SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
[ X ] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-7619
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HENG FAI CHINA INDUSTRIES, INC.
(Name of issuer in its charter)
DELAWARE 93-063633
(State Or Other Jurisdiction (IRS Employer
Of Incorporation) Identification No.)
650 West Georgia Street, Suite 1600, P.O. Box 11586, Vancouver,
British Columbia, CANADA V6B 4N8
(604) 685-8318
(Address and telephone number of principal executive offices)
----------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $.01 par value per share.
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ]
The Registrant's revenues for the fiscal year ended December 31, 1996 totalled
$2,051,366.00
As of April 7, 1997 the aggregate market value of the voting stock held by
non-affiliates of the Registrant (assuming for this purpose that only directors
and officers of the Registrant are affiliates of the Registrant), based on the
average of the closing bid and asked prices of $.765 on that date, was
approximately $5,898,434.
As of April 7, 1997 the Registrant had outstanding 13,686,814 shares of Common
Stock and 379,520 shares of Preferred Stock.
Documents incorporated by reference: Other than certain exhibits here to which
have been specifically incorporated by reference herein in Item 14 under Part
IV hereof, no other documents are incorporated by reference.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
INDEX TO FORM 10-K
OF
HENG FAI CHINA INDUSTRIES, INC.
Page
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PART I
Item 1. Business
General - The Company ............................................ 1
The Business ..................................................... 2
The Container Industry ........................................... 2
Container Customers .............................................. 3
The Cement Industry .............................................. 3
Cement Customers, ................................................ 4
Real Estate ...................................................... 4
Employees ........................................................ 6
Government Regulation ............................................ 6
Item 2. Description of Property .......................................... 7
Item 3. Legal Proceedings ................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders .............. 7
Part II
Item 5. Market for Common Equity and Related Stockholder Matters ......... 8
Item 6. Selected Financial Data .......................................... 8
Item 7. Management's Discussion and Analysis of Financial ................ 9
Condition and Results of Operations
Item 8. Financial Statements ............................................. 15
Item 9. Changes in and Disagreements with Accountants on ................. 16
Accounting and Financial Disclosures
Part III
Item 10. Directors and Executive Officers of the Registrant
Management Biographies ........................................... 17
Indemnification of Directors and Officers ........................ 18
Committees of the Board of Directors ............................. 18
Compliance with Section 16(a) of the Exchange Act of 1934 ........ 18
Page
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Item 11. Executive Compensation
Summary Compensation Table ....................................... 19
Stock Option Plans ............................................... 19
Option/SAR Grants in Last Fiscal Year ............................ 19
Aggregate Option/SAR Exercises in Last Fiscal Year ............... 19
And Fiscal Year-End Option/SAR Values
Employment Agreements ............................................ 19
Remuneration of Directors ........................................ 19
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 20
Item 13. Certain Relationships and Related Transactions ................... 21
Item 14. Exhibits and Reports on Form 8-K ................................. 21
(a) Exhibits
(b) Reports on Form 8-K
Part I
Item 1. Business
General - The Company
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 and issued 258,943 shares of its common stock (the "Common Stock")
and 258,943 common stock purchased warrants, which are exercisable through
September 2, 1999 at an exercise price of US$3.20 per share (the "Warrants"). In
addition, concurrent therewith, the Company also issued 37,500 shares of Common
Stock and 37,500 Common Stock Purchase Warrants. The foregoing share and per
share numbers reflect the effects of a one-for-four and a one-for-ten reverse
stock split undertaken by the Company subsequent to the acquisition of Vancouver
Hong Kong. See Note 1 of the Notes to the Consolidated Financial Statements
included elsewhere herein.
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 wholly-owned subsidiary, Heng Fai China Industries Limited
("China"). China was incorporated in Hong Kong and obtained the rights to
acquire direct or joint venture operating lease interests for three cement
factories in the Hebei province of the Peoples' Republic of China (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").
In April 1995, Min You Cement Company Limited was established (formerly Cangzhou
Citizen Cement Product Co. Ltd. and referred to hereinafter as "Min You").and
exercised its option to lease a production line at the Cangzhou Factory. From
April through June 1995, Min You suspended its operations at the Cangzhou
Factory to facilitate the Company's expansion and modernisation of such factory
as required pursuant to the provisions of the agreement governing the Company's
exercise of its options. Operations at the factory resumed at the end of June
1995 upon completion of the expansion and modernization of such factory. Neither
the Company nor its subsidiaries exercised the options to acquire the interest
in the Qingxian Factory or the Hebei Factory, which options expired unexercised.
On September 4, 1996, through a wholly-owned subsidiary, the Company acquired a
70% interest in Wuhan Monkey King Container Co., Ltd. ("Wuhan Container") in
exchange for 727,272 shares of the Company's restricted Common Stock. Wuhan
Container is a PRC state company engaged in the design, manufacture, lease and
repair of standard and non-standard containers and related steel structure
products. See Note 3 of the Notes to the Consolidated Financial Statements
included elsewhere herein.
1
The Business
The Company's business consists primarily of the operation of container
manufacturing by Wuhan Container, of cement production by Min You and of
apartment rental by Vancouver Hong Kong. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 below.
The Container Industry
The use of containers for sea freight play a important role in international
trade by facilitating the movement of goods. Sea freight is the main mode of
transporting goods because of its low cost compared with air transport. In
addition, the size and weight of cargoes, which can be carried by aircraft, are
less than those of cargoes which can be carried by ship. Less valuable and
non-seasonal merchandise, bulky and heavy cargoes, and goods, which do not
require urgent delivery, are usually transported by sea using containers.
The use of containers for shipping became popular during the 1970's because of
their reduced costs, damage and pilferage of goods. Containerization also
facilitates the unloading and reloading of cargoes between different modes of
transport, thereby saving valuable time which would otherwise be spent in
re-packing.
The freight forwarding industry is affected by world's economic growth and the
world's volume of international trade. In a forecast published by the
International Monetary Fund in May 1995, the world economy was forecasted to
expand by 3.8 percent in 1995 and 4.2 percent in 1996, with the economic growth
of Asia (excluding Japan) forecasted to be 7.6 percent in 1995 and 7.3 percent
in 1996. The forecast also predicted that world trade volume would grow at a
rate of 8.0 percent in 1995 and of 6.8 percent in 1996. With continued strong
growth of external trade, the demand for freight forwarding services are
expected to continue to be positive, this will without doubt increase the demand
for containers.
In the PRC, there are currently approximately 40 container manufacturers and the
annual aggregate production capacity for 1996 is approximately 340,000
twenty-foot equivalent units ("TEUs"). Most of the manufacturers are
small-to-medium size plants, located in the coastal regions of the PRC. The
major manufactures of containers in the PRC are as follows:
(1) China International Marine Containers (Group) Limited, a PRC state-owned
company whose production capacity is approximately 160,000 TEUs;
(2) Yangzhou Tongyun Container Company Limited, a sino-foreign joint venture
whose production capacity is approximately 40,000 TEUs;
(3) Hyundai Container Manufacturing Company Limited, a Korean conglomerate
whose production capacity is approximately 40,000 TEUs. Its production
plants are located throughout the PRC, such as in Shanghai, Guangdong
Province and Tsingtao; and
(4) Jindo Container Company Limited, another Korean conglomerate whose
production capacity is approximately 50,000 TEUs. It also operates
production plants in the coastal regions of the PRC.
The container-manufacturing industry in the PRC is very competitive, especially
for the production of TEUs. The Company estimates that there are currently over
40 manufacturers in the PRC who compete directly or indirectly with Wuhan
Container. In the PRC there are no specific barriers which prevent entry into
the container manufacturing industry.
Since the establishment of Wuhan Container, a significant amount of capital
investments have been made into the plant to modernize the mechanical processing
line, the wielding line and the painting line, to double its annual production
capacity to 20,000 TEUs.
2
Container Customers
The main products of Wuhan Container are International Standard Organization ICC
Type 20' x 8' x 8'6" dry cargo steel container and non-standard containers
according to each customers' specifications. The management at Wuhan Container
continues to broaden their customer base and are currently soliciting well
established container customers for orders. Customer orders signed in 1996 are
as follows:
60 TEUs from B&C SAS International whose registered office is in Italy;
100 TEUs from CKS Asia Management whose registered office is in Singapore;
and 5,000 TEUs from China Railway Container Transportation Center.
In 1997, Wuhan Container signed another contract with CKS Asia Management for an
order of 122 TEUs and currently Wuhan Container is negotiating with B&C SAS
International for an additional 150 TEUs. Potential orders from customers in
Singapore, Britain, and other countries are currently being initiated by Wuhan
Container.
It is expected that the world demand for containers will continue to increase in
1997, as the world economy continues to grow. The local government of the City
of Wuhan City has been promoting the city's accessibility to the world. As a
result, it is believed that Wuhan Container shall continue to have opportunities
to develop in 1997 and the years ahead.
The Cement Industry
The cement industry in the PRC consists of over 7,000 small, medium and large
cement plants. Most of the cement plants in the PRC are small, use relatively
old technology, have an average production scale of less than 50,000 tons per
year and supply a customer market located within close proximity. Historically,
the cement industry in the PRC developed around the concept of cement plants
utilizing vertical kiln technology imported from Eastern Europe and the former
Soviet Union. The manufacturing of cement involves the following: (i) the
quarrying of raw materials; (ii) the crushing, grinding and blending of these
raw materials into either a powder (the "dry process") or a mud-like mixture of
slurry (the "wet process"); (iii) the burning of raw material mix in kilns to
produce pellets called "clinker"; and (iv) the grinding of the clicker with
gypsum and other products, such as slag from steel mills, to produce cement. The
"burning" phase is the key phase of production and is primarily responsible for
the quality of the cement. The "burning" phase consumes most of the fuels used
in the production of cement, while the "grinding" of the raw materials and
production of "clinker" consumes most of the electricity used in the production
of cement. The type of production process, "wet process" or "dry process",
determines the type and design characteristics of the kiln. Vertical kiln is an
older technology that utilizes the "dry process" of cement production. When
technology transfers from Eastern Europe and the former Soviet Union were
restricted in the late 1980's, the PRC was forced to develop its own technology.
The PRC continued to utilise vertical kilns, largely due to their: (i) lower
investment costs; (ii) simplicity of design, shorter construction time and
production goals; and (iii) relatively less sophisticated technological
requirements. As the cement industry in the PRC matures and demand for higher
grade cement increases, the Company believes that there will be a greater shift
to rotary kiln technology because vertical kilns are not expected to be able to
satisfy significantly increased demand.
Rotary kiln technology is able to use the "wet process", "dry process" or
combination for the production of cement. Rotary kilns can be built to any
desired capacity and are capable to replace multiple vertical kilns with a
single production line. It is uncertain how long it will be before vertical
kilns are replaced by more technologically modern kilns, such as rotary kilns.
Factors which limit the shift to rotary kiln technology include the difficulty
in obtaining the necessary capital to acquire rotary kiln technology and
equipment, and
3
the poor infrastructure in the PRC which inhibits the ability to distribute the
volume of products necessary to justify the higher investment. The Company
believes that vertical kilns will most likely continue to be used in the PRC for
the foreseeable future.
Cement in the PRC is categorized on the basis of its compressive strength so
that, for example, #425 cement has a minimum strength of 425kg/cm2. The common
grades of cement include #325, #425, #525 and #625. In the PRC, #325 is commonly
used for basic construction with long fixation periods and minimal weight
requirements, such as plastering; #425 is commonly used for buildings of up to
20 to 30 stories (depending on each building's specifications); bridges and city
roads; #525 is commonly used for infrastructure projects, such as airports,
railways and highways and for buildings requiring stronger cement that #425; and
#625 is commonly used for specialized purposes such as providing support for
certain structures such as power plants and where extremely quick fixation times
are necessary. The term "higher grades of cement" generally refer to grades for
#425 cement of above.
Vertical kiln technology is employed by Min You and only cement #325 is produced
there.
Cement Customers
All cement production by Min You at the Cangzhou Factory is #325 cement,
accounting for 100% of the cement sales in 1996. Products are primarily sold to
over 5 distributors (approximately 59% of the cement sales in 1996). The balance
of sales are made directly to end-users, such as farmers or small-size
developers located in the Hebei Province, PRC. In 1996, Zhongjie Materials
Company, Limited was the largest customer of Min You, representing approximately
19% of the total cement sales. However, the amount of sales to each customer may
vary from quarter to quarter depending upon the customer's particular
construction activities or, in case of distributors, those of its customers. Min
You has resisted entering into fixed price sales contracts due to its
expectation that cement prices will continue to escalate for as long as demand
exceeds supply.
Real Estate
The apartment building operated by the Company is located within the Central
Lonsdale area of the City of North Vancouver, British Columbia. Developments in
the immediate area consist primarily of low to medium density residential units,
with commercial development focused along Lonsdale Avenue to the west and the
more prominent cross streets such as 13th Street and 15th Street. Lions Gate
Hospital, a principal medical facility, is located just north of the apartment
building at the intersection of East 13th Street and St. George Avenue.
The Central Lonsdale corridor serves as the primary commercial centre for the
city and the surrounding areas of North Vancouver. Residential development in
the surrounding areas consist of variety of 3-story rental and strata tiled
apartments, plus lower density townhouse developments. The area also has signs
of higher density development spotted throughout the area. Thus, the apartment
building is located within a desirable and stable multiple residential oriented
neighbourhood, located in close proximity to local retail, recreational and
public amenities.
The following information has been extracted from the Canada Housing
Corporation's ("CMHC") Vancouver CMA Rental Market Report.
4
VACANCY RATES
Region 10/95 10/96
- ------ ----- -----
City of North 0.2% 0.1%
Vancouver
District of North 0.5% 0.2%
Vancouver
Metro Vancouver 0.8% 1.1%
APARTMENT RENTAL RATES
City of North Vancouver 10/95 10/96
- ----------------------- ----- -----
Bachelor CDN$552 CDN$553
One Bedroom CDN$650 CDN$677
Two Bedroom CDN$779 CDN$812
The apartment building improvements in North Vancouver consist of a three-story
wood frame rental apartment building constructed in the late 1960's. The
building has a below grade basement containing the mechanical rooms, various
storage rooms, workshops and recreational areas.
The apartment building has a total of 60 suites consisting of one bachelor
suite, 38 one bedroom suites and 21 two bedrooms suites. Twelve of the two
bedrooms suites, located on the corners of the building offer wood burning
fireplaces. The suites are generally larger than average and on the whole, have
been well maintained. General finishing details include hardwood floors or
wall-to-wall carpeting with vinyl flooring in the kitchens and bathrooms,
adequate cabinet/counter space in the kitchens with two appliances, partly tiled
shower surrounds in the bathroom and covered balconies or patios.
Paved open parking for 60 vehicles is provided at the rear of the apartment
building. Access/egress is available by a paved rear service lane off St.
Andrews Avenue.
Overall, the property provides well maintained rental accommodations, consistent
with the quality of other projects located within the general area. The roof was
replaced in 1992. Since then, there has been no major upgrading, but day to day
maintenance as required.
5
Rental Rates On Apartment Building
The current monthly rents* are as follows:
SUITE TYPE MONTHLY RENT
- ---------- ------------
Bachelor CDN$580
One Bedroom CDN$600 - $680
Two Bedroom CDN$745 - $800
- ----------
* Rent includes heat, hot water, parking and cablevision
By way of comparison, average apartment rents in the City of North Vancouver and
surrounding District of North Vancouver were as follows, based on CMHC Rental
Market Survey:
CMHC Rental Market Survey
October 1996 Bachelor 1Bdrm 2Bdrm
- ------------ -------- ----- -----
City of North Vancouver CDN$553 CDN$677 CDN$812
District of North Vancouver CDN$625 CDN707 CDN$915
The above survey would tend to support the conclusion that the monthly rents
within the subject are reasonably in line with market rents, taking into account
the size and condition of the units plus the inclusions in the month rent.
Employees
The Company currently employs approximately 500 persons, 4 of whom are in
management, 2 of whom oversee operation of the apartment building in North
Vancouver, British Columbia and the other 2 monitor the operations in the PRC.
Out of 500 persons, 140 were employed full time at Min You (29 of such employees
are in management) and 350 were employed full time at Wuhan Container (58 of
such employees are in technical department). Pursuant to the articles of
association governing the activities of Min You and Wuhan Container, the
employees at such factories have established a trade union to protect the rights
of the employees. The Company believes that its relationship with its employees
at Min You and Wuhan Container are good and that establishment of the trade
union facilitates the fulfilment of the economic goals of Min You and Wuhan
Container and provides effective assistance in resolution through mediation of
disputes between those employees in management of Min You and Wuhan Container
and the other employees at the factories.
Government Regulation
The Company is not aware of any government regulations in the United States
which materially adversely affects its business or operations in the United
States. The Company's participation in operation of Min You and Wuhan Container
are subject to significant governmental regulation in the PRC and the Company
believes it is in compliance with such regulations to the extent the same are
applicable to the Company.
6
Item 2. Description of Property
The apartment building which the Company operates in Vancouver is composed of 60
individual residential units in a three story frame building situated at the
corner of East 12th Street and St. Andrews Avenue in North Vancouver, British
Columbia, Canada. The apartment building consists of approximately 57,340 square
feet and is situated on approximately 1,109 acres of land. The apartment
building is owned by the Company, subject to first and second mortgages. The
land underlying the apartment building is leased pursuant to a lease which
terminates on May 31, 2032, subject to earlier termination in certain
circumstances. The annual lease cost for the land is fixed at CDN$110,000
(US$80,321) until the year 2010, after which time it will be renegotiated for
the remaining term. See Note 18 of the Notes to the Consolidated Financial
Statements included elsewhere herein.
Item 3. Legal Proceedings
The Company is not a party to any pending or ongoing litigation.
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1996, no matters were placed before the
stockholders of the Company for consideration.
7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on NASDAQ OTC Electronic Bulletin Board
(the Bulletin Board"). The following table sets forth, for the periods
indicated, the reported high and low bid and asked price quotations for the
Common Stock for the periods such securities have been reported on the Bulletin
Board. Such quotations reflect inter-dealer prices, but do not include retail
mark-ups, mark-downs or commissions and may not necessarily represent actual
transactions.
Common Stock
------------
Bid($) Asked ($)
------ ---------
Period of Quotation High Low High Low
------------------- ---- --- ---- ---
Fiscal 1995: First Quarter 5 4 7 5
- -----------
Second Quarter 8 4 8-3/4 5
Third Quarter 9-1/4 8 10 8-3/4
Fourth Quarter 9-1/2 5-1/4 10 5-7/8
Fiscal 1996: First Quarter 6-1/4 5-1/4 7 5-1/2
- -----------
Second Quarter 7-1/2 1-1/2 8 2
Third Quarter 2-1/2 1 2-3/4 1-1/4
Fourth Quarter 1-3/8 17/32 1-1/2 5/8
The Company's Common Stock commenced quotation on the Bulletin Board in March
1994. Prior thereto, the Common Stock was quoted in the so-called "Pink Sheets"
issued by the National Quotation Bureau. Information relating to that period of
time that the Company's Common Stock has been quoted on the Bulletin Board, was
received from NASDAQ Market Research. Information relating to the prior period
was provided by the National Quotation Bureau.
As of April 7, 1997, there were approximately 1,447 holders of record of the
Common Stock based upon information furnished by OTR/Oxford Transfer & Registrar
Securities Agent, the transfer agent for the Common Stock. The Company believes,
based upon security positions listings, that there are more than 2,570
beneficial owners of the Common Stock. The closing bid and asked prices of the
Common Stock as reported on the NASDAQ OTC Electronic Bulletin Board on April 7,
1997 were: US$.718 and US$.812 per share of Common Stock, respectively. As of
April 7, 1997, there were 13,686,814 shares of Common Stock outstanding and
379,520 shares of non-trading Preferred Stock.
The Company has never paid and does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future. The Company intends to retain all
earnings for use in the Company's business operations and in the expansion of
its business.
Item 6. Selected Financial Data
Financial statements of the Company for the two years ended December 31, 1996
have all been audited by Deloitte Touche Tohmatsu International, independent
certified public accountants, whose report is included in this document. As the
Company acquired the container manufacturing business in the PRC only in
September
8
1996, no historic comparative financial data was selected for discussion.
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based on the operational results of each of the subsidiaries.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Introduction
In June 1994, Company, then known as Alpine International Corporation entered
into a business combination with Vancouver Hong Kong Properties Limited, 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 and 10,357,700 Warrants
of Alpine. 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
Warrants for an aggregate of US$120,000 in cash. The foregoing share numbers do
not reflect the Company's subsequent one-for-four reverse stock split and
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. Subsequent to the business combination the
name of the legal parent Alpine was changed to Heng Fai China Industries Inc.
During 1996 and 1995 the Company made two acquisitions. The acquisitions were
accounted for as a purchase and their operating results are included in the
consolidated statements of income from their respective dates of acquisition.
On September 4, 1996, the Company through a wholly-owned subsidiary acquired a
70% interest in Wuhan Container Co., Ltd. in exchange for 727,272 shares of the
Company's restricted common stock. Wuhan Container is a joint venture
incorporated in the PRC which was formed to engage in the design, manufacture,
lease and repair of standard and non-standard containers and related steel
structure products.
The acquisition of Wuhan Container in the PRC 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. No goodwill arose on this acquisition.
On January 9, 1995, the Company acquired from Fai H. Chan, an officer, director
and stockholder of the Company, 100% of the common stock of Heng Fai China &
Asia Industries, Limited ("Heng Fai Asia") in exchange for nominal
consideration. Heng Fai Asia through its wholly-owned subsidiaries had various
options to acquire interests in various lease interests or operating joint
ventures in the PRC, but otherwise had no material assets and liabilities or
operations at the time of acquisition.
Heng Fai Asia, through its wholly-owned subsidiary formed in January 1995
exercised its option to enter into a lease, 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"). The subsidiary was
entitled to lease the production line for five years for a rental of Rmb1.2
million (US$144,288) payable through expenditures to renovate and modernize the
Cangzhou Factory. The expenditures were made in 1995 and the resulting prepaid
rental is being amortized over the five year term of the leases. Amortization
was US$28,683 in 1996 and US$28,750 in 1995. At the initiation of the Cangzhou
Factory lease, the lessor provided certain raw materials and finished goods
totaling US$91,415, payment of which is due, without interest, at the expiration
of the lease in December 1999. Heng Fai Asia's other options lapsed in 1995.
9
Results of Operations
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
With a commitment to total manufacturing excellence, the Company undertook a
series of initiatives during the year, designed to provide long term cost
effective productions to meet anticipated growth in customer demand in 1997 and
beyond. These included the modernization of the production line of both Min You
and Wuhan Container. The directors considered the costs associated with this
upgrade to be fully justified by providing a more flexible pricing structure
giving rise to an increase in orders for the coming years.
Consolidated sales increased substantially by 223.8% in 1996 to US$2,051,366
from US$633,574 in 1995, reflecting the contribution in sales from Wuhan
Container as well as the rise in the sales of cement by Min You.
General corporate expenses increased by US$68,452 from US$1,833,233 in 1995 to
US$1,901,685 in 1996, a rise of only 3.7%. Despite the Company had carried out
acquisition during 1996, the general corporate exercises for the Company and its
subsidiaries have been closely kept under control.
Other operating and administrative expenses, included in the general corporate
expenses, increased to US$297,245 in 1996, up 70.3% from US$174,527 in 1995;
however this represents an decrease as a percentage of turnover to 14.5% in 1996
compared to 27.6% in 1995. Net interest expenses increased to US$184,485 in 1996
from US$101,248 in 1995. The rise in interest expenses in 1996 was attributed to
the interest expenses bore by Wuhan Container.
Minority interests increased to US$3,583,399 in 1996 and such an increase is
primarily due to the minority shareholders of Wuhan Container.
Provision for income taxes of the Company was nil for 1996 compared to US$16,947
for 1995 which is the provision for Canadian taxes in 1995 only. Under current
PRC regulations, one of the Company's subsidiaries in the PRC receive a full
exemption from enterprise income tax for two years starting from their first
profitable year, followed by 50% reduction in income taxes for the next three
profitable years. In 1996, the subsidiaries had not reported any operating
profits.
The Company's net loss increased by 16.0% to US$2,288,328 in 1996 from
US$1,972,726 in 1995, making the net loss per share to be US$0.20 in 1996 from
US$0.19 in 1995.
Though the Company had experienced the operating loss in 1996, its total assets
had soared up to slightly over US$10 million as at December 31, 1996 (US$0.89
per share of common stock) while that was only US$1.7 million as at December 31,
1995 (US$0.16 per share of common stock).
Year Ended December 31, 1995 Compared to Year Ended 31, 1994
The Company's operations during 1994 was comprised solely of the operation of
the North Vanocuver, British Columbia, property while in the second half of
1995, the Company has acquired the cement operations. Henceforth, the revenues
for the year ended December 31, 1995 increased to US$633,574 from US$333,319 for
the year ended December 31, 1994, principally the result of the revenues derived
in the second half of 1995 from the Company's cement operation.
The Company's net loss for 1995 was US$1,972,726, a change of US$2,000,041
compared to net income of US$27,315 for 1994. The increase in the net loss was
due to (i) the operating loss for the cement segment;
10
and (ii) higher general corporate expenses.
The operating profit for the Company's North Vancouver, British property
decreased by US$14,511 due to increased operating costs while the Company's
cement operations incurred an operating loss of US$75,107 in 1995.
During 1995 the Company purchased shares of the common stock of three companies
traded on Hong Kong Stock Exchange. These securities are classified as available
for sale and, accordingly, the decline in their market value has been charged
directly to stockholders' equity as a separate component thereof.
General corporate expenses increased in 1995 by US$1,814,594 as the results of
consulting fees of US$1,620,433, and a US$110,751 increase in legal,
professional and audit fees. The consulting fees relate to an agreement the
Company entered into in June 1995 for investor relations and financial advisory
services. Legal and professional fees increased in 1995 for expenses related to
the Company's commencement of new business activities through investments in the
PRC.
Liquidity and Capital Resources
In 1996, net cash provided by financing activities was US$2,333,764 and net cash
used in operating activities and investing activities were US$1,845,079 and
US$373,427 respectively and resulted in a net increase in cash and cash
equivalents of US$115,258.
The Company primarily used the operating cash flows to fund its capital
expenditures and working capital requirements. For fiscal 1996, the Company's
working capital requirements have not fluctuated significantly. From December
31, 1996 to December 31, 1995, net accounts receivable increased from US$29,307
to US$980,172, short-term borrowings increased from US$60,120 to US$2,403,026,
and long-term mortgage payable (including current portion) decreased from
US$992,433 to US$973,663. Total borrowings as of December 31, 1996 amounted to
US$3,376,689, representing an increase of 220.8% over total borrowings of
US$1,052,553 as of December 31, 1995. In addition, cash and cash equivalents
increased from US$55,001 at December 31, 1995 to US$170,259 at December 31,
1996.
As discussed in Note 2 of the Notes to the 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
At present, the Company's sales and purchases are denominated in US dollars,
Hong Kong dollars and Renminbi ("Rmb"). In view of the exchange rate pegged
between Hong Kong dollars and US dollars, the Company is not subject to any
direct exposure from the fluctuation of US dollars.
Rmb is currently not freely convertible. Prior to January 1, 1994, all foreign
exchange transactions involving Rmb in the PRC were placed through the People's
bank of China or authorised financial institutions at the official exchange rate
set by the State Administration of Exchange Control (the "SAEC"). In addition,
Rmb could also be converted at swap centres established by the SAEC open to PRC
enterprises and foreign investment enterprises, subject to the SAEC approval of
each foreign currency transaction, at exchange rate influenced by the actual
demand and supply of foreign currency in the PRC. The exchange rate quoted by
the SAEC generally differs from the exchange rate quoted by the swap centres.
11
On January 1, 1994, the PRC government unified the two-tier system by adopting a
unified floating exchange rate system largely based on market supply and demand.
In place of the official rate and swap rate, the People's Bank of China now
publishes a daily exchange rate (the "PBOC Exchange Rate"). Banks and other
financial institutions authorised to deal in foreign currency may enter into
foreign exchange transactions at exchange rates within an authorised range above
or below the PBOC Exchange Rate according to the market conditions. While the
new system has removed the two-tier exchange rate system, Rmb is still not a
freely convertible currency.
Full convertibility of the Rmb was expected to be possible by the year 2000.
However, recent improvements in the PRC's foreign exchange reserves have
accelerated the PRC government's plan to make the Rmb fully convertible.
As a matter of policy, the Company sources supply of raw materials from PRC
domestic producers whenever possible. The management believes that the policy
allows the Company to utilise the Rmb received from its customers and minimise
the Company's exposure to Rmb exchange risks. The Company therefore does not
anticipate any exchange rate fluctuation which would have an adverse effect on
the financial performance and assets value of the Company when measured in terms
of U.S. Dollars.
The Company is not involved in any hedging activities in foreign currencies.
Inflation
The general inflation rate in China was approximately 13%, 24% and 15% per annum
in 1993, 1994 and 1995, respectively. Accordingly, the PRC Government has taken
steps to control inflation by means of credit restrictions, increase in interest
rates and open market operations, which in turn, lead to a slowdown of the
Chinese economy. As a result of the PRC inflation, the austerity measures
implemented by the PRC Government have continued to affect the operations of Min
You and Wuhan Container. Although there is a sign of easing in such austerity
measures, both turnover and profit margin of Min You and Wuhan Container are
still severely affected.
The Operating Subsidiaries
Vancouver Hong Kong Properties Limited - Summary Financial Information
Fiscal 1996 Fiscal 1995 Fiscal 1994
Revenues $ 336,644 $ 347,034 $ 327,381
Income from operations 85,883 110,608 125,119
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue decreased by 3% to US$336,644 in 1996 from US$347,034 in 1995. The
decrease was principally attributable to a decrease of the occupancy rate during
1996.
Operating income dropped by 22.4% to US$85,883 in 1996 compared to US$110,608 in
1995, and also decreased as a percentage of revenue to 25.5% in 1996 compared to
31.9% in 1995. The decrease was primarily due to the extent of the increase in
rentals is less than the extent of the increase in the operating and
administrative expenses during 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
12
Income increased by 6% to US$110,608 in 1995 from US$327,381; however, the
operating income has been dropped by 11.6% which mainly due to the increase in
the operating costs.
Min You Cement Company Limited - Summary Financial Information
Fiscal 1996 Fiscal 1995
Revenues $ 540,191 $ 278,622
Loss from operations 62,487 75,107
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues for Min You increased by 93.9% to US$540,191 in 1996 from US$278,622 in
1995. Min You only started its production in the second half of 1995 and when it
operated at its full capacity, the volume produced almost doubled those of 1995.
The operating loss decreased by 17% to US$62,487 in 1996 from US$75,107 in 1995
and also a percentage of revenues to 11.6% in 1996 compared to 27% in 1995. The
austerity measures mentioned above had severely undermined the profitability of
the cement operation.
The cement operation only commenced in the second half of 1995.
Wuhan Container Company Limited
The Company's operation of container manufacturing incurred an operating loss of
US$241,208 in fiscal 1996, is as follows:
Sales $ 1,082,317
Cost of Sales (1,009,105)
Other (314,420)
-----------
$ (241,208)
===========
For the months of September through December 1996, Wuhan Container operated less
than its full capacity. As a result, the sales and gross profit margin of the
container manufacturing operations in 1996 were lower than the level management
believes can be achieved under normal operating conditions. In addition, the
cost of sales have increased due to an overall increase in raw material costs.
Summary financial information has not been provided for securities investment as
its operations is insignificant compared to the above.
Significant Uncertainties
The Company, by choosing to concentrate many of its resources in the PRC, may be
subject to substantial regulatory hurdles and governmental and economic
uncertainties. By doing business in the PRC through joint ventures with local
Chinese partners this risk is reduced; however, there is no assurance that the
Company will be successful in financing and carrying through these projects into
profitability.
The Company's investments are principally carried out in Rmb, Canadian dollars
and Hong Kong dollars. At present, the Company's currency receipts for the
manufacturing segments are in Rmb while the currency receipts for rental
operations and securities investments are in Canadian dollars and Hong Kong
dollars respectively. With the increase in the manufacturing operation of the
Company in the PRC, the currency
13
receipts in Rmb will to some extent be increased.
Since the late 1980's, the PRC economy has moved from a centrally planned
economy to a "socialist market-oriented economy" subject to a series of economic
reforms and economic plans adopted by the PRC government. Although it is
expected that the PRC government will continue to follow the model of a
socialist market-oriented economy more closely, there is no assurance that the
PRC government will continue to pursue its economic reforms and that its current
policies will remain relatively consistent with such reforms, particularly in
the event of any change in the political leadership of, or the political,
military, economic or social conditions in, the PRC.
The policies adopted by the PRC government to regulate matters such as currency
conversion, taxation and restrictions on the import and distribution of foreign
goods can have significant effects on the economic environment in the PRC and
consequently on enterprises with business interests in the PRC.
The Company's production facilities are located in the PRC. The PRC has been the
Company's largest market and sales to the PRC accounted for approximately 82.2%
of the Company's turnover for the year ended December 31, 1996. There is no
assurance that the Company will not be adversely affected by any change in
governmental policies or any unfavourable change in the political, military,
economic or social conditions; the laws or regulations; or the rates or basis of
taxation in the PRC.
14
Item 8. Financial Statements
The following financial statements are filed at the end of this report,
beginning on page F-1:
HENG FAI CHINA INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
CONTENT PAGE(S)
- ------- -------
REPORT OF INDEPENDENT AUDITORS ................................... F - 1
CONSOLIDATED BALANCE SHEETS ...................................... F - 2
CONSOLIDATED STATEMENTS OF INCOME ................................ F - 4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
EQUITY (DEFICIT) ............................................... F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS ............................ F - 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ................... F - 7
15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
There have been no changes in or disagreements with accountants on accounting,
financial disclosure or other matters, which would require disclosure herein.
16
PART III
Item 10. Directors and Executive Officers of the Registrant
The names and ages of all directors and executive officers of the Company are as
follows:
Name Age Position with the Company
Fai H. Chan 52 President, Chief Executive Officer and Director
Ronald M.T. Lau 27 Director
Robert H. Trapp 41 Secretary, Treasure and Director
Management Biographies
Fai H. Chan has been the president and a director of the Company since June 1994
and has served as the Company's Chief Executive Officer since June 1995. From
June 1993 onwards, Mr. Chan has been a director of Inter-Asia Equities, Inc., a
Canadian company and since September 1992, Mr. Chan has also been an executive
director and director of Heng Fung Holdings Co., Ltd., a public company in Hong
Kong which is listed on the Hong Kong Stock Exchange. Since March 1988, Mr. Chan
has been chairman of the board of directors of American Pacific Bank, a bank in
Oregon, and between April 1991 and April 1993, he was the chief executive
officer of such bank.
Ronald M.T. Lau has been a director of the Company since July 1995. Since June
1995, Mr. Lau has been the financial controller of Heng Fung Holdings Co., Ltd.,
a public company in Hong Kong which is listed on the Hong Kong Stock Exchange.
Prior thereto, from August 1991 until October 1994, Mr. Lau worked as an auditor
at Deloitte Touche Tohmatsu in Hong Kong. He had been the vice president of Hua
Jian International Finance Company Limited (a member of China Huaneng Group)
until June 1995.
Robert H. Trapp has been the secretary and treasurer and a director of the
Company sine June 1994. Since May 1995, Mr. Trapp has been a director of Heng
Fung Holding Co., Ltd., a public company in Hong Kong, which is listed on the
Hong Kong Stock Exchange. Since April 1994, Mr. Trapp has been the secretary of
the Company. Since February 1995, Mr. Trapp has been a director of Inter-Asia
Equities, Inc. a Canadian company.
Since July 1991, he has also been the Canadian operational manager of Pacific
Concord Holding (Canada) Ltd., responsible for management, marketing, and
financial reporting operations of such company to Pacific Concord Holding Ltd.
of Hong Kong. Between March and June 1991, Mr. Trapp was a securities trainee at
Pacific International Securities in Vancouver, B.C., Canada. Between September
1985 and June 1989, Mr. Trapp served as an executive officer and a director of
Inter-Asia Equities, Inc.
All officers of the Company are elected to serve in such capacities until the
next annual meeting of the Board of Directors of the Company and until their
successors are duly elected and qualified.
The Board of Directors met twice during the fiscal year ended December 31, 1996.
No incumbent director attended fewer than all of the meetings held by the Board
of Directors.
17
There are no material proceedings to which any director, officer or affiliate of
the Company, any owner of record or beneficially of more than 5% of any class of
voting securities of the Company, or any associate of any such director,
officer, affiliate of the Company or security holder is a party adverse to the
Company or any of its subsidiaries.
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law empowers a corporation to
indemnify its directors and officers and to purchase insurance with respect to
liability arising out of their capacity or status as directors and officers
provided that this provision shall not eliminate of limit the liability of a
director: (i) for any breach of the director's duty of loyalty to the
corporation or its shareholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
arising under Section 174 of the Delaware General Corporation Law; or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the indemnification
permitted thereunder shall not be deemed exclusive of any other rights to which
the directors and officers may be entitled under the corporation's by-laws, any
agreement, vote of shareholders or otherwise. The Company's Certificate of
Incorporation eliminates the personal liability of directors to fullest extent
permitted by Section 102(b)(7) of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to indemnify the officers
and directors of the Company for any claim arising against such persons in their
official capacities if such person acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in Securities Act and is therefore unenforceable.
Committees of the Board of Directors
The Board of Directors has not established any committees.
Compliance with Section 16(a) of the Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's officers and directors, and persons who own more
than ten percent of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership of equity securities of the
Company with the Securities and Exchange Commission (the "Commission") and
NASDAQ. Officers, directors and greater-than-ten percent stockholders are
required by regulation to furnish the Company with copies of all Section 16(a)
forms that they file.
Based solely upon a review of Form 3, Forms 4, and Forms 5 furnished to the
Company pursuant to Rule 16a-3 under the Exchange Act, it is the Company's
belief that, other than that as set forth below, any such forms required to be
filed pursuant to Section 16(a) of the Exchange Act were timely filed, as
necessary, by the officers, directors and security holders required to file the
same.
18
Item 11. Executive Compensation
Summary Compensation Table
During the year ended December 31, 1996 Heng Fai Management, Inc., a wholly
owned subsidiary of the Company, paid $500,000 in consulting and management fees
to Tight Hold Investment Limited, a company wholly owned by Fai H. Chan, the
Company's chief executive officer. No other officers or directors of the Company
earned in excess of $100,000 during the year ended December 31, 1996.
Long-Term Compensation
Annual Compensation ------------------------------------
----------------------
Awards Payouts
------ -------
Name Restricted
and Other Annual Stock All
Principal Salary Bonus Compensation Awards Options/ LTIP Other
Position Year ($) ($) ($) ($) SARs (#) Payout (#) Compensation(s)
- --------- ------ ------ ----- ------------ ------ -------- ---------- ---------------
Fai H. Chan '96 500,000(1) -- -- -- -- -- --
President '95 -- -- -- -- -- -- --
& CEO '94 -- -- -- -- -- -- --
(1) Represents fees paid to Tight Hold Investment Ltd. a company wholly owned
by Mr. Chan
Stock Option Plans
The Company currently has no stock option plans.
Option/SAR Grants in Last Fiscal Year
There were no options granted during the fiscal year ended December 31, 1996 as
set forth below.
Aggregate Option/SAR Exercises in Last Fiscal Year And Fiscal Year-End
Options/SAR Values
No options were exercised during the fiscal year ended December 31, 1995 as set
forth below and there exist no unexercised options as of the end of the fiscal
year ended December 31, 1996.
Employment Agreements
Heng Fai Management, Inc., a wholly owned subsidiary of the Company, entered
into a consultation and management agreement with Tight Hold Investment Limited,
a company wholly owned by Fai H. Chan, President and Chief Executive Officer of
the Company. The term of this agreement is for ten years having commenced
November 1st, 1996 and ending October 31, 2006. The remuneration the Company
shall pay for services rendered pursuant to this agreement is as follows: (i)
the sum of $500,000 per year for the duration of employment, a rate of
$41,666.67 per month over 12 equal payments; and (ii) upon the Company meeting
Nasdaq National Markets System requirements of having $4,000,000 in net tangible
assets, and obtaining the other requirements which allow the Company's stock to
be marginable on NASDAQ and having declared at least a minimum $0.10 per share
earning and $0.05 dividend to common shareholders, the fee shall increase to
US$1,000,000 per year for the duration of employment, a rate of $83,333.00 per
month.
Remuneration of Directors
Directors do not receive compensation for attendance at meetings of the Board of
Directors. All directors are entitled to reimbursement of reasonable travel and
lodging expenses related to attending meetings of the Board of Directors.
19
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of April 7, 1997, certain information with
respect to stock ownership of: (i) all persons known by the Company to be
beneficial owners of five percent or more of its outstanding Common Stock: (ii)
each of the Company's directors and executive officers; and (iii) all directors
and executive officers as a group (3 persons). Unless otherwise indicated, the
beneficial owners have sole voting and investment power over the shares of
Common Stock listed below.
% of Outstanding
Shares
Name and Address Number of Shares of Common Stock
of Beneficial Owner (1) Beneficially Owned (1) Beneficially Owned (1)
- ------------------------------- ---------------------- ----------------------
Fai H. Chan
Unit B, 13/Floor
Lippo Leighton Tower
103-109 Leighton Road
Causeway Bay
Hong Kong 3,892,886 (2) 28.4%
Keow Y. Chan
Unit B, 13/Floor
Lippo, Leighton Tower
103-109 Leighton Road
Causeway Bay
Hong Kong 2,180,000 (3) 15.9%
Ebly Profit Limited
7 Temasek Boulevard
#43-03 Suntec City Tower 1
Singapore, 038987 2,000,000 14.6%
Ronald M.T. Lau
Room 204, Block West
Upper Wong Tai
Sin Estate, Kowloon 100,000 .7%
Robert H. Trapp
2103-1651 Harwood Street
Vancouver, B.C.
Canada V6G 1Y2 100,000 .7%
All Executive Officers &
Directors as a Group
(3 Persons) (4) 6,272,886 45.8%
(1) Unless otherwise noted, the Company believes that all of such shares are
owned of record by each individual named as beneficial owner and that such
individual has sole voting and dispositive power with respect to the shares
of Common Stock owned by each of them. Such person's percentage ownership
is determined by assuming that the options or convertible securities that
are held by such person which are exercisable within 60 days from April 7,
1997 have been exercised or converted, as the case may be.
(2) Includes 3,300,000 shares owned of record directly by the noted
stockholder. Also includes 37,500 shares of Common Stock and 37,500 shares
of Common Stock underlying Warrants owned of record by Inter-Asia Equities,
Inc. ("Inter-Asia") and 258,943 shares of Common Stock and 258,943 shares
Common Stock underlying Warrants owned by the Excess Pension
20
Fund, Inc. (the "Fund"). The noted stockholder is an officer, director and
stockholder of Inter-Asia and a beneficial owner of the Fund. The
stockholder's wife is the President and Director of Inter-Asia and a
beneficial owner of the Fund. Excludes the 2,180,000 shares owned of record
by the wife of the noted stockholder. See Footnote (3) below.
(3) Excludes 3,300,000 shares owned of record by the husband of the noted
stockholder, 258,943 shares of Common Stock and 258,943 Warrants owned by
the Fund and the 37,500 shares of Common Stock and 37,500 Warrants owned by
Inter-Asia. See Footnote (2) above.
(4) In the event that the noted stockholder was deemed to beneficially own all
of the shares owned of record by the spouse of the noted stockholder, such
stockholder would be deemed to beneficially own 6,272,886 shares or
approximately 45.8% of the outstanding Common Stock of the Company.
There are no agreements or other arrangements or understandings known to the
Company concerning the voting of the Common Stock of the Company or otherwise
concerning control of the Company which are not disclosed herein. There are no
pre-emptive rights applicable to the Company's securities.
Item 13. Certain Relationships and Related Transactions
The Company maintains deposits in accounts at American Pacific Bank. Fai H. Chan
(an officer, director and stockholder of the Company) is an officer and/or
director of such bank. See Note 12 of the Notes to the Consolidated Financial
Statements.
The Company owns 7,492,000 shares of common stock of Heng Fung Holdings Company
Limited. Messrs. Chan ,Trapp, and Lau (officers, directors and/or stockholders
of the Company) are officers, directors and /or stockholders of such company.
See Note 12 of the Notes to the Consolidate Financial Statements included
elsewhere herein.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8K
(a)(1)(2) Financial Statements and Schedules - See index to financial
statements and financial statement schedule on page 15 of this
Annual Report.
(a)(3) Exhibits marked with an (*) are filed herewith. Other exhibits,
incorporated by reference, were previously filed with the Securities
and Exchange Commission ("SEC") as indicated.
Exhibit No. Description
*3.1(a) Certificate of Incorporation of Registrant, as amended.
*3.1(b) Agreement and Plan of Merger, as amended.
*3.2 By-laws of Registrant, as amended.
*4.1 Specimen certificate representing Registrant's Common Stock.
10.1 Wuhan Container Acquisition Agreement incorporated by reference to
Exhibit 2 of the Registrant's Current Report on Form 8-K filed with
the SEC on September 20, 1996, as amended.
10.2 Consulting Agreement between Registrant and Thomas E. Waite
incorporated by reference to Exhibit 4.1 of the Registrant's Form
S-8 filed with the SEC on March 20, 1997.
*10.3 Consulting and Management Agreement between Heng Fai Management,
Inc. and Tight Hold Investment Limited dated November 4, 1996.
*21 Subsidiaries of the Registrant.
*27 Financial Data Schedule.
(b) The Company has not filed any reports on Form 8K during the last
quarter of the period covered by this Report.
21
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorised, on April 16, 1997
HENG FAI CHINA INDUSTRIES, INC.
By: /s/ Fai H. Chan
----------------------------------
Fai H. Chan
In accordance with Exchange Act, this report has been signed by the
following persons on behalf of the Registrant, in the capacities and on the
dates indicated
Signature Title Date
- --------- ----- ----
/s/ Fai H. Chan President, CEO & Director April 16, 1997
- ----------------------
Fai H. Chan
/s/ Robert H. Trapp Secretary, Treasurer & Director April 16, 1997
- ----------------------
Robert H. Trapp
/s/ Ronald M.T. Lau Director April 16, 1997
- ----------------------
Ronald M.T. Lau
22
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
HENG FAI CHINA INDUSTRIES, INC.
We have audited the accompanying consolidated balance sheets of Heng Fai China
Industries, Inc. (the Company) and its subsidiaries as of December 31, 1996 and
1995 and the related consolidated statements of income, shareholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Heng Fai China Industries, Inc. and
its subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1996 in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses from operations and minimal
net tangible assets raise doubt its ability to continue as a going concern. The
financial support from a principal shareholder is described in Note 2.
Hong Kong
April 14, 1997
F-1
HENG FAI CHINA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(United States Dollars)
ASSETS
As of December 31,
------------------------
1996 1995
----------- -----------
Current assets:
Cash and cash equivalents .......................... $ 170,259 $ 55,001
Available-for-sale securities (note 5) ............. 682,331 480,835
Accounts receivable, trade, less allowance
for doubtful accounts of $70,258 in 1996
and $0 in 1995 .................................. 980,172 29,307
Inventories (note 6) ............................... 4,403,682 154,370
Prepaid and other current assets ................... 151,722 19,726
Amounts receivable from related parties (note 12) .. 136,439 11,639
Value added taxes recoverable ...................... 611,790 --
----------- -----------
Total current assets ............................ 7,136,395 750,878
Property, plant and equipment, net (note 7) .......... 3,402,238 857,548
Prepaid rental (note 3) .............................. 86,747 115,430
----------- -----------
Total assets ..................................... $10,625,380 $ 1,723,856
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term borrowings (note 9) ..................... $ 2,403,026 $ 60,120
Mortgage loan payable - current portion (note 13) .. 108,069 17,325
Accounts payable ................................... 837,596 165,652
Bills payable (note 10) ............................ 722,892 --
Margin loans payable (note 11) ..................... 489,193 274,420
Interest payable ................................... 40,212 32,983
Other accrued expenses ............................. 360,749 116,718
Security deposits payable .......................... 11,992 10,095
Amounts payable to related parties (note 12) ....... 1,110,544 22,005
----------- -----------
Total current liabilities ....................... 6,084,273 699,318
----------- -----------
Long-term liabilities:
Mortgage loans payable (note 13) ................... 865,594 975,108
Long-term payable (note 3) ......................... 88,744 91,415
----------- -----------
Total long-term liabilities ..................... 954,338 1,066,523
=========== ===========
F-2
HENG FAI CHINA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(United States Dollars)
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
As of December 31,
----------------------------
1996 1995
------------ ------------
Minority interests .......................................... 3,583,399 --
------------ ------------
Commitments and contingencies (note 18)
Shareholders' equity (deficit):
Preferred stock, $10 par value, 500,000 shares authorized,
unissued ............................................... -- --
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding 1996: 11,986,814 shares and 1995:
10,859,542 shares ...................................... 119,868 108,595
Contributed surplus ....................................... 4,701,023 2,812,546
Unrealized loss on available-for-sale securities (note 5) . (78,825) (43,941)
Cumulative exchange adjustments ........................... 6,968 6,968
Accumulated deficit ....................................... (4,510,914) (2,222,586)
------------ ------------
238,120 661,582
Common stock issued for consulting services to be received
(note 8) ................................................. (234,750) (703,567)
------------ ------------
Total shareholders' equity (deficit) ...................... 3,370 (41,985)
------------ ------------
Total liabilities and shareholders' equity (deficit) ...... $ 10,625,380 $ 1,723,856
============ ============
See accompanying notes to the Consolidated Financial Statements.
F-3
HENG FAI CHINA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(United States Dollars)
Year ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Revenues:
Rental income ............................. $ 336,644 $ 347,034 $ 327,381
Sales of cement ........................... 540,191 278,622 --
Sales of containers ....................... 1,082,317 -- --
Interest .................................. 1,490 4,187 3,235
Investment income ......................... 56,552 3,731 2,703
Others .................................... 34,172 -- --
------------ ------------ ------------
Total revenues .......................... 2,051,366 633,574 333,319
------------ ------------ ------------
Expenses:
Cost of sales of cement ................... 469,495 235,711 --
Cost of sales of containers ............... 1,009,105 -- --
Allowance for doubtful accounts ........... 70,258 48,420 --
Machinery lease rental (note 3) ........... 28,683 28,570 --
Depreciation .............................. 42,800 43,573 46,442
Legal and professional fees ............... 82,831 133,101 22,350
Consulting fees (note 8) .................. 1,368,567 1,620,433 --
Consulting fees paid to a related company
(note 12) ............................... 500,000 -- --
Interest on long-term debt ................ 85,990 89,650 --
Interest on short-term debt ............... 99,985 15,785 79,165
Utilities ................................. 48,924 41,871 43,995
Foreign exchange loss (gain) .............. 17,094 12,025 (50,153)
Land lease ................................ 80,321 80,321 80,533
Plant lease rental ........................ 22,809 -- --
Real estate management fees ............... 14,020 15,845 12,373
Salaries .................................. 107,716 11,185 --
Travelling ................................ 70,950 38,336 --
Other operating and administrative expenses 297,245 174,527 71,299
------------ ------------ ------------
Total expenses .......................... 4,416,793 2,589,353 306,004
------------ ------------ ------------
Net (loss) income before income taxes ....... (2,365,427) (1,955,779) 27,315
------------ ------------ ------------
Provision for income taxes (note 15) ........ -- 16,947 --
------------ ------------ ------------
Net (loss) income before minority interest .. (2,365,427) (1,972,726) 27,315
Minority interest ........................... 77,099 -- --
------------ ------------ ------------
Net (loss) income ........................... $ (2,288,328) $ (1,972,726) $ 27,315
============ ============ ============
Net (loss) income per share ................. $ (.20) $ (.19) $ .02
============ ============ ============
Weighted average number of shares of common
stock outstanding ......................... 11,223,288 10,624,064 1,108,037
============ ============ ============
See accompanying notes to the Consolidated Financial Statements.
F-4
HENG FAI CHINA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(United States Dollars)
Unrealized Common stock
Common loss on issued for
stock available Cumulative consulting
Number of Contributed Accumulated for sale exchange services to
shares Amount surplus deficit securities adjustments be received Total
---------- -------- ---------- ----------- ---------- ---------- --------- ----------
At December 31, 1993.... 3,335,820 $167,000 $1,435,000 $(1,602,000) $ -- $ -- $ -- $ --
Elimination of deficit
and net assets at date
of acquisition........ -- -- (1,602,000) 1,602,000 -- -- -- --
---------- -------- ---------- ----------- -------- ------ --------- ----------
3,335,820 167,000 (167,000) -- -- -- -- --
Issued to effect the
acquisition of
Vancouver Hong
Kong (Note 1)......... 10,357,700 517,885 (440,744) (277,175) -- -- -- (200,034)
Issued for cash
(Note 1).............. 1,500,000 75,000 45,000 -- -- -- -- 120,000
---------- -------- ---------- ----------- -------- ------ --------- ----------
15,193,520 759,885 (562,744) (277,175) -- -- -- (80,034)
Reverse stock split
(Note 14a)............ (11,395,140) (569,757) 569,757 -- -- -- -- --
---------- -------- ---------- ----------- -------- ------ --------- ----------
3,798,380 190,128 7,013 (277,175) -- -- -- (80,034)
Reverse stock split
(Note 14b)............ (3,413,838) (186,283) 186,283 -- -- -- -- --
---------- -------- ---------- ----------- -------- ------ --------- ----------
384,542 3,845 193,296 (277,175) -- -- -- (80,034)
Private placement
(Note 14c)............ 10,000,000 100,000 -- -- -- -- -- 100,000
---------- -------- ---------- ----------- -------- ------ --------- ----------
10,384,542 103,845 193,296 (277,175) -- -- -- 19,966
Net income.............. -- -- -- 27,315 -- -- -- 27,315
---------- -------- ---------- ----------- -------- ------ --------- ----------
At December 31, 1994.... 10,384,542 103,845 193,296 (249,860) -- -- -- 47,281
Issued to effect a
consulting agreement
(notes 14d) (note 8a). 400,000 4,000 2,320,000 -- -- -- (2,324,000) --
Amortization of
consulting fees....... -- -- -- -- -- -- 1,620,433 1,620,433
---------- -------- ---------- ----------- -------- ------ --------- ----------
10,784,542 107,845 2,513,296 (249,860) -- -- (703,567) 1,667,714
Private placement
(Note 14e)............ 75,000 750 299,250 -- -- -- -- 300,000
---------- -------- ---------- ----------- -------- ------ --------- ----------
10,895,542 108,595 2,812,546 (249,860) -- -- (703,567) 1,967,714
Foreign exchange
translation
adjustments........... -- -- -- -- -- 6,968 -- 6,968
Net loss................ -- -- -- (1,972,726) -- -- -- (1,972,726)
---------- -------- ---------- ----------- -------- ------ --------- ----------
10,859,542 108,595 2,812,546 (2,222,586) -- 6,968 (703,567) 1,956
Unrealized loss on
securities available
for-sale.............. -- -- -- -- (43,941) -- -- (43,941)
---------- -------- ---------- ----------- -------- ------ --------- ----------
At December 31, 1995.... 10,859,542 108,595 2,812,546 (2,222,586) (43,941) 6,968 (703,567) (41,985)
Issued to affect
consulting agreements
(note 14f)(note 8b)... 400,000 4,000 895,750 -- -- -- (899,750) --
Amortization of
consulting fee........ -- -- -- -- -- -- 1,368,567 1,368,567
Issued for acquisition of
a subsidiary (note 14g) 727,272 7,273 992,727 -- -- -- -- 1,000,000
---------- -------- ---------- ----------- -------- ------ --------- ----------
11,986,814 119,868 4,701,023 (2,222,586) (43,941) 6,968 (234,750) 2,326,582
Net loss................ -- -- -- (2,288,328) -- -- -- (2,288,328)
---------- -------- ---------- ----------- -------- ------ --------- ----------
11,986,814 119,868 4,701,023 (4,510,914) (43,941) -- (234,750) 38,254
Unrealized loss on
securities available for
sale.................. -- -- -- -- (34,884) -- -- (34,884)
---------- -------- ---------- ----------- -------- ------ --------- ----------
At December 31, 1996.... 11,986,814 $119,868 $4,701,023 $(4,510,914) $(78,825) $6,968 $(234,750) $ 3,370
========== ======== ========== =========== ======== ====== ========= ==========
See accompanying notes to the Consolidated Financial Statements.
F-5
HENG FAI CHINA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(United States Dollars)
1996 1995 1994
----------- ----------- -----------
Cash flow from operating activities
Net (loss) income .................................... $(2,288,328) $(1,972,726) $ 27,315
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Minority interest ............................... (77,099) -- --
Depreciation and amortization ................... 194,939 43,573 46,442
Consulting fees ................................. 1,868,567 1,620,433 --
Allowance for doubtful accounts ................. 70,258 -- --
Provision for stock obsolescence ................ 52,322 -- --
Changes in working capital components:
Accounts receivable ........................... (1,021,123) (27,024) (2,002)
Inventories ................................... (1,935,180) (62,955) --
Prepaid and other current assets .............. 4,851 (17,654) (166)
Amounts receivable from related parties ....... (124,800) (11,639) --
Value added taxes recoverable ................. (611,790) -- --
Accounts payable .............................. 576,792 164,646 (13,510)
Bills payable ................................. 722,892 -- --
Interest payable .............................. 7,229 12,490 4,902
Other accrued expenses ........................ 197,553 116,327 --
Security deposits payable ..................... 1,897 (1,208) (538)
Unearned rent ................................. -- (12,053) 12,053
Amounts payable to related parties ............ 487,258 (10,383) (32,617)
Exchange difference ........................... -- -- (60,717)
Prepaid rental ................................ 28,683 (115,430) --
----------- ----------- -----------
Net cash used in operating activities ................ (1,845,079) (273,603) (18,838)
----------- ----------- -----------
Cash flow from investing activities:
Purchase of available for sale securities ............ (264,688) (480,835) --
Proceeds from sale of available for sale securities .. 28,308 -- --
Purchase of property, plant and equipment ............ (158,987) -- --
Cash acquired on purchase of subsidiary (note 4) ..... 21,940 -- --
----------- ----------- -----------
Net cash used in investing activities ................ (373,427) (480,835) --
----------- ----------- -----------
Cash flow from financing activities:
Common stock issued for cash ......................... -- 300,000 220,000
Increase in margin loan payable ...................... 243,081 274,420 --
Repayment of margin loan ............................. (28,308) -- --
Increase in short-term borrowings .................... 1,092,930 60,120 --
Repayment of mortgage loans .......................... (18,770) (16,832) (15,449)
Repayment of long-term payable ....................... (2,671) -- --
Advance from a minority shareholder .................. 1,047,502 -- --
----------- ----------- -----------
Net cash provided by financing activities ............ 2,333,764 617,708 204,551
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents ... 115,258 (136,730) 185,713
Cash and cash equivalents:
Beginning of the period .............................. 55,001 191,731 6,018
----------- ----------- -----------
End of the period .................................... $ 170,259 $ 55,001 $ 191,731
----------- ----------- -----------
Cash paid during the year for:
Interest ............................................. $ 184,078 $ 89,650 $ 84,399
Non-cash financing activities:
Issuance of common stock for consulting services ..... $ 1,368,567 $ 2,324,000 --
Inventories (note 3) ................................. -- $ 91,415 --
=========== =========== ===========
See accompanying notes to the Consolidated Financial Statements.
F-6
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
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 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 Alpine. 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 $120,000 in cash. The foregoing share numbers do not reflect 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. Subsequent to the business
combination the name of the legal parent Alpine was changed to Heng Fai
China Industries Inc. (the "Company").
At December 31, 1996, the Company and its subsidiaries' principal
activities are the operation of a rental property in North Vancouver,
British Columbia in Canada, and the production of cement and containers in
the People's Republic of China (the "PRC"). As a result, changes in the
economic environment in which these operations exist, including changes in
the cost or availability of labor or materials, could have a material
impact on the Company. See Note 16 for information on the geographic
location of the Company's accounts.
At December 31, 1996, details of the subsidiary companies are as follows:
Percentage of
equity interest
Place of attributable to Principal
Name of subsidiary incorporation the Company activities
------------------ ------------- ----------- ----------
Heng Fai China & Asia Industries Hong Kong 100% Investment holding
Limited
Heng Fai China Industries Limited Hong Kong 100% Investment holding
Worldwide Containers Limited Hong Kong 100% Investment holding
Cangzhou Min You Cement Co., Ltd. PRC 100% Cement manufacturing
and trading
Wuhan Monkey King Container PRC 70% Container
Co., Ltd. manufacturing and
trading
Vancouver Hong Kong Properties Canada 100% Property investment
Ltd. and management
America & China Business Development Canada 100% Inactive
Inc.
Heng Fai Management Inc. British Virgin 100% Provision of
Islands management services
The Company holds certain investments in marketable equity securities,
which are carried at fair value. Future changes in the market value of
these securities could materially affect the Company's financial position.
F-7
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
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 minimal 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, Fai H. Chan who
has signed a letter of financial support to the Company.
3. ACQUISITIONS
During 1996 and 1995 the Company made two acquisitions. The acquisitions
were accounted for as a purchase and their operating results are included
in the consolidated statements of income from their respective dates of
acquisition.
On September 4, 1996, through a wholly-owned subsidiary, the Company
acquired a 70% interest in Wuhan Monkey King Container Co., Ltd. ("Wuhan")
in exchange for 727,272 shares of the Company's restricted common stock. No
goodwill arose on the acquisition. Wuhan is a joint venture incorporated in
the PRC which was formed to engage in the design, manufacture, lease and
repair of standard and non-standard containers and related steel structure
products.
The following summary, prepared on a pro forma basis, presents the
consolidated results of operations of the Company as if Wuhan had been
acquired as of the beginning of the fiscal years presented.
Year ended Year ended
December 31, 1996 December 31, 1995
----------------- -----------------
Net revenues $2,154,644 $1,113,103
Net loss $2,467,619 $2,168,331
Net loss per share $0.22 $0.20
The above pro forma financial information is presented for informational
purposes and is not necessarily indicative of the operating results that
would have occurred had the acquisition been consummated as of the
beginning of the years presented.
F-8
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
3. ACQUISITIONS - continued
On January 9, 1995, the Company acquired from Fai H. Chan, an officer,
director and stockholder of the Company, 100% of the common stock of Heng
Fai China & Asia Industries, Limited ("Heng Fai Asia") in exchange for
nominal consideration. Heng Fai Asia through its wholly-owned subsidiaries
had various options to acquire interests in various lease interests or
operating joint ventures in the PRC, but otherwise had no material assets
and liabilities or operations at the time of acquisition.
Heng Fai Asia, through its wholly-owned subsidiary formed in January 1995
exercised its option to enter into a lease, 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"). The subsidiary was
entitled to lease the production line for five years for a rental of RMB1.2
million ($144,288) payable through expenditures to renovate and modernize
the Cangzhou Factory. The expenditures were made in 1995 and the resulting
prepaid rental is being amortized over the five year term of the leases.
Amortization was $28,683 in 1996 and $28,750 in 1995. At the initiation of
the Cangzhou Factory lease, the lessor provided certain raw materials and
finished goods totalling $91,415, payment of which is due, without
interest, at the expiration of the lease in December 1999. Heng Fai Asia's
other options lapsed in 1995.
4. 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:
Principles of consolidation - The consolidated financial statements of Heng
Fai China Industries, Inc. include the assets, liabilities, revenues and
expenses of the Company and all its subsidiaries. All material intercompany
transactions and balances have been eliminated.
Cash flows - The Company's cash and cash equivalents include cash on hand
and short-term bank deposits, with original maturities of three months or
less .
The following supplemental schedule summarizes the fair value of assets
acquired, cash paid net of cash acquired, common stock issued and the
liabilities assumed in conjunction with the acquisition of equity interests
in subsidiaries in 1996 and 1995:
As of December 31,
---------------------------
1996 1995
----------- ----------
Fair value of non-cash assets acquired $5,083,943 -
Cash acquired 21,940 -
Common stock issued (1,000,000) -
----------- ----------
Liabilities assumed $ 4,105,883 -
=========== ==========
Inventories - Inventories are stated at the lower of cost determined by the
weighted average method or market. Work-in-progress and finished goods
consist of raw materials, direct labor and overhead associated with the
manufacturing process.
F-9
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
Properties, plant and equipment - Properties, plant and equipment are
stated at cost. Depreciation and amortization is based on the respective
estimated useful lives as calculated on the following bases:
Building in Canada 5% declining balance
Buildings in the PRC 5% straight line method
Leasehold improvements Amortized over the term of the lease
which expires on May 31, 2032 using the
straight line method
Plant and machinery 10% straight line method
Furniture and equipment 10% to 20% straight line method
Motor vehicles 20% straight line method
No depreciation is provided for 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.
Revenue recognition - Sales of cement and containers are recognized when
merchandise is shipped and title has passed to the customer. Rental income
is recognized on a straight-line basis over the periods of the leases.
Income taxes - Certain items are treated differently for financial
reporting purposes than for income tax purposes. Pursuant to the provision
of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", deferred tax is provided, under the liability method, for
the resulting temporary differences between the financial reporting and tax
bases of assets and liabilities, using the tax rates expected to be in
effect when the related temporary difference reverse.
Earnings per share - Earnings per share are based on the weighted average
number of common stock outstanding during the year.
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.
Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year's presentation.
F-10
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
5. AVAILABLE-FOR-SALE SECURITIES
The cost and approximate market value of investment securities were as
follows:
As of December 31,
-------------------------
1996 1995
--------- ---------
Corporate equity securities:
Cost $ 761,156 $ 524,776
Less: Gross unrealized losses (78,825) (43,941)
--------- ---------
Estimated fair value $ 682,331 $ 480,835
========= =========
Carrying value $ 682,331 $ 480,835
========= =========
All investment securities are pledged to secure the Company's margin loan
payable (See Note 11).
Included in the above securities are 7,492,000 shares at December 31, 1996
and 1995 representing 1.9 percent (1995: 2.7 percent) of the outstanding
common stock of Heng Fung Holdings Company Limited, ("Heng Fung") at
December 31, 1996. These securities were acquired in 1995 at a cost of
$484,778 and had a carrying value of $426,342 at December 31, 1996 and
$445,722 at December 31, 1995. Fai H. Chan and Robert H. Trapp, directors
of Heng Fung, are also officers, directors and/or shareholders of the
Company.
The investment securities held by the Company are not subject to any
contractual or statutory resale restrictions and any portion of these
securities can be reasonably expected to qualify for sale within one year.
6. INVENTORIES
Inventories by major categories are summarized as follows:
As of December 31,
---------------------------
1996 1995
---------- ----------
Raw materials and supplies $3,176,209 $ 67,253
Work-in-progress 1,070,066 67,591
Finished goods 157,407 19,526
---------- ----------
$4,403,682 $ 154,370
========== ==========
F-11
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
7. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
As of December 31,
--------------------------
1996 1995
----------- -----------
Buildings ............................. $ 2,316,819 $ 722,538
Leasehold improvements ................ 548,333 548,333
Plant and machinery ................... 1,276,853 --
Furniture and equipment ............... 50,024 --
Motor vehicles ........................ 55,816 --
Construction in progress .............. 1,231 --
----------- -----------
Total ................................. 4,249,076 1,270,871
Less: Accumulated depreciation
and amortization .................... (846,838) (413,323)
----------- -----------
$ 3,402,238 $ 857,548
=========== ===========
8. DEFERRED EXPENDITURE
(a) In June 1995, the Company entered into a consulting agreement with an
unaffiliated party 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 common stock and (b) is obligated to
issue to the consultant 20,000 shares of common stock each month
during the term of the agreement.
The unamortized portion of the amount recorded for the 260,000 shares
of common stock initially issued brought forward from 1995 of $703,567
was fully amortized in 1996 and recognized as consulting fees.
During 1996, 100,000 shares of common stock were issued to the
consultant pursuant to the terms of the agreement in (b) above. The
value attributable to the 100,000 shares of common stock issued of
$581,000 was charged to the statement of income in 1996 and recognized
as consulting fees.
F-12
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
8. DEFERRED EXPENDITURE - continued
(b) In September 1996, the Company entered into a consulting agreement
with another unaffiliated party 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 issued an aggregate of 300,000 shares of
common stock to the consultant in September 1996. The value
attributable to the 300,000 shares of common stock issued was $319,500
which has been capitalized and is being amortized over the 12 months
term of the consulting agreement. The unamortized portion of the
amount recorded for the 300,000 shares of common stock issued is
presented as a reduction of shareholders' equity.
9. SHORT-TERM BORROWINGS
As of December 31,
-------------------------
1996 1995
---------- ----------
Short-term borrowings consist of:
Unsecured bank overdraft ............... $ 2,977 $ 60,120
Unsecured bank borrowings .............. 2,400,049 --
---------- ----------
$2,403,026 $ 60,120
========== ==========
The weighted average interest rate as of December 31, 1996 and 1995 was
13.21% and 14.42% per annum, respectively.
10. BILLS PAYABLE
Bills payable represents accounts payable in form of bills of exchange
whose acceptances and settlements are handled by banks.
11. MARGIN LOAN PAYABLE
The margin loan payable is collateralized by the Company's investment
securities with a carrying value of $682,331. The loan is repayable on
demand and bears interest at Hong Kong best lending rate (8.50% at December
31, 1996) plus 3.5 percent per annum.
F-13
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
12. RELATED PARTY TRANSACTIONS
At the balance sheet date the Company had the following balances with
related parties, which are interest-free, repayable on demand and unsecured
unless otherwise stated:
As of December 31,
------------------------
1996 1995
---------- ----------
Amounts receivable from:
A director ............................. $ 12,409 $ --
Parties related to certain directors ... 124,030 11,639
---------- ----------
$ 136,439 $ 11,639
---------- ----------
Amounts payable to:
Certain directors ...................... $ 688,987 $ 22,005
Parties related to certain directors ... 421,557 --
---------- ----------
$1,110,544 $ 22,005
========== ==========
In addition at December 31, 1996 and 1995, the second mortgage of $87,623
and related interest payable of $3,522 are payable to the Silverstein
Foundation, Inc., a Panama company, in which Fai H. Chan's children have
beneficial ownership interests. The related interest expense was $8,947 in
1996, $11,066 in 1995 and $9,463 in 1994.
In addition to the above, in 1996, a consulting fee of $500,000 was paid to
a company in which Fai H. Chan has a beneficial ownership interest.
13. MORTGAGE LOANS PAYABLE
As of December 31,
----------------------
1996 1995
--------- ---------
First mortgage, principal due monthly through
June 15, 1998 with fixed interest at 8.75% ... $ 886,040 $ 904,810
Second mortgage, principal due September 1, 1997
with interest at Canadian prime (4.75% as at
December 31, 1996) plus 4% ................... 87,623 87,623
--------- ---------
973,663 992,433
Less: Current portion .......................... (108,069) (17,325)
--------- ---------
$ 865,594 $ 975,108
========= =========
The mortgage loans are denominated in Canadian dollars. The maturities of
the mortgage loans as at December 31, 1996 are as follows:
1997 $108,069
1998 865,594
--------
$973,663
========
The Company has pledged property and premises with a net book value of
$783,565 at December 31, 1996 to secure the mortgage loans.
F-14
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
14. CAPITAL STOCK
During the three years ended December 31, 1996 there were several changes
of the Company's capital as set out below:
In 1994,
a) the Company changed its state of incorporation through a merger of the
Company with and into its wholly-owned Delaware subsidiary. A reverse
stock split of four old shares for one new share effected the merger.
b) the Company effected a reverse stock split of ten old shares for one
new share.
c) the Company issued 10,000,000 shares of common stock at $0.01 per
share pursuant to a private placement for proceeds of $100,000.
In 1995,
d) the Company issued 400,000 shares of common stock at $5.81 per share
pursuant to a consulting agreement. (see Note 8).
e) the Company issued 75,000 shares of common stock at $4 per share
pursuant to private placements for proceeds of $300,000.
In 1996,
f) the Company issued 100,000 and 300,000 shares of common stock at $5.81
and $1.0625 pursuant to consulting agreements (See Note 8).
g) the Company issued 727,272 shares of common stock at $1.375 to acquire
a 70% interest in a subsidiary (See Note 3).
As of December 31, 1996, there were outstanding warrants to purchase an
aggregate of 296,443 shares of common stock, at an exercise price of $3.20
per share through September 2, 1999. No warrants were issued or exercised
during 1996.
F-15
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
15. INCOME TAXES
No provision for income taxes for 1994 and 1996, as the Company and its
subsidiaries made losses in those years. The 1995 provision for income
taxes consists of Canadian taxes for 1995.
Under current PRC regulations, the Company's subsidiaries receive a full
exemption from enterprise income tax for two years starting from the first
profitable year, followed by 50% reduction in income taxes for the next
three profitable years. At December 31, 1996 the subsidiaries had not
reported any operating profits.
At December 31, 1996 certain of its subsidiaries had operating tax loss
carry forwards for income tax purposes which may be applied to reduce
future taxable income of the same company. At December 31, 1996 there were
tax losses carry forward in Hong Kong of approximately $107,000 with no
expiration date.
The Company has established a valuation allowance for the entire amount of
these losses. There were no other material timing differences.
F-16
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
16. SEGMENT INFORMATION
The following is a summary of information regarding the Company's
operations by principal activities for each of the three years ended
December 31, 1996:
1996
---------------------------------------------------------------------------
Rental Investment
income Cement Containers income Consolidated
------------ ------------ ------------ ------------ ------------
Revenues .................... $ 336,644 $ 540,191 $ 1,082,317 $ 92,214 $ 2,051,366
Income (loss) from operations 85,883 (62,487) (241,208) (59,955) (277,767)
General corporate expenses .. -- -- -- -- (1,901,685)
Interest expense ............ -- -- -- -- (185,975)
------------
Loss before income taxes .... -- -- -- -- $ (2,365,427)
============
Identifiable assets ......... 787,920 395,955 8,560,939 710,307 $ 10,455,121
Corporate assets ............ -- -- -- -- 170,259
------------
$ 10,625,380
============
1995
---------------------------------------------------------------------------
Rental Investment
income Cement Containers income Consolidated
------------ ------------ ------------ ------------ ------------
Revenues .................... $ 347,034 $ 278,622 $ -- $ 7,918 $ 633,574
Income (loss) from operations 110,608 (75,107) -- (52,612) (17,111)
General corporate expenses .. -- -- -- -- (1,833,233)
Interest expense ............ -- -- -- -- (105,435)
------------
Loss before income taxes .... -- -- -- -- $ (1,955,779)
============
Identifiable assets ......... 877,265 299,107 -- 492,483 $ 1,668,855
Corporate assets ............ -- -- -- -- 55,001
------------
$ 1,723,856
============
1994
---------------------------------------------------------------------------
Rental Investment
income Cement Containers income Consolidated
------------ ------------ ------------ ------------ ------------
Revenues .................... $ 327,381 $ -- $ -- $ 5,938 $ 333,319
Income from operations ...... 125,119 -- -- -- 125,119
General corporate expenses .. -- -- -- -- (18,639)
Interest expense ............ -- -- -- -- (79,165)
------------
Loss before income taxes .... -- -- -- -- $ 27,315
============
Identifiable assets ......... 939,734 -- -- -- $ 939,734
Corporate assets ............ -- -- -- -- 189,962
------------
$ 1,129,696
============
F-17
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
16. SEGMENT INFORMATION (Continued)
The following is a summary of information regarding the Company's
operations by geographical area for each of the three years ended December
31, 1996:
1996 1995 1994
------------ ------------ ------------
Revenues
North America ....... $ 342,112 $ 349,698 $ 333,319
PRC ................. 1,685,642 279,251 --
Hong Kong ........... 23,612 4,625 --
------------ ------------ ------------
$ 2,051,366 $ 633,574 $ 333,319
============ ============ ============
Operating income (loss)
North America ....... $ 91,351 $ 104,640 $ 125,119
PRC ................. (240,561) (74,480) --
Hong Kong ........... (128,557) (47,271) --
------------ ------------ ------------
(277,767) (17,111) 125,119
============ ============ ============
Identifiable assets
North America ....... $ 787,920 $ 877,265 $ 939,734
PRC ................. 8,956,894 299,107 --
Hong Kong ........... 710,307 492,483 --
Corporate assets ...... 170,259 55,001 189,962
------------ ------------ ------------
$ 10,625,380 $ 1,723,856 $ 1,129,696
============ ============ ============
F-18
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
17. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of the SFAS No. 107
"Disclosure about Fair Value of Financial Instruments". The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that the Company could realize in
a current market exchange.
The carrying amounts of cash and cash equivalents, short-term borrowings,
current portion of mortgage loans payable and margin loan payable, are a
reasonable estimate of their fair value due to the short maturity of the
instruments. The fair value for the available for sale securities are based
primarily on quoted market prices and such securities are carried at fair
value.
The fair value for the long-term portion of mortgage loans payable and
long-term payable were estimated based on the current rates available to
the Company for debt of the same remaining maturities. At December 31, 1996
mortgage loans payable and long-term payable with book values of $865,594
and $88,744 had fair values of approximately $731,907 and $61,162
respectively.
18. COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company had capital commitments of $8,675 to
acquire plant and machinery.
The Company had contingent liability of approximately RMB739,000 ($89,000)
at December 31, 1996 for the delay in the completion of a sales order for
containers. The negotiation between the Company and the customer to revise
the contract terms and extend the completion date of contract is in
progress. The Company does not believe the ultimate resolution of the
matters will have any material effect on the Company's financial position.
The Company leases land in North Vancouver, British Columbia on which the
Company's rental property is located. The annual rent of CDN$110,000
($80,321) is fixed until May 31, 2010. The Company has the option to extend
the lease to May 31, 2032 at a rent to be negotiated. The Company also
leases certain manufacturing equipment under operating leases for its
cement operation for a period of five years commencing January 1, 1995. All
amounts due under this lease were prepaid.
The Company also leases a plant in Wuhan, for the production of containers
at an annual rent of RMB380,000 ($45,618). The operating lease commenced
from June 1, 1996 and expires in 2016 and the annual rental is subject to
review every three years.
Total rental expense charged to operations was $131,813 in 1996, $108,891
in 1995 and $80,533 in 1994.
F-19
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
18. COMMITMENTS AND CONTINGENCIES - continued
At December 31, 1996, the minimum future rental commitments under
non-cancellable leases payable over the remaining lives of the leases are:
1997................................... $ 125,939
1998................................... 125,939
1990................................... 125,939
2000................................... 125,939
2001................................... 125,939
2002 through 2016...................... 1,380,552
-----------
$ 2,010,247
===========
19. SUBSEQUENT EVENTS
The following transactions took place subsequent to December 31, 1996:
(a) On January 13, 1997, a consulting agreement engaged Tom Kosta for
public affairs and related financial services was approved by the
Board of Directors. In consideration for such services, the Company
issued options to acquire 50,000 shares of the Company's common stock,
25,000 exercisable at $1.00 per common share and 25,000 exercisable at
$1.25 per common share.
(b) On January 24, 1997, a private placement to the following parties has
been approved by the Board of Directors:
Number of shares Issue price Consideration
---------------- ----------- -------------
Fai H. Chan 1,300,000 $0.6 $780,000
Y.K. Chan 200,000 0.6 120,000
M.T. Lau 100,000 0.6 60,000
Robert H. Trapp 100,000 0.6 60,000
Except for Y.K. Chan, who is the wife of Fai H. Chan, all the above
parties are directors of the Company.
(c) On March 19, 1997, the Company entered into a conditional agreement
(the "Agreement") through a newly formed, wholly-owned Hong Kong
incorporated subsidiary, (the "Subsidiary") with an unaffiliated party
in PRC, (the "PRC Party") to establish a joint venture, (the "JV"), in
Zhangjiagang Free Trade Zone, PRC.
The principal business of the JV is property development and
distribution of commercial buildings. In accordance to the Agreement,
the Company will issue 379,520 non-trading preferred stock with a par
value of $10.00 each to the PRC Party for consideration of a 70%
interest in the JV to be acquired by the Subsidiary.
- --------------------------------------------------------------------------------
F-20