As filed with the Securities and Exchange Commission on October 24, 1995
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE
PERIOD ENDED JUNE 30, 1995
----------------------
HENG FAI CHINA INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 0-7619 93-063633
(State or other jurisdiction (Commission (IRS Employer
of incorporation or organization) File Number) Identification Number)
650 West Georgia Street, Suite 588, P.O. Box 11586
Vancouver, B.C. CANADA V6B 4N8
(604) 685-8318
(Address and telephone number of Registrant's principal executive offices)
----------------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
As of October 20, 1995, there were 10,819,542 shares of common stock of Heng Fai
China Industries, Inc. outstanding.
HENG FAI CHINA INDUSTRIES, INC.
FORM 10-Q
FOR THE
QUARTER ENDED JUNE 30, 1995
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements.......................................................................... 1
Condensed Consolidated Balance Sheets as at
June 30, 1995 and December 31, 1994........................................................... 2
Condensed Consolidated Statements of Operations for the
six and three months ended June 30, 1995 and 1994............................................. 3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1995 and 1994....................................................... 4
Notes to Condensed Consolidated Financial Statements.......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 12
Item 2. Changes in Securities......................................................................... 12
Item 3. Defaults Upon Senior Securities............................................................... 12
Item 4. Submission of Matters to a Vote of Securityholders............................................ 12
Item 5. Other Information............................................................................. 12
Item 6. Exhibits and Reports on Form 8-K.............................................................. 12
Signature Page............................................................................................Last Page
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements of Heng Fai China Industries, Inc.
(the "Company") are provided herewith:
(a) Condensed Consolidated Balance Sheets as at June 30, 1995 and
December 31, 1994;
(b) Condensed Consolidated Statements of Operations for each of
the six months ended June 30, 1995 and June 30, 1994 and each
of the three months ended June 30, 1995 and June 30, 1994;
(c) Condensed Consolidated Statements of Cash Flows for each of
the six months ended June 30, 1995 and June 30, 1994; and
(d) Notes to the Condensed Consolidated Financial Statements.
1
HENG FAI CHINA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(United States Dollars)
As at As at
Notes June 30, 1995 December 31, 1994
----- ------------- -----------------
CURRENT ASSETS
Cash $348,849 $191,731
Accounts receivable 63,995 2,393
Prepaids 51,895 2,024
Inventories 1 72,711 --
----------- --------------
537,450 195,986
FIXED ASSETS, net 4 956,257 933,710
DEFERRED EXPENDITURE 5 1,465,075 --
---------- --------------
$2,958,782 $1,129,696
========== ==========
CURRENT LIABILITIES
Accounts payable $116,433 $20,545
Short-term borrowings 71,568 --
Interest payable 27,840 19,733
Security deposits payable 9,769 11,071
Other payable 26,683 --
Unearned rent -- 12,053
Due to related parties 14,574 32,617
Current portion of mortgage 14,830 14,785
------------ -----------
281,697 110,804
============ ===========
LONG-TERM LIABILITIES
Mortgages payable 984,871 971,611
Deferred exchange gains -- 50,153
----------- -----------
1,266,568 1,132,568
----------- ----------
DEFICIENCY IN ASSETS
Preferred stock, $10 par value,
500,000 shares authorized,
none issued -- --
Share capital, $.01 par value,
30,000,000 shares authorized,
10,759,542 and 10,384,542
shares issued and outstanding 6 107,595 103,845
Contributed surplus 2,218,472 193,296
Deficit (633,853) (300,013)
----------- -----------
1,692,214 (2,872)
---------- ------------
$2,958,782 $1,129,696
========== ==========
See accompanying notes to the Condensed Consolidated Financial Statements.
2
HENG FAI CHINA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(United States Dollars)
Six Six Three Three
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Notes 1995 1994 1995 1994
----- -------- -------- -------- --------
Revenues
Rental income $171,496 $161,712 $88,139 $80,231
Sales of cement 55,220 -- 55,220 --
Interest income 5,290 2,456 2,484 1,833
Foreign exchange gain 7,490 -- 3,424 (8,620)
---------- ------------ --------- ---------
239,496 164,168 149,267 73,444
--------- -------- -------- --------
Expenses
Cost of cement sales 49,362 -- 49,362 --
Amortization and
depreciation 23,611 18,188 13,487 7,078
Legal and professional
expenses 41,581 172 41,581 --
Consulting fees 5 277,925 -- 277,925 --
Interest expenses 46,030 44,378 23,804 22,380
Land lease 40,095 39,855 20,377 19,945
Real estate management
fees 8,984 7,609 6,439 4,134
Other administrative
expenses 85,748 49,901 44,756 27,948
---------- --------- ---------- ---------
573,336 160,103 477,731 81,485
---------- -------- ---------- ---------
Net income (loss) $(333,840) $ 4,065 $(328,464) $ (8,041)
========== ========= ========== =========
Net income (loss) per
common share $(.03) $.02 $(.03) $(.03)
====== ==== ====== ======
Weighted average common
shares outstanding 10,445,207 258,943 10,505,896 258,943
========== ======= ========== =======
See accompanying Notes to Condensed Consolidated Financial Statements.
3
HENG FAI CHINA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(United States Dollars)
Six Six
Months Months
Ended Ended
June 30, June 30,
Notes 1995 1994
----- -------- --------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $(333,840) $4,065
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 23,811 18,188
Consulting fees paid in common stock 5 277,925 --
Changes in working capital components:
Accounts receivable (61,764) 36,755
Prepaids (49,871) --
Inventories (72,711) --
Accounts payable (95,888) --
Interest payable 8,107 --
Security deposits payable (1,302) --
Other payable 14,680 --
---------- -----------
Net cash used in operating activities (99,327) 59,008
---------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of fixed assets (83,775) --
---------- -----------
Net cash used in investing activities (83,775) --
---------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Issue of shares 300,000 --
New short-term borrowings 71,568 --
Repayment of mortgage (13,305) (7,600)
Advances (Repayment) of related party advances (18,043) (58,813)
---------- ---------
Net cash provided by financing activities 340,220 (66,413)
---------- ---------
Net increase in cash and cash equivalents 157,118 (7,405)
Cash and cash equivalents:
Beginning of the period 191,731 5,764
---------- ---------
End of the period 348,849 (1,641)
========== =========
ANALYSIS OF THE BALANCES OF CASH AND
CASH EQUIVALENTS
Bank Balances and Cash 348,849 --
Short-term Borrowings -- (1,641)
--------- ---------
$ 348,849 $ (1,641)
========= =========
See accompanying notes to the Condensed Consolidated Financial Statements.
4
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United States Dollars)
1. BASIS OF PRESENTATION
In June 1994, Heng Fai China Industries, Inc., then known as
Alpine International Corporation ("Alpine") entered into a business
combination with Vancouver Hong Kong Properties, Ltd. ("Vancouver Hong
Kong"), which owns and operates a residential rental property in North
Vancouver, British Columbia. The business combination resulted in the
shareholders of Vancouver Hong Kong being issued 10,357,700 shares of
Alpine's common stock and 10,357,700 common stock purchase warrants. As
a part of the business combination, a company related to Vancouver Hong
Kong agreed to subscribe for 1,500,000 shares of Alpine's common stock
and 1,500,000 common stock purchase warrants for an aggregate of
US$120,000 in cash. The business combination was accounted for as a
reverse acquisition whereby the purchase method of accounting has been
used with Vancouver Hong Kong being the accounting parent. Accordingly,
results of operations for periods prior to the reverse acquisition are
those of Vancouver Hong Kong, and the results of Alpine's operations
are included only from the date of such reverse acquisition. Subsequent
to the business combination, the name of the legal parent Alpine was
changed to Heng Fai China Industries, Inc. (hereinafter referred to as
"HFCI" as the context may require).
The condensed consolidated financial statements include the
accounts of HFCI and its wholly-owned subsidiaries (collectively, the
"Company"). The condensed consolidated financial statements included
herein have been prepared by the Company, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading. The condensed consolidated financial statements and the
notes thereto should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form
10-K for the year ended December 31, 1994.
In the opinion of the management of the Company, the
accompanying unaudited condensed consolidated financial statements
contain all necessary adjustments to present fairly the financial
position, the results of operations and cash flows for the periods
reported. All adjustments are of a normal recurring nature.
The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year.
5
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United States Dollars)
2. SIGNIFICANT ACCOUNTING POLICIES
Inventories - Inventories relating to the Company's cement
operations are stated at the lower of cost (determined on the first-in,
first-out method) or market. Inventories at June 30, 1995 represent
cement raw materials.
Translation of foreign currency - The Company's functional
currency is the Canadian dollar (C$). Consolidated financial statements
are stated in United States dollars (US$) which is the reporting
currency of the Company. Assets, liabilities, revenues and expenses
denominated in other currencies are translated into Canadian dollars at
current exchange rates. Gains and losses arising from foreign currency
transactions are included in income. The translation of the C$ amounts
into US$ amounts, for the purposes of reporting in US$, is, with
respect to assets and liabilities, based on the exchange rate in effect
at the date of the balance sheet (C$1.3717 to US$1.00 at June 30, 1995)
and, with respect to revenues and expenses, based on the average
exchange rate during the period (C$1.3532 to US$1.00 for the six months
ended June 30, 1995). Changes in the exchange rate between the C$ and
the US$ have not had a significant effect on financial condition or the
results of operations.
3. ACQUISITIONS
On January 9, 1995, HFCI acquired from the chairman of its
board of directors 100% of the common stock of Heng Fai China and Asia
Industries, Limited ("Asia") in exchange for nominal consideration.
Asia's only assets, owned by its wholly-owned subsidiaries, Heng Fai
China Industries Limited ("China") and Heng Fai Light Products Limited
("Light"), were options to acquire operating or lease interests in
three cement manufacturing operations located in the People's Republic
of China ("PRC"), as follows:
A. Light, through its newly formed subsidiary, Cangzhou Citizen
Cement Product Co., Ltd. ("Citizen") may acquire the use, for
a period of five years commencing January 1, 1995, of a
production line at the Hebei Cangzhou City Chemical
Corporation Factory (the "Cangzhou Factory"). Citizen may
exercise its option to lease the existing facilities for five
years at a nominal rental, by expending RMB$1.2 million
(US$144,000) on the expansion and modernization of the
Cangzhou Factory plant.
B. China has the option to acquire an interest in a joint
venture, the Cangzhou Jiuhe Cement Co., Ltd. ("Jiuhe"), which
would acquire the use of the existing facilities of the
Qingxian Cement Factory for 30 years. In exchange for
contributing RMB$17 million (US$2,043,000) for the expansion
and modernization of the existing factory, China would be
entitled to 100% of the profits of the joint venture until it
recovers its contribution, and thereafter 70% of the profits
of the joint venture. The control of Jiuhe would be shared by
China and the PRC government, which would contribute a 30 year
lease on the existing facilities for its interest. The assets
of the joint venture would revert to the PRC government at the
termination of the joint venture.
6
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United States Dollars)
C. China has the option to acquire an interest in a joint
venture, the Hebei Iron Lion Cement Co., Ltd. ("Hebei"), which
would acquire the use of the existing facilities of the Hebei
Cangzhou Area Construction Materials Factory for 30 years. In
exchange for contributing RMB$70 million (US$8,190,000) for
the expansion and modernization of the existing factory, China
would be entitled to 100% of the profits of the joint venture
until it recovers its contribution, and thereafter 52% of the
profits of the joint venture. The control of Hebei would be
shared by China and the PRC government, which would contribute
a 30 year lease on the existing facilities for its interest.
The assets of the joint venture would revert to the PRC
government at the termination of the joint venture.
China and Light acquired the foregoing options for nominal
consideration and, as a result, no financial statement recognition is
accorded to the unexercised options.
On April 17, 1995, China exercised its option to acquire,
through Citizen, the use for five years of a production line at the
Cangzhou Factory. Through June 30, 1995, the Company had expended
approximately RMB$658,000 on the expansion and modernization of the
factory.
4. PROPERTY AND EQUIPMENT
June 30, 1995
---------------------------------------------
Accumulated
Depreciation
and Net Book
Cost Amortization Value
---------- -------- --------
Residential Rental Property
Building $748,669 $287,394 $461,275
Leasehold improvement 601,932 186,051 415,881
Cement factory leasehold improvements 79,101 -- 79,101
---------- -------- --------
$1,429,702 $473,445 $956,257
========== ======== ========
December 31, 1994
---------------------------------------------
Accumulated
Depreciation
and Net Book
Cost Amortization Value
---------- -------- --------
Building $748,669 $257,654 $491,015
Leasehold improvement 601,932 159,237 442,695
---------- -------- --------
$1,350,601 $416,891 $933,710
========== ======== ========
7
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United States Dollars)
5. DEFERRED EXPENDITURE
In June 1995, HFCI entered into a consulting agreement with
previously unaffiliated parties pursuant to which it receives various
investor relations and financial advisory services. The consulting
agreement has a term of 12 months, subject to earlier termination
thereof or renewal for subsequent periods. Pursuant to the terms of the
agreement, the Company: (a) in June 1995, issued to the consultant an
aggregate of 260,000 shares of its common stock and (b) is obligated to
issue to the consultant 20,000 shares of its common stock each month
during the term of the agreement.
The value attributable to the 260,000 shares issued to the
consultant pursuant to the consulting agreement, $1,510,600, has been
capitalized and is being amortized over the 12 month term of the
consulting agreement. The value attributable to the shares of common
stock being issued on a monthly basis is being charged to expense as
such shares of common stock are issued.
6. SHARE CAPITAL
The changes in share capital during the six months ended June
30, 1995 were as follows:
Common Shares
----------------------------
Number of Contributed
Shares Amount Surplus
---------- --------- ----------
Balance, December 31, 1994 10,384,542 $103,845 $193,296
Private Placement 75,000 750 299,250
Consulting Agreement (Note 5) 300,000 3,000 1,725,926
---------- --------- ----------
Balance, June 30, 1995 10,759,542 $107,595 $2,218,472
========== ======== ==========
As of June 30, 1995, there were outstanding warrants
exercisable to purchase 296,443 shares of common stock, at an exercise
price of $3.00 per share through July 1, 1999.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
Background
Heng Fai China Industries, Inc. (the "Company") was originally
organized on March 24, 1958 as Time Saver Markets, Inc. pursuant to the laws of
the State of California. On October 29, 1973, Alpine International Corporation,
a private Oregon corporation merged with and into Time Saver Markets, Inc.
Subsequent thereto, Time Saver Markets, Inc. changed its name to Alpine
International Corporation. In August 1994, Alpine International Corporation
changed its name to Alpine Merger Corporation ("Alpine-California") after having
entered into a merger agreement with a Delaware corporation named Alpine
International Corporation ("Alpine-Delaware") which was formed for the purpose
of facilitating the reincorporation of Alpine-California in the State of
Delaware through a merger with and into Alpine-Delaware. Subsequently, in
November 1994, Alpine-Delaware changed its name to Heng Fai China Industries,
Inc. Alpine-California and Alpine-Delaware may be collectively referred to
hereinafter as "Alpine."
Alpine conducted no significant operations between April 1992, when it
emerged from reorganization under Chapter 11 of Title II of the U.S. Bankruptcy
Code, and June 1994, when it acquired Vancouver Hong Kong Properties Limited
("Vancouver Hong Kong") which owns an apartment building in North Vancouver,
British Columbia. In connection therewith, Alpine obtained equity financing of
US$120,000 in exchange for the issuance of 1,500,000 shares of its common stock
and 1,500,000 common stock purchase warrants exercisable for a period of _____
years. See Note 1 of the Notes to the Condensed Consolidated Financial
Statements included elsewhere herein.
Throughout the remainder of fiscal 1994, the Company's operations were
limited to the operation of the real estate acquired through the Company's
acquisition of Vancouver Hong Kong. In January 1995, the Company acquired its
wholly-owned subsidiary, Heng Fai China & Asia Industries Limited ("Asia"), a
company incorporated in Hong Kong, along with Asia's two wholly-owned
subsidiaries, Heng Fai China Industries Limited ("China") and Heng Fai Light
Products Limited ("Light"). China and Light were incorporated in Hong Kong and
the Peoples' Republic of China ("PRC"), respectively. China and Light (through
its wholly-owned subsidiary, Cangzhou Citizen Cement Product Co., Ltd., referred
to hereinafter as "Citizen") have the rights to acquire direct or joint venture
operating lease interests for three cement factories in the Hebei province of
the PRC: (i) the Hebei Cangzhou City Chemical Corporation Factory (the "Cangzhou
Factory"); (ii) the Qingxian Cement Factory (the "Qingxian Factory"); and (iii)
the Hebei Cangzhou Area Construction Materials Factory (the "Hebei Factory").
See Note 3 of the Notes to the Condensed Consolidated Financial Statements
included elsewhere herein.
On April 17, 1995, Light (through Citizen) exercised its option to
lease the Cangzhou Factory. The Company is currently making the expansion and
modernization expenditures
9
required to exercise pursuant to the terms of the agreement governing the lease
option. The Cangzhou Factory suspended operations during the expansion and
modernization, which were completed in June 1995, at which time the operations
thereof were resumed.
Results of Operations
The Company generates revenue through the leasing of the apartment
building in North Vancouver, British Columbia and the sale of cement products.
In the six month period ended June 30, 1995, approximately 73.82% of the
Company's total revenue was derived from the leasing of the apartment building
while 23.6% was contributed by the sale of cement products.
There were no significant changes in the revenues and expenses
attributable to the operation of Vancouver Hong Kong's real estate between the
second quarter or first half of fiscal 1995 and the comparable periods of fiscal
1994.
Revenues and expenses for Citizen's cement operations represent
operations from April 17, 1995. As previously discussed, Citizen's facilities
were undergoing expansion and modernization, and the operations during the
second quarter of fiscal 1995 were limited to the purchase and resale of
finished cement products.
Legal and professional fees, and other administrative expenses,
increased significantly during the second quarter and first half of fiscal 1995.
The increased expenses resulted from personnel added during 1995 to establish a
Hong Kong office to support the Company's activities in the PRC. Continued
increases in the Company's investigation and acquisition of business
opportunities in the PRC are expected, and will result in additional increases
in legal, professional and administrative expenses.
In June 1995, the Company entered into a consulting agreement pursuant
to which it receives investor relations and financial advisory services. As a
result, the Company recorded consulting expenses of US$277,925 during the second
quarter of fiscal 1995. See Note 5 of the Notes to the Condensed Consolidated
Financial Statements included elsewhere herein.
Liquidity and Capital Resources
To date, the Company has financed its operations primarily through
private placements of its common stock, short term borrowings and cash flow from
operations. As at June 30, 1995, the Company had cash of US$348,849 together
with short term borrowings amounting to US$71,568.
The Company had net cash outflow of approximately US$99,327 from
operating activities during the first half of fiscal 1995 as compared to net
cash inflow of US$59,008 during the first half of fiscal 1994. The outflow was
mainly attributable to the current year six month net loss. The Company financed
the net loss, and capital additions, through the private placement of shares of
its common stock for cash proceeds of $300,000. The proceeds from that private
10
placement are also being used to fund the expenditures incurred by Citizen in
connection with the expansion and modernization of the Cangzhou Factory
described above.
As discussed in Note 3 of the Notes to Condensed Consolidated Financial
Statements, the Company, through Asia, holds options to acquire joint venture
interests in two additional PRC cement factories: (i) the Qingxian Factory; and
(ii) the Hebei Factory. The exercise of those options would require that the
Company expend US$2 million and US$8.2 million, respectively, on the expansion
and modernization of the plants. The Company currently expects that the funds
for such investments, if the options are exercised, would be derived from the
Company's issuance of shares of its common stock.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending or ongoing
litigation.
Item 2. Changes in Securities
There have been no changes in the securities of the Company
required to be disclosed pursuant to this item.
Item 3. Defaults upon Senior Securities
There has been no material default with respect to any
indebtedness of the Company required to be disclosed pursuant
to this item.
Item 4. Submission of Matters to a Vote of Securityholders
There have been no matters submitted to a vote of
securityholders during the six months ended June 30, 1995.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibits are incorporated by
referenced into this report:
Exhibit No. Exhibit Name
10.1 Contract, dated June 25, 1994, between Heng
Fai China Industries, Ltd. and Qingxian
Cement Factory
10.2 Contract, dated September 3, 1994, between
Heng Fai China Industries, Ltd. and Hebei
Cangzhou Area Construction Material Factory
10.3 Contract of Tenancy, dated October 20, 1994,
between China Hebei Cangzhou City Chemical
Corporation and Heng Fai Light Products Co.,
Ltd.
(b) Reports on Form 8-K: None.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HENG FAI CHINA INDUSTRIES, INC.
Dated: October 13, 1995 By: /s/ Robert H. Trapp
-------------------
Robert H. Trapp
Secretary and Treasurer