the FRN and valued separately. The premium is initially recorded as a derivative liability associated with long-term debt at fair value of US$3,593,000. The fair value at September 30, 2007 was US$171,000, with the resulting change
in fair value recognized in current earnings, net of amounts capitalized.
FRN Warrants
One FRN with par value of US$100,000 attached with one warrant is called one unit, and one unit is issued at the price of USD100,000. Therefore, a total
of 750 units were issued. Upon issuance, the FRN Warrants were immediately separable and detachable. Each FRN Warrant entitles the holder to subscribe at the warrant exercise price for the number of common shares equal to the quotient obtained by
dividing (i) US$40,000 by (ii) the warrant exercise price, which will be equal to 80% of the price per common share derived from the qualifying IPO.
F-72
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
The FRN Warrant was initially recorded as a derivative liability associated with long-term debt at a
fair value of US$7,359,000 and the fair value at September 30, 2007 was US$13,965,000. The proceeds, net of the portion allocated to the warrant, are allocated to the FRN, which will be accreted to its face amount at maturity using the effective
interest method. The accretion amount is recognized as interest expense.
(ag) Debt Issuance Costs
Debt issuance costs are capitalized and amortized over the life of the loan to which they relate on an effective interest method.
(ah) Effect of change in estimate
Revisions in
estimated gross profit margins related to percentage of completion revenues are made in the period in which circumstances requiring the revisions become known. During 2007, two real estate development projects had changes in their estimated gross
profit margins. As a result of these changes, gross profit, net income and basic earnings per share in the nine months ended September 30, 2007 increased by US$22.2 million, US$14.9 million and US$0.14 per share, respectively.
(ai) Share-based compensation
The company has
adopted SFAS No.123 (R)
Share-Based Paymen
t, which requires that share-based payment transactions with employees, such as restricted shares or stock options, be measured based on the grant-date fair value of the equity
instrument issued and recognized as compensation expense over the requisite service period, which is generally the vesting period.
(aj) Recent
accounting pronouncements
In September 2006, the EITF issued EITF Issue No. 06-8,
Applicability of the Assessment of a
Buyers Continuing Investment under SFAS No. 66 for the Sale of Condominiums
(EITF 06-8). EITF 06-8 states that in assessing the collectibility of the sales price pursuant to paragraph 37(d) of SFAS 66, an entity
should evaluate the adequacy of the buyers initial and continuing investment to conclude that the sales price is collectible. If an entity is unable to meet the criteria of paragraph 37, including an assessment of collectibility using the
initial and continuing investment tests described in paragraphs 8-12 of SFAS 66, then the entity should apply the deposit method as described in paragraphs 65-67 of SFAS 66. EITF 06-8 is effective for fiscal years beginning after March 15,
2007. In November 2006, the FASB ratified the EITFs recommendation. The application of the continuing investment criteria on the collectibility of the sales price will limit the Groups ability to recognize revenue and costs using the
percentage of completion accounting method. Although the Group will continue to evaluate the application of EITF 06-8, management does not foresee that the adoption will have a material impact on the revenue or costs reported under percentage of
completion accounting in fiscal 2004-2006. The effect of a change resulting from adoption of this consensus will be recognized as a cumulative-effect adjustment.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements
. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles,
clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The provisions are to be applied
F-73
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
prospectively as of the beginning of the fiscal year in which SFAS No. 157 is initially applied, except as it pertains to a change in accounting
principles related to (i) large positions previously accounted for using a block discount and (ii) financial instruments (including derivatives and hybrids) that were initially measured at fair value using the transaction price in
accordance with guidance in footnote 3 of EITF No. 02-3 or similar guidance in SFAS No. 155
Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140
. For these
transactions, differences between the amounts recognized in the statement of financial position prior to the adoption of SFAS No. 157 and the amounts recognized after adoption should be accounted for as a cumulative-effect adjustment to the
opening balance of retained earnings in the year of adoption. The Group is currently assessing the impact, if any, of this new standard on its financial statements. However, management does not currently foresee that the adoption will have a
material impact on the Groups results of operations or financial position.
In February 2007, the FASB issued SFAS No.159,
The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No.115
. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value
that are not currently required to be measured at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Group is currently
assessing the impact of this new standard on its financial statements. However, management does not currently foresee that the adoption will have a material impact on the Groups results of operations or financial position.
In March 2007, the FASB EITF released Topic No. D-109,
Determining the Nature of a Host Contract Related to a Hybrid Financial Instrument Issued
in the Form of a Share under FASB Statement No. 133
. EITF Topic D-109 provides guidance on the determination of the nature of the host contract for a hybrid financial instrument (that is, whether the nature of the host contract is
more akin to debt or to equity) issued in the form of a share should be based on a consideration of economic characteristics and risks. The SEC believes that the consideration of the economic characteristics and risks of the host contract should be
based on all the stated and implied substantive terms and features of the hybrid financial instrument. EITF Topic D-109 is effective at the beginning of the first fiscal quarter beginning after September 15, 2007. Although the Group will
continue to evaluate the application of EITF Topic No. D-109, management does not currently foresee that the adoption will have a material impact on the Groups results of operations or financial position.
F-74
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
3. Real estate property development completed and under development
The following summarizes the components of real estate property completed and under development at December 31, 2006 and September 30, 2007:
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
September 30,
2007
|
|
|
|
|
|
US$
|
|
|
US$
|
|
Development completed:
|
|
|
|
|
|
|
Zhengzhou Xinyuan Splendid 1A
|
|
847,804
|
|
|
284,348
|
|
Zhengzhou Xinyuan Splendid 3A3B3C
|
|
243,498
|
|
|
|
|
Zhengzhou Xinyuan Splendid City Homestead
|
|
141,496
|
|
|
|
|
Zhengzhou City Family
|
|
3,204,531
|
|
|
1,209,990
|
|
Zhengzhou City Manor
|
|
16,716
|
|
|
|
|
Zhengzhou Central Garden East
|
|
|
|
|
940,322
|
|
|
|
|
|
|
|
|
Real estate property development completed
|
|
4,454,045
|
|
|
2,434,660
|
|
|
|
|
|
|
|
|
Under development:
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Suzhou Colorful Garden
|
|
|
|
|
40,377,110
|
|
Suzhou Lake Splendid
|
|
35,977,718
|
|
|
74,201,096
|
|
Suzhou Xinyuan Splendid
|
|
|
|
|
59,663,297
|
|
Hefei Wangjiang Garden
|
|
10,287,628
|
|
|
29,525,954
|
|
Zhengzhou Commercial Plaza
|
|
3,041,617
|
|
|
11,035,614
|
|
Zhengzhou Xinyuan Huating
|
|
|
|
|
15,444,395
|
|
Zhengzhou Central Garden East
|
|
35,275,285
|
|
|
|
|
Zhengzhou Central Garden West
|
|
40,072,801
|
|
|
|
|
Jinan City Family
|
|
14,520,670
|
|
|
22,562,741
|
|
Jinan Elegant Scenery
|
|
23,371,650
|
|
|
41,554,858
|
|
Jinan International City Garden I
|
|
|
|
|
23,743,389
|
|
Jinan International City Garden II
|
|
|
|
|
17,152,633
|
|
Chengdu Xinyuan Splendid I
|
|
|
|
|
48,248,988
|
|
Chengdu Xinyuan Splendid II
|
|
|
|
|
10,887,896
|
|
|
|
|
|
|
|
|
|
|
162,547,369
|
|
|
394,397,971
|
|
Profit recognized
|
|
19,427,999
|
|
|
40,432,124
|
|
Less: progress billings (see Note 12)
|
|
(94,356,103
|
)
|
|
(179,735,862
|
)
|
|
|
|
|
|
|
|
Real estate property under developmentcurrent
|
|
87,619,265
|
|
|
255,094,233
|
|
|
|
|
|
|
|
|
Non-current:
|
|
|
|
|
|
|
Zhengzhou Longhai Road Project
|
|
19,184,534
|
|
|
32,397,360
|
|
Zhengzhou Xinyuan Colorful Garden
|
|
|
|
|
21,217,524
|
|
|
|
|
|
|
|
|
Real estate property under developmentnon-current
|
|
19,184,534
|
|
|
53,614,884
|
|
|
|
|
|
|
|
|
Total real estate property under development
|
|
106,803,799
|
|
|
308,709,117
|
|
|
|
|
|
|
|
|
Total real estate property development completed and under development
|
|
111,257,844
|
|
|
311,143,777
|
|
|
|
|
|
|
|
|
F-75
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
As of September 30, 2007, land use rights included in the real estate properties under
development totaled US$262,710,143 (2006: US$48,296,027).
As of September 30, 2007, partial payments for land use rights included in
the real estate properties under development totaled US$35,334,452 (2006: US$ 47,879,929).
As of September 30, 2007, real estate
properties under development with an aggregate net book value of US$199,061,780 (2006: US$33,427,697) were pledged as collaterals for certain bank loans.
4. Real estate properties held for lease, net
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
September 30,
2007
|
|
|
|
US$
|
|
|
US$
|
|
Zhengzhou Longhai Garden
|
|
1,191,079
|
|
|
1,245,255
|
|
Elementary school
|
|
2,726,937
|
|
|
2,839,755
|
|
Zhengzhou Xinyuan Splendid 1A
|
|
41,378
|
|
|
|
|
Kindergarten
|
|
853,090
|
|
|
1,203,750
|
|
Parking facility
|
|
1,992,740
|
|
|
2,071,778
|
|
|
|
|
|
|
|
|
Total cost
|
|
6,805,224
|
|
|
7,360,538
|
|
|
|
|
Accumulated depreciation
|
|
(1,264,682
|
)
|
|
(1,580,604
|
)
|
|
|
|
|
|
|
|
Real estate properties held for lease, net
|
|
5,540,542
|
|
|
5,779,934
|
|
|
|
|
|
|
|
|
Depreciation expense for the nine months ended September 30, 2007 amounted to US$315,922
(2006: US$395,668).
Real estate properties held for lease with an aggregate net book value of US$1,015,031 (2006: US$1,536,747) were
pledged as collateral for certain bank loans.
As of September 30, 2007, minimum future rental income on non-cancellable leases, in
aggregate and for each of the five succeeding fiscal years and thereafter, is as follows:
|
|
|
Year
|
|
Amount
|
|
|
US$
|
Last quarter of 2007
|
|
77,907
|
2008
|
|
174,039
|
2009
|
|
166,209
|
2010
|
|
155,468
|
2011
|
|
155,468
|
2012
|
|
184,203
|
Thereafter
|
|
1,150,682
|
|
|
|
Total
|
|
2,063,976
|
|
|
|
F-76
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
5. Property and equipment, net
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
September 30,
2007
|
|
|
|
US$
|
|
|
US$
|
|
Buildings and improvements
|
|
2,720,820
|
|
|
3,229,784
|
|
Vehicles
|
|
772,303
|
|
|
1,478,072
|
|
Furniture and fixtures
|
|
582,313
|
|
|
892,070
|
|
|
|
|
|
|
|
|
Total
|
|
4,075,436
|
|
|
5,599,926
|
|
|
|
|
Accumulated depreciation
|
|
(606,414
|
)
|
|
(960,471
|
)
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
3,469,022
|
|
|
4,639,455
|
|
|
|
|
|
|
|
|
Depreciation expense for the nine months ended September 30, 2007 amounted to US$354,057
(2006: US$65,400).
6. Other long-term investment
As of December 31, 2006 and September 30, 2007 other long-term investment consisted of the following:
|
|
|
|
|
|
|
|
|
|
Investee
|
|
Initial cost
|
|
Ownership
|
|
|
December 31,
2006
|
|
September 30,
2007
|
|
|
US$
|
|
|
|
|
US$
|
|
US$
|
Henan Lianhe Real Estate Co., Ltd.
|
|
241,648
|
|
1.85
|
%
|
|
241,648
|
|
241,648
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2006 and 2007 the Group recognized no investment loss
or profit.
7. Interest in an equity investee
As of December 31, 2006 and September 30, 2007, interest in an equity investee consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Accounted
|
Investee
|
|
Initial cost
|
|
Ownership
|
|
|
December 31,
2006
|
|
September 30,
2007
|
|
|
US$
|
|
|
|
|
US $
|
|
US$
|
Zhengzhou Jiantou Xinyuan Real Estate Co., Ltd.
|
|
446,086
|
|
45
|
%
|
|
|
|
5,970,558
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2007, the investee recognized earnings of
US$13,035,766 (2006: net loss of US$1,100,252). The Groups share of the income of the equity investee was US$5,819,734 (2006 share of loss :US$446,086).
F-77
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
Variable Interest Entity
In accordance with FIN 46 (R),
Consolidation of Variable Interest Entities
, Jiantou Xinyuan is a variable interest entity, as if it was established with insufficient equity at risk. The Group is not
considered as the primary beneficiary, as it does not absorb the majority of Jiantou Xinyuans expected losses or residual returns.
Jiantou Xinyuan was established as a joint venture corporation between the Group and an unrelated company in 2005. Its purpose is to undertake residential property development projects in Zhengzhou city, Henan province. As at
September 30, 2007, it had one project completed, two projects under construction, and one project under planning and had consolidated total assets of US$120.6 million.
The Groups maximum exposure to loss is limited to its 45% equity investment and such loans as it may make from time to time to Jiantou Xinyuan (See
Note 15(b)). As of September 30, 2007, its maximum exposure was approrimately US$12 million (2006: US$7.7 million).
Summarized
consolidated balance sheet information of Jiantou Xinyuan is as follows:
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
September 30,
2007
|
|
|
US$
|
|
|
US$
|
Current assets
|
|
94,390,457
|
|
|
120,305,376
|
Non-current assets
|
|
263,524
|
|
|
344,157
|
Current liabilities
|
|
94,331,044
|
|
|
66,476,625
|
Non-current liabilities
|
|
|
|
|
39,984,775
|
Venturers capital (deficit)
|
|
(211,768
|
)
|
|
13,267,907
|
|
|
|
|
|
|
Summarized consolidated statement of operations information of Jiantou Xinyuan is as follows:
|
|
|
|
|
|
|
|
September 30,
2006
|
|
|
September 30,
2007
|
|
|
US$
|
|
|
US$
|
Revenue, net
|
|
|
|
|
79,994,917
|
Cost of revenue
|
|
|
|
|
57,453,711
|
Gross profit
|
|
|
|
|
22,541,206
|
Operating expenses
|
|
1,176,682
|
|
|
2,994,540
|
Income (loss) from operations before minority interest
|
|
(1,100,252
|
)
|
|
13,311,224
|
Net income (loss)
|
|
(1,100,252
|
)
|
|
13,035,766
|
|
|
|
|
|
|
8. Acquisitions
On March 16, 2006, the Group increased its existing ownership of Henan Wanzhong from 80% to 100% by acquiring the remaining 20% from Ms. Yuyan Yang for a cash consideration of US$0.22 million. As the Group
and Henan Wanzhong were under common control at the time, the acquisition was accounted for in a manner similar to a pooling-of-interest the effect of which had been taken to February 6, 2005, the day Henan Wanzhong was incorporated.
Accordingly, no adjustment was made to the recorded book values of assets and liabilities transferred. The cash consideration was recorded as a distribution to shareholders.
F-78
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
9. Short-term bank loans
Short term bank loans represent amounts due to various banks and are due on the dates indicated below. These loans generally can be renewed with the banks. Short term bank loans at December 31, 2006 and
September 30, 2007 consisted of the following:
|
|
|
|
|
|
|
December 31,
2006
|
|
September 30,
2007
|
|
|
US$
|
|
US$
|
Loans from China Construction Bank,
|
|
|
|
|
Due September 29, 2007, at 6.51% per annum
|
|
1,920,934
|
|
|
Due December 21, 2007, at 6.42% per annum
|
|
3,201,557
|
|
|
|
|
|
|
|
|
|
5,122,491
|
|
|
|
|
|
|
|
Loan from China Communication Bank,
|
|
|
|
|
Due March 21, 2007, at 6.138% per annum
|
|
1,536,747
|
|
|
Due September 15, 2008, at 6.90% per annum
|
|
|
|
1,730,841
|
|
|
|
|
|
|
|
1,536,747
|
|
1,730,841
|
|
|
|
|
|
Loans from Industrial and Commercial Bank of China (ICBC),
|
|
|
|
|
Due December 31, 2007, at 7.344% per annum
|
|
9,604,672
|
|
|
Due October 31, 2007, at 7.344% per annum
|
|
|
|
6,657,080
|
Due March 31, 2008, at 6.75% per annum
|
|
|
|
3,195,399
|
Due December 31, 2007, at 6.41% per annum
|
|
|
|
1,331,416
|
Due June 30, 2008, at 6.75% per annum
|
|
|
|
798,850
|
Due September 30, 2008, at 6.75% per annum
|
|
|
|
2,662,832
|
|
|
|
|
|
|
|
9,604,672
|
|
14,645,577
|
|
|
|
|
|
Loan from China Merchants Bank,
|
|
|
|
|
Due May 25, 2008, at 6.57% per annum
|
|
|
|
13,314,161
|
|
|
|
|
|
|
|
|
|
13,314,161
|
|
|
|
|
|
Loan from Shanghai Pudong Development Bank,
|
|
|
|
|
Due May 28, 2007, at 7.254% per annum
|
|
6,403,115
|
|
|
|
|
|
|
|
|
|
6,403,115
|
|
|
|
|
|
|
|
Total short-term bank loans
|
|
22,667,025
|
|
29,690,579
|
|
|
|
|
|
As of September 30, 2007, the Groups short term bank loans are all denominated in RMB
and are secured by the Groups real estate properties under development with net book value of US$25,317,438 (2006: US$12,924,924), property and equipment with net book value of US$1,015,031 (2006:US$ nil) and certain deposits in the banks
amounting to US$8,293,356 (2006:US$8,759,733). In 2006, the short term bank loans were also secured by real estate properties held for lease property certificates with net book value of US$ 1,536,747.
The weighted average interest rate on short-term bank loans as of September 30, 2007 was 6.99% (2006: 6.73%).
F-79
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
10. Long-term bank loans
Long-term bank loans as of December 31, 2006 and September 30, 2007 consisted of the following:
|
|
|
|
|
|
|
December 31,
2006
|
|
September 30,
2007
|
|
|
US$
|
|
US$
|
Loan from China Construction Bank,
|
|
|
|
|
Due January 3, 2009, at 6.93% per annum
|
|
|
|
3,861,107
|
Due January 3, 2009, at 6.93% per annum
|
|
|
|
4,127,390
|
Due May 13, 2009, at 6.57% per annum
|
|
|
|
6,657,080
|
Due June 12, 2009, at 6.41% per annum
|
|
|
|
14,645,577
|
Due June 12, 2009, at 6.41% per annum
|
|
|
|
11,916,174
|
|
|
|
|
|
|
|
|
|
41,207,328
|
|
|
|
|
|
Loan from ICBC,
|
|
|
|
|
Due December 18, 2008, at 6.93% per annum
|
|
12,806,229
|
|
10,917,612
|
Due December 18, 2008, at 6.93% per annum
|
|
|
|
6,657,080
|
Due March 27, 2009, at 6.57% per annum
|
|
|
|
3,994,248
|
Due December 31, 2008, at 5.99% per annum
|
|
|
|
6,923,364
|
Due December 31, 2008, at 6.24% per annum
|
|
|
|
1,065,133
|
Due December 31, 2008, at 6.75% per annum
|
|
|
|
2,662,832
|
Due June 28, 2010, at 7.72% per annum
|
|
|
|
13,314,161
|
Due June 28, 2010, at 7.72% per annum
|
|
|
|
1,331,416
|
Due October 23, 2008, at 8.22% per annum
|
|
|
|
1,331,416
|
|
|
|
|
|
|
|
12,806,229
|
|
48,197,262
|
|
|
|
|
|
Loan from China Merchants Bank,
|
|
|
|
|
Due September 29, 2009, at 7.47% per annum
|
|
|
|
19,971,244
|
Due September 29, 2009, at 7.47% per annum
|
|
|
|
3,994,248
|
|
|
|
|
|
|
|
|
|
23,965,492
|
|
|
|
|
|
Loan from China Agriculture Bank,
|
|
|
|
|
Due October 30, 2008, at 6.37% per annum
|
|
|
|
6,657,080
|
Due April 30, 2009, at 6.11% per annum
|
|
|
|
6,657,080
|
Due July 30, 2009, at 6.11% per annum
|
|
|
|
6,657,080
|
Due March 27, 2010, at 6.37% per annum
|
|
|
|
6,657,080
|
|
|
|
|
|
|
|
|
|
26,628,320
|
|
|
|
|
|
Total long-term bank loans
|
|
12,806,229
|
|
139,998,402
|
|
|
|
|
|
F-80
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
As of September 30, 2007, the contractual maturities of these loans are as follows:
|
|
|
|
|
|
Amount
|
|
Year
|
|
US$
|
|
4
th
quarter 2007
|
|
7,988,496
|
|
2008
|
|
57,916,600
|
|
2009
|
|
82,481,228
|
|
2010
|
|
21,302,657
|
|
|
|
|
|
|
|
169,688,981
|
|
Less: short term loan (Note 9)
|
|
(29,690,579
|
)
|
|
|
|
|
|
|
Total long-term bank loans
|
|
139,998,402
|
|
|
|
|
|
As of September 30, 2007, the Groups long term bank loans are all denominated in RMB
and are secured by the Groups real estate properties under development with net book value of US$173,744,342 (2006: US$20,489,966).
The interest rates of these bank loans are adjustable based on the range of 95% to 110% of the PBOC benchmark rate. The weighted average interest rate on long-term bank loans as of September 30, 2007 was 7.77% (2006: 6.89 %).
11. Other long-term debt
As of
December 31, 2006 and September 30, 2007, other long-term debt consisted of the following:
|
|
|
|
|
|
|
December 31,
2006
|
|
September 30,
2007
|
|
|
US$
|
|
US$
|
Convertible subordinated notes due in April 2012 at 2% (adjustable to 8% from October 15, 2009 to maturity)
|
|
|
|
22,923,490
|
Senior floating rate notes due 2010 at 6 month LIBOR plus 6.8%
|
|
|
|
70,208,429
|
Fair value of embedded derivatives
|
|
|
|
232,000
|
|
|
|
|
|
Total other long-term debt
|
|
|
|
93,363,919
|
|
|
|
|
|
Warrant on Series A Preference Shares
|
|
631,000
|
|
211,000
|
Warrant on senior floating rate notes
|
|
|
|
13,965,000
|
|
|
|
|
|
Total warrant liabilities
|
|
631,000
|
|
14,176,000
|
|
|
|
|
|
Convertible Subordinated Notes
On April 13, 2007, the Company issued 2% Convertible Subordinated Notes due 2012 (the Convertible Notes) with an aggregate principal
amount of US$25 million.
F-81
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
The Convertible Notes are repayable on April 15, 2012. The Notes bear interest at 2% per
annum, adjustable to 8% from October 15, 2009 to maturity, if a qualifying IPO does not occur prior to October 15, 2009. The interest is payable on a semi-annual basis on April 15 and October 15 each year. The Company shall pay
interest on overdue principal, premium, if any, and interest at the rate of 4.0% per annum.
The holder shall have the right, at such
holders option (i) at any time from and after a qualifying IPO and prior to April 9, 2012 and (ii) if there has been no qualifying IPO prior to April 1, 2012 then from April 2, 2012 through April 6, 2012 (each,
the Conversion Period), to convert the principal amount of the Convertible Notes, or any portion of such principal amount which is a multiple of US$100,000, into fully paid and non-assessable common shares (as such shares shall then be
constituted) at the conversion price in effect at such time.
In addition, if there are certain events, such as the Company granting
its shareholders right to purchase common shares at a relatively low price, or distributing a dividend (in excess of 5% of the fair value of the common shares), the Convertible Notes may be surrendered for conversion at any time on and after the
date that the Company gives notice to the holders of such transactions.
The conversion price is set such that each $100,000 principal
amount of the notes is convertible to 38,388 shares of the Companys common stock (US$2.6049 per share at inception) and is adjustable from time to time for anti-dilutive purposes.
The embedded derivative associated with these notes is initially recorded as a derivative liability associated with long-term debt at fair value of
US$2,543,000 and the fair value at September 30, 2007 was US$61,000.
The Convertible Notes are subject to various restrictive
covenants, including restrictions on the Groups ability to incur additional debt or guarantees, make restricted payments, payment of dividends or distributions on capital stock, repurchase of capital stock, payment of subordinated
indebtedness, settlement of intercompany loans or advances, sales or transfers of properties or assets, sales of capital stock, enter into non-ordinary course business transactions, make investments, merge or consolidate with another company and
engage in any business other than related businesses.
Senior Floating Rate Notes and Warrants
On April 13, 2007, the Company issued Senior Floating Notes due 2010 (the FRN) with an aggregate principal amount of US$75 million and
detachable warrants to subscribe for common shares The FRN bear interest at 6-month LIBOR (with the LIBOR rate reset semi-annually) plus 6.80%, payable semi-annually in arrears. The FRN shall be repurchased or redeemed by the Company in cash on the
third anniversary of the issuance date at the price equal to 100% of the principal amount, and if no qualifying IPO has occurred on or prior to the expiration of 30 months after their issuance, the repurchase price shall be equal to 112% of the
principal amount plus accrued but unpaid interest.
In connection with the FRN, a total of 750 units of warrants (the Warrants)
were issued at the price of US$100,000 each. The Warrants entitle the holders to purchase common shares equal to the quotient obtained by dividing two-fifths of the face value of the FRN by the warrant exercise price, which is equal to 80% of the
price
F-82
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
per common shares sold to public under a qualifying IPO. The maturity date of the Warrants shall be the later of the expiration of three years from the
issuance date and the expiration of six months following the qualifying IPO. The fair value of the Warrants was US$13,965,000 as of September 30, 2007.
The embedded derivative associated with the FRN is initially recorded as a derivative liability associated with long-term debt at fair value of US$3,593,000 and the fair value at September 30, 2007 was
US$171,000.
The FRN are subject to various restrictive covenants, including restrictions on the Groups ability to incur additional
debt or guarantees, make restricted payments, payment of dividends or distributions on capital stock, repurchase of capital stock, payment of subordinated indebtedness, settlement of intercompany loans or advances, sales or transfers of properties
or assets, sales of capital stock, enter into non-ordinary course business transactions, make investments, merge or consolidate with another company and engage in any business other than related businesses.
12. Customer deposits
Customer deposits consisted
of amounts received from customers for the pre-sale of residential units in the PRC.
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
September 30,
2007
|
|
|
|
US$
|
|
|
US$
|
|
Advances for real estate properties under development
|
|
119,888,088
|
|
|
223,938,298
|
|
Less: recognized as progress billings (see Note 3)
|
|
(94,356,103
|
)
|
|
(179,735,862
|
)
|
|
|
|
|
|
|
|
Total net balance
|
|
25,531,985
|
|
|
44,202,436
|
|
|
|
|
|
|
|
|
Customer deposits are typically funded up to 80% by mortgage loans made by banks to the customers.
Until the customer obtains legal title to the property, the banks have a right to seek reimbursement from the Group for any defaults by the customers. The Group holds certain cash balances in restricted deposit accounts at the relevant banks (see
Note 2 (f)). The Group, in turn, has a right to withhold transfer of title to the customer until outstanding amounts are fully settled.
13. Income
taxes
(a) Corporate income tax (CIT)
As a Cayman Island resident company, the Company is not subject to income tax.
The PRC subsidiaries are
governed by the Income Tax Law of the PRC concerning Chinese limited liability companies. Under the Income Tax Laws of the PRC, the PRC subsidiaries are subject to an income tax at a statutory rate of 33% (30% state income taxes plus 3% local income
taxes) on income reported in the statutory financial statements after appropriate tax adjustments.
F-83
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
Income tax expense for the nine months periods ended September 30, 2006 and 2007 is summarized
as follows:
|
|
|
|
|
|
|
September 30,
|
|
|
2006
|
|
2007
|
|
|
US$
|
|
US$
|
Current:
|
|
|
|
|
CIT expense
|
|
4,127,193
|
|
3,604,761
|
Land Appreciation Tax (LAT) expense
|
|
396,100
|
|
3,848,643
|
Unrecognized tax uncertainty benefit
|
|
|
|
8,810,065
|
|
|
|
Deferred tax expense
|
|
2,425,299
|
|
4,320,681
|
|
|
|
|
|
Income tax expense
|
|
6,948,592
|
|
20,584,150
|
|
|
|
|
|
The Groups income tax expense differs from the tax expense computed by applying the
statutory CIT rate of 33% for the nine months ended September 30, 2006 and 2007 as follows:
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
US$
|
|
|
US$
|
|
CIT at rate of 33%
|
|
6,415,755
|
|
|
18,661,118
|
|
Tax effect of change in income tax rate
|
|
|
|
|
(2,165,740
|
)
|
Tax effect of non-deductible expenses
|
|
267,450
|
|
|
3,430,693
|
|
Tax effect of non-taxable income
|
|
|
|
|
(1,920,512
|
)
|
LAT expense
|
|
396,100
|
|
|
3,848,643
|
|
Tax effect of LAT
|
|
(130,713
|
)
|
|
(1,270,052
|
)
|
|
|
|
|
|
|
|
Actual income tax expense
|
|
6,948,592
|
|
|
20,584,150
|
|
|
|
|
|
|
|
|
(b) Liability for Unrecognized Tax Benefit
On January 1, 2007, the Group adopted FIN 48. There was no cumulative effect adjustment to beginning retained earnings resulting from the adoption
of FIN 48. The total liability for cumulative unrecognized tax benefits as of January 1, 2007 was $2,667,599, as discussed below. As of the date of adoption, no interest and penalties have been recognized under FIN 48.
The liability for unrecognized tax benefit relates to the application of the deemed profit method by the local tax authority of Zhengzhou city. During
the years ended December 31, 2004-2006, in accordance with the provisions of the PRC tax law, the local tax authority of Zhengzhou City concluded a deemed profit method is a better measure of income tax liability for companies in the real
estate industry located in that province, including the PRC subsidiaries, than the statutory taxable income method. Under the deemed profit method, the local tax authority levies income tax based on 33% of an arbitrary deemed profit of 12% or 14% of
total cash receipts of real estate property companies, rather than based on 33% of statutory taxable income. The PRC subsidiaries in that province have filed their tax returns based on the deemed profit method. The local tax authority has confirmed
verbally that it will apply the same deemed profit method for the year ending December 31, 2007. The local tax authority is entitled to re-evaluate prior years income taxes assessed under the deemed profit method,
F-84
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
upon receipt of audited accounts or upon completion of specific development projects, however, the tax authority has not indicated if it will do so.
Although the local tax authority of Zhengzhou City has not indicated that it will re-evaluate prior years, the Group believes that the
possibility exists for reinterpretation of the application of the tax regulations by higher tax authorities in the PRC, potentially overturning the decision made by the local tax authority to apply the deemed profit method. Because of the
uncertainty surrounding whether or not these tax years will be re-evaluated and the taxes adjusted, the difference between the taxes due based on taxable income calculated according to statutory taxable income method and the taxes due based on the
deemed profit method has been recorded as an additional receivable or payable and has been included in unrecognized tax benefits. Management believes if the local tax authority of Zhengzhou City or a higher tax authority were to re-evaluate any of
these tax years, the PRC subsidiaries would be required to pay additional taxes due, or would be entitled to receive additional taxes paid, based on the accumulated difference between the amounts paid under the deemed profit method and the amounts
due under the PRC statutory taxable income method.
Under PRC tax law, the statute of limitations for the PRC subsidiaries is generally
five years (2001-2006). However, local tax authorities may exercise broad discretion in applying the tax law, thus potentially exposing the PRC subsidiaries to audits of tax years outside the general statute of limitations.
Since the adoption of FIN 48 on January 1, 2007, the change in the Groups total unrecognized tax benefit was an increase of US$8,810,065 and
the balance at September 30, 2007 is US$11,765,394.
(c) LAT
Since January 1, 1994, LAT has been applicable at progressive tax rates ranging from 30% to 60% on the appreciation of land values, with an exemption provided for the sales of ordinary residential properties if
the appreciation values do not exceed certain thresholds specified in the relevant tax laws. However, prior to September 2004, the Groups local tax authority in Zhengzhou city did not impose the regulation on real estate companies in its area
of administration. Since September, 2004, the local tax authority has levied the LAT at the rate of 0.8% or 1.0% against total cash receipts from sales of real estate properties, rather than according to the progressive rates. In early 2007, the
national PRC tax authorities clarified the regulations to require the full payment of LAT in accordance with the progressive rates.
For
the nine months ended September 30, 2007, the Group has made full provision for LAT with respect to properties sold up to September 30, 2007 in accordance with the requirements set forth in the relevant PRC tax laws and regulations.
F-85
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
(d) Deferred tax
The tax effects of temporary differences that give rise to the Groups net deferred tax assets and liabilities as of December 31, 2006 and September 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
December 31,
2006
|
|
|
September 30,
2007
|
|
|
|
US$
|
|
|
US$
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Tax due under tax statutes versus tax due under deemed profit method
|
|
3,311,108
|
|
|
|
|
Real estate propertiesaccelerated deductions
|
|
1,460,020
|
|
|
1,072,359
|
|
Percentage of completion revenue
|
|
1,211,337
|
|
|
9,012,053
|
|
Property and equipment
|
|
297,297
|
|
|
205,973
|
|
Property management rights
|
|
300,520
|
|
|
215,998
|
|
Others
|
|
167,100
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
6,747,382
|
|
|
10,506,383
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Tax due under deemed profit method versus tax due under tax statutes
|
|
(643,514
|
)
|
|
|
|
Doubtful debt allowances
|
|
(33,363
|
)
|
|
(12,963
|
)
|
Accruals and provisions
|
|
(674,084
|
)
|
|
(2,259,520
|
)
|
Others
|
|
(398,403
|
)
|
|
(1,411,317
|
)
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
(1,749,364
|
)
|
|
(3,683,800
|
)
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
4,998,018
|
|
|
6,822,583
|
|
Classified as current
|
|
(1,211,337
|
)
|
|
(3,825,631
|
)
|
|
|
|
|
|
|
|
Long term deferred tax liabilities
|
|
3,786,681
|
|
|
2,996,952
|
|
|
|
|
|
|
|
|
For each PRC subsidiary, deferred tax assets have been netted against deferred tax liabilities by
current or non-current classification, as the reversal of the underlying temporary differences is expected to occur in the same future periods.
The deferred tax assets and liabilities will reverse when the originating temporary differences reverse. In addition, as a result of applying the deemed profit method to calculate PRC income taxes payable, deferred tax assets and
liabilities will reverse either if the tax years are re-evaluated and reassessed under the statutory taxable income method or the tax years are no longer open for tax review.
(e) The impact of the New Corporate Income Tax Law
During the 5
th
Session of the 10th National Peoples Congress, which was concluded on March 16, 2007, the PRC Corporate Income Tax Law
(the New Corporate Income Tax Law) was approved and will become effective on January 1, 2008. The New Corporate Income Tax Law introduces a wide range of changes which include, but are not limited to, the unification of the income
tax rate for domestic-invested and foreign-invested enterprises at 25% and a withholding tax on dividend distributions up to a rate of 20%. As a result of the new law, the Group remeasured its deferred tax items anticipated to reverse in 2008 and
later years at the new
F-86
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
25% tax rate. The impact of this remeasurement is reflected as a reduction of income tax expense of US$2,165,740. However, as of the date of release for
these financial statements, detailed implementation and administrative rules and regulations have not yet been announced.
14. Share-based compensation
(a) Options
On August 11, 2007,
the Company granted under the 2007 Equity Incentive Plan (the Plan) share options to purchase up to 3,198,417 common shares to its directors and employees at exercise prices ranging from US$0.81 to US$2.50 per share. These options have a
weighted average grant date fair value of US$2.07 per option, and a total expected compensation cost, net of forfeitures, of US$6,094,030. The vesting of these options is contingent upon the completion of a qualifying IPO, and the compensation
expense related to these options would then begin to be recognized over the future vesting periods. These options have various vesting periods based on length of service ranging from 10 to 40 months and will expire no later than August 10,
2017. The Companys Board of Directors may, at its discretion, accelerate the vesting of these options at the time of the effectiveness of the IPO, to immediately vest options that would have vested between the grant date and the effectiveness
of the IPO.
Due to the vesting being contingent upon completion of a qualifying IPO, no compensation expense has been recognized during
the nine months ended September 30, 2007. The Company assumed a forfeiture ratio of 10% for non-executive employees in arriving at the total compensation expense.
The derived fair value of the ordinary shares underlying the options was determined by the Company, with reference to a retrospective third-party valuation as of August 11, 2007 by American Appraisal, using
generally accepted valuation methodologies.
The fair value of each option is estimated on the date of grant using the Dividend Adjusted
Black-Scholes option-pricing model that uses the assumptions noted below.
|
|
|
Average risk-free rate of return
|
|
5.22%
|
Expected term
|
|
5.61 Years
|
Volatility rate
|
|
50.13%
|
Dividend yield
|
|
0%
|
The risk-free rate for periods within the expected life of the option is based on the implied
yield rates of China International Bond denominated in USD as of the valuation date. The expected life of options represents the period of time the granted options are expected to be outstanding. As the Company did not grant options before, no
historical exercising pattern could be followed in estimating the expected life. Therefore, the expected life is estimated as the average of the contractual term and the vesting period. The Company has not paid dividends in the past nor does it
expect to pay dividends in the foreseeable future. Because the Companys shares are not publicly tradable at the moment, the expected volatility was based on the historical volatilities of comparable publicly traded companies engaged in similar
business.
F-87
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
(b) Restricted Shares
On August 11, 2007, the Company issued under the Plan, grants of 3,270,745 restricted shares to its directors and employees with an exercise price of US$0.0001 per share. These restricted shares have a weighted
average grant date fair value of US$3.25 per restricted share, and a total expected compensation cost, net of forfeitures, of US$10,215,809. The vesting of these restricted shares are contingent upon the completion of a qualifying IPO whereupon they
will have vesting periods based on length of service ranging from 10 to 60 months and will expire no later than August 10, 2017. Upon effectiveness of the IPO, these awards will have an immediate vesting of all shares that would have vested between
the grant date and the effectiveness of the IPO and compensation expense will be recognized at that time based on the numbers of shares vested. Due to the vesting being contingent upon completion of a qualifying IPO, no compensation expense has been
recognized during the nine months ended September 30, 2007.
In addition, on August 11, 2007, the Company issued, under the Plan, a
grant of 333,333 restricted shares to a non-employee consultant, with an exercise price of US$0.0001 per share. These restricted shares have a vesting period based on length of service of 60 months and will expire no later than August 10, 2017. All
other terms of this award are the same as the employee awards. These awards are accounted for under EITF 96-18
Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or
Services
and the cost will be measured at the dates that the services are completed during the vesting period.
Due to
performance condition in the awards, no compensation expense had been recognized during the nine months ended September 30, 2007.
The
Company assumed a forfeiture ratio of 10% for non-executive employees in arriving at the total compensation expense.
The derived fair
value of the ordinary shares underlying the restricted share awards was determined by the Company, with reference to a retrospective third-party valuation as of August 11, 2007 by American Appraisal, using generally accepted valuation methodologies.
15. Related-party and employee transactions
(a)
Due from shareholders
The balances represent cash advances to two shareholders from the Company for traveling expenses and other
expenses. The balances bear no interest and have no fixed payment terms.
(b) Due from related parties
|
|
|
|
|
|
|
December 31,
2006
|
|
September 30,
2007
|
|
|
US$
|
|
US$
|
Jiantou Xinyuan
|
|
7,728,227
|
|
6,055,173
|
|
|
|
|
|
Total
|
|
7,728,227
|
|
6,055,173
|
|
|
|
|
|
F-88
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
Jiantou Xinyuan is co-invested by a third party and the Group, and the Group holds 45% of total
shares of Jiantou Xinyuan (see Note 7). The balance represents an entrusted loan to Jiantou Xinyuan for the development of real estate properties, which carries interest of 6.57% per annum (2006: 6.138%) and is repayable within one year.
(c) Due from employees
|
|
|
|
|
|
|
December 31,
2006
|
|
September 30,
2007
|
|
|
US$
|
|
US$
|
Advances to employees
|
|
313,807
|
|
660,142
|
|
|
|
|
|
The balance represents cash advances to employees for traveling expenses and other expenses. The
balances bear no interest and have no fixed payment terms.
(d) Due to related parties
|
|
|
|
|
|
|
December 31,
2006
|
|
September 30,
2007
|
|
|
US$
|
|
US $
|
Jiantou Xinyuan
|
|
3,763,843
|
|
324,077
|
|
|
|
|
|
Total
|
|
3,763,843
|
|
324,077
|
|
|
|
|
|
All the amounts bear no interest and have no fixed payment terms.
(e) Due to employees:
|
|
|
|
|
|
|
December 31,
2006
|
|
September 30,
2007
|
|
|
US$
|
|
US$
|
Total
|
|
25,612
|
|
38,586
|
|
|
|
|
|
Balance as of September 30, 2007 represented reimbursable expenses paid by the staff which
was reimbursable by the Group.
(f) Due to shareholders
|
|
|
|
|
|
|
December 31,
2006
|
|
September 30,
2007
|
|
|
US$
|
|
US$
|
Blue Ridge China
|
|
21,000,000
|
|
|
Equity International
|
|
14,000,000
|
|
|
|
|
|
|
|
Total
|
|
35,000,000
|
|
|
|
|
|
|
|
The loans from shareholders were fully paid off in April 2007.
F-89
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
(g) Others
For the nine months ended September 30, 2007, total directors remuneration paid amounted to US$128,556 (2006: US$ nil).
On April 16, 2005, Henan Xinyuan entered into a consulting agreement with a consulting company which is beneficially owned by Yong Cui, one of its directors, to provide finance consulting services to the Group
for a duration of 24 months. Total consulting fees paid in the nine months ended September 30, 2006 under the agreement amounted to US$30,202. No consulting fees were paid to the consulting company in the nine months ended September 30,
2007. On December 27, 2006, Henan Xinyuan entered into a consulting agreement with another consulting company which is beneficially owned by Yong Cui to provide similar finance consulting services to the Group, with an annual fee of US$30,735
starting from April 16, 2007. The agreement will expire on April 15, 2012, and it can be terminated by written consent from both parties. The agreement contains provisions on confidentiality and non-competition.
16. Equity
(a) Convertible Redeemable Preference Shares
As disclosed in Note 1, the Company entered into a securities purchase agreement with Blue Ridge China and Equity International
(collectively, the Investors) on August 25, 2006, whereby the Company issued a total of 30,805,400 Series A convertible redeemable preference shares (Series A preference shares) with warrants for total cash proceeds of
US$21,883,178, net of issuance costs of US$3,081,580 (including US$35,242 incurred in 2007). The Series A preference shares are issued with warrants to purchase additional Series A preference shares. Other significant terms of the preference shares
and warrants are outlined below:
Redemption
The Companys Series A convertible preference shares are redeemable, if not previously converted, upon the earlier occurrence of the date on which Mr. Zhang ceases to serve in the capacity of Chairman or the
fifth anniversary of the issuance date. Anytime thereafter, the holder may, by written notice given to the Company require the Company to redeem any or all Series A convertible redeemable preference shares held.
The redemption price is determined at a per share price in cash equal to the sum of the original issue price of US$0.81155 per share and an accreted
annual amount of ten percent (10%) of the original issue price, compounded annually to the date of redemption.
Conversion
Each Series A preference shares shall be convertible, upon issuance, into fully paid common shares at the option of the holder at an
initial conversion ratio of 1 to 1. Each Series A preference shares shall be converted into fully paid common shares automatically upon an initial public offering of the Group (IPO) or written approval by 75% of the Investors at a
conversion ratio that is adjustable under certain circumstances as follows:
(a) If the value of the common shares issuable
upon conversion of the Series A preference shares in connection with the IPO of the Group is less than an amount equal to two times the original Series A issue price plus an accreted annual amount of 10% compounded annually to the date of
F-90
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
completion of the IPO, the Company shall issue to the preference shareholders a number of common shares equal to the amount of such shortfall divided by the
price of common shares at IPO.
(b) If the Company sub-divides the outstanding common shares or issues a share dividend on
its outstanding common shares, the number of common shares issuable upon conversion of the Series A preference shares immediately prior to such subdivision or the issuance of such share dividend shall be proportionately increased by the same ratio
as the subdivision or dividend (with appropriate adjustments in the Series A conversion price). In case the Company shall at any time combine its outstanding common shares, the number of common shares issuable upon conversion of the Series A
preference shares immediately prior to such combination shall be proportionately decreased by the same ratio as the combination.
Voting
Rights
The Investors have voting rights that are equal to common shares on an as-converted basis. In addition, as mentioned in Note 1,
the Investors have substantive participating rights, the most significant of which relate to approval of annual plans and budgets and changes in existing management.
Dividends
The Series A preference shares shall rank senior to the common shares in all respects as
to rights of payment and distribution (whether in cash, in kind or in other property or securities), whether by way of dividend or upon a liquidation or otherwise. All such payments and distributions shall be made to the Series A convertible
redeemable preference shares in full prior to dividend distributions to ordinary shareholders. The Series A preference shares are participating securities for EPS purposes.
Liquidation Preference
On a
winding-up, the holders of Series A preference shares shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to holders of the Junior Shares by reason of their ownership of such
shares, for each Series A preference shares, the amount per share (the Series A Preference Amount) equal to two (2) times the sum of (x) US$0.81155, and (y) an accreted annual amount of ten percent (10%) on the
original Series A issue price, compounded annually from the date of issuance of such Series A preference shares to the date of payment hereunder.
After the payment in full has been made to the holders of Series A preference shares, the holders of the Series A preference shares shall be entitled to share ratably in all remaining assets and funds to be distributed.
Measurement and Recording
The
Series A preference shares were classified as mezzanine equity at gross proceeds net of issuance costs and are increased by period accretions using the interest method at an annual rate of 10%, so that the carrying amount will equal to the
redemption amount at the redemption date. At the issuance date of the Series A preference shares, the Group determined that there was no beneficial conversion feature as a result of the effective conversion price being higher than the fair value per
common share.
F-91
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
The carrying values of the preference shares are as follows:
|
|
|
|
|
|
Series A
|
|
|
|
US$
|
|
Issuance of preference shares
|
|
25,000,000
|
|
Issuance costs incurred in 2006
|
|
(3,081,580
|
)
|
Issuance costs incurred in 2007
|
|
(35,242
|
)
|
Warrant liability
|
|
(496,000
|
)
|
Burnham Warrants
|
|
(55,595
|
)
|
Accretion
|
|
3,109,660
|
|
|
|
|
|
Balance as of September 30, 2007
|
|
24,441,243
|
|
|
|
|
|
Warrant terms, Measurement and Recording
The warrants issued together with the Series A preference shares entitle the holders to purchase more Series A preference shares at an exercise price of
US$0.01 per share if the Group fails to meet specified profit performance targets in 2007 and 2008. If cumulative net income for the two-year period ending December 31, 2008 is less than US$80 million, the holders of the warrants are entitled
to purchase up to a maximum additional number of 3,987,009 fully paid Series A preference shares at an exercise price of US$0.01 per share so that their percentage interest in the Group on a fully diluted basis will be brought to a maximum of 36%.
If cumulative net income for the two-year period ending December 31, 2008 equals or exceeds US$80 million, then the warrants will expire without being exercised. On August 28, 2007, the Company amended the terms of the warrants issued to
Equity International and Blue Ridge China. Under the amended agreement, if the Company consummates a qualified initial public offering prior to March 31, 2008 the warrants will expire without being exercised.
The warrants were allocated their full fair value from the basket issuance with the Series A preference shares and classified as a liability in
accordance with FSP FAS 150-5
Issuers Accounting under FAS 150 for Freestanding Warrants and Other Similar Instruments on Shares that are Redeemable
on the basis that the issuer faces a cash outflow to settle them on redemption.
Changes in value from period to period are recognized through earnings. Management assessed that the probability of the exercisability for the Series A preference share warrants was 15% on September 30, 2007.
In the event that the warrants are exercised and additional Series A preference shares are issued, the total redemption amount in respect thereof is
limited to the exercise price of US$0.01 per share plus an accreted annual amount of ten percent (10%) of the exercise price, compounded annually, from the date of exercise to the date of redemption. The total impact on the redemption price of
the issued Series A convertible redeemable preference shares from the exercise of the warrants would be nominal since the Company is obligated to pay the holders upon redemption the exact amount received from the exercise of the warrants plus some
nominal interest accretion. With the exercise of the warrants being contingent upon certain events, the measurement date of a beneficial conversion feature will be on the date of exercise of the warrants.
(b) Common Shares
(i) As at
September 30, 2007 the Companys authorized share capital was 500 million common shares, par value US$0.0001 per share (2006: 450 million common shares).
F-92
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
(ii) In March 2006, the Company issued 60,000,000 outstanding common shares to the
Zhang Family for a consideration of US$6,000.
(iii) In August 2006, the Company issued the Burnham Warrants as payment for
services rendered and recorded its fair value of US$55,595 as paid in capital.
(iv) Under the terms of the agreement, if
any of the Burnham Warrants remains unexercised upon termination, Mr. Yong Zhang is entitled to purchase, within 60 days, the common shares underlying such remaining unexercised amount, at a purchase price of US$0.0001 per share. This benefit
was valued at the time of the issuance of the Burnham Warrants, and determined to be insignificant. The total cost is being amortized over the life of the Burnham Warrants. In November 2006, the Company issued 15,704,379 common shares for US$0.9551
per share, for total cash proceeds of US$14,552,985, net of issuance cost. These shares were issued to Blue Ridge China (9,422,627 shares) and Equity International (6,281,752 shares). Blue Ridge China and Equity International, subsequent to this
purchase, owned 12.4% and 8.3% of the Companys outstanding common shares, respectively, as of September 30, 2007.
The Company has certain restrictions on its ability to declare and pay dividends on its common shares and preference shares. No dividends are paid on convertible notes and floating rate notes; however, restrictions inherent in these notes
also restrict the ability to declare and pay dividends on common shares and preference shares. In addition, as disclosed in note 22, under the PRC laws and regulations, the Companys PRC subsidiaries are restricted in their ability to transfer
certain of their net assets to the Company in the form of dividend payments, loans or advances. The amounts restricted include paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling
US$78,730,297 as of September 30, 2007 (2006: US$78,730,297).
F-93
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
17. Earnings per share
Basic and diluted net earnings per share for each period presented are calculated as follows:
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
US$
|
|
|
US$
|
|
Numerator:
|
|
|
|
|
|
|
Net income
|
|
12,495,313
|
|
|
35,964,693
|
|
Accretion of Series A convertible redeemable preference shares
|
|
(235,575
|
)
|
|
(2,167,359
|
)
|
|
|
|
|
|
|
|
Net income attributable to ordinary Shareholders-basic
|
|
12,259,738
|
|
|
33,797,334
|
|
|
|
|
|
|
|
|
Interest related to convertible notes
|
|
|
|
|
232,877
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary shareholdersdiluted
|
|
12,259,738
|
|
|
34,030,211
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Number of shares outstanding, opening
|
|
60,000,000
|
|
|
75,704,379
|
|
Convertible redeemable preference shares
|
|
3,038,341
|
|
|
30,805,400
|
|
|
|
|
|
|
|
|
Number of shares outstandingbasic
|
|
63,038,341
|
|
|
106,509,779
|
|
|
|
|
|
|
|
|
Burnham warrants
|
|
|
|
|
1,853,172
|
|
Convertible bonds
|
|
|
|
|
5,905,920
|
|
|
|
|
|
|
|
|
Number of shares outstandingdiluted
|
|
63,038,341
|
|
|
114,268,871
|
|
|
|
|
|
|
|
|
Earnings per sharebasic
|
|
0.19
|
|
|
0.32
|
|
|
|
|
|
|
|
|
Earnings per sharediluted
|
|
0.19
|
|
|
0.30
|
|
|
|
|
|
|
|
|
The Burnham warrants have been excluded from the computation of dilutive earnings per share for
the nine months ended September 30, 2006, as they are anti-dilutive.
F-94
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
On August 25, 2006, the Company issued Series A convertible redeemable preference shares that
will convert automatically into common shares upon the completion of an IPO. Assuming the conversion had occurred on a hypothetical basis on January 1, 2007, the proforma basic and diluted earnings per share for the nine months
ended September 30, 2007 is calculated as follows:
|
|
|
|
|
|
Nine months ended
September 30, 2007
|
|
|
|
US$
Proforma
(Note 2)
Unaudited
|
|
Numerator:
|
|
|
|
Net income attributable to ordinary shareholders
|
|
33,797,334
|
|
Accretion of convertible redeemable preference shares
|
|
2,167,359
|
|
|
|
|
|
Net income for proforma basic earnings per share
|
|
35,964,693
|
|
|
|
|
|
Interest related to convertible notes
|
|
232,877
|
|
Stock compensation cost
|
|
(1,688,154
|
)
|
|
|
|
|
Net income for proforma diluted earnings per share
|
|
34,509,416
|
|
|
|
|
|
Denominator:
|
|
|
|
Number of shares outstanding, opening
|
|
75,704,379
|
|
Vested restricted shares
|
|
22,113
|
|
Conversion of preference shares to common shares (30,805,400 shares)
|
|
30,805,400
|
|
|
|
|
|
Number of shares outstandingproforma basic
|
|
106,531,892
|
|
|
|
|
|
Burnham warrants
|
|
1,853,172
|
|
Convertible bonds
|
|
5,905,920
|
|
Unvested restricted shares
|
|
42,983
|
|
|
|
|
|
Number of shares outstandingproforma diluted
|
|
114,333,967
|
|
|
|
|
|
Proforma basic earnings per share
|
|
0.34
|
|
|
|
|
|
Proforma diluted earnings per share
|
|
0.30
|
|
|
|
|
|
The terms of the Series A preference shares allow the holders to receive additional common shares
if the value of the common shares upon conversion of the Series A preference shares in connection with an IPO is less than two times the original Series A preference shares issuance price of US$0.81155, plus an accreted mount of 10% compounded
annually to the date of completion of the IPO. The holders of the Series A preference shares shall receive common shares equal to the amount of the shortfall divided by the price of the common shares. The effect of the Senior Floating Rate note
warrants on pro forma earnings per share cannot be determined as their exercise price is based on a percentage of the IPO price.
The
effects of 3,198,417 options have been excluded from the computation of pro-forma diluted earnings per share for the period ended September 30, 2007 as they are anti-dilutive.
F-95
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
18. Segment reporting
The Group considers that each of its individual property developments is a discrete operating segment. The Group has aggregated its segments on a provincial basis as property development projects undertaken within a
province have similar expected economic characteristics, type of properties offering, customers and market and regulatory environment. The Groups reportable operating segments are comprised of the Henan Province, Shandong Province, Jiangsu
Province, Sichuan Province and Anhui Province. Each geographic operating segment is principally engaged in the construction and development of residential real estate units. The other category relates to investment holdings, property
management services, installation of intercom systems, landscaping, engineering and management, real estate sale, purchase and lease activities. The accounting policies of the various segments are the same as those described in Note 2, Summary
of Significant Accounting Policies.
The Groups chief operating decision maker relies upon net sales, gross profit and net
income when making decisions about allocating resources and assessing performance of the Group. Net sales for geographic segments are generally based on the location of the project development. Net income for each segment includes net sales to third
parties, related cost of sales and operating expenses directly attributable to the segment.
No single customer accounted for more than 10%
of net sales for the nine months ended September 30, 2006 and 2007.
Summary information by operating segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
Henan
|
|
|
Shandong
|
|
|
Others
|
|
|
Consolidated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net real estate sales
|
|
99,341,045
|
|
|
|
|
|
|
|
|
99,341,045
|
|
Real estate lease income
|
|
171,150
|
|
|
|
|
|
|
|
|
171,150
|
|
Other revenue
|
|
|
|
|
651
|
|
|
142,220
|
|
|
142,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
99,512,195
|
|
|
651
|
|
|
142,220
|
|
|
99,655,066
|
|
|
|
|
|
|
Cost of real estate sales
|
|
(75,100,616
|
)
|
|
|
|
|
|
|
|
(75,100,616
|
)
|
Cost of real estate lease income
|
|
(347,341
|
)
|
|
|
|
|
|
|
|
(347,341
|
)
|
Other cost
|
|
|
|
|
|
|
|
(164,543
|
)
|
|
(164,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
(75,447,957
|
)
|
|
|
|
|
(164,543
|
)
|
|
(75,612,500
|
)
|
|
|
|
|
|
Gross profit
|
|
24,064,238
|
|
|
651
|
|
|
(22,323
|
)
|
|
24,042,566
|
|
|
|
|
|
|
Operating expenses
|
|
(3,693,527
|
)
|
|
(224,373
|
)
|
|
(54,110
|
)
|
|
(3,972,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
20,370,711
|
|
|
(223,722
|
)
|
|
(76,433
|
)
|
|
20,070,556
|
|
|
|
|
|
|
Interest income
|
|
120,393
|
|
|
2,054
|
|
|
2,004
|
|
|
124,451
|
|
Interest expense
|
|
(307,239
|
)
|
|
|
|
|
|
|
|
(307,239
|
)
|
Share of loss in an equity investee
|
|
(446,086
|
)
|
|
|
|
|
|
|
|
(446,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
19,737,779
|
|
|
(221,668
|
)
|
|
(74,429
|
)
|
|
19,441,682
|
|
Income tax expense
|
|
(6,948,592
|
)
|
|
|
|
|
|
|
|
(6,948,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) before minority interest
|
|
12,789,187
|
|
|
(221,668
|
)
|
|
(74,429
|
)
|
|
12,493,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
695,997
|
|
|
3,738
|
|
|
|
|
|
699,735
|
|
Goodwill
|
|
|
|
|
|
|
|
1,105,408
|
|
|
1,105,408
|
|
Capital expenditure
|
|
297,551
|
|
|
146,870
|
|
|
|
|
|
444,421
|
|
Total long-lived assets
|
|
27,489,533
|
|
|
|
|
|
|
|
|
27,489,533
|
|
Total assets
|
|
89,618,875
|
|
|
30,843,651
|
|
|
3,218,919
|
|
|
123,681,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-96
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Henan
|
|
|
Shandong
|
|
|
Jiangsu
|
|
|
Anhui
|
|
|
Sichuan
|
|
|
Others
|
|
|
Consolidated
|
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
|
US$
|
|
Net real estate sales
|
|
91,193,644
|
|
|
32,415,011
|
|
|
74,393,335
|
|
|
17,906,287
|
|
|
|
|
|
|
|
|
215,908,277
|
|
Real estate lease income
|
|
165,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,514
|
|
Other revenue
|
|
|
|
|
6,943
|
|
|
3,915
|
|
|
3,357
|
|
|
2
|
|
|
2,212,733
|
|
|
2,226,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
91,359,158
|
|
|
32,421,954
|
|
|
74,397,250
|
|
|
17,909,644
|
|
|
2
|
|
|
2,212,733
|
|
|
218,300,741
|
|
|
|
|
|
|
|
|
|
Cost of real estate sales
|
|
(45,765,302
|
)
|
|
(26,524,696
|
)
|
|
(58,342,695
|
)
|
|
(14,398,718
|
)
|
|
|
|
|
|
|
|
(145,031,411
|
)
|
Cost of real estate lease income
|
|
(319,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(319,750
|
)
|
Other cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,638,620
|
)
|
|
(1,638,620
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
(46,085,052
|
)
|
|
(26,524,696
|
)
|
|
(58,342,695
|
)
|
|
(14,398,718
|
)
|
|
|
|
|
(1,638,620
|
)
|
|
(146,989,781
|
)
|
|
|
|
|
|
|
|
|
Gross profit
|
|
45,274,106
|
|
|
5,897,258
|
|
|
16,054,555
|
|
|
3,510,926
|
|
|
2
|
|
|
574,113
|
|
|
71,310,960
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
(4,670,464
|
)
|
|
(2,388,880
|
)
|
|
(2,866,887
|
)
|
|
(1,291,271
|
)
|
|
(383,863
|
)
|
|
(2,091,260
|
)
|
|
(13,692,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
40,603,642
|
|
|
3,508,378
|
|
|
13,187,668
|
|
|
2,219,655
|
|
|
(383,861
|
)
|
|
(1,517,147
|
)
|
|
57,618,335
|
|
Interest income
|
|
291,897
|
|
|
125,492
|
|
|
205,299
|
|
|
17,830
|
|
|
4,068
|
|
|
90,790
|
|
|
735,376
|
|
Interest expense
|
|
(509,610
|
)
|
|
(88,006
|
)
|
|
(1,214,504
|
)
|
|
(146,901
|
)
|
|
|
|
|
520,419
|
|
|
(1,438,602
|
)
|
Income from change in fair value of warrant liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,186,000
|
)
|
|
(6,186,000
|
)
|
Share of income in an equity investee
|
|
5,819,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,819,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
46,205,663
|
|
|
3,545,864
|
|
|
12,178,463
|
|
|
2,090,584
|
|
|
(379,793
|
)
|
|
(7,091,938
|
)
|
|
56,548,843
|
|
Income tax expense
|
|
(15,959,572
|
)
|
|
(910,758
|
)
|
|
(3,078,299
|
)
|
|
(579,820
|
)
|
|
100,780
|
|
|
(156,481
|
)
|
|
(20,584,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) before minority interest
|
|
30,246,091
|
|
|
2,635,106
|
|
|
9,100,164
|
|
|
1,510,764
|
|
|
(279,013
|
)
|
|
(7,248,419
|
)
|
|
35,964,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
235,744
|
|
|
39,000
|
|
|
30,479
|
|
|
19,215
|
|
|
4,222
|
|
|
997,660
|
|
|
1,326,320
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,105,408
|
|
|
1,105,408
|
|
Capital expenditure
|
|
938,964
|
|
|
161,330
|
|
|
220,892
|
|
|
84,834
|
|
|
208,877
|
|
|
|
|
|
1,614,897
|
|
Total long-lived assets
|
|
84,662,759
|
|
|
396,962
|
|
|
59,961,748
|
|
|
153,407
|
|
|
208,058
|
|
|
6,165,603
|
|
|
151,548,537
|
|
Total assets
|
|
72,959,560
|
|
|
117,826,968
|
|
|
150,778,882
|
|
|
24,589,622
|
|
|
64,034,312
|
|
|
74,827,186
|
|
|
505,016,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-97
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
19. Commitments and contingencies
The Group leases certain of its office properties under operating lease arrangements. Payments under operating leases are expensed on a straight-line
basis over the periods of their respective leases, and the terms of the leases do not contain rent escalation, or contingent rent, renewal, or purchase options. There are no restrictions placed upon the Group by entering into these leases.
Commitments
As of September 30,
2007, the Group has lease payments under non-cancellable leases falling due as follows:
|
|
|
|
|
Amount
|
|
|
US$
|
Due within 1 year
|
|
168,170
|
Due after 1 year, within 2 years
|
|
17,525
|
|
|
|
Total
|
|
185,695
|
|
|
|
As of September 30, 2007, the Group has outstanding commitments with respect to
non-cancelable construction contracts for real estate development and land use rights purchases as follows:
|
|
|
|
|
Amount
|
|
|
US$
|
Due within 1 year
|
|
117,483,543
|
|
|
|
Contingencies
On June 28, 2003, Henan Xinyuan was sued by Henan Jiantong Industrials Co., Ltd. (Jiantong), its former contractor. The lawsuit charged Henan Xinyuan with a total fine of US$102,287 for breach of
contract. However, on August 9, 2003, Henan Xinyuan countercharged Jiantong with false allegation that impaired Henan Xinyuans reputation and appealed for the withdrawal of investment capital from Jiantong. Total amount of the investment
capital to be withdrawn and reputation compensation sought is US$28,604. As of September 30, 2007, the final judgment from the court was still pending.
On March 14, 2006, Henan Xinyuan was sued by Henan Oriental Construction Company Co., Ltd., its former contractor, claiming payment of construction fees of US$225,940 and an amount of US$32,016 for breach of
contract. As of September 30, 2007, the final judgment from the court was still pending.
The PRC subsidiaries have complied with the
requirements of their local authority to accrue for retirement benefit contributions in respect of their employees (See Note 2 (s)). However payment of such accrued amount has not been sought by the regulatory bureau.
As at September 30, 2007, the Group provided guarantees of US$172,470,416 (September 30, 2006: US$51,476,855), in favor of their customers
in respect of mortgage loans granted by banks to such customers for their purchases of the Groups properties where the underlying real estate ownership certificates can only be provided to the banks on a time delay manner due to administrative
procedures in the PRC. Pursuant to the terms of the guarantees, upon default in mortgage payments by these purchasers, the Group is responsible to repay the outstanding mortgage principals together with the accrued interest and penalty owed by the
defaulted
F-98
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
purchasers to the banks and the Group is entitled to take over the legal titles and possession of the related properties. The Groups guarantee period
starts from the dates of grant of the relevant mortgage loans and ends upon issuance of real estate ownership certificates which will generally be available within six to twelve months after the purchasers take possession of the relevant properties.
The fair value of the guarantees is not significant and the directors consider that in case of default in payments, the net realizable
value of the related properties can cover the repayment of the outstanding mortgage principal together with the accrued interest and penalty and therefore no provision has been made for the guarantees.
On September 16, 2004, Henan Xinyuan acquired an interest in a land site located in Zhengzhou City of Henan Province from Henan Park Property Co. Ltd.
(Park Property) for a total purchase price of US$21,636,124. However, Park Property failed to transfer the land use right to Henan Xinyuan before the due date, December 5, 2004. On April 5, 2005, Henan Xinyuan sued Park Property for
breach of the land transfer agreement. Pursuant to the final judgment of the court filed on December 12, 2005, Park Property was ordered to transfer the land use right to Henan Xinyuan. Park Property appealed the court decision. As of November 10,
2006, the court has turned down the appeal of Park Property and rendered its final verdict that Henan Xinyuan prevail. The court then enforced the legal transfer of the subject land to Henan Xinyuan, which received the official land certificate in
February 2007. However, Henan Xinyuan may be required to settle the relocation and settlement costs of US$5,122,492 due to Park Propertys financial insolvency. As Park Property is currently under liquidation procedures, any additional costs
incurred by Henan Xinyuan may not be fully recoverable from Park Property. The Company has assessed the recoverability of its investment in this land site, including the additional costs that may be incurred and has concluded that no impairment
provision is required.
20. Concentration of risk
The Groups operations are conducted in the PRC. Accordingly, the Groups business, financial condition and results of operations may be influenced by the political, economic and legal environments in the
PRC, and by the general state of the PRC economy.
The Groups operations in the PRC are subject to special considerations and
significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Groups results
may be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates
and methods of taxation, among other things.
The Group transacts part of its business in RMB, which is not freely convertible into foreign
currencies. All foreign exchange transactions take place either through the Peoples Bank of China (PBOC) or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the PBOC. Approval of foreign
currency payments by the PBOC or other institutions requires submitting a payment application form together with suppliers invoices, shipping documents and signed contracts.
On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the RMB to the US$. Under the new policy, the RMB is
permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy has resulted in a 7.98% appreciation of the RMB against the US$ from July 21, 2005 to 30, September, 2007.
F-99
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
Additionally, the value of the RMB is subject to changes in central government policies and to
international economic and political developments affecting supply and demand in the PRC foreign exchange trading system market.
The
Groups real estate projects are concentrated in Henan province. Any negative events such as a slow down in the economy in Henan province might cause material loss to the Group and have a material adverse effect on the Groups financial
condition and results of operations. The risk in this respect is mitigated by the Group by expanding its operations outside of Henan province.
The Group sells to a wide range of customers. No single customer accounted for a significant percentage of the revenue for the nine months ended September 30, 2006 and 2007.
21. Subsequent event
(a) 2007 Long Term
Incentive Plan
In November 2007, the Company adopted the 2007 Long Term Incentive Plan (the 2007 Plan) which provides for
the grant of options, restricted shares, restricted stock units, stock appreciation rights and other stock-based awards to purchase its common shares. The maximum aggregate number of common shares which may be issued pursuant to all awards,
including options, is 10 million common shares, subject to adjustment to accounting for changes in the capitalization of the Company. The board of directors may grant awards under the 2007 Plan prior to the offering, provided that no awards granted
may vest prior to completion of the IPO.
On November 5, 2007, the Company granted options under the 2007 Plan to directors, management and
key employees for an aggregate of 2,441,844 common shares at the exercise price equal to the price of the offering. These options have vesting periods of up to 36 months, and will expire no later than the 10th anniversary of the date of grant.
(b) Waiver of Certain Conversion Rights of Series A Convertible Preference Shares
On November 13, 2007, the holders of the Series A convertible preference shares agreed to waive the contingent conversion option. As such, the Series A
convertible preference shares will automatically convert at the time of a qualifying IPO on a 1 to 1 basis, subject to usual anti-dilution adjustments.
The modification is deemed to be substantive and will be treated as an extinguishment of the Series A convertible preference shares. Under EITF Topic D-42,
The Effect on the Calculation of Earnings per Share
for the Redemption or Induced Conversion of Preferred Stock
, the Company will recognize a dividend to the Series A convertible preferred shareholders, representing the difference between the fair value of the convertible preference shares
immediately after modification and the carrying value of the Series A convertible preference shares immediately prior to modification. This deemed dividend to the Series A shareholders will not affect the Companys net income or cash flows,
however, it will reduce the Companys net income attributable to ordinary shareholders and earnings per share (ADS) for the year ending December 31, 2007.
The Company has determined that on November 13, 2007, a 4% marketability discount be applied to the initial offering price of US$14.00 per ADS to arrive at a fair value of US$6.72 for each Series A convertible
preference share. In calculating the discount, the Company has taken into account the premium in the value of the Series A convertible preference shares relative to the common shares, and the residual price risk of the Series A preference
shareholders before the offering, and has assumed that the offering will be consummated prior to year
F-100
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
end. The Company will also review the actual IPO issue price and account for the Series A convertible preference shares accordingly in its financial
statements for the year ending December 31, 2007. At this estimated fair value, the Company will record the modified Series A convertible preference shares at an amount of approximately US$207.0 million and the deemed dividend to the Series A
preference shareholders at approximately US$182.2 million, which will reduce the net income attributable to ordinary shareholders and retained earnings by the same amount of US$182.2 million.
22. Condensed financial information of the Company
Under the PRC laws and regulations, the Companys PRC subsidiaries are restricted in their ability to transfer certain of their net assets to the Company in the form of dividend payments, loans or advances. The amounts restricted
include paid-in capital and statutory reserves, as determined pursuant to PRC generally accepted accounting principles, totaling US$78,730,297 as of September 30, 2007 (2006: US$78,730,297).
Balance sheet
|
|
|
|
|
September 30,
2007
|
|
|
US$
(Unaudited)
|
ASSETS
|
|
|
|
|
Investments in subsidiaries
|
|
111,205,735
|
|
|
|
Current assets
|
|
|
Other current assets
|
|
1,530,020
|
|
|
|
TOTAL ASSETS
|
|
112,735,755
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
Current liabilities
|
|
|
Due to a subsidiary
|
|
322,448
|
Other payable and accrued liabilities
|
|
1,215,020
|
|
|
|
Total liabilities
|
|
1,537,468
|
|
|
|
Preference shares
|
|
|
Preference shares, $0.0001 par value:
|
|
|
Authorized50,000,000 shares
|
|
|
Issued and outstanding30,805,400 shares
|
|
24,441,243
|
|
|
Shareholders equity
|
|
|
Common shares, $0.0001 par value:
|
|
|
Authorized500,000,000 shares
|
|
|
Issued and outstanding75,704,379 shares
|
|
7,570
|
Additional paid-in capital
|
|
17,180,691
|
Other comprehensive income
|
|
8,024,651
|
Retained earnings
|
|
61,544,132
|
|
|
|
Total shareholders equity
|
|
86,757,044
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
112,735,755
|
|
|
|
F-101
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
Statement of operations
|
|
|
|
|
|
September 30,
2007
|
|
|
|
US$
(Unaudited)
|
|
|
General and administrative expenses
|
|
(5,133
|
)
|
|
|
|
|
Operating loss
|
|
(5,133
|
)
|
Equity in profit of subsidiaries, net
|
|
35,969,826
|
|
|
|
|
|
Income from operations before income taxes
|
|
35,964,693
|
|
Income taxes
|
|
|
|
|
|
|
|
Net income
|
|
35,964,693
|
|
Accretion of Series A convertible redeemable preference shares
|
|
(2,167,359
|
)
|
|
|
|
|
Net income attributable to ordinary shareholders
|
|
33,797,334
|
|
|
|
|
|
Statement of cash flows
|
|
|
|
|
|
September 30,
2007
|
|
|
|
US$
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
|
35,964,693
|
|
|
|
Adjustment to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Equity in profit of subsidiaries, net
|
|
(35,969,826
|
)
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Due to a subsidiary
|
|
5,133
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Investment in a subsidiary
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
|
|
|
Cash and cash equivalents, at the beginning of the period
|
|
|
|
|
|
|
|
Cash and cash equivalents, at end of the period
|
|
|
|
|
|
|
|
F-102
XINYUAN REAL ESTATE CO., LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2006 and September 30, 2007 (unaudited) for the nine months ended
September 30,
2006 (unaudited) and 2007 (unaudited)
(All amounts stated in US$, except for number of shares data)
(a) Basis of presentation
In the Company-only financial statements, the Companys investment in subsidiaries is stated at cost plus its equity interest in undistributed earnings of subsidiaries since inception. The Company-only financial
statements should be read in conjunction with the Companys consolidated financial statements.
The Company records its investment in
its subsidiaries under the equity method of accounting as prescribed in APB Opinion No. 18,
The Equity Method of Accounting for Investments in Common Stock
. Such investment is presented on the balance sheet as
Investment in subsidiaries and share of the subsidiaries profit or loss as Equity in profit (loss) of subsidiary company on the statements of operations.
The subsidiaries did not pay any dividends to the Company for the periods presented.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting
principles have been condensed or omitted.
(b) Related party balances
For the nine months ended September 30, 2007, a subsidiary of the Company paid start-up costs and audit fees amounting to US$322,448 total on behalf
of the Company.
(c) Commitments
The
Company does not have significant commitments or long-term obligations as of the period end presented.
F-103
Through and including January 5, 2008 (the 25th day
after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
17,500,000
American Depositary Shares
Xinyuan Real Estate Co., Ltd.
(incorporated in the Cayman Islands with limited liability)
Representing
35,000,000 Common Shares
PROSPECTUS
Merrill Lynch & Co.
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Deutsche Bank Securities
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Allen & Company LLC
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