U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 000-30173
HUAYANG INTERNATIONAL HOLDINGS, INC.
(Exact name of Company as specified in its charter)
Nevada 58-1667944
------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
386 Qing Nian Avenue
Shenyang, China 110003
(Address of principal executive offices) (zip code)
011 (86)(24) 2318-0688
(Issuer's telephone number, including area code)
The number of shares of common stock, par value $0.02, outstanding on March 31,
2001, was 7,500,807.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Condensed Format)
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001 AND DECEMBER 31, 2000
March 31 December 31
2001 2000
----------- -----------
(Unaudited) (Audited)
A S S E T S
ASSETS:
Real estate rental property, net of
accumulated depreciation of $746,753 at
March 31, 2001 and $555,647 at December 31,2000 $30,752,074 $30,979,816
Real estate held for development and sale 5,674,443 5,674,648
Cash 230 851
Due from related companies 11,371,390 10,087,408
Investment in affiliates 14,971,382 15,343,007
Property and equipment, net 1,470,543 1,482,376
Deferred tax asset 113,552 --
Other assets 102,815 67,927
----------- -----------
Total assets $64,456,429 $63,636,033
=========== ===========
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
LIABILITIES:
Accounts payable and accrued liabilities $ 5,140,285 $ 4,384,485
Bank loans 17,285,740 17,286,367
Due to related companies 15,101,314 15,266,821
Income taxes payable 2,234,704 1,993,187
Deferred income taxes payable 381,410 337,145
Deferred interest income 407,919 370,158
----------- -----------
Total liabilities 40,551,372 39,638,163
----------- -----------
MINORITY INTEREST 1,103,028 1,092,009
----------- -----------
SHAREHOLDERS' EQUITY:
Common Stock, $0.02 par value, authorized
50,000,000 shares, 7,500,807 shares issued
and outstanding 150,016 150,016
Paid-in capital 18,296,291 18,296,291
Accumulated other comprehensive income 35,428 36,743
Retained earnings 4,320,294 4,422,811
----------- -----------
Total shareholders' equity 22,802,029 22,905,861
----------- -----------
Total liabilities and
shareholders' equity $64,456,429 $63,636,033
=========== ===========
The accompanying notes are an integral part of this statement.
2
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
March 31 March 31
2001 2000
----------- -----------
(Unaudited) (Unaudited)
REVENUES:
Real estate sales $ -- $ 1,012,496
Real estate rental income 1,067,488 298,092
Interest income 151,046 163,800
----------- -----------
Total revenues 1,218,534 1,474,388
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COSTS AND EXPENSES:
Cost of real estate sold -- 662,718
Real estate operating expenses 65,416 20,890
Depreciation 202,915 65,684
Interest expense 315,782 165,713
Other operating expenses 47,614 110,000
----------- -----------
Total costs and expenses 631,727 1,025,005
----------- -----------
LOSS FROM INVESTMENT IN AFFILIATES 371,156 --
----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 215,651 449,383
PROVISION FOR INCOME TAXES 307,149 181,701
----------- -----------
(LOSS) INCOME BEFORE MINORITY INTEREST (91,498) 267,682
MINORITY INTEREST (11,019) (11,991)
----------- -----------
NET (LOSS) INCOME (102,517) 255,691
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments (1,315) 3,883
----------- -----------
COMPREHENSIVE (LOSS) INCOME $ (103,832) $ 259,574
=========== ===========
NET (LOSS) INCOME PER SHARE (basic and diluted) $ (0.01) $ 0.03
=========== ===========
The accompanying notes are an integral part of this statement.
3
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
March 31 March 31
2001 2000
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (102,517) $ 255,691
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Gain on sales of real estate -- (349,778)
Net cash proceeds from sales of real estate -- 1,012,496
Real estate development costs (1,056,035) (67,385)
Depreciation 202,915 65,684
Loss from investment in affiliates 371,156 --
Change in investment in affiliates due to
currency translation 469 (261)
Increase in deferred tax assets (113,552) --
Increase in other assets (34,888) (10,686)
Increase (decrease) in accounts payable and
accrued liabilities 755,800 (215,027)
Increase in deferred income taxes payable 44,265 10,925
Increase in deferred interest income 37,761 36,855
Increase in income taxes payable 241,517 88,672
Increase (decrease) in comprehensive income (1,315) 3,883
----------- -----------
Net cash provided by operating activities 345,576 831,069
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (191,082) (10,138)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayments) to short term bank loans (627) 2,835
Repayments to related companies (165,507) (743,895)
Increase in minority interest 11,019 11,991
----------- -----------
Net cash used in financing activities (155,115) (729,069)
----------- -----------
NET (DECREASE) INCREASE IN CASH (621) 91,862
CASH, beginning of period 851 133,909
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CASH, end of period $ 230 $ 225,771
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid (net of interest capitalized
of $0 in 2001 and $136,727 in 2000) $ 2,479 $ 174,044
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
The accompanying notes are an integral part of this statement.
4
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Reporting entity
The financial statements of Huayang International Holdings, Inc. and Subsidiary
(HIHI) reflect the activities and financial transactions of its subsidiary
Shenyang Haitong House Properties Development Ltd. (HAITONG). HIHI has a 95%
ownership interest in HAITONG. HIHI also has a less than majority ownership
interest in three other companies, Changyang International Hotel (Shenyang) Co.
Ltd. (HOTEL), Changyuan (Shenyang) Park Ltd. (GARAGE) and Changhua (Shenyang)
Business Co. Ltd. (BUSINESS CENTER) collectively referred to as HOTEL GROUP.
HIHI is incorporated under the laws of the State of Nevada in the United States.
HAITONG, HOTEL, GARAGE and BUSINESS CENTER are incorporated under the laws of
the People's Republic of China (PRC).
The interim consolidated financial statements presented herein have been
prepared by the Company and include the unaudited accounts of HIHI and its
subsidiary HAITONG. All significant inter-company accounts and transactions have
been eliminated in the consolidation.
These condensed financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
the instructions to Form 10-QSB and Article 10 of Regulation S-X. Certain
information and footnote disclosures normally included in financial statements
presented in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the disclosures made are adequate to
make the information presented not misleading. The condensed consolidated
financial statements should be read in conjunction with the the Company's
consolidated financial statements for the year ended December 31, 2000 and notes
thereto included in HIHI's Form 10-KSB, dated March 30, 2001.
In the opinion of management, the unaudited condensed consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of March 31, 2001, the results of operations for the three months ended March
31, 2001 and 2000, respectively. Interim results are not necessarily indicative
of full year performance because of the impact of seasonal and short-term
variations.
Certain items in the 2000 financial statements have been reclassified to conform
to the 2001 presentation.
Note 3 - Investment in affiliates
Investments in which the Company owns a 20% interest are accounted for using the
equity method. These investments collectively referred to as HOTEL GROUP
consists of following as of March 31, 2001 and December 31, 2000:
5
March 31, December 31,
2001 2000
Share of net assets $ 6,590,528 $ 6,951,607
Advances made 8,380,854 8,391,400
----------- -----------
Totals $14,971,382 $15,343,007
=========== ===========
Place of Ownership Principal
Name Incorporation interest activity
Changyang International The People's 20% Hotel
Hotel (Shenyang) Co. Ltd. Republic of China operation
(Hotel)
Changhua (Shenyang) The People's 20% Business
Business Co., Ltd. Republic of China center,
(Business Center) commercial
retail
Changhua (Shenyang) The People's 20% Car
Business Co., Ltd. Republic of China Parking
Shown below is summarized financial information relative to the investments at
March 31, 2001:
BUSINESS
HOTEL CENTER GARAGE Total
Balance Sheet
Assets $ 56,906,941 $ 32,282,383 $ 21,509,618 $ 110,698,942
Liabilities 47,254,132 20,771,320 9,720,851 77,746,303
------------- ------------- ------------- -------------
Equity 9,652,809 11,511,063 11,788,767 32,952,639
Other shareholders'
equity 7,722,247 9,208,850 9,431,014 26,362,111
------------- ------------- ------------- -------------
HIHI, equity $ 1,930,562 $ 2,302,213 $ 2,357,753 $ 6,590,528
============= ============= ============= =============
Revenue $ -- $ -- $ -- $ --
Depreciation 332,221 203,006 120,160 655,387
General expense 719,439 319,823 161,128 1,200,390
------------- ------------- ------------- -------------
Net loss $ (1,051,660) $ (522,829) $ (281,288) $ (1,855,777)
============= ============= ============= =============
HIHI share of loss $ (210,333) $ (104,566) $ (56,258) $ (371,156)
============= ============= ============= =============
The Hotel Group has not yet commenced operations and has not generated revenues
for the three months ended as of March 31, 2001. In accordance with Financial
Accounting Standards no. 67, the project changes from non-operating to operating
when it is substantially completed and held available for occupancy or
operations upon completion of improvements but no later than one year from
cessation of major construction activities. Starting from January 1, 2001, all
carrying costs, including interest, have been charged to expense when incurred
and depreciation expense has been provided for the three months ended March 31,
2001.
Note 4 - Segment reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS No. 131 requires the
Company to disclose information used by management to evaluate its individual
business segments. As the Company currently is engaged in only one business
segment, no additional disclosures are required. The Company's net investment in
and the operating results of its various real estate activities may be derived
directly from the accompanying consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion of the financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
related notes thereto. The following discussion contains certain forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from the discussions herein. Factors that could cause or contribute
to such differences include, but not limited to, risks and uncertainties related
to the general economic situations in China and in the world, the availability
for additional funds, whether we can successfully manage the rapid growth of the
operations and our ability to operate profitably after the initial growth period
is completed.
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 2001 were $1,218,534, decreased
17.4% from $1,474,388 over the three months ended March 31, 2000. This decrease
was primarily attributable to a 100% decrease in revenues from real estate
sales, offset in part by a 258.1% increase in real estate rental income. For the
three months ended March 31, 2001, the Company did not have any revenues from
real estate sales, compared to $1,012,496 in the first quarter of 2000. Revenues
from real estate rental increased to $1,067,488 from $298,092 over the first
quarter of 2000. These changes reflect the fact that we are close to completing
the sale of our real estate property held for sale, and real estate rental
income and other operating income have become our major revenue sources. As of
March 31, 2001, the remaining real estate property held for sale and net real
estate rental property were $5,674,443 and $30,752,074. Interest income was
$151,046 for the three months ended March 31, 2001, slightly decreased from
$163,800 for the three months ended March 31, 2000.
Total costs and expenses were $631,727 in the three months ended March 31, 2001,
down from $1,025,005 in the three months ended March 31, 2000, a decrease of
38.4%. This decrease was primarily attributable to a 100% decrease in real
estate sales and a 56.7% decrease in other operating expenses, offset in part by
a 213.2% increase in real estate operating expenses, a 208.9% increase in
depreciation expenses, as well as a 90.6% increase in interest expenses. For the
three months ended March 31, 2001, costs of real estate sold were $0 compared to
$662,718 in the same period of 2000, due to the fact that we are close to
completing the sale of our real estate property held for sale, and real estate
rental income and other operating income have become our major revenue sources.
Real estate operating expenses increased to $65,416 from $20,890, caused by
increased real estate leasing activities. For the first quarter of 2001,
depreciation expenses increased to $202,915 from $65,684 and interest expenses
increased to $315,782 from $165,713 over the same period of 2000. These
increases were primarily due to the status change for Podium A from
non-operating to operating status in accordance with Financial Accounting
Standards no. 67. Other operating expenses for the three months ended March 31,
2001 dropped 56.7% to $47,614 from $110,000 of the same period of 2000. The main
components of these expenses are legal and professional fees related to the
Company's filings
7
with the SEC. These expenses were higher in 2000 because Company's initial
filings with the SEC required larger amount of legal and professional services.
Due to request from Sheraton Hotel Management that certain interior decoration
be redesigned, the Hotel completion has been postponed to July 2001 to allow the
redecoration work to be performed. Although the Hotel Group has not yet
commenced operations and has not generated revenues for the three months ended
as of March 31, 2001, according to Financial Accounting Standards no. 67, the
project changes from non-operating to operating when it is substantially
completed and held available for occupancy or operations upon completion of
improvements but no later than one year from cessation of major construction
activities. Starting from January 1, 2001, all carrying costs, including
interest, have been charged to expense when incurred and depreciation expense
has been provided for the three months ended March 31, 2001, which caused the
Hotel Group to recognize a loss of $1,855,777. As a 20% equity owner, the
Company also recognized its share of this loss, and booked a loss of $371,156,
or $0.049 per share, from investment in affiliates for the first quarter of
2001. The Company will continue to recognize such loss in subsequent quarters.
For the three months ended March 31, 2001, net income before taxes and minority
interest, after the loss from investment in the Hotel Group, was $215,651, down
52.0% from $449,383 over the same period of 2000. The Company's net loss for the
first quarter of 2001 was $102,517, compared to a net income of $255,691 for the
same period of 2000. Net loss per share for the first quarter of 2001 was $0.01,
compared to $0.03 in net earnings in the same period a year ago. These changes
were primarily due to the mixed effect of the recognized loss from investment in
the Hotel Group and the increased real estate rental income.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources consist of cash, receivables, real estate
held for development and sale and receipts from rental activities. It is
expected that future cash needs will be financed by a combination of cash flows
from rental and leasing operations, future advances under bank loans, and if
needed, other alternative financing arrangements, which may be available to us.
We do not have any material commitments for capital expenditures for the year
ending December 31, 2001.
Our projection of future cash requirements is affected by numerous factors,
including but not limited to, changes in customer receipts, consumer industry
trends, operating cost fluctuations, and other factors that may entail
substantial expenses.
We have retired $4,086,343 of bank debt in 1999 through cash flows from
operations and additional advances of $1,747,479 from related companies. As a
result of future cash payments required to retire bank loans and debts owed to
its related companies, management believes that it will be necessary to secure
additional financing to sustain our operations and to fund our anticipated
growth.
8
As of the date hereof, we have consolidated indebtedness that is substantial in
relation to our stockholders equity. As of December 31, 2000, we had total debt
of $17,286,367. Our indebtedness poses substantial risks to holders of our
Common Stock, including the risks such as (i) a substantial portion of our cash
flow from operations will be dedicated to the payment of interest on such
indebtedness, (ii) our indebtedness may impede our ability to obtain financing
in the future for working capital, capital expenditures and general corporate
purposes and (iii) our debt position may leave us more vulnerable to economic
downturns and may limit our ability to withstand competitive pressures. If we
are unable to generate sufficient cash flow from operations in the future to
service our indebtedness and to meet our other commitments, we will be required
to adopt one or more alternatives, such as refinancing or restructuring its
indebtedness, selling material assets or operations, or seeking to raise
additional debt or equity capital. There can be no assurance that any of these
actions could be effected on satisfactory terms, that they would enable us to
continue to satisfy our capital requirements or that they would be permitted by
the terms of existing or future debt agreements.
All of our debt is secured by the Commercial Towers. As of December 31, 2000,
our lenders held an aggregate of $17,286,367 of liens against the Commercial
Towers as security for bank loans of the same amount. If we are unable to meet
the terms of our bank loans, resulting in a default under such bank loans, the
lenders may elect to declare all amounts outstanding under the loans to be
immediately due and payable and foreclose on the Commercial Towers, which would
have a material adverse effect on us.
EFFECT OF FLUCTUATIONS IN FOREIGN EXCHANGE RATES
We operate in the People's Republic of China, maintain our financial control
center in Shenyang, PRC, and record most of our operating activities in Renminbi
("RMB"), the Chinese currency. The exchange rate between RMB and US Dollars has
been relatively stable for the last few years. We do not believe that
fluctuations in the foreign exchange rates will have a material effect on our
financial statements. The RMB exchange rates, however, are fixed by the
government of the PRC, and a change in the exchange rate by the PRC could have a
material adverse effect on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks include, but not limited to, the risk of change in the value of
short-term investments and financial instruments caused by fluctuations in
investment returns, interest rates and foreign currency exchange rates.
The Company operates in the People's Republic of China, and is exposed to
foreign exchange rate fluctuations related to the translation of the financial
results of our operations in China into U.S. dollars during consolidation. As
exchange rates fluctuate, these results, when translated, may vary from
expectations and adversely impact overall expected profitability.
9
The effect of foreign exchange rate fluctuations on the Company for the three
months ended March 31, 2001 was immaterial. The exchange rate between RMB and US
Dollars has been relatively stable for the last few years. We do not believe
that fluctuations in the foreign exchange rates will have a material effect on
our financial statements. The RMB exchange rates, however, are fixed by the
Chinese government, and a change in the exchange rate by the PRC could have a
material adverse effect on our financial statements.
The Company has not entered into any derivative financial instruments to manage
interest rate risk or for speculative purpose and is not currently evaluating
the future use of such financial instruments.
The Company does not hold cash equivalents or marketable securities as of March
31, 2001 and has no plans to do so within the next twelve months.
PART II. OTHER INFORMATION
None.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Huayang International Holdings, Inc.
Date: May 14, 2001 /s/ Gao WanJun
--------------------------------------------------
Name: Gao WanJun
Title: President and Chief Executive Officer
Date: May 14, 2001 /s/ Wang XiaoLuan
--------------------------------------------------
Name: Wang XiaoLuan
Title: Vice President and Chief Financial Officer
Date: May 14, 2001 /s/ Wang Yufei
--------------------------------------------------
Name: Wang Yufei
Title: Secretary and Director
11