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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended September 30, 2012
 
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from __________ to __________ 


Commission File No. 0-23015

GREAT CHINA INTERNATIONAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction of
incorporation or organization)
 
87-0450232
(IRS Employer Identification No.)
 
C Site 25-26F President Building, No. 69 Heping North Street
Heping District, Shenyang 110003, Peoples Republic of China
(Address of principal executive offices)

0086-24-22813888
(Issuer’s telephone number)

Not Applicable
(Former name, address and fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-3 of the Exchange Act). (check one)
 
Large Accelerated Filer [  ]  Accelerated Filer [  ]  Non-Accelerated Filer [  ]  Smaller Reporting Company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ] No [X]

State the number of shares outstanding of each of the issuer’s classes of common equity:  As of October 31, 2012, there were 11,759,966 shares of common stock outstanding.

 
 

 

FORM 10-Q
GREAT CHINA INTERNATIONAL HOLDINGS, INC.

TABLE OF CONTENTS

   
Page
PART I.
Item 1.  Financial Information
 
     
 
Balance Sheet as of September 30, 2012 (Unaudited) and December 31, 2011 
3
     
 
Statements of comprehensive Income (Loss) for the Three-Month and Nine-Month
   Periods Ended September 30, 2012 and 2011 (Unaudited) 
4
     
 
Statements of Cash Flows for the Nine-Month Periods
   Ended September 30, 2012 and 2011 (Unaudited) 
5
     
 
Notes to the Financial Statements
6
     
 
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 
12
     
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 
14
     
 
Item 4.  Controls and Procedures 
14
     
PART II.
Other Information 
 
     
 
Item 6.  Exhibits 
15
     
 
Signatures
16
 
2

 
 

 
GREAT CHINA INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
(UNAUDITED)
                 
       
September 30, 2012
 
December 31, 2011
                 
ASSETS
                 
Current assets:
         
 
Cash and cash equivalents
$
6,899,541
 
$
6,294,500
 
Accounts receivable, net
 
275,034
   
12,782
 
Other receivable, net
 
307,206
   
233,634
                 
     
Total current assets
 
7,481,781
   
   6,540,916
                 
Long-term loan receivable
 
4,821,156
   
  5,131,953
Property and equipment, net
 
249,259
   
313,679
Rental property, net
 
  47,104,632
   
49,420,220
                 
Total assets
$
59,656,828
 
$
61,406,768
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
                 
 Current liabilities:
         
 
 Bank loans
  6,364,562
 
  20,940,911
 
 Accounts payable
 
   4,506,130
   
   4,515,394
 
 Accrued expenses
 
  123,855
   
   165,418
 
 Other payable
 
   2,171,263
   
   2,031,351
 
 Payable to disposed subsidiaries
 
   835,579
   
  834,371
 
 Advances from buyers
 
  1,239,205
   
   1,327,291
 
 Taxes payable
 
   4,298,168
   
  4,369,834
                 
 Total current liabilities
 
 19,538,762
   
  34,184,571
                 
 Long term debt, net
 
14,606,670
      -
 Total liabilities
 
34,145,433
   
34,184,571
                 
 Stockholders' equity:
         
 
Common stock,  $.001 par value 50,000,000 shares authorized,
         
 
   11,759,966  issued and outstanding as of
         
 
   September 30, 2012 and December 31, 2011
 
  11,760
   
    11,760
 
 Additional paid in capital
 
  4,566,156
   
   4,566,156
 
 Statutory reserve
 
  638,128
   
  638,128
 
 Accumulated other comprehensive income
 
   4,259,648
   
  4,256,243
 
 Retained earnings
 
  16,035,703
   
  17,749,911
                 
 Total stockholders' equity
 
  25,511,396
   
  27,222,198
                 
 Total liabilities and stockholders' equity
 59,656,828
 
  61,406,768
                 
                 
The accompanying notes are integral part of these unaudited consolidated financial statements.
 
3
 
 

 


GREAT CHINA INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND 2011
(UNAUDITED)
         
   
Three month periods ended September 30,
 
Nine month periods ended September 30,
   
2012
 
2011
 
2012
 
2011
Revenues
                     
 
Real estate sales
$
-
 
$
-
 
$
-
 
$
-
 
Rental income
 
1,460,072
   
1,291,349
   
4,288,068
   
3,869,589
 
Management fee income
 
549,375
   
502,300
   
1,560,745
   
1,491,467
 
Total revenues
 
2,009,447
   
1,793,649
   
5,848,649
   
5,361,056
Cost of revenues
                     
 
Real estate cost
 
-
   
-
      -    
-
 
Rental cost
 
1,270,284
   
1,107,951
   
3,396,465
   
3,418,064
 
Management fee cost
 
334,584
   
362,346
   
1,205,972
   
1,193,414
 
Total cost
 
1,604,868
   
1,470,298
   
4,602,437
   
4,611,478
 
Gross profit
 
404,580
   
323,351
   
1,246,376
   
749,578
Operation expenses
                     
 
Selling expenses
 
20,736
   
24,280
   
46,453
   
58,896
 
General and administrative expenses
 
455,021
   
354,490
   
1,359,907
   
1,342,797
 
Depreciation and amortization
 
22,742
   
26,045
   
66,795
   
79,284
 
Abandonment of real estate inventory
 
-
   
-
   
-
   
-
 
Total operation expenses
 
498,499
   
404,815
   
1,473,156
   
1,480,977
                         
Loss from operations
 
(93,919)
   
(81,463)
   
(226,780)
   
(731,399)
Other income (expense)
                     
 
Land leveling income
 
-
   
-
   
-
   
-
 
Disposal of parking lots income
 
-
   
439,181
   
-
   
828,038
 
Other income, net
 
80,759
   
57,048
   
147,573
   
161,294
 
Interest and finance costs
 
(410,103)
   
(507,427)
   
(1,634,836)
   
(1,659,490
 
Total other income (expense)
 
(329,344)
   
(11,198)
   
(1,487,263)
   
(670,158)
                         
Loss before income taxes
 
(423,263)
   
(92,662)
   
(1,714,043)
   
(1,401,557)
                       
Provision for income taxes
 
-
   
-
   
-
   
-
                         
Net loss
 
(423,263)
   
(92,662)
   
(1,714,043)
   
(1,401,557)
Other comprehensive income (loss):
                     
 
Foreign currency translation adjustment
 
305,441
   
366,036
   
3,405
   
928,943
Comprehensive income (loss)
$
(117,822)
 
$
273,374
 
$
(1,710,637)
 
$
(472,614)
Net (loss) income per share
                     
 
Basic
$
(0.01)
 
$
0.02
 
$
(0.15)
 
$
(0.04)
 
Diluted
$
(0.01)
 
$
0.02
 
$
(0.15)
 
$
(0.04)
                         
Weighted average number of shares outstanding
                     
 
Basic
 
11,759,966
   
11,759,966
   
11,759,966
   
11,759,966
 
Diluted
 
11,759,966
   
11,759,966
   
11,759,966
   
11,759,966
                         
                         
The accompanying notes are integral part of these unaudited consolidated financial statements.
 
4
 
 

 


GREAT CHINA INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2012 AND 2011
(UNAUDITED)
             
   
For the Nine Months Ended
September 30,
   
2012
 
2011
             
Cash flows from operating activities:
         
Net loss
$
(1,714,043)
 
$
(1,401,557)
Adjustments to reconcile net loss to net cash provided
         
 
by (used in) operating activities
         
 
Depreciation and amortization
 
2,460,442
   
2,456,928
 
Gain on disposal of parking lots
 
-
   
(828,038)
 
Provision for doubtful accounts
 
-
   
37,004
(Increase) decrease in current assets:
         
 
Accounts receivable and other receivable
 
(341,738)
   
(168,663)
 
Advances to suppliers
 
8,688
   
6,148
 
Properties held for resale
 
-
   
-
Increase (decrease) in current liabilities:
         
 
Accounts payable and accrued expenses
 
78,935
   
126,698
 
Advances from buyers
 
(89,359)
   
(196,415)
 
Income and other taxes payable
 
(77,429)
   
(22,857)
             
Net cash provided by operating activities
 
325,497
   
9,247
             
Cash flows from investing activities:
         
 
Purchases of property and equipment
 
(10,886)
   
-
 
Proceeds from disposal of parking lots
 
-
   
832,039
             
Net cash (used in) provided by investing activities
 
(10,886)
   
832,039
             
Cash flows from financing activities:
         
 
Loans repayment from third party
 
315,935
   
-
 
Loan to third party
 
-
   
(2,397,883)
             
Net cash provided by (used in) financing activities
 
315,935
   
(2,397,883)
           
Effect of exchange rate
 
(25,505)
   
215,438
           
Net increase (decrease) in cash and cash equivalents
 
605,041
   
(1,341,159)
           
Cash and cash equivalents, beginning of period
 
  6,294,500
   
9,584,071
           
Cash and cash equivalents, end of period
$
6,899,541
 
$
 8,242,912
           
Supplemental disclosures of cash flow information:
         
 
Interest paid
$
1,634,787
 
$
1,698,808
 
Income tax paid
$
-
 
$
-
             
             
The accompanying notes are integral part of these unaudited consolidated financial statements.
 
5
 
 

 
 

GREAT CHINA INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - UNAUDITED
 
1.  
Description of business

Great China International Holdings, Inc., (the “Company”) was incorporated in the State of Nevada on December 4, 1987, under the name of Quantus Capital, Inc. The Company, through its various subsidiaries, is engaged in commercial and residential real estate leasing, management, consulting, investment, development and sales in the city of Shenyang, Liaoning Province, in the People’ Republic of China (“PRC”).

2.  
Summary of significant accounting policies
 
Unaudited Interim Financial Information

The accompanying unaudited financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results for any future period. These statements should be read in conjunction with the Company's audited financial statements and notes thereto for the fiscal year ended December 31, 2011. The results of the three month and nine-month periods ended September 30, 2012 are not necessarily indicative of the results to be expected for the full fiscal year ending December 31, 2012.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances within the Company are eliminated in consolidation.

Use of estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign currency translation

The Company uses the United States dollar for financial reporting purposes. The Company’s subsidiaries maintain their books and records in their functional currency - Chinese Yuan Renminbi (CNY), being the primary currency of the economic environment in which their operations are conducted. All assets and liabilities are translated at the current exchange rate, stockholder’s equity are translated at the historical rates and income statement and statement of cash flows items are translated at the average exchange rate for the period. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet. The resulting translation adjustments are reported under other comprehensive as a component of shareholders’ equity.

Cash and cash equivalents

The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
 
Allowance for doubtful accounts

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and other receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. As of September 30, 2012 and December 31, 2011, the Company reserved $1,702,276 and $1,699,814 respectively, for other receivable bad debt, and $696,686 and $695,678, respectively, for accounts receivable bad debt. The Company also reserved $1,988,926 and $1,986,050 respectively for loans receivable.
 
6
 
 

 

Property and equipment

Property and equipment is being depreciated over the estimated useful lives of the related assets. Depreciation is computed on the straight-line basis over useful lives as follows:

Buildings
8-26 years
Equipment
5 years
Automobile
5 years
Office furniture and fixtures
5 years

Repairs and maintenance costs are normally charged to the statement of operations and other comprehensive income in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.

Property and equipment are evaluated annually for any impairment in value. Where the recoverable amount of any property and equipment is determined to have declined below its carrying amount, the carrying amount is reduced to reflect the decline in value. There were no property and equipment impairments recognized as of September 30, 2012 and December 31, 2011 respectively.

Real estate held for development or sale

The Company capitalizes as real estate held for development or sale, the direct construction and development costs, property taxes, interest incurred on costs related to land under development and other related costs (i.e. engineering, surveying, landscaping, etc.) until the property reaches its intended use. As of the December 31, 2010, except the parking spaces, all the merchantable real estates of Qiyuan New Village, Peacock Garden, Chenglong Garden had been sold. As of September 30, 2012 and December 31, 2011, real estate held for development or sale amounted to zero.

Properties held for rental

Properties include buildings held for rental and land use rights, which are being depreciated over the estimated useful lives of the related assets. Depreciation is computed on the straight-line basis over 20-26 years. As of September 30, 2012 and December 31, 2011, net property held for rental amounted to $47,104,632 and $49,420,220, respectively. Accumulated depreciation of rental properties amounted to $25,829,746 as of September 30, 2012 and $23,402,215 as of December 31, 2011.

Revenue recognition

Real estate sales – Revenue from the sales of development properties is recognized by the full accrual method when the sale is consummated. A sale is not considered consummated until (1) the parties are bound by the terms of a contract, (2) all consideration has been exchanged, (3) any permanent financing of which the seller is responsible has been arranged, (4) all conditions precedent to closing have been performed, (5) the seller does not have substantial continuing involvement with the property, and (6) the usual risks and rewards of ownership have been transferred to the buyer. Sales transactions not meeting all the conditions of the full accrual method are accounted for using the deposit method of accounting. Under the deposit method, all costs are capitalized as incurred, and payments received from the buyer are recorded as a deposit liability.

Rental income and management fee income – The Company recognizes the rental income on the straight-line basis over the terms of the tenancy agreements. The management fee, including the service fee mainly for property management, maintenance and repair, and security, is recognized quarterly over the terms of the tenancy agreements.

Real estate capitalization and cost allocation – Real estate held for development or sale is stated at cost or estimated net realizable value, whichever is lower. Costs include land and land improvements, direct construction costs and development costs, including predevelopment costs, interest on indebtedness, real estate taxes, insurance, construction overhead and indirect project costs. Selling and advertising costs are expensed as incurred. Total estimated costs of multi-unit developments are allocated to individual units based upon specific identification methods.

Impairment – If real estate is determined to be impaired, it will be written down to its fair market value. Real estate held for development or sale costs include the cost of land use rights, land development and home construction costs, engineering costs, insurance costs, wages, real estate taxes, and interest related to development and construction. All costs are accumulated by specific projects and allocated to residential and commercial units within the respective projects. The Company leases the land for the residential unit sites under land use rights with various terms from the government of the PRC. The Company evaluates the carrying value for impairment based on the undiscounted future cash flows of the assets. Write-downs of inventory deemed impaired would be recorded as adjustments to the cost basis. No depreciation is provided for construction in progress.
 
7
 
 

 

Other income

Other income consists of land leveling income, parking lot income, cleaning income, etc., of which land leveling income was a one-time service performed at the request of our customers. This income was recognized as the services were performed and the settled amount has been paid in accordance with the terms of the agreement.

Earnings per share

Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares and dilutive potential common shares outstanding during the period.

As of September 30, 2012 and December 31, 2011, respectively, there were no outstanding securities or other contracts to issue common stock, such as options, warrants or conversion rights, which would have a dilutive effect on earnings per share as the effect of options outstanding at that time was anti- dilutive.

Income taxes

The Company accounts for income taxes using an asset and liability approach which allows for the recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, 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.

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the difference are expected to affect taxable income.

The Company records a valuation allowance for deferred tax assets, if any, based on its estimates of its future taxable income as well as its tax planning strategies when it is more likely than not that a portion or all of its deferred tax assets will not be realized.
 
Concentrations of business and credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents, accounts receivable and other receivables arising from its normal business activities. The Company places its cash and cash equivalents in what it believes to be credit-worthy financial institutions. The Company maintains large sums of cash in two major banks in China. The aggregate balance in such accounts as of September 30, 2012 was $ 6,802,435. There is no insurance securing these deposits in China. The Company has a diversified customer base, most of which are in China.

The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

Statement of cash flows

Cash flows from the Company's operations is calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.
 
Recent accounting pronouncements

In July 2012, the FASB issued amended standards to simplify how entities test indefinite-lived intangible assets for impairment which improve consistency in impairment testing requirements among long-lived asset categories. These amended standards permit an assessment of qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. For assets in which this assessment concludes it is more likely than not that the fair value is more than its carrying value, these amended standards eliminate the requirement to perform quantitative impairment testing as outlined in the previously issued standards. These amended standards are effective for us beginning in the fourth quarter of 2012; however, early adoption is permitted. We do not expect these new standards to significantly impact our consolidated condensed financial statements.

In December 2011, the FASB issued guidance on offsetting (netting) assets and liabilities. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The new guidance is effective for annual periods beginning after January 1, 2013. The Company does not believe that this will have a material impact on its consolidated financial statements. We do not expect the adoption will have a significant impact on our consolidated condensed financial statements.
 
8
 
 

 
 
In June 2011, the FASB issued amended guidance on the presentation of comprehensive income. The amendments provide an entity with an option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The guidance is effective for fiscal years, and interim periods within those years beginning after December 15, 2011 and should be applied on a retrospective basis. As the amendments are limited to presentation only, the Company does not believe that this will have a material impact on its consolidated financial statements. We do not expect the adoption will have a significant impact on our consolidated condensed financial statements.

Reclassifications

Certain amounts in the 2011 financial statements may have been reclassified to conform to the 2012 presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
 
3.  
Going concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. The Company has a working capital deficit of $12,056,981 and $27,643,654 as of September 30, 2012 and December 31, 2011, respectively. As the Company has limited cash flow from operations, its ability to maintain normal operations is dependent upon obtaining adequate cash to finance its overhead, sales and marketing activities. Additionally, in order for the Company to meet its financial obligations, including salaries, debt service and operations, it has maintained substantial short term bank loans that have historically been renewed each year. The Company’s ability to meet its cash requirements for the next twelve months largely depends on the bank loans that involve interest expense requirements that reduce the amount of cash we have for our operations. These factors raise substantial doubt about the Company's ability to continue as a going concern.

The Company is in the process of obtaining informal assurance from our current lender that our short term loans will continue to be renewed and further opening dialog with the lender to convert the short term loans to long term loans. Additionally, the Company is assessing its ability to increase rental rates for its leasing business in order to generate additional revenue. Further, the Company is continuing to focus efforts on cost containment to reduce general and administrative expenses. With its relevant hands-on expertise, the Company also plans to expand operations to include property management.
 
4.  
Loans receivable

During 2011, the Company entered into a collateralized loan agreement with Beijing Sihai Real Estate Development Ltd., pursuant to which the Company loaned $2,752,673, due on November 29, 2013. The loan bears interest at a variable rate based on the Peoples’ Bank of China lending rate applicable to the period plus 10%. $318,228 of repayment from Beijing Sihai Real Estate Development Ltd was received during 2012 first quarter.

During 2011, the Company entered into a collateralized loan agreement with Shenyang Landing Concrete Ltd. Company, pursuant to which, the Company loaned $2,386,711, due on March 27, 2013.  The loan bears interest at a variable rate based on the Peoples’ Bank of China lending rate applicable to the period. On November 30, 2011 the Company, along with Shenyang Landing Concrete Ltd reassigned the loan amount to Kaiyuan Hongyun Concrete Admixture Ltd. with the same terms.

During 2009, the Company entered into an uncollateralized loan agreement with Zhongxin Guoan Ltd., pursuant to which the Company loaned $1,988,926, due on October 30, 2011. The loan bore interest at a variable rate based on the Peoples’ Bank of China lending rate applicable to the period.  Subsequent to the issuance of the loan, the Company determined that the loan was uncollectible and recorded a reserve on the entire loan amount.  During the fourth quarter of 2011, this loan was reassigned to Shenyang Konggang New City Investment Development Ltd., who is working on a development project with Zhongxin Guoan Ltd.  The loan remains uncollateralized and is now due on November 24, 2013. The loan bears interest at a variable rate based on the Peoples’ Bank of China lending rate applicable to the period.
 
9
 
 

 
 
5.  
Property and equipment
 
Property, Plant & Equipment consisted of the following:

 
September 30, 2012
 
December 31, 2011
Building
$
15,609
 
$
15,587
Automobile
 
1,171,700
   
1,170,005
Office equipment & Furniture
 
558,194
   
555,469
   
1,745,503
   
1,741,061
Accumulated depreciation
 
(1,496,244)
   
(1,427,382)
Property and equipment, net
$
249,259
 
$
313,679

The Company recorded depreciation expense relating to properties held for rental, as well as property and equipment amounting to $2,460,442 and $2,456,928 for the nine months ended of 2012 and 2011, respectively, of which, $66,795 and $79,284 were recorded as general and administrative expense, respectively.

As of September 30, 2012, fixed assets and rental property totaling $31,080,924 were pledged as security for various bank loans totaling $20,971,232.

6.  
Accrued expenses

Accrued expenses consisted of the following:

 
September 30, 2012
 
December 31, 2011
Payroll and welfare payable
$
113,341
 
$
112,083
 Accrued expenses
 
10,514
   
53,335
Total
$
123,855
 
$
165,418
 
7.  
Other payables
 
Other payables consisted of the following:

 
September 30, 2012
 
December 31, 2011
Customer guarantee deposit
$
1,143,859
 
$
            1,044,960
Customer deposit for property decoration
 
16,970
   
                  19,042
Miscellaneous payable
 
1,010,434
   
               967,349
Total
$
            2,171,263
 
$
            2,031,351
 
8.  
Tax payables

Tax payables consisted of the following:

 
September 30, 2012
 
December 31, 2011
Income tax payable in Mainland China
$
1,219,514
 
$
1,217,751
Income tax payable in Hong Kong
    -       -
Business tax
 
657,955
   
685,396
Land VAT payable
 
2,387,525
   
2,390,499
Other levies
 
33,174
   
76,188
Total
$
4,298,168
 
$
4,369,834

In 2007, the Company sold its interest in Loyal Best, a subsidiary of the Company, booking a gain and the corresponding income tax of $5,049,321. GCIH initially acquired Loyal Best to obtain land use rights for development of real estate assets. Based on an assessment from the taxing authority in Hong Kong, the Company was provided relief of income taxes payable in Hong Kong of $5,049,321 during the year-ended December 31, 2011.
 
10
 
 

 


9.  
Payable to disposed subsidiary
 
The Company had amounts due to a Loyal Best, a previously disposed of entity, as of September 30, 2012 and December 31, 2011 in the amount of $835,579 and $834,371, respectively.

10.  
Loan Payable

Loans payable (including accrued interest) consisted of the following:

Nature
 
Due on
 
Interest per Annum
 
September 30, 2012
 
December 31, 2011
Bank loan
 
6-12-2013
 
8.775%
 
$
6,364,562
 
$
6,355,360
Bank loan
 
10-13-2013
 
10.395%
   
14,606,670
   
14,585,551
             
20,971,232
   
20,940,911
Less current portion
           
6,364,562
   
20,940,911
           
$
14,606,670
 
$
-

The above loans are secured by Company rental properties.

As of September 30, 2012 and 2011, the Company’s accrued interest and finance cost amounted to $1,634,836 and $1,659,490, respectively.

11.  
Statutory reserve

As stipulated by the Company Law of the People’s Republic of China (PRC), net income after taxation can only be distributed as dividends after appropriation has been made for the following:

 
i.
Making up cumulative prior years’ losses, if any;
     
 
ii.
Allocations to the “Statutory Surplus Reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company’s registered capital;
     
 
iii.
Allocations of 5% to 10% of income after tax, as determined under PRC accounting rules and regulations, to the Company’s “Statutory Common Welfare Fund”, which is established for the purpose of providing employee facilities and other collective benefits to the Company’s employees; and statutory common welfare fund is no longer required per the new cooperation law executed in 2006.
     
 
iv.
Allocations to the discretionary surplus reserve, if approved in the stockholders’ general meeting.

The Company did not contribute to statutory reserve for the six months ended of September 30 2012 and 2011, respectively, due to the net loss incurred for its Chinese operation.

12.  
Segment information

ASC 280 requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.

During 2012 and 2011, the Company was organized into two main business segments: (1) Property for sale, and (2) Rental income and Income of management fee of commercial buildings. The following table presents a summary of operating information and certain year-end balance sheet information as of six months ended of September 30, 2012 and2011, respectively.

11
 
 

 

 
 
September 30, 2012
 
September 30, 2011
Revenues from unaffiliated customers:
         
 
Selling of properties
$
       -
 
$
  -
 
Rental income & Management fee
 
5,848,813
 
 
5,361,056
 
Consolidated
 
5,848,813
 
 
  5,361,056
Operating income (loss):
 
 
 
 
 
 
Selling of properties
 
(185,494)
 
 
(104,635)
 
Rental income & Management fee
 
(6,561)
 
 
390,148
 
Corporation (1)
 
(34,724)
 
 
(1,016,912)
 
Consolidated
 
(226,780)
 
 
(731,399)
Net loss before taxes:
 
 
 
 
 
 
Selling of properties
 
(1,816,442)
 
 
(1,764,125)
 
Rental income & Management fee
 
(5,803)
 
 
   390,148
 
Corporation (1)
 
108,203
 
 
(27,581)
 
Consolidated
 
(1,714,043)
 
 
 (1,401,558)
Identifiable assets:
 
 
 
 
 
 
Selling of properties
 
3,991
 
 
  2,277
 
Rental & management fee
 
47,290,099
 
 
50,321,312
 
Corporation (1)
 
12,362,738
 
 
10,508,463
 
Consolidated
 
59,656,828
 
 
  60,832,052
Depreciation and amortization:
 
 
 
 
 
 
Selling of properties
 
 
 
 
   79,284
 
Rental & management fee
 
2,393,647
 
 
2,358,669
 
Corporation (1)
 
66,795
 
 
18,975
 
Consolidated
 
2,460,442
 
 
   2,456,928
Capital expenditures:
 
 
 
 
 
 
Selling of properties
 
 -
 
 
   -
 
Rental & management fee
 
4,463
 
 
 14,232
 
Consolidated
$
 4,463
 
$
14,232

(1) Unallocated loss from Operating income (loss) and Net income before provision for income taxes are primarily related to general corporate expenses.

12
 
 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
(1)  Caution Regarding Forward-Looking Information
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements prepared in accordance with accounting principles generally accepted in the USA. Unless otherwise indicated, references in this discussion to “we”, “our” and “us” are to Great China International Holdings, Inc., and its subsidiaries.
 
Any statements in this discussion that are not historical facts are forward-looking statements that involve risks and uncertainties; actual results may differ from the forward-looking statements. Sentences or phrases that use such words as “believes”, “anticipates”, “plans”, “may”, “hopes”, “can”, “will”, “expects”, “is designed to”, “with the intent”, “potential” and others indicate forward-looking statements, but their absence does not mean that a statement is not forward-looking.  We do not undertake any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
 
(2)  Executive Summary
 
Great China International Holdings Inc., through its various subsidiaries, is or has been engaged in commercial and residential real estate leasing, management, consulting, investment, development and sales. We conduct all our operation in the People’s Republic of China through our direct and indirect wholly owned subsidiaries; Shenyang Maryland International Industry Company Limited and Silverstrand International Holdings Company Limited.

(3)  Results of Operations

Comparison of operations for the periods ended September 30, 2012 and 2011:

The Company incurred a net loss of $1,714,043 for the first nine months of 2012, an increase of $312,486, or 22.3%, compared with the same period of 2011. Components resulting in this improvement are discussed below.

Sales revenues increased by $487,757 or 9.10% from $5,361,056 for the first nine months of 2011 to $5,848,813 for the same period of 2012. For the nine months ended September 30, 2012, both the rental income and management fee income increased compared to the same period of 2011, of which the rental income increased by $418,479 or 10.81%`from $3,869,589 for the first nine months of 2011 to $4,288,068 for the same period of`2012, which is largely attributable to the Company increasing rental rates in 2012. The management fee income increased by $69,278 or 4.64% from $1,491,467 for the first nine months of 2011 to $1,560,745 for the same period of 2012.

There is no significant change in cost of revenue for the first nine months of 2012 compared with same period of 2011, which was $4,602,437 and $4,611,478 for 2012 and 2011, respectively.

The gross profit margin of rental business were 21% and 12%, in the first nine months of 2012 and 2011, respectively, which increased by 9%. This increase is attributed to the constant increase of rental fee and decrease of cost of rental business. The gross profit margin of management business were 23% and 20% in the first nine months of 2012 and 2011, respectively, which increased by 3%.  The increase is attributed to an increase of income of management business.
 
Selling expenses decreased by $12,443 or 21.13% from $58,896 for the first nine months of 2011 to $46,453 for the same period of 2012. This is attributed to a decrease in employee bonuses in the first nine months of 2012 compared to the same period of 2011.
 
General and administrative expenses did not change significantly, increasing just $17,110 or 1.27% from $1,342,797 for the first nine months of 2011 to $1,359,907 for the same period of 2012.

Depreciation expense decreased by $12,489 or 15.75% from $79,284 for the first nine months of 2011 to $66,795 for the same period of 2012. This decrease was mainly due to the company disposing of some fixed assets in 2012, but there is no such disposal during the same period of 2011.

Interest and finance costs decreased by $24,654 or 1.49% from $1,659,490 for the first nine months of 2011 to $1,634,836 for the same period of 2012, which is primarily due to the effect of exchange differences in 2011 compared to 2012.

The Company earned $828,038 income from disposal of parking lots in the first nine months of 2011, but there is was no such disposal of assets in the first nine months of 2012.
 
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 (4)  Cash Flow Discussion

Net cash flows provided by operating activities for the first nine months of 2012 and 2011 were $325,497 and $9,247, respectively. The increase amounted to $316,250 or 3420%.  This significant change was due to the below factors:
 
The main factor is that the Company disposed of parking lots in the first nine months of 2011, which reduced cash flow from operating activities by $828,038 in 2011, but there is no similar disposal of assets in the same period of 2012.

Net cash flows used in investing activities for the first nine months of 2012 were not significant.

Net cash flows from financing activities were $315,935 and negative $2,397,883 during the first nine months of 2012 and 2011, respectively. The change is due to the Company making a loan to a third party in the first nine months of 2011, but there were no similar loan transactions in the same period of 2012. Furthermore, the Company was repaid part of a loan, approximately $318,228, from a third party during the first quarter of 2012.

(5)  Liquidity and Capital Resources

Current liabilities exceeded current assets by $12,056,981 as of September 30, 2012. The Short Term Loans amounted to $6,364,562 the loan accounted for about 53% of the working capital deficit. This bank loan is due in June 2013 and secured by some of the Company’s real estate assets. It has become common practice in China, for banks and companies to renegotiate loan extensions on an annual basis.  This is driven by the ever changing banking regulatory environment and a situation where banks are becoming more conservative.
 
Under the circumstances, most lending banks have usually worked closely with borrowers for loan extension or restructuring within the administrative guidelines of the government. As State policies are issued outside the control of the banks in China and form part of the macro and micro-economic measures, many bankers and their customers work together to deal with the situation provided the borrowers are responsible.

(6)  Contractual Obligations

The following table was a summary of the Company’s contractual obligations as of September 30, 2012:

 
Total
 
Less than
one year
 
1-3 Years
 
Thereafter
Short-Term Debt
$
6,364,562
 
$
6,364,562
 
$
-
 
$
-
Long-Term Debt
 
 14,606,670
   
-
   
 14,606,670
   
-
Amounts due to related parties
 
-
   
-
   
  -
   
-
Construction commitments
 
-
   
-
   
-
   
-
Total Contractual Cash Obligations
$
20,971,232
 
$
6,364,562
 
$
 14,606,670
 
$
-

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Disclosure under this item is not required of a smaller reporting company.

Item 4.  Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the Securities and Exchange Commission (“SEC”), and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.
 
14
 
 

 


In connection with the preparation of this report, Great China International’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, reassessed the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2011.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that Great China International’s disclosure controls and procedures were effective as of the end of the fiscal quarter on September 30, 2011, to ensure that information that is required to be disclosed by Great China International in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within Great China International to disclose information that is otherwise required to be set forth in its periodic reports.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three-month period ended September 30, 2011, that have materially affected, or are likely to materially affect, our internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 6.  Exhibits

Copies of the following documents are included or furnished as exhibits to this report pursuant to Item 601 of Regulation S-K.

Exhibit No.
SEC Ref. No.
Title of Document
     
31.1
31
The certification of chief executive officer required by Rule 13a-14(a) or Rule 15d-14(a)
     
31.2
31
The certification of chief financial officer required by Rule 13a-14(a) or Rule 15d-14(a)
     
32.1
32
The certifications required by Rule 13a-14(b) or Rule 15d-14(b) and 18 U.S.C. Section 1350


15
 
 

 


SIGNATURES

In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
GREAT CHINA INTERNATIONAL HOLDINGS, INC.
   
     
     
Date: November 16, 2012
By
  /s/ Jiang Peng
   
Jiang Peng, Chairman of the Board
   
(Principal Executive Officer)
     
     
     
Date: November 16, 2012
By
  /s/ Sun Dongqing
   
Sun Dongqing, Chief Financial Officer
   
(Principal Financial and Accounting Officer)

16