SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended SEPTEMBER 30, 1996
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) File Number) Identification No.)
650 West Georgia Street, Suite 1600, P.O. Box 11586, V6B 4N8
Vancouver, B.C. CANADA (Postal Code)
(Address Of Principal Executive Offices)
Registrant's telephone number, including area code (604) 685-8318
Indicate by check mark whether 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 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 December 17, 1996, there were 11,986,814 shares of common stock of
Registrant outstanding.
HENG FAI CHINA INDUSTRIES, INC.
FORM 10-Q
FOR THE
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements......................................... 1
Condensed Consolidated Balance Sheets as at
September 30, 1996 and December 31, 1995..................... 2
Condensed Consolidated Statements of Operations for the
nine and three months ended September 30, 1996 and 1995...... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995................ 4
Notes to Condensed Consolidated Financial Statements......... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 15
Item 2. Changes in Securities........................................ 15
Item 3. Defaults Upon Senior Securities.............................. 15
Item 4. Submission of Matters to a Vote of Securityholders........... 15
Item 5. Other Information............................................ 15
Item 6. Exhibits and Reports on Form 8-K............................. 15
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 September 30, 1996 and
December 31, 1995;
(b) Condensed Consolidated Statements of Operations for each of nine
months ended September 30, 1996 and September 30, 1995 and each of the
three months ended September 30, 1996 and 1995;
(c) Condensed Consolidated Statements of Cash Flows for each of the nine
months ended September 30, 1996 and September 30, 1995; and
(d) Notes to the Condensed Consolidated Financial Statements.
1
HENG FAI CHINA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(United States Dollars)
Notes As at As at
----- ----- -----
September 30, 1996 December 31, 1995
------------------ -----------------
CURRENT ASSETS
Cash and cash equivalents $ 264,430 $ 55,001
Available-for-sale securities 4 408,739 480,835
Accounts receivable 144,344 29,307
Prepaids and other current assets 1,234,143 31,365
Inventories 5 2,438,241 154,370
---------- ----------
4,489,897 750,878
PROPERTY, net 6 3,371,935 857,548
PREPAID RENTAL 93,788 115,430
---------- ----------
Total Assets $7,955,620 $1,723,856
========== ==========
CURRENT LIABILITIES
Accounts payable 101,968 165,652
Bank overdraft 4,357 --
Short-term borrowings 8 1,357,967 60,120
Margin loan payable 9 268,465 274,420
Interest payable 39,785 32,983
Security deposits payable 10,754 10,095
Accrued expenses 247,429 116,718
Due to related parties 1,710,385 22,005
Due to PRC joint venture partners 10 1,530,747 --
Current portion of mortgage 17,203 17,325
---------- ----------
5,289,060 699,318
LONG-TERM LIABILITIES
Mortgages payable 968,242 975,108
Long-term payable 91,415 91,415
Minority interest 858,061 --
---------- ----------
7,206,778 1,765,841
---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $10 par value,
500,000 shares authorized,
none issued --
Share capital, $.01 par value,
30,000,000 shares authorized,
11,686,814 and 10,859,542
shares issued and outstanding 11 116,868 108,595
Contributed surplus 4,385,272 2,812,546
Unrealized loss on available-for-sale securities 4 (28,777) (43,941)
Cumulative exchange adjustments 11,952 6,968
Accumulated deficit (3,736,473) (2,222,586)
---------- ----------
748,842 661,582
Common stock issued for consulting services
to be received 7 -- (703,567)
---------- ----------
Total stockholders' equity 748,842 (41,985)
---------- ----------
Total liabilities and stockholders' equity $7,955,620 $1,723,856
========== ==========
See accompanying notes to the Condensed Consolidated Financial Statements.
2
HENG FAI CHINA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(United States Dollars)
Nine Nine Three Three
Months Months Months Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
Notes 1996 1995 1996 1995
------------ ------------ ------------ ------------
Revenues
Rental income $ 253,154 $ 270,332 83,504 $ 98,836
Sales 346,930 148,141 172,135 92,921
Investment income 30,942 6,793 4,666 1,503
Laundry and interest income 4,826 -- 1,845 --
Foreign exchange gain -- (34,002) -- (41,492)
------------ ------------ ------------ ------------
Total Revenues 635,852 391,264 262,150 151,768
------------ ------------ ------------ ------------
Expenses
Cost of goods sold 321,737 127,281 167,399 77,919
Depreciation 46,579 44,570 22,507 20,959
Legal and professional expenses 29,650 54,287 2,999 12,706
Consulting fees 7 1,295,395 1,004,175 5,000 726,250
Interest expenses 141,365 73,814 74,328 27,874
Land lease 60,662 61,078 20,131 20,983
Real estate management fees 10,331 12,253 3,514 3,269
Other administrative expenses 275,677 147,698 170,267 61,860
------------ ------------ ------------ ------------
Total Expenses 2,181,396 1,525,156 466,145 951,820
------------ ------------ ------------ ------------
Loss before income taxes and
minority interests (1,545,544) (1,133,892) (203,995) (800,052)
Provision for income tax -- -- -- --
------------ ------------ ------------ ------------
(1,545,544) (1,133,892) (203,995) (800,052)
Minority interests 31,657 -- 31,657 --
------------ ------------ ------------ ------------
Net income (loss) $ (1,513,887) $ (1,133,892) $ (172,338) $ (800,052)
============ ============ ============ ============
Net income (loss) per share $ (.14) $ (.11) $ (.02) $ (.08)
============ ============ ============ ============
Weighted average common
shares outstanding 10,961,587 10,766,428 11,022,783 10,445,207
============ ============ ============ ============
See accompanying notes to Condensed Consolidated Financial Statements.
3
HENG FAI CHINA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(United States Dollars)
Nine Nine
Months Months
Ended Ended
September 30, September 30,
Notes 1996 1995
----- ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) $(1,513,887) $(1,133,892)
Adjustments to reconcile loss to net cash
used for operating activities:
Depreciation and amortization 68,221 44,570
Consulting fees paid in common stock 1,295,395 1,004,175
Adjustments of trading securities to fair value 72,096 --
Minority interest 31,657 --
Changes in working capital components:
Trading securities -- (502,847)
Accounts receivable (115,037) (22,737)
Prepaid and other current assets (65,465) (132,589)
Inventories 82,583 (90,978)
Accounts payable (158,835) 76,146
Interest payable 6,802 11,179
Security deposits payable 659 (669)
Accrued expenses 84,233 203,651
Exchange difference 22,659 18,693
----------- -----------
Net cash used in operating activities (188,919) (525,298)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of a subsidiary company 12 (1,228,036) (130,939)
----------- -----------
Net cash used in investing activities (1,228,036) (130,939)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Issue of shares -- 300,000
Margin loan payable (5,955) 253,891
Repayment of mortgage (6,988) (24,439)
Advances (repayment) of related party advances 1,587,099 (15,930)
Short-term borrowings raised 47,871 --
Bank overdraft raised 4,357 --
----------- -----------
Net cash provided by financing activities 1,626,384 513,522
----------- -----------
Net increase (decrease) in cash and cash equivalents 209,429 (142,715)
----------- -----------
Cash and cash equivalents:
Beginning of the period 55,001 191,731
----------- -----------
End of the period 264,430 49,016
=========== ===========
ANALYSIS OF THE BALANCES OF CASH AND
CASH EQUIVALENTS
Bank Balances and Cash 264,430 49,016
----------- -----------
264,430 49,016
=========== ===========
Non-cash financing activities:
Issuance of common stock for consultancy services $ 581,000 --
Issuance of common stock for acquisition $ 1,000,000 --
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. (the "Company") entered
into a business combination with Vancouver Hong Kong Properties Limited
("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 common stock (the "Common Stock") and 10,357,700 common stock
purchase warrants (the "Warrants") of the Company. As a part of the
business combination, a company related to Vancouver Hong Kong agreed to
subscribe for 1,500,000 shares of Common Stock and 1,500,000 common stock
purchase warrants for an aggregate of US$120,000 in cash. The foregoing
share numbers are before the effects of the Company's subsequent
one-for-four reverse stock split and a one-for-ten reverse stock split. The
business combination was accounted for as a reverse acquisition whereby the
purchase method of accounting was 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.
As of September 4, 1996, the Company entered into an agreement, (the
"Agreement") with Monkey King Group pursuant to which Worldwide Container
Company Ltd. ("Worldwide"), a wholly owned subsidiary of the Company,
acquired from the Seller a 70% interest in Wuhan Container Co., Ltd.
("Wuhan") in exchange for 727,272 shares of the Company's restricted common
stock. Wuhan is a People's Republic of China state company which was formed
to engage in the design, manufacture, lease and repair of standard and
non-standard containers and related steel structure products.
The closing of the Agreement was conditioned upon the approval of the
Board of Directors of the Company as well as the Company's satisfactory
completion of a due diligence review of Wuhan. On September 19, 1996 the
Company's Board approved the Agreement, completed its due diligence review
of Wuhan and directed the issuance of the Shares to Hubei Monkey King
Investment & Development Corporation ("HMK").
5
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United States Dollars)
1. BASIS OF PRESENTATION - Continued
The condensed consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. 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, 1995.
In the opinion of the management of the Company, the accompanying
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 a
normal recurring nature.
The results of operations for the nine months periods are not
necessarily indicative of the results to be expected for the full year.
2. CONTINUING OPERATIONS
These consolidated financial statements have been prepared on the
going concern basis of accounting which assumes the Company will realize
its assets and discharge its liabilities in the normal course of business.
The Company is currently operating at a loss and has a deficiency in net
tangible assets. Should the Company be unable to continue as a going
concern it may be required to realize its assets and settle its liabilities
at amounts substantially different from the current carrying values.
The Company's ability to continue as a going concern is dependent on
continued financial support from its principal shareholder who has signed a
letter of financial support to the Company.
6
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United States Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States. The following sets forth the significant accounting principles
utilized in the preparation of the consolidated financial statements:
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and the disclosures of contingent assets
and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Principles of consolidation - The consolidated financial statements
include the accounts of Heng Fai China Industries, Inc. and all significant
subsidiaries. All significant intercompany transactions and balances have
been eliminated.
Cash and cash equivalents - Cash and cash equivalents include cash on
hand and short-term bank deposits.
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. Cost includes material and conversion cost.
Trading-securities - Equity securities purchased principally for the
purpose of resale in the near term are classified as trading securities and
are measured at fair value, with unrealized gains and losses included in
earnings. Fair values are determined based on quoted prices.
Investment securities - The Company has classified the marketable
equity securities it holds as available-for-sale. Accordingly, pursuant to
Statement of Financial Accounting Standard No. 115 the securities are
measured at fair value, with unrealized gains and losses, net of applicable
taxes, reported as a separate component of equity.
7
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United States Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Depreciation is provided to write off the cost of fixed assets over
their estimated useful lives as follows:
Building 5% declining balance
Leasehold improvements amortized over the term of the
lease which expires May 31, 2032
using the straight line method
Electric equipment 5 years straight line
Furniture and equipment 10 years straight line
Motor vehicles 5 years straight line
Plant and machinery 10 years straight line
No depreciation is provided in respect of construction in progress.
Foreign currency translation - Financial statements of international
subsidiaries are translated into U.S. dollars using the exchange rate at
each balance sheet date for assets and liabilities and a weighted average
exchange rate for each period for revenue and expenses. Where the local
currency is the functional currency, translation adjustments are recorded
as a separate component of shareholders' equity. Where the U.S. dollar is
the functional currency, the financial statements of international
subsidiaries are translated at historical rates and translation adjustments
are recorded in income.
4. AVAILABLE-FOR-SALE SECURITIES
The cost and approximate market value of investment securities at
September 30, 1996 were as follows:
Gross Estimated Carrying
----- --------- --------
Cost Unrealized Loss Fair Value Value
---- --------------- ---------- -----
Corporate equity
securities $525,184 116,445 408,739 408,739
======== ======= ======= =======
8
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United States Dollars)
4. AVAILABLE-FOR-SALE SECURITIES - Continued
The Company acquired the investment securities for cash financed
partially by the Company's internal resources and partially by a margin
loan (See Note 9).
These investment securities are not subject to any contractual or
statutory resale restrictions and any portion of these stock can be
reasonably expected to qualify for sale within one year.
5. INVENTORIES
Inventories by major categories are summarized as follows:
September 30, 1996 December 31, 1995
------------------ -----------------
Raw materials and supplies $2,097,135 $ 67,253
Work-in-progress 142,179 67,591
Finished goods 198,927 19,526
--------- -------
Total inventories 2,438,241 154,370
========= =======
6. PROPERTY
The components of property are as follows:
September 30, 1996 December 31, 1995
------------------ -----------------
Building 1,837,654 $ 722,538
Leasehold improvements 548,333 548,333
Furniture and equipment 36,210 --
Plant and machinery 1,673,423 --
Motor vehicles 31,763 --
Construction-in-progress 1,265 --
--------- -------
Total 4,128,648 1,270,871
Less: accumulated depreciation
and amortization 756,713 413,323
--------- -------
3,371,935 857,548
========= =======
9
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United States Dollars)
7. DEFERRED EXPENDITURE
In June 1995, the Company 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 consulting agreement expires in June 1997.
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 expenses as such shares of common stock are
issued.
8. SHORT-TERM BORROWINGS
Short-term borrowings at September 30, 1996 represent bank overdrafts
on which the Company pays interest based on the "best lending" rate in the
PRC. The effective interest rate at September 30, 1996 was 14.42%.
9. MARGIN LOAN PAYABLE
The margin loan payable is to a third party and is collateralized by
the Company's investment securities with a carrying value of US$408,739.
The loan is repayable on demand and bears interest at Hong Kong best
lending rate (12% at September 30, 1996) plus 3.5 per cent per annum.
10. DUE TO PRC JOINT VENTURE PARTNERS
These amounts are unsecured, interest-free and have no fixed repayment
date.
10
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United States Dollars)
11. SHARE CAPITAL
The changes in share capital during the nine months ended September
30, 1996 were as follows:
Common Shares
------------------------------
Number of Contributed
Shares Amount Surplus
--------------- ------------ -------------
Balance, December 31, 1995 10,859,542 $108,595 $2,812,546
Consulting Agreement (Note 7) 100,000 1,000 580,000
Consideration Shares (Note 1) 727,272 7,273 992,726
---------- ------- ---------
Balance, September 30, 1996 11,686,814 116,868 4,385,272
========== ======= =========
As of September 30, 1996, there were outstanding warrants exercisable
to purchase 296,443 shares of common stock, at an exercise price of $3.20
per share through September 2, 1999.
12. ANALYSIS OF NET CASH FLOW OF CASH AND CASH EQUIVALENTS IN RESPECT OF THE
PURCHASE OF A SUBSIDIARY COMPANY
US$
---------------
Cash at bank and in hand acquired 21,940
Bank borrowings of the company acquired (1,249,976)
----------
Net outflow of cash and cash equivalents in respect of
the purchase of subsidiary companies (1,228,036)
==========
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company was originally incorporated in 1958 and until June 1994 had
been engaged in business other than those it presently operates, or, since its
Alpine 1992 emergence from reorganization under Chapter 11 of the U.S.
Bankruptcy code, had been inactive.
Vancouver Hong Kong owns and operates an apartment building in North
Vancouver, British Columbia, and until June 1995 the Company's operations were
comprised of that single segment. In January 1995, the Company acquired from Fai
Chan (an officer, director and principal stockholder of the Company) the
ownership of 100% of the common stock of Heng Fai China and Asia Industries
Limited ("Asia") and Asia's wholly-owned subsidiaries, Heng Fai China Industries
Limited ("China") and Heng Fai Light Products Limited ("Light"). Light, through
its subsidiary Cangzhou Min You Cement Company Limited ("Min You"), obtained the
right to acquire the use, for a period of five years commencing January 1,
11995, of a production line at Min You in the PRC. Min You was entitled to lease
the production line for five years by expending Renmibi ("RMB"), the currency of
the PRC, RMB 1.2 million on the expansion and modernization of Min You. The
option was exercised and the required RMB 1.2 million was expended in fiscal
1995, and beginning in June 1995 the Company's operations included a second
business segment, the production and sale of cement.
As of September 4, 1996, the Company entered into an agreement, (the
"Agreement") with Monkey King Group pursuant to which Worldwide Container
Company Ltd. ("Worldwide"), a wholly owned subsidiary of the Company, acquired
from the Seller a 70% interest in Wuhan Container Co., Ltd. ("Wuhan") in
exchange for 727,272 shares of the Company's restricted common stock. Based upon
negotiations between the Company's President and the Monkey King Group the
Shares were valued at a per share price of $5.50. Wuhan is a People's Republic
of China state company which was formed to engage in the design, manufacture,
lease and repair of standard and non-standard containers and related steel
structure products. Wuhan commenced trial production of its containers in the
Spring of 1996.
The closing of the Agreement was conditioned upon the approval of the Board
of Directors of the Company as well as the Company's satisfactory completion of
a due diligence review of Wuhan. On September 19, 1996 the Company's Board
approved the Agreement, completed its due diligence review of Wuhan and directed
the issuance of the Shares to Hubei Monkey King Investment & Development
Corporation ("HMK").
The assets acquired by the Company through the acquisition of a 70%
interest in Wuhan consisted of assembly lines, plant and manufacturing
production equipment, power generators and related equipment. Wuhan presently
owns its manufacturing plant which is located in the City of Wuhan on the banks
of the Yangtze River and Hanshui River. The facility consists of approximately
480,000 square feet which will Wuhan estimates has a capacity to produce 10,000
containers on an annual basis. The Company believes that approximately
$5,000,000 in capital improvements will be required to be made to the plant in
order to reach maximum capacity. The Company intends to utilize Wuhan's assets
12
in order to engage in the full scale design, manufacture and production of
container and related steel structure products.
The acquisitions of Wuhan was accounted for under the purchase method of
accounting. Under this method, the purchase price is allocated to the fair value
of the net assets acquired and any excess is considered to be goodwill.
In addition, the Company only acquired majority interests in Wuhan which
requires allocation to the minority holders of their interests in Wuhan's income
and losses.
Results of Operations - Period Ended September 30, 1996 as Compared to the
Period Ended September 30, 1995
The consolidated sales increased 62.51% in the nine months' period ended
September 30, 1996 to US$636,000 from US$391,000 in the corresponding period in
1995, reflecting the contribution in sales from Min You. For the nine month's
period September 30, 1996, approximately 39.81% of the Company's total revenue
was derived from the leasing of the apartment building while 54.56% was
contributed by the sale of cement products. Out of the total revenue about 5%
was generated through securities investment for the nine months period ended
September 30, 1996.
The statement of operations include the operation of Wuhan. There were no
significant changes in the expenses attributable to the operation of Vancouver
Hong Kong between the nine months' period of fiscal 1996 and fiscal 1995.
General corporate expenses increased to US$2,181,395 for the period ended
September 30, 1996 from US$1,525,156 for the corresponding period in 1995
resulting from the significant increase in the consulting expenses and the cost
of cement production. The consulting fees related to an agreement the Company
entered into June 1995 for investor relations and financial advisory services
(see Note 7 of the Notes to the Condensed Consolidated Financial Statements).
Legal and professional fees increased for the period ended September 30, 1996
for the expenses related to the Company's corporate operations.
The Company's net loss after minority interest for the period ended
September 30, 1996 was $1,513,887, a change of US$379,995 compared to net loss
of US$1,133,892 for the corresponding period in 1995. The increases in the net
loss was due to (i) the operating loss for the cement segment; and (ii) higher
general corporate expenses, the consulting expenses in particular.
As at September 30, 1996, the Company held shares of common stock of three
companies traded on the Stock Exchange of Hong Kong Limited. As of September 30,
1996, the quoted market price of the shares are, in the aggregate, US$116,445
less than their initial costs. The securities are classified as available for
sale and, accordingly, the decrease in their market value has been debited
directly to stockholders' equity as a separate component thereof. These
marketable equity securities are carried at fair value and future changes in the
market value of these securities could materially affect the Company's financial
position.
13
Minority interests was US$31,657 for the nine months period ended September
30, 1996 which was solely the losses of Wuhan shared by the minority holders of
Wuhan.
There was no provision for income taxes of the Company and its
subsidiaries. The subsidiaries in the PRC were either in their first or second
year of the tax holiday.
Liquidity and Capital Resources
The Company did not generate net profits from operations on an accounting
basis for the nine months period ended September 30, 1996.
Operating cashflows for the nine months period ended September 30, 1996
were a negative US$188,919. The Company met its working capital requirements by
(i) utilizing cash on hand and (ii) proceeds obtained from bank overdraft and
other short-term borrowings.
As discussed in Note 2 of the Notes to the Condensed Consolidated Financial
Statements, the Company's operating losses and net asset deficiency raise
substantial doubts concerning the Company's ability to continue as a going
concern. However, the Company's principal shareholder has agreed to continue to
provide the Company with necessary financial support.
Exchange Rate Risk
As the Company's operations in the PRC increased, the exposure to exchange
fluctuation has increased.
The exchange rate between the Renminbi and the U.S. Dollar ranged between
RMB 8.5 and RMB 8.2. Since the unification of the two-tier exchange rate system
effective January 1, 1994, the Renminbi continued to strengthen against the U.S.
Dollar. Therefore, management believes that it is unlikely that there will be
any devaluation of the Renminbi against the U.S. Dollar. The Company therefore
does not anticipate any exchange rate fluctuation which would have an adverse
effect on the financial performance and asset values of the Company when
measured in terms of United States Dollar.
Inflation
The general inflation rate in China was approximately 24% and 15% per annum
in 1994 and 1995 respectively. Accordingly, the Chinese government has taken
steps to control inflation by means of credit restrictions, increase in interest
rates and open market operations, which in turn, may lead a slowdown of the
Chinese economy.
As a result of the PRC inflation, the Company experienced a rise in the
cost of raw materials which was the primary cause for the decline in the gross
margins of the cement production in the PRC.
14
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 nine months ended September 30,
1996.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K:
Form 8-K regarding the acquisition of Wuhan KMK Container
Company Limited ("Wuhan") was filed on September 20, 1996. A
copy of the Stock Purchase Agreement between the Company and
the Monkey King Group was filed as an appendix. The amendments
to the Form 8-K were filed on November 25, 1996 and December
9, 1996, respectively, incorporating the audited financial
statements of Wuhan as at December 31, 1995 and the pro-forma
condensed balance sheet and statement of income and
explanatory notes and giving effect to the combined accounts
of the Company and Wuhan as required by the instructions to
Form 8-K.
15
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: December 30, 1996 By: /s/ Robert H. Trapp
-----------------------------------------
Robert H. Trapp
Secretary and Treasurer