SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 0-7619
HENG FAI CHINA INDUSTRIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 93-063633
(State or other jurisdiction (I.R.S. Employer
corporation or organization) Identification No.)
650 West Georgia Street, Suite 1600, Vancouver, British Columbia Canada V6B 4N8
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (604) 685-8318
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _____ No __X__
16,286,814 shares of common stock, $.01 par value, were issued and outstanding
as of September 30, 1997.
HENG FAI CHINA INDUSTRIES, INC.
FORM 10-Q
FOR THE
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements............................................... 1
Condensed Consolidated Balance Sheets as at
September 30, 1997 and December 31, 1996 ........................ 2
Condensed Consolidated Statements of Operations for the
nine and three months ended September 30, 1997 and 1996 ........... 3
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 ................. 4
Notes to the Condensed Consolidated Financial Statements .......... 5
Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations ............................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 20
Item 2. Changes in Securities.............................................. 20
Item 3. Defaults Upon Senior Securities.................................... 20
Item 4. Submission of Matters to a Vote of Security Holders ............... 20
Item 5. Other Information.................................................. 20
Item 6. Exhibits and Reports on Form 8-K................................... 20
Signature
Page......................................................................... 21
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements of Heng Fai China Industries,
Inc. (the "Company") are provided herewith:
(a) Condensed Consolidated Balance Sheets as at September 30, 1997
and December 31, 1996;
(b) Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1997 and September 30, 1996 and
each of the three months ended September 30, 1997 and 1996;
(c) Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and September 30, 1996; and
(d) Notes to the Condensed Consolidated Financial Statements.
1
HENG FAI CHINA INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(United States Dollars)
As at As at
September 30, 1997 December 31, 1996
------------------ -----------------
Current assets:
Cash and cash equivalents ...................................... $ 165,365 $ 170,259
Available-for-sale securities (note 4) ......................... 2,762,118 682,331
Accounts receivable, trade, less allowance for doubtful
accounts of $0 in 1997 and $70,258 in 1996 ................... 3,997,565 980,172
Inventories (note 5) ........................................... 2,111,932 4,403,682
Prepaid and other current assets ............................... 1,327,973 151,722
Amounts receivable from related parties (note 10) .............. 1,825,066 136,439
Value added taxes recoverable .................................. 184,421 611,790
------------ ------------
Total current assets ........................................ 12,374,440 7,136,395
Property, plant and equipment, net (note 6) ........................ 3,263,668 3,402,238
Prepaid rental ..................................................... 65,060 86,747
------------ ------------
Total Assets .................................................. $ 15,703,168 $ 10,625,380
============ ============
Current liabilities:
Short-term borrowings (note 8) ................................. $ 5,541,301 $ 2,403,026
Margin loan payable (note 9) ................................... 1,338,848 489,193
Interest payable ............................................... 41,280 40,212
Mortgage payable - ST .......................................... 18,894 108,069
Accounts payable ............................................... 1,429,428 837,596
Bills payable .................................................. 160,241 722,892
Accrued expenses ............................................... 591,383 360,749
Security deposits payable ...................................... 10,971 11,992
Amounts payable to related parties (note 10) ................... 721,018 1,110,544
------------ ------------
Total current liabilities .................................. 9,853,364 6,084,273
------------ ------------
Long-term liabilities:
Mortgage loans payable ......................................... 939,700 865,594
Long-term payable .............................................. 88,744 88,744
------------ ------------
Total long-term liabilities .................................. 1,028,444 954,338
------------ ------------
Minority interest .................................................. 3,483,369 3,583,399
------------ ------------
Stockholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized;
issued and outstanding 1997: 16,286,814 shares and
1996: 11,986,814 shares (note 11) ........................... 162,868 119,868
Contributed surplus ............................................ 6,378,023 4,701,023
Unrealized gain (loss) on available-for-sale securities (note 4) 221,648 (78,825)
Cumulative exchange adjustments ................................ 6,968 6,968
Accumulated deficit ............................................ (5,344,016) (4,510,914)
------------ ------------
1,425,491 238,120
Common stock issued for consulting services
to be received (note 7) ..................................... (87,500) (234,750)
------------ ------------
Total stockholders' equity .................................... 1,337,991 3,370
------------ ------------
Total liabilities and stockholders' equity .................... $ 15,703,168 $ 10,625,380
============ ============
See accompanying notes to the Condensed Consolidated Financial Statements
2
HENG FAI CHINA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(United States Dollars)
Nine Months Ended Three Months Ended
September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ---------
Revenues:
Rental income ................... $. 259,989 $ 253,154 $ 88,313 $ 83,504
Sales of containers ............. 2,934,871 -- -- --
Sales of cement ................. 262,257 346,930 118,989 172,135
Investment income ............... 678,710 30,942 569,498 4,666
Other Income .................... 5,659 4,826 1,607 1,845
------------ ------------ ----------- ---------
Total revenues ............... $ 4,141,486 $ 635,852 $ 778,407 $ 262,150
------------ ------------ ----------- ---------
Expenses:
Cost of sales of containers ..... 2,647,720 -- 58,225 --
Cost of sales of cement ......... 288,437 321,737 127,552 167,399
Machinery lease rental .......... 21,687 -- 7,229 --
Depreciation .................... 30,288 46,579 8,703 22,507
Legal and professional fees ..... 51,731 29,650 8,252 2,999
Consulting fees (note 7) ........ 247,250 1,295,395 71,250. 5,000
Consulting fees paid to a
related company ............... 375,000 -- 125,000 --
Interest on long-term debt ...... -- 141,365 -- 74,238
Interest on short-term debt ..... 321,898 -- 23,763 --
Foreign exchange loss ........... 48,427 -- 9,073 --
Land lease ...................... 60,241 60,662 20,080 20,131
Rental estate
management fees .............. 24,521 10,331 5,694 3,514
Salaries ........................ 32,208 -- 5,625 --
Other operating and
administrative expenses ....... 925,210 275,677 179,964 170,267
------------ ------------ ----------- ---------
Total expenses ............... 5,074,618 2,181,396 650,410 466,145
------------ ------------ ----------- ---------
Net (loss) income before
income taxes ...................... (933,132) (1,545,544) 127,997 (203,995)
Provision for income taxes .......... -- -- -- --
------------ ------------ ----------- ---------
Net (loss) income before
minority interest for the year .... (933,132) (1,545,544) 127,997 (203,995)
Minority interest ................... 100,030 31,657 25,566 31,657
------------ ------------ ----------- ---------
Net (loss) income ................... (833,102) (1,513,887) 153,563 (172,338)
------------ ------------ ----------- ---------
Net (loss) income per share.......... (0.06) (0.14) 0.01 (0.02)
============ ============ =========== =========
Weighted average number
of shares of common stock
outstanding........................ 14,402,740 10,961,587 16,234,592 11,022,783
============ ============ =========== =========
See accompanying notes to the Condensed Consolidated Financial Statements
3
HENG FAI CHINA INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(United States Dollars)
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
Cash flow from operating activities
Net loss .............................................. $ (833,102) $(1,513,887)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest ................................. (100,030) 31,657
Adjustments of trading securities to fair value ... -- 72,096
Depreciation and amortization ..................... 198,008 68,221
Consulting fee paid in common stock ............... 247,250 1,295,395
Changes in working capital components:
Accounts receivable ............................... (3,017,393) (115,037)
Inventories ....................................... 2,291,750 82,583
Prepaid and other current assets .................. (1,176,251) (65,465)
Amounts receivable from related parties ........... (1,688,627) --
Value added taxes recoverable .................... 427,369 --
Accounts payable .................................. 591,832 (158,835)
Bills payable ..................................... (562,651) --
Interest payable .................................. 1,068 6,802
Accrued expenses ................................. 230,634 84,233
Prepaid rental .................................... 21,687 --
Security deposits payable ......................... (1,021) 659
Amounts payable to related parties ................ (389,526) --
Exchange difference ............................... -- 22,659
----------- -----------
Net cash used in operating activities ............. (3,759,003) (188,919)
----------- -----------
Cash flow from investing activities:
Purchase of available for sale securities ......... (4,367,238) --
Proceeds from sale of available-for-sale securities 2,587,924 --
Purchases of property, plant and equipment ........ (59,438) --
Purchase of a subsidiary .......................... -- (1,228,036)
----------- -----------
Net cash used in investing activities ............. (1,838,752) (1,228,036)
----------- -----------
Cash flow from financing activities:
Common stock issued for cash ...................... -- --
Increase in short-term borrowings ................. 3,138,275 47,871
Loan from related companies ....................... -- 1,587,099
Bank overdraft raised ............................. -- 4,357
Margin loan raised ................................ 849,655 --
Margin loan repaid ................................ -- (5,955)
Mortgage loan repaid ............................. (15,069) (6,988)
Issue of common stock ............................. 1,620,000 --
----------- -----------
Net cash provided by financing activities ......... 5,592,861 1,626,384
----------- -----------
Net (decrease) increase in cash and cash equivalents .. (4,894) 209,429
Cash and cash equivalents:
Beginning of the period ........................... 170,259 55,001
----------- -----------
End of the period ................................. $ 165,365 $ 264,430
=========== ===========
Analysis of the balance of cash and cash equivalents:
Bank balances and cash ............................ $ 165,365 $ 264,430
=========== ===========
Non-cash financing activities:
Issuance of common stock for consulting services ...... $ 100,000 $ 581,000
Issuance of common stock for acquisition .............. -- 1,000,000
----------- -----------
$ 100,000 $ 1,581,000
=========== ===========
See accompanying notes to the Condensed Consolidated Financial Statements
4
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United Stated Dollars)
1. BASIS OF PRESENTATION
In June 1994, Heng Fai China Industries, Inc., then known as Alpine
International Corporation ("Apline") 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 are before the effects of
the Company 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 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").
The condensed consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. The condensed
consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. The condensed consolidated financial statements
and the notes thereto should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996.
In the opinion of the management of the Company, the accompanying
condensed consolidated financial statements contain all necessary
adjustments to present fairly the financial position, the results of
operations and cash flows for the periods reported. All adjustments are a
normal recurring nature.
The results of operations for the three months periods are not
necessarily indicative of the results to be expected for the full year.
5
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United Stated Dollars)
1. BASIS OF PRESENTATION - Continued
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 of 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.
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. 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.
On March 3, 1997, the Company acquired from Fai H. Chan, an officer,
director and stockholder of the Company, 100% of the common stock of Heng
Fai China Industries Acquisition Limited ("Heng Fai Acquisition") in
exchange for nominal consideration. Heng Fai Acquisition had an option to
form a co-operative joint venture in the PRC, but otherwise had no
material assets and liabilities or operations at the time of acquisition.
On March 19, 1997, the Company entered into a conditional agreement
(the "Agreement") through Heng Fai Acquisition with an unaffiliated party
in PRC to establish a joint venture, (the "JV"), in Zhangjiagang Free
Trade Zone, PRC. However, the Agreement was not completed and the Company
has lodged an application to cancel the registration of the JV during
1997.
6
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United Stated Dollars)
2. CONTINUING OPERATIONS
These condensed consolidated financial statements have been prepared
on the going concern basis of accounting which assumes the Company will
realize its assets and discharge its liabilities in the normal course of
business. The Company is currently operating at a loss and has a
deficiency in net tangible assets. Should the Company be unable to
continue as a going concern it may be required to realize its assets and
settle its liabilities at amounts substantially different from the current
carrying values.
The Company ability to continue as a going concern is dependent on
continued financial support from its principal shareholder, who has signed
a letter of financial support to the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed 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 condensed consolidated
financial statements:
Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and the disclosures of contingent
assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Principles of consolidation - The consolidated financial statements
of Heng Fai China Industries, Inc. include the assets, liabilities,
revenues and expenses of the Company and 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.
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 labour and overhead associated with
the manufacturing process.
Investment securities - The Company has classified the marketable
equity securities it holds as available-for-sale. Accordingly, pursuant to
Statement of Financial Accounting Standard No. 115 the securities are
measured at fair value, with unrealized gains and losses, net of
applicable taxes, reported as a separate component of equity.
7
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United Stated Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Properties, plant and equipment - Properties, plant and equipment
are stated at cost. Depreciation and amortization is based on the
respective estimated useful live, as calculated on the following rates:
Building in Canada 5% declining balance
Buildings in PRC 5% declining balance
Leasehold improvements amortized over the term
of the lease which expires 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.
8
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United Stated Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Earnings per share - Earnings per share are based on the weighted
average number of common stock outstanding during the period.
Reclassifications - Certain prior period amounts have been
reclassified to conform to the current period's presentation.
4. AVAILABLE-FOR-SALE SECURITIES
The cost and approximate market value of investment securities as of
September 30, 1997 were as follows:
Gross Estimated Carrying
Cost Unrealized Loss Fair Value Value
---------- --------------- ---------- ----------
Corporate equity
securities $2,540,470 $221,648 $2,762,118 $2,762,118
========== ======== ========== ==========
The Company acquired the investment securities for cash financed
partially by the Company's internal resources and partially by a margin
loan (See Note 9).
These investment securities are not subject to any contractual or
statutory resale restrictions and any portion of these stock can be
reasonably expected to qualify for sale within one year.
5. INVENTORIES
Inventories by major categories are summarized as follows:
As of As of
September 30, 1997 December 31, 1996
------------------- -----------------
Raw materials and supplies $1,699,459 $3,176,209
Work-in-progress 195,329 1,070,066
Finished goods 217,144 157,407
---------- ----------
Total inventories $2,111,932 $4,403,682
========== ==========
9
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United Stated Dollars)
6. PROPERTIES, PLANT AND EQUIPMENT
The components of properties, plant and equipments are as follows:
As of As of
September 30, 1997 December 31, 1996
------------------ -----------------
Buildings $ 2,316,819 $ 2,316,819
Leasehold improvements 548,333 548,333
Furniture and equipment 63,475 50,024
Plant and machinery 1,322,840 1,276,853
Motor vehicles 55,816 55,816
Construction-in-progress 1,231 1,231
----------- -----------
Total Cost 4,308,514 4,249,076
Less : accumulated depreciation
and amortization (1,044,846) (846,838)
----------- -----------
$ 3,263,668 $ 3,402,238
=========== ===========
All premises and equipment are pledged to secure banking facilities
extended to the Company.
7. DEFERRED EXPENDITURE
(a) In September 1996, the Company entered into a consulting agreement with
another previously 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.
The unamortized portion of the amount recorded for the 300,000 shares of
common stock initially issued brought forward from 1996 of $234,750 was
fully amortized in 1997 and recognized as consulting fees.
10
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United Stated Dollars)
7. DEFERRED EXPENDITURE - Continued
(b) In August 1997, the Company entered into a consulting agreement with a
previously 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 is obligated to issue 100,000 shares of common stock to the
consultant.
During 1997, 100,000 shares of common stock were issued to consultant
pursuant to the terms of the agreement above. The value attributable to
the 100,000 shares of common stock issued was $100,000 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 100,000 shares of common stock issued is presented as a reduction of
shareholders' equity.
8. SHORT-TERM BORROWINGS
Short-term borrowings at September 30, 1997 represent bank
overdrafts on which the Company pays interest based on the "besting
lending" rate in the PRC. The effective interest rate at September 30,
1997 was 8.415%.
9. MARGIN LOAN PAYABLE
The margin loan payable is to a third party and is collateralized by
the Company's investment securities with a carrying value of US$2,762,118.
The loan is repayable on demand and bears interest at Hong Kong best
lending rate (8.75% at September 30, 1997) plus 3.5 per cent per annum.
10. RELATED PARTIES TRANSACTIONS
These amounts are unsecured, interest-free and have no fixed
repayment date.
11
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(United Stated Dollars)
11. CAPITAL STOCK
The changes in share capital during the three months ended September
30, 1997 were as follows:
Common Stock
---------------------
Number of Amount Contributed
Shares Surplus
------ ------ -------
Balance as of December 31, 1996 11,986,814 $119,868 $4,701,023
Common stock issued for cash 4,200,000 42,000 1,578,000
Common stock issued for
consultancy services 100,000 1,000 99,000
---------- -------- ----------
Balance as of September 30, 1997 16,286,814 $162,868 $6,378,023
========== ======== ==========
As of September 30, 1997, there were outstanding warrants
exercisable to purchase 296,443 shares of common stock, at an exercise
price of $3.20 per share through September 2, 1999.
12. SUBSEQUENT EVENTS
Subsequent to the balance sheet date, the Company disposed a 70% and
a 81% interests in its subsidiaries in Wuhan and Cangzhou, respectively.
12
Heng Fai China Industries, Inc.
September 30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The Company was originally incorporated in 1958 and until June 1994 had been
engaged in business other than those it presently operates, or, since its Alpine
1992 emergence from reorganization under Chapter 11 of the U.S. Bankruptcy code,
had been inactive.
Vancouver Hong Kong owns and operates an apartment building in North Vancouver,
British Columbia, and until June 1995 the Company's operations were comprised of
that single segment. In January 1995, the Company acquired from Fai Chan (an
officer, director and principal stockholder of the Company) the ownership of
100% of the common stock of Heng Fai China and Asia Industries Limited ("Asia")
and Asia's wholly-owned subsidiaries and Heng Fai China Industries Limited
("China"). China, through its subsidiary Cangzhou Min You Cement Company Limited
("Min You"), obtained the right to acquire the use, for a period of five years
commencing January 1, 1995, of a production line at Min You in the PRC. Min You
was entitled to lease the production line for five years by expending Renminbi
("RMB"), the currency of the PRC, RMB 1.2 million on the expansion and
modernization of Min You. The option was exercised and the required RMB 1.2
million was expended in fiscal 1995, and beginning in June 1995 the Company's
operations included a second business segment, the production and sale of
cement.
On September 4, 1996, the Company through a wholly owned-subsidiary acquired a
70% interest in Wuhan Monkey King Container Co. ("Wuhan"), in exchange for
727,272 shares of the Company's restricted common stock. 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.
On February 19, 1997, the Company entered into a conditional agreement through
Heng Fai China Industries Acquisition Limited with a an unaffiliated party in
PRC, (the "PRC Party") to establish a joint venture, the "JV"), in Zhangjiagang.
However, the Agreement was not completed and the Company has lodged an
application to cancel the registration of the JV in 1997.
During December 1997 the Company effected an agreement to reverse the
acquisition of Wuhan. Also, in December 1997, the Company disposed of 81% of its
interest in Cangzhou Cement and submitted its application for change in
ownership to the respective authorities in PRC for consensus and approval.
During March 1998, pursuant to a resolution passed on March 23, 1998, by written
consent in lieu of a meeting pursuant to section 141(f) of the General
Corporations Law of the State of Delaware, the Company's name was changed to
Powersoft Technologies, Inc.
13
Subsequent events
Subsequent to March 31, 1997, the Company disposed of a 70% and an 81% interest
in its subsidiaries in Wuhan and Cangzhou, respectively.
Results of Operations - Nine months ended September 30, 1997 as compared to the
nine months ended September 30, 1996
Consolidated revenues increased to US$4,141,486 for the nine months ended
September 30, 1997, from US$635,852 for the nine months ended September 30,
1997. Wuhan Container Co., Ltd., a majority owned subsidiary that was acquired
in September 1996, represents the primary reason for this increase. Sales of
Wuhan amounted to US$2,934,871 in 1997.
Cement sales amounted to US$262.257 and US$346,930 for the nine months ended
September 30, 1997 and 1996, respectively. The decrease is because the austerity
measures implemented by the PRC government in late 1995 continued to have an
impact on the economic developments in the PRC which in turn affect the
infrastructure activities and the building developments. Although there is a
sign of easing in such austerity measures, both turnover and profit margin of
the cement sector are still severely affected.
There were no significant changes in the revenues and expenses attributable to
the operation of Vancouver Hong Kong's real estate between the first nine months
of fiscal 1997 and fiscal 1996.
Investment income amounted to US$678,710 for the first nine months of 1997
compared to US$30,942 for the same period in 1996. The income is derived from
the increased holdings in available for sale securities.
Operating expenses increased from US$2,181,396 for the nine months ended
September 30, 1996 to US$5,074,618 for the nine months ended September 30, 1997.
This represents an increase amounting to US$2,893,222. The fluctuation in
operating expenses includes the increase in cost of sales of containers,
US$2,647,720 in 1997 and the change in cost of sales of cement from US$321,737
in 1996 to US$288,437 in 1997 that are associated with the revenue trends
described above.
Fees are paid to a related party for consulting and management services. During
the nine month period ended September 30, 1997 such fees amounted to US$375,000.
Consulting fees amounting to US$247,250 represents a consulting fee paid in the
form of common stock for public relations and related financial services. The
consulting agreement was entered into in September 1996. Consulting fees
decreased from US$1,295,395 for the nine months ended September 30, 1996.
Interest expense increased to US$321,898 for the nine months ended September 30,
1997 as compared to US$141,365 for the nine months ended September 30, 1996.
This reflects the increase in short-term borrowings and margin loans payable.
The increase in financing was used to fund increases in accounts receivable and
available-for-sales securities.
14
Other operating and administrative expenses increased from US$275,677 for the
nine months ended September 30, 1996 to US$925,210 for the nine months ended
September 30, 1997. The increase reflects increased expenditures for investment
banking fees of US$151,319, amortization of deferred expenditures of US$197,196
and various administrative and general expenses.
The charge for minority interests is primarily due to the interests of the
minority shareholders of Wuhan.
The Company's net loss for the nine months ended September 30, 1997 was
US$833,102, a change of US$680,785 compared to a net loss of US$1,513,887 for
the corresponding period in 1996. The decrease in the net loss was the net
result of (i) the operating loss of the container segment; (ii) lower consulting
expenses; (iii) increased administrative and interest expenses.
As at September 30, 1997, the Company held shares of corporate equity
securities. The quoted market price of these securities, in the aggregate,
US$221,648 more than their initial costs. The securities are classified as
available for sale and, accordingly, the increase in their market value has been
credited directly to stockholders' equity as a separate component thereof.
Results of Operations - Three months ended September 30, 1997 as compared to the
three months ended September 30, 1996
Consolidated revenues increased to US$778,407 for the three months ended
September 30, 1997, from US$262,150 for the three months ended September 30,
1996. The primary reason for this increase is the investment income for the
quarter. Investment income amounted to US$569,498 for three months ended
September 30, 1997, compared to $4,666 for the same period in 1996. The income
is derived from the sale of significant positions of available for sale
securities. At September 30, 1997, the unrealized gains of these securities were
credited to stockholder's equity.
Cement sales amounted to US$118,989 and US$172,135 for three months ended
September 30, 1997 and 1996, respectively. Austerity measures implemented by the
PRC government in late 1995 continued to have an impact on the economic
developments in the PRC which in turn affect the infrastructure activities and
the building developments. Although there is a sign of easing in such austerity
measures, both turnover and profit margin of the cement sector are still
severely affected.
There were no significant changes in the revenues and expenses attributable to
the operation of Vancouver Hong Kong's real estate between the second quarter of
fiscal 1997 and fiscal 1996.
Operating expenses increased from US$466,145 for the three months ended
September 30, 1996 to US$650,410 for the three months ended September 30, 1997.
This represents an increase amounting to US$184,265. The fluctuation in
operating expenses includes the increase in cost of sales of containers,
US$58,225 in 1997 and the change in cost of sales of cement from US$167,399 in
1996 to US$127,552 in 1997 that are associated with the revenue trends described
above.
15
Fees are paid to a related party for consulting and management services. During
the three month period ended September 30, 1997 such fees amounted to
US$125,000.
Consulting fees amounting to US$71,250 represents a consulting fee paid in the
form of common stock for public relations and related financial services. The
consulting agreement was entered into in September 1996. Consulting fees
increased from US$5,000 for the three months ended September 30, 1996.
Interest expense decreased to US$23,763 for the three months ended September 30,
1997 as compared to US$74,328 for the three months ended September 30, 1996.
This reflects the decrease in margin loans payable. The decrease in margin
financing occurred as securities positions were sold.
Other operating and administrative expenses amounted to US$170,267 and
US$179,964 for the three month periods ended September 30, 1996 and 1997,
respectively.
The charge for minority interests is primarily due to the interests of the
minority shareholders of Wuhan.
The Company's recorded net income for the three months ended September 30, 1997,
amounting to US$153,563, as compared to a net loss of US$172,338 for the
corresponding period in 1996. This improvement was the net result of (i) the
investment income for the third quarter of 1997; (ii) increases in consulting
and container expenses lower consulting expenses; and (iii) decreased interest
expense.
Liquidity and Capital Resources
The Company did not generate net profits from operations on an accounting basis
for the nine months period ended September 30, 1997.
The net cash used in operating activities cash flows for the nine months period
ended September 30, 1997 amounted to US$3,759,003. This was primarily due to the
operating losses experienced, increases in receivables from the container
segment and the payment of amounts that were payable to related parties. The
Company met its working capital requirements from the proceeds of bank
borrowings and the issuance of common shares.
The net cash used in investing activities amounted to US$1,838,752 for the nine
months ended September 30, 1997. This is primarily due to the use of cash to pay
for the purchase of investments.
The net cash provided by financing activities amounted to US$5,592,861 for the
nine months ended September 30, 1997. This is due to the increases in short term
borrowings and margin loans and the issuance of common shares.
As discussed in Note 2 of the Notes to the Consolidated Financial Statements,
the Company's operating losses and deficiency in net tangible assets 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.
16
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 authorized 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 centers 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 centers.
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 authorized to deal in foreign currency may enter into
foreign exchange transactions at exchange rates within an authorized 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.
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 utilize the Rmb received from its customers and minimize
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 24%, 15% and 8%per annum
in 1994, 1995 and 1996, 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.
New accounting standards not yet adopted
In June 1997 the Financial Accounting Standards Board ("FASB") issued SFAS No.
130 "Reporting Comprehensive Income" which requires information on comprehensive
income to be provided in the financial statements. Results of operations and
financial position will not
17
be affected by implementation of this new standard.
Also, in June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information", which supercedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise", and which and which
establishes standards for the way that public enterprises report information
about operating segments in financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Results of
operations and financial position will not be affected by implementation of the
new standard.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which amends the disclosure
requirements for pensions and other postretirement benefits. Adoption of the
standard will not significantly change the Company's financial statement
disclosures.
The above new standards not yet adopted are effective for financial statements
for periods beginning after December 15, 1997, and require comparative
information for earlier years to be restated.
During April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities".
Generally the Statement requires that the costs of start-up activities shall be
expensed as incurred, and that upon initial adoption an adjustment to reflect
the cumulative effect of a change in accounting principle shall be recorded.
This statement will be effective for periods beginning after December 15, 1998,
with earlier application permitted.
The Company believes that the effect of adopting these standards will not be
material to the Company's financial position or results of operations.
Regional economic developments
Several countries in Asia have recently experienced significant adverse economic
developments including substantial exchange rate fluctuations, inflation, social
unrest, increased interest rates, reduced economic growth rates, corporate
bankruptcies, declines in the market value of shares listed on stock exchanges,
emergency loan agreements with the International Monetary Fund and
government-imposed austerity measures. To date, neither the PRC nor Hong Kong
has experienced these developments to the same extent as many other major Asian
countries. However, there can be no assurance that these economic developments
in other countries will not adversely affect the economy of the PRC or Hong
Kong, or that similar adverse economic developments will not occur in the PRC or
Hong Kong in the future, which could have a material adverse effect on a
Company's financial condition or results of operations.
The year 2000
The use of computer systems that rely on two-digit programs to perform
computations or other functions may cause such systems to malfunction with
respect to the year 2000 and
18
subsequent years. Like many other entities, the Company is currently assessing
its computer software and database with respect to its functionality beyond the
turn of the century. The extent and estimated cost of the modifications which
will be required cannot yet be determined, although it is expected that such
expenditures will not have a material effect on the financial condition and
results of operations of the Company. There can be no assurance, however, that
the year 2000 problem will be resolved successfully and in a timely fashion or
that any failure or delay by the Company or any third parties which interact
with the Company in achieving year 2000 compliance will not have an adverse
effect on its operations.
19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults in Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HENG FAI CHINA INDUSTRIES, INC.
Dated: November 19, 1998 By: /s/ Robert H. Trapp
----------------------------
Robert H. Trapp
Secretary and Treasurer
20