China Energy & Carbon Black (CHEY) Inactive
Filed: 19 Nov 02, 12:00am
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission File Number 000-30173
HUAYANG INTERNATIONAL HOLDINGS, INC.
(Exact name of Company as specified in its charter)
Nevada 58-1667944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
386 Qing Nian Avenue, Shenyang, China 110003
(Address of principal executive offices) (Zip code)
011 (86)(24) 2318-0688
(Issuer's telephone number, including area code)
The number of shares of common stock, par value $0.02, outstanding on September
30, 2002, was 7,700,807.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
----------------------------------------------
A S S E T S
-----------
December 31,
2002 2001
------------- -------------
Unaudited Audited
------------- -------------
ASSETS:
Real estate rental property,
net of accumulated
depreciation of $1,235,211
at September 30, 2002 and
$1,348,515 at
December 31, 2001 $ 16,825,065 $ 32,513,101
Real estate held for
development and sale 3,808,008 2,285,143
Cash 2,641 253
Due from related companies 13,161,301 15,674,533
Proceed receivable from
sale of investment in
affiliates 13,076,990 -
Investment in affiliates - 13,616,339
Property and equipment, net 1,355,017 1,387,965
Deferred tax asset 742,756 544,668
Other assets 710,369 761,553
------------- -------------
Total assets $ 49,682,147 $ 66,783,555
============= =============
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
------------------------------------------------------------------
LIABILITIES:
Accounts payable and accrued
liabilities $ 4,733,310 $ 7,131,131
Bank loans 3,294,197 17,268,635
Due to related companies 15,287,759 15,287,772
Income taxes payable 3,676,123 2,773,238
Deferred income taxes payable 242,530 758,097
Deferred interest income - 521,202
------------- -------------
Total liabilities 27,233,919 43,740,075
------------- -------------
MINORITY INTEREST 1,188,769 1,116,125
------------- -------------
SHAREHOLDERS' EQUITY:
Common Stock, $0.02 par value,
authorized 50,000,000 shares,
7,700,807 and 7,500,807 shares
issued and outstanding at
September 30, 2002 and
December 31, 2001, respectively 154,016 150,016
Paid-in-capital 18,342,291 18,296,291
Accumulated other
comprehensive income 14,666 17,347
Retained earnings 2,748,486 3,463,701
------------- -------------
Total shareholders' equity 21,259,459 21,927,355
------------- -------------
Total liabilities and
shareholders' equity $ 49,682,147 $ 66,783,555
============= =============
-2-
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
----------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Unaudited Unaudited Unaudited Unaudited
------------- ------------- ------------- -------------
REVENUES:
Real estate sales $ 242,955 $ - $ 639,336 $ -
Real estate rental income 431,586 1,132,990 1,506,225 3,294,291
Interest income - 151,046 302,092 453,138
------------- ------------- ------------- -------------
Total revenues 674,541 1,284,036 2,447,653 3,747,429
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of real estate sold 189,131 - 497,801 -
Real estate operating expenses 32,875 37 200,832 76,052
Depreciation 112,952 205,220 469,233 611,277
Interest expense 98,654 324,454 665,342 964,741
Loss on sale of rental property 585,161 - 585,161 -
Other operating expenses 50,000 40,119 50,000 112,048
------------- ------------- ------------- -------------
Total costs and expenses 1,068,773 569,830 2,468,369 1,764,118
------------- ------------- ------------- -------------
LOSS FROM INVESTMENT IN AFFILIATES - 352,375 821,778 1,184,307
------------- ------------- ------------- -------------
LOSS ON SALE OF INVESTMENT
IN AFFILIATES 1,863,389 - 1,863,389 -
-------------- ------------- ------------- -------------
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (2,257,621) 361,831 (2,705,883) 799,004
(BENEFIT) PROVISION FOR INCOME TAXES (661,613) 319,281 (426,259) 946,798
------------- ------------- ------------- -------------
(LOSS) INCOME BEFORE MINORITY
INTEREST (1,596,008) 42,550 (2,279,624) (147,794)
MINORITY INTEREST (63,748) (16,539) (72,644) (41,929)
------------- ------------- ------------- -------------
NET (LOSS) INCOME BEFORE
EXTRAORDINARY ITEM (1,659,756) 26,011 (2,352,268) (189,723)
GAIN ON EXTRAORDINARY ITEM, NET OF
INCOME TAX EFFECT 1,221,570 - 1,637,053 -
------------- ------------- ------------- -------------
NET (LOSS) INCOME AFTER
EXTRAORDINARY ITEM (438,186) 26,011 (715,215) (189,723)
OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation
adjustments 732 (33,033) 2,681 (20,236)
------------- ------------- ------------- -------------
COMPREHENSIVE INCOME (LOSS) $ (437,454) $ (7,022) $ (712,534) $ (209,959)
============= ============= ============= =============
WEIGHED AVERAGE NUMBER OF SHARES 7,657,329 7,500,807 7,553,554 7,500,807
============= ============= ============= =============
NET LOSS PER SHARE (basic) $ (0.06) $ 0.00 $ (0.09) $ (0.03)
============= ============= ============= =============
-3-
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
-----------------------------------------------------
2002 2001
------------- -------------
Unaudited Unaudited
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (715,215) $ (189,723)
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sales of real estate (141,535) -
Net cash proceeds from sales of real estate 639,336 -
Net gain on debt extinguishment (1,637,053) -
Real estate development costs 234,470 117,753
Depreciation 469,233 611,277
Change in investment in affiliates due to
translation difference - (4,308)
Loss from investment in affiliates 821,778 1,184,307
Increase in deferred tax assets (198,088) (336,925)
Decrease (increase) in other assets 51,184 (168,940)
Increase in accounts payable and accrued
liabilities 522,282 3,457,861
Increase in deferred income taxes payable - 143,160
Increase in deferred interest income - 113,283
Increase in income taxes payable 96,935 721,974
Stocks issued for legal service received 50,000 -
Change in accumulated other comprehensive income (2,681) (20,236)
------------- -------------
Net cash provided by operating activities 190,646 5,629,483
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (29,750) (575,207)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in bank loan due to currency translation (1,076) (17,940)
Net repayments to related companies (230,076) (5,078,839)
Increase in minority interest 72,644 41,929
------------- -------------
Net cash used in financing activities (158,508) (5,054,850)
------------- -------------
NET INCREASE (DECREASE) IN CASH 2,388 (574)
CASH, beginning of period 253 851
------------- -------------
CASH, end of period $ 2,641 $ 277
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ - $ 2,479
============= =============
Income taxes paid $ - $ 124,868
============= =============
NON-CASH FINANCING AND INVESTING ACTIVITIES:
During the nine months ended September 30, 2002, the Company transferred title
of office space recorded under the caption "Real estate held for development and
sale" in the amount of $13,394,445 to satisfy bank loan obligations in the
amount of $13,973,362 plus accrued interest of $2,920,103.
In July 2002, the Company issued 200,000 shares of common stock for legal
service received.
In September 2002, the Company sold its investment in affiliates. As of
September 30, 2002, total proceed of $13,076,990 from the sale of investment in
affiliates is recorded as a receivable.
-4-
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Reporting entity
The financial statements of Huayang International Holdings, Inc. and Subsidiary
(HIHI or the Company) reflect the activities and financial transactions of its
subsidiary Shenyang Haitong House Properties Development Ltd. (HAITONG). HIHI
has a 95% ownership interest in HAITONG. HIHI also had a less than majority
ownership interest in three other companies, Shenyang Lido Hotel Company
Limited, formerly Changyang International Hotel (Shenyang) Co. Ltd. (HOTEL),
Shenyang Lido Park Company Limited, formerly Changyuan (Shenyang) Park Ltd.
(GARAGE) and Shenyang Lido Business Company Limited, formerly Changhua
(Shenyang) Business Co. Ltd. (BUSINESS CENTER), collectively referred to as
HOTEL GROUP. As further discussed in Note 3, HIHI sold its 20% equity interest
in the HOTEL GROUP to the majority shareholder of the HOTEL GROUP in September
2002.
HIHI is incorporated under the laws of the State of Nevada in the United States.
HAITONG is incorporated under the laws of the People's Republic of China (PRC).
Note 2 - Condensed financial statements and footnotes
The interim consolidated financial statements presented herein have been
prepared by the Company and include the unaudited accounts of HIHI and its
subsidiary HAITONG. All significant inter-company accounts and transactions have
been eliminated in the consolidation.
These condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and the instructions to Form 10-QSB and Article 10
of Regulation S-X. Certain information and footnote disclosures normally
included in financial statements presented in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. The Company believes the disclosures made are adequate to
make the information presented not misleading. The condensed consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 2001 and notes
thereto included in HIHI's Form 10-KSB, dated April 1, 2002.
In the opinion of management, the unaudited condensed consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of September 30, 2002, the results of operations for the three and nine
months ended September 30, 2002 and 2001, respectively. Interim results are not
necessarily indicative of full year performance because of the impact of
seasonal and short-term variations.
Note 3 - Investment in affiliates
Investments in which the Company owned a 20% interest were accounted for using
the equity method.
-5-
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 3 - Investment in affiliates, (continued)
Place of Ownership
Name incorporation interest Principal activity
- ------------------------- ------------------- ----------- --------------------
Shenyang Lido Hotel The People's 20% Hotel
Company Limited (Hotel) Republic of China operation
Shenyang Lido Business The People's 20% Business
Company Limited Republic of China center,
(Business Center) commercial
retail
Shenyang Lido Park The People's 20% Car parking
Company Limited Republic of China
(Garage)
During September 2002, HIHI entered into an agreement with the majority
shareholder of HOTEL GROUP to sell its 20% equity interest of HOTEL GROUP,
effective September 28, 2002. The operating results of the HOTEL GROUP for the
period from July 1, 2002 to September 28, 2002 have not been separately stated
under the caption "Loss from investment in affiliates" in the accompanying
financial statements. Any losses or income that occurred during this period has
been reflected in the "Loss on the sale of investment in affiliates" on the
consolidated income statement for the period ended September 30, 2002. Details
are as follows:
September 28,
2002
---------------------
Share of net assets $ 4,402,408
Advances made 8,391,400
---------------------
Total investment in Hotel Group 12,793,808
Interest receivable from Hotel Group 2,743,295
Deferred interest income from Hotel Group (596,724)
---------------------
Total cost 14,940,379
Selling price (13,076,990)
---------------------
Net loss on sale of Hotel Group $ 1,863,389
=====================
HIHI entered into an agreement in 1997 with a related company to advance funds
in the form of purchased materials. The agreement states that HIHI can postpone
principal payments for three years starting from the initial shipment without
incurring any interest charges. HIHI has the option to pay off the debt in cash
or common stock of HIHI. As of December 31, 2001, the total amount of debt under
this agreement amounted to $14,787,763. In connection with the sale of the
interest in the HOTEL GROUP, HIHI has agreed to apply the net selling price as a
payment against this debt. As of September 30, 2002, the proceed of $13,076,990
has not been received and recorded as a receivable.
-6-
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4 - Segment reporting
The Company currently is engaged in only one business segment. The Company's net
investment in and the operating results of its various real estate activities
may be derived directly from the accompanying consolidated financial statements.
Note 5 - Sale of rental property
In July 2002, Haitong reached an agreement with Agricultural Bank to sell the
office space, previously rented by the Bank, in the amount of $1,327,406.
Haitong agreed for the Bank to apply previous rental payment in the amount of
$1,086,059 to the purchase price. Haitong transferred the office space from
rental property to property held for sales and had recorded the office space at
historical cost less accumulated depreciation, which amounted to $931,441. As a
result of this transaction, the Company recorded a loss on sale of rental
property of $585,161.
Note 6 - Extinguishment of debt
In April 2002, Haitong reached an agreement with Housing Fund Management Center
to settle loans in the amount of $7,240,168 plus accrued interest of $1,800,386.
Haitong has transferred title to certain office space in full satisfaction of
the loans due to Housing Fund Management Center. Haitong transferred the office
space from rental property to property held for sales and had recorded the
office space at historical cost less accumulated depreciation, which amounted to
$7,568,415. As a result of this transaction, the Company recorded an
extraordinary gain of $596,014, net of related income taxes of $293,559. Net
gain per share, net of related income tax effect, amounted to approximately
$0.08.
In September 2002, Haitong reached an agreement with a Bank to settle loans in
the amount of $6,733,194 plus accrued interest of $1,119,717. Haitong has
transferred title to certain office space in full satisfaction of the loans due
to the Bank. Haitong transferred the office space from rental property to
property held for sales and had recorded the office space at historical cost
less accumulated depreciation, which amounted to $5,826,030. As a result of this
transaction, the Company recorded an extraordinary gain of $1,041,039, net of
related income taxes of $512,409. Net gain per share, net of related income tax
effect, amounted to approximately $0.14.
Note 7 - Acquisition of a subsidiary
In September 2002, HIHI reached an agreement with a third party, a citizen and
resident of China, to acquire a 100% interest in Jiahe Medicine Group (Jiahe), a
pharmaceutical company organized in the People's Republic of China, in exchange
for 1,900,000 shares of HIHI common stock. After the transaction has been
completed, HIHI will own 99% of Jiahe and HAITONG will own the remaining 1%. The
agreement requires the third party to satisfy certain contingencies prior to
December 31, 2002 or HIHI has the option to reduce the number of shares given to
the third party or HIHI can withdraw from the agreement. The 1,900,000 of common
stock has been issued in the name of the third party and they are being held by
HIHI until the December 31, 2002 deadline has passed and the contingencies have
been satisfied. As there are still contingencies to satisfy this agreement, the
financial activities of Jiahe have not been included in the accompanying
consolidated financial statements of September 30, 2002 and the period then
ended. If the contingencies are satisfied prior to December 31, 2002, the
acquisition will be treated as effective September 7, 2002 and the operating
result starting September 8, 2002 will be included in HIHI's consolidated
financial statements.
-7-
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 7 - Acquisition of a Subsidiary (continued)
Jiahe's unaudited balance sheet as of September 7, 2002 is as follows:
September 7, 2002
---------------------
Current assets $ 1,681,677
Fixed assets, net 1,894,635
Intangible assets 59,039
---------------------
Total assets $ 3,635,351
=====================
Current liabilities $ 523,004
Bank Loans 414,645
---------------------
Total Liabilities $ 937,649
=====================
In accordance with Statement of Financial Accounting Standards No. 141,
"Business Combinations", the acquisition will be recorded on the basis of the
fair value of the consideration given up or the fair value of the acquired
assets less liabilities assumed, whichever is more clearly evident and reliably
measurable. Management has considered the fair value of the acquired assets less
liabilities assumed is more representative of the value of the acquisition.
However, the Company is still in the process of determining the fair value of
the total assets acquired and liabilities assumed.
Note 8 - Loss per share
As discussed in Note 7, HIHI issued 1,900,000 shares of common stock to acquire
a 100% interest in Jiahe in September 2002. However, since there are still
certain contingencies to be satisfy to complete this acquisition, HIHI has not
recorded this transaction and issue of 1,900,000 shares of common stock.
Accordingly, the 1,900,000 shares of common stock are not included in the loss
per share calculation. Had the 1,900,000 shares been recorded, the loss per
share would have been $0.05 and $0.09 for the three months and nine months ended
September 30, 2002. No diluted per share information was calculated due to a net
loss incurred in the reporting period.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of the financial condition and results of operations
should be read in conjunction with our consolidated financial statements and
related notes thereto. The following discussion contains forward-looking
statements. Huayang International Holdings, Inc. is referred to herein as "the
Company", "we" or "our." The words or phrases "would be," "will allow," "intends
to," "will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements". Such statements include those concerning our
expected financial performance, our corporate strategy and operational plans.
Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) our entry into the pharmaceutical business and whether we can
successfully incorporate this business into our operations; (b) substantial debt
obligations which may impede our ability to grow our business and compete
against our competitors and other debt related risks discussed below under
"Liquidity and Capital Resources"; (c) any economic, political, regulatory,
legal and social conditions in China that may negatively affect our business;
and (d) our dependence upon funding from related companies. Statements made
herein are as of the date of the filing of this Form 10-QSB with the Securities
and Exchange Commission and should not be relied upon as of any subsequent date.
Unless otherwise required by applicable law, we do not undertake, and we
specifically disclaim any obligation, to update any forward-looking statements
to reflect occurrences, developments, unanticipated events or circumstances
after the date of such statement.
THIRD QUARTER OVERVIEW
During the third quarter of 2002, the Company continued to sell and lease its
real estate properties.
The Company has completed several transactions deemed necessary for the
Company's development, as follows:
(a) In September 2002, the Company acquired Jiahe Medicine Group ("Jiahe" or the
"Selling Party"), a pharmaceutical company organized and operated in China. The
acquisition terms include the issuance of restricted shares of our common stock
to the Selling Party and a requirement that the Selling Party satisfy certain
contingencies prior to December 31, 2002. Should the Selling Party fail to
satisfy these contingencies, the Company has the option to reduce the number of
shares issued to the Selling Party or rescind the transaction. Because there are
outstanding contingencies to satisfy in the transaction, the financial
activities of Jiahe have not been included in the accompanying consolidated
financial statements for the period ended September 30, 2002. Should the
contingencies be satisfied prior to our year end at December 31, 2002, the
effective date of the acquisition will be September 7, 2002 and our operating
results from September 8, 2000 going forward will include this transaction in
the Company's consolidated financial statements.
The acquisition of Jiahe is the Company's first step in our strategic plan to
enter the technology sector in China. The Company will also attempt to expand
its operations to other technology sectors.
-9-
(b) In September 2002, the Company sold all of its 20% equity interest in the
Hotel Group and agreed to apply the selling price directly as a payment for
certain debt owed to a related party. Greater China Appraisal Limited, an
international appraisal firm headquartered in Hong Kong, served as an
independent appraiser for the valuation of the Company's 20% equity interest in
the Hotel Group in conjunction with the payment of the debt. Because the
Company's sole equity interest in the Hotel Group has been sold, the operating
results of the Hotel Group for the third quarter of 2002 were not included in
the Company's consolidated financial statements.
(c) During the third quarter of 2002, the Company continued its efforts to
reduce its bank loans. As such, in September 2002, the Company reached an
agreement with China Construction Bank to settle loans in the amount of $6.7
million plus accrued interest. The Company transferred title to certain office
space in full satisfaction of the loans due to the bank.
The Company had already settled bank loans in the amount of $7.2 million with
various China based financial institutions in the second quarter of 2002.
RESULTS OF OPERATIONS
Revenues
Revenues for the three-month period ended September 30, 2002 were $674,541, down
47.5% from $1,284,036 over the three-month period ended September 30, 2001. This
decrease was primarily attributable to a 61.9% drop in revenues from real estate
rental income, caused primarily by loss of a major tenant, as well as reduced
interest income from hotel operations. This decrease was partly offset by
additional real estate sales. Revenues from real estate rental income in the
third quarter of 2002 were $431,586, compared to $1,132,990 in the third quarter
of 2001. As of September 30, 2002, the net real estate rental property was
$16,825,065. Interest income was $0 for the third quarter of 2002, compared to
$151,046 in the third quarter of 2001. Real estate sales in the third quarter of
2002 were $242,955, compared to $0 during the same period of 2001.
Revenues for the nine-month period ended September 30, 2002 were $2,447,658,
down 34.7% from $3,747,429 over the nine-month period ended September 30, 2001.
This decrease was primarily attributable to a 54.3% drop in revenues from real
estate rental income, caused mostly by loss of a major tenant, as well as a
33.3% decrease in interest income from hotel operations. This decrease was
partly offset by additional real estate sales. Revenues from real estate rental
income for the first three quarters of 2002 were $1,506,225, compared to
$3,294,291 in the first three quarters of 2001. Interest income was $302,092 for
the first three quarters of 2002, compared to $453,138 in the first three
quarters of 2001. Real estate sales in the first three quarters of 2002 were
$639,336, compared to $0 in the same period of 2001.
Costs and Expenses
For the three-month period ended September 30, 2002, total costs and expenses
were $1,068,773, 87.6% higher than $569,830 of total costs and expenses during
the same period of 2001. This increase was primarily due to a loss from sale of
rental property with a bank, as well as the increase of the cost of real estate
sold, offset partly by significant decreases in depreciation costs and interest
expenses. In July 2002, the Company reached an agreement with Agricultural Bank
to sell the office space, previously rented by the Bank, in the amount of
$1,327,406. Our subsidiary, Shenyang Haitong House Properties Development Co.,
Ltd. ("Haitong"), agreed for the Bank to apply previous rental payment in the
amount of $1,086,059 to the purchase price. Haitong transferred the office space
from rental property to property held for sales and had recorded the office
space at historical cost less accumulated depreciation, which amounted to
$931,441. As a result of this transaction, the Company recorded a loss of
$585,161 on sale of rental property.
-10-
In the third quarter of 2002, the depreciation expenses dropped to 45.0% to
$112,952 from $205,220 in the same period of 2001, and interest expenses dropped
69.6% to $98,654 from $321,454 in the same period of 2001. These significant
decreases were a direct result of a bank loan settlement. In the third quarter
of 2002, real estate operating expenses increased to $32,875 from $37 in the
same period of 2001, and other operating expenses increased to $50,000 from
$40,119 in the same period of 2001. Cost of real estate sold was $189,131 for
the third quarter of 2002, compared to $0 in the same period of 2001.
For the nine-month period ended September 30, 2002, total costs and expenses
were $2,468,369, 39.9% higher than $1,764,118 in the same period of 2001. This
was a mixed result of dropped depreciation costs and interest expenses and
increased cost of real estate sold and operating expenses as well as the effect
of the loss from sale of rental property. In the first three quarters of 2002,
the depreciation expenses dropped 23.2% to $469,233 from $611,277 in the same
period of 2001, and interest expenses dropped 31.0% to $665,342 from $964,741 in
the same period of 2001. These decreases were a direct result of a bank loan
settlement. In the first three quarters of 2002, real estate operating expenses
increased to $200,832 from $76,052 in the same period of 2001, while other
operating expenses decreased to $50,000 from $112,048 in the same period of
2001. Cost of real estate sold was $497,801 for the first three quarters of
2002, compared to $0 in the same period of 2001.
Sale of Equity Interest in the Hotel Group
In September 2002, the Company sold all of its 20% equity interest in the Hotel
Group, and agreed to apply the selling price directly as a payment to certain
debt owed to a related party. Greater China Appraisal Limited, an international
appraisal firm headquartered in Hong Kong, served as an independent appraiser
for the valuation of the Company's equity interest in the Hotel Group in
conjunction with the payment of the debt. In connection with the sale of the
Company's equity interest in the Hotel Group, a loss of $1,863,495 from the sale
was recorded.
Before the Company sold its equity interest in the Hotel Group, the hotel had a
soft opening in 2002 and generated minimum revenues. The Company booked a loss
of $821,778 for the first two quarters of 2002, and losses of $352,375 and
$1,184,307, respectively, in the third quarter and the first three quarters of
2001. Operating results of the Hotel Group for the third quarter of 2002 were
not included in the Company's consolidated financial statements.
Settlement of Bank Loans
In September 2002, Haitong reached an agreement with China Construction Bank to
settle loans in the amount of $6,733,194 plus accrued interest of $1,119,717.
Haitong has transferred title to certain office space in full satisfaction of
the loans due to China Construction Bank. Haitong had recorded the office space
at historical cost less accumulated depreciation, which amounted to $5,826,030.
As a result of this transaction, the Company recorded an extraordinary gain of
$1,041,039, net of related income taxes of $512,409. Net gain per share, net of
related income tax effect, amounted to approximately $0.14.
-11-
In the previous quarter, Haitong reached an agreement with Housing Fund
Management Center to settle loans in the amount of $7,240,168, plus accrued
interest of $1,800,386. Haitong has transferred title to certain office space in
full satisfaction of the loans due to Housing Fund Management Center. Haitong
had recorded the office space at historical cost less accumulated depreciation,
which amounted to $7,568,415. As a result of this transaction, the Company
recorded an extraordinary gain of $596,014, net of related income taxes of
$293,559. Net gain per share, net of related income tax effect, amounted to
approximately $0.08.
Gains on extraordinary item net of tax effect were $1,221,570 and $1,637,053,
respectively, for the third quarter and the first three quarters of 2002.
Net Income
For the three-month period ended September 30, 2002, net income before taxes and
minority interest, after the loss from sale of equity interest in the Hotel
Group but before the extraordinary gain from debt settlement, was a loss of
$2,257,621, compared to a net income of $361,831 in the same period of 2001. The
Company's net loss for the third quarter of 2002 excluding the extraordinary
gain from debt settlement was $1,659,756, compared to a net income of $26,011 in
the same period of 2001. Net loss after the extraordinary gain from the bank
loan settlement was $438,186 for the third quarter of 2002, compared to a net
income of $26,011 in the same period of 2001. Net loss per share, after the
extraordinary gain of $0.14 from debt settlement, was $0.06, compared to a net
income per share of $0.00 over the same period a year ago.
For the nine-month period ended September 30, 2002, net income before taxes and
minority interest, after the loss from investment in the Hotel Group and the
loss from sale of equity interest in the Hotel Group but before the
extraordinary gain from debt settlement, was a loss of $2,705,883, compared to a
net income of $799,044 in the same period of 2001. The Company's net loss for
the first three quarters of 2002 excluding the extraordinary gain from debt
settlement was $2,352,268, compared to a net loss of $189,723 in the same period
of 2001.For the first three quarters of 2002, net loss after the extraordinary
gain from bank loan settlement was $715,215, compared to a net loss of $189,723
in the same period of 2001. Net loss per share, after the extraordinary gain of
$0.22 from debt settlement, was $0.09, compared to a net loss per share of $0.03
over the same period a year ago.
Factors causing these changes include the loss from sale of the equity interest
in the Hotel Group, a one-time increase in other expenses, and a drop in real
estate rental income, caused mostly by the loss of a major tenant late last
year. These factors were partly offset by the extraordinary gain from debt
settlement and additional real estate sales.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity consists of cash, receivables, real estate held for development
and sale and receipts from rental activities. As of September 30, 2002, our cash
balance was $2,641. We have been dependent upon the support of related companies
that have from time to time lent funds to us. However, there are no assurances
that we will receive financing from related companies in the future and
financing may not always be available. Accordingly, the Company may need to
secure further financing to support its operations. Future cash needs may be
financed by a combination of cash flows from rental and leasing operations,
future advances under bank loans, and if needed, other alternative financing
arrangements, which may or may not be available to us.
-12-
As a result of future cash payments required to retire bank loans and debts owed
to its related companies, management believes that it will be necessary to
secure additional financing to sustain our operations and to fund our
anticipated growth.
We do not have any material commitments for capital expenditures for the year
ending December 31, 2002.
Our projection of future cash requirements is affected by numerous factors,
including but not limited to, changes in customer receipts, consumer industry
trends, operating cost fluctuations, and unplanned capital spending.
As of the date hereof, we have substantial consolidated indebtedness in relation
to our stockholders equity. As of September 30, 2002, we had total bank debt of
$3,294,197. We also owed $2,210,769 to related parties. Our indebtedness poses
substantial risks to our common stock holders including: (i) a substantial
portion of our cash flow from operations will be dedicated to the payment of
interest on such indebtedness, (ii) our indebtedness may impede our ability to
obtain financing in the future for working capital, capital expenditures and
general corporate purposes and (iii) our debt position may leave us more
vulnerable to economic downturns and may limit our ability to withstand
competitive pressures. If we are unable to generate sufficient cash flow from
operations in the future to service our indebtedness and to meet our other
commitments, we will be required to adopt one or more alternatives, such as
refinancing or restructuring its indebtedness, selling material assets or
operations, or seeking to raise additional debt or equity capital. There can be
no assurance that any of these actions could be effected on satisfactory terms,
that they would enable us to continue to satisfy our capital requirements or
that they would be permitted by the terms of existing or future debt agreements.
All of our bank debt is secured by our real estate properties. As of September
30 2002, our lenders held an aggregate of $3,294,197 of liens against our real
estate properties as security for bank loans of the same amount. If we are
unable to meet the terms of our bank loans, resulting in default under such bank
loans, the lenders may elect to declare all amounts outstanding under the loans
to be immediately due and payable and foreclose on our real estate properties,
which would have a material adverse effect on us.
The Company is currently negotiating with China Construction Bank and China
Merchant Bank to extend its remaining bank loans in the amount of $3,294,197,
which were past due as of September 30, 2002. In connection with these
negotiations, we will attempt to secure more favorable payment terms. If we are
unable to reach an agreement with these two financial institutions, they may
elect to declare all amounts outstanding under the loans to be immediately due
and payable. Should we be unable to repay the loans when requested by the
financial institutions to do so, they may foreclose on our real estate
properties, which would have a material adverse effect on us.
-13-
EFFECT OF FLUCTUATIONS IN FOREIGN EXCHANGE RATES
We operate in the People's Republic of China, maintain our financial control
center in Shenyang, PRC, and record most of our operating activities in Renminbi
("RMB"), the Chinese currency. The exchange rate between RMB and US Dollars has
been relatively stable for the last few years. We do not believe that
fluctuations in the foreign exchange rates will have a material effect on our
financial statements. The RMB exchange rates, however, are fixed by the
government of the PRC, and a change in the exchange rate by the PRC could have a
material adverse effect on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of change in the value of short-term investments
and financial instruments caused by fluctuations in investment prices, interest
rates and foreign currency exchange rates.
The Company operates in the People's Republic of China, and is exposed to
foreign exchange rate fluctuations related to the translation of the financial
results of our operations in China into U.S. dollars during consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact overall expected profitability.
The effect of foreign exchange rate fluctuations on the Company for the nine
months ended September 30, 2002 was immaterial. The exchange rate between RMB
and US Dollars has been relatively stable for the last few years. We do not
believe that fluctuations in the foreign exchange rates will have a Material
effect on our financial statements. The RMB exchange rates, however, are fixed
by the Chinese government, and a change in the exchange rate by the PRC could
have a material adverse effect on our financial statements.
The Company has not entered into any derivative financial instruments to manage
interest rate risk or for speculative purpose and is not currently evaluating
the future use of such financial instruments.
The Company does not hold cash equivalents or marketable securities as of
September 30, 2002 and has no plans to do so within the next twelve months.
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer evaluated the
Company's disclosure controls and procedures within the 90 days preceding the
filing date of this quarterly report. Based upon this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in ensuring that material
information required to be disclosed is included in the reports that it files
with the Securities and Exchange Commission.
There were no significant changes in the Company's internal controls or, to the
knowledge of the management of the Company, in other factors that could
significantly affect these controls subsequent to the evaluation date.
-14-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Default Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Securities
Not applicable
Item 5. Other Information
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits and Index of Exhibits
Exhibit Description
10(h)(i) Acquisition Agreement between Huayang International Holdings,
Inc. and Mr. Zheng Hongwei dated July 5, 2002
10(h)(ii) Final Agreement between Huayang International Holdings, Inc. and
Mr. Zheng Hongwei dated September 5, 2002
10(i) Agreement between Huayang International Holdings, Inc. and
Huayang International Investment Ltd. dated September 10, 2002.
10(j) Agreement between Shengyang Huayuan Management Limited, Huayang
International Holdings, Inc., YickHo Limited and Huayang
(Shengyang) Group Limited dated September 28, 2002.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Chief Executive Officer.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Chief Financial Officer.
99.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Principal Accounting Officer.
(b) Reports on Form 8-K
During the three months ended September 30, 2002, the Company filed the
following reports on Form 8-K:
On September 18, 2002, the Company filed Form 8-K regarding Item 2 - Acquisition
or Disposition of Assets - related to the acquisition of Jiahe Medicine Group, a
pharmaceutical company based in China, and Item 5 - Other Events and Regulation
FD Disclosure - related to a press release issued on September 16, 2002
announcing the Company's acquisition of Jiahe Medicine Group.
On September 30, 2002, the Company filed Form 8-K regarding Item 5 - Other
Events and Regulation FD Disclosure - relating to a press release issued on
September 26, 2002 announcing the disposal of interest in its investment in
Sheraton Shenyang Lido Hotel and the settlement of debts.
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
Huayang International Holdings, Inc.
Date: November 19, 2002 /s/ Gao WanJun
Name: Gao WanJun
Title: President and Chief Executive Officer
Date: November 19, 2002 /s/ Wang Yufei
Name: Wang Yufei
Title: Director, Chief Financial Officer
and Secretary
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Gao WanJun, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Huayang
International Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Huayang International Holdings, Inc. as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14)for Huayang International Holdings, Inc.
and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to Huayang International Holdings, Inc., including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Huayang International Holdings, Inc.'s disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to Huayang International Holdings, Inc.'s auditors and
the audit committee of Huayang International Holdings, Inc.'s board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect Huayang International Holdings, Inc.'s ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Huayang International Holdings, Inc.'s
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Gao WanJun
Gao WanJun
President and Chief Executive Officer
-16-
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Wang Yufei, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Huayang
International Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Huayang International Holdings, Inc. as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14)for Huayang International Holdings, Inc.
and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to Huayang International Holdings, Inc., including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Huayang International Holdings, Inc.'s disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to Huayang International Holdings, Inc.'s auditors and
the audit committee of Huayang International Holdings, Inc.'s board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect Huayang International Holdings, Inc.'s ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Huayang International Holdings, Inc.'s
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Wang Yufei
Wang Yufei
Chief Financial Officer
-17-
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Kitty Zhao, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Huayang
International Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Huayang International Holdings, Inc. as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14)for Huayang International Holdings, Inc.
and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to Huayang International Holdings, Inc., including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Huayang International Holdings, Inc.'s disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to Huayang International Holdings, Inc.'s auditors and
the audit committee of Huayang International Holdings, Inc.'s board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect Huayang International Holdings, Inc.'s ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Huayang International Holdings, Inc.'s
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 19, 2002
/s/ Kitty Zhao
Kitty Zhao
Principal Accounting Officer
-18-