U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2004
|_| TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)
Nevada 58-1667944
- -------------------------------- ------------------------------------
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation)
386 Qingnian Avenue, Shenyang, China 110004
(Address of principal executive offices)
Issuer's telephone number: (86)(24) 2318-0688
The number of shares of common stock, par value $0.02, outstanding on March 31,
2004, was 7,700,807.
Transitional Small Business Disclosure Format (Check one): Yes |_| No |X|
HUAYANG INTERNATIONAL HOLDINGS, INC.
FORM 10-QSB
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations and Comprehensive Loss 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4-7
Item 2. Management's Discussion and Analysis or Plan of Operation 8-11
Item 3. Controls and Procedures 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
(Unaudited)
------------- --------------
ASSETS
- ------
Real estate rental property, net $ 6,591,908 $ 6,681,080
Real estate held for development and sale 2,603,460 2,603,586
Cash and cash equivalents 350,405 302,172
Accounts receivable 7,885 520
Due from related company, net of allowance for
doubtful accounts of 9,196,457 2,412,052 2,505,987
Property and equipment, net 1,243,022 1,252,909
Other assets 26,045 25,995
------------- --------------
TOTAL ASSETS $ 13,234,777 $ 13,372,249
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Accounts payable and accrued liabilities $ 649,779 $ 778,868
Bank loans 3,298,257 3,298,416
Due to related parties 1,904,657 1,760,772
Taxes payable 2,348,314 2,348,849
Minority interest 177,972 183,905
------------- --------------
TOTAL LIABILITIES 8,378,979 8,186,905
------------- --------------
SHAREHOLDERS' EQUITY:
Common stock, par value $0.02 per share;
authorized 50,000,000 shares; issued and
outstanding 7,700,807 shares 154,016 154,016
Paid-in capital 18,342,291 18,342,291
Accumulated deficit (13,666,113) (13,520,739)
Accumulated other comprehensive income 25,604 25,871
------------- --------------
TOTAL SHAREHOLDERS' EQUITY 4,855,798 5,001,439
------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 13,234,777 $ 13,372,249
============= ==============
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statement.
1
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
REVENUES
Real estate rental income $ 84,055 $ 146,221
----------- -----------
Total Revenues 84,055 146,221
----------- -----------
COSTS AND EXPENSES
Real estate operating expenses 74,342 85,342
Depreciation expense 98,676 91,312
Interest expense 62,344 62,178
----------- -----------
Total Costs and Expenses 235,362 238,832
----------- -----------
Loss Before Income Taxes (151,307) (92,611)
Income taxes - -
----------- -----------
Loss Before Minority Interest (151,307) (92,611)
Minority interest 5,933 2,631
----------- -----------
Net Loss (145,374) (89,980)
Other comprehensive income
Foreign currency translation (267) -
----------- -----------
Comprehensive Loss $ (145,641) $ (89,980)
=========== ===========
Weighted average shares outstanding:
Basic and diluted 7,700,807 7,700,807
=========== ===========
Basic and diluted loss per share $ (0.02) $ (0.01)
=========== ===========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statement.
2
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH
31, 2004 AND 2003
(UNAUDITED)
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(145,374) $ (89,980)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 98,676 91,312
Minority interest (5,933) (2,631)
Changes in operating assets and liabilities:
Decrease in due from related parties 93,935 378,385
Increase in accounts receivable (7,365) -
Increase in other assets (50) (45,802)
Increase(decrease) in accounts payable and accrued
liabilities 14,798 (124,973)
(Decrease) increase in taxes payable (535) 16,537
---------- ----------
Net cash used by operating activities (44,713) (155,537)
---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Advances from related parties 93,935 378,385
---------- ----------
Net cash provided by investing activities 93,935 378,385
---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES - -
---------- ----------
NET INCREASE IN CASH 48,152 222,848
Effect of exchange rate changes on cash 81 -
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 302,172 110
---------- ----------
CASH, END OF PERIOD $ 350,405 $ 222,958
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ - $ 120,482
========== ==========
Income taxes paid $ - $ -
========== ==========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statement.
3
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. REPORTING ENTITY
The condensed consolidated financial statements of Huayang International
Holdings, Inc. and Subsidiary (HIHI) (the "Company") 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 was incorporated under the laws of the State of Nevada in the United
States. HAITONG was incorporated under the laws of the People's Republic of
China (PRC).
2. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND FOOTNOTES
The interim condensed 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 consolidated 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
310(b) of Regulation S-B. 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 balance
sheet information as of December 31, 2003 was derived from the audited
consolidated financial statements included in the Company's Annual Report
Form 10-KSB. The condensed consolidated financial statements should be read
in conjunction with the Company's consolidated financial statements for the
year ended December 31, 2003 and notes thereto included in HIHI's Form
10-KSB.
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 consolidated
financial position of the Company as of March 31, 2004, the results of
operations for the three months ended March 31, 2004 and 2003,
respectively. Interim results are not necessarily indicative of full year
performance because of the impact of seasonal and short-term variations.
4
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. 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
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results when ultimately realized could
differ from those estimates.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments including cash and cash
equivalents, receivables, accounts payable and accrued expenses and debt,
approximates their fair value at March 31, 2004 and December 31, 2003 due
to the relatively short-term nature of these instruments.
5. GOING CONCERN
The Company's condensed consolidated financial statements have been
presented on the basis that it is a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The Company has a net loss of $145,374 for the three
months ended March 31, 2004, and has an accumulated deficit of$13,666,113
as of March 31, 2004. These matters raise substantial doubt its ability to
continue as a going concern.
The Company is dependent on the management company to collect revenues and
to make payments on a timely basis. As of March 31, 2004, the management
company owed the Company $11,608,509, against which $9,196,457 has been
provided as an allowance for doubtful accounts. The management company is a
related party and is controlled by the majority shareholder of the Company.
On January 30, 2004, the management company signed and executed a
promissory note for an amount of $2,532,000 in favor of the Company. The
promissory note is repayable by installments as follows:
Period Installment payment schedule
------ ----------------------------
Year 2004 Monthly installments of $24,000
Year 2005 Quarterly installments of $121,000
Year 2006 Quarterly installments of $181,000
First three quarters of year 2007 Quarterly installments of $266,000
Fourth quarter of year 2007 Final payment of $238,000
5
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. GOING CONCERN (CONT'D)
The promissory note bears interest at 5.5% per annum. In addition, the
promissory note is secured by a security agreement dated January 30, 2004
executed by the related company for the benefit of the Company whereby the
related company grants and conveys to the Company a security interest in
all of its fixed and current assets which it owns. According to the related
company's management accounts, the related company had unaudited total
assets and unaudited net assets of approximately $17.9 million and $6.2
million, respectively as of December 31, 2003.
Should the management company continue to fail to pay obligations as they
fall due, it could impair the ability of the Company to continue as a going
concern. Management of the Company believe that sufficient funding will be
available to meet operating needs of the Company.
6. REAL ESTATE RENTAL PROPERTY AND REAL ESTATE HELD FOR DEVELOPMENT AND SALE
As of March 31, 2004, real estate comprised the following:
Held for rental Held for sale
----------------- ---------------
Cost $ 17,769,956 $ 3,788,179
Less: Accumulated depreciation and
amortization (1,517,106) -
Provision for impairment (9,660,942) (1,184,719)
----------------- ---------------
Net book value $ 6,591,908 $ 2,603,460
================= ===============
7. BANK LOANS
The Company's bank loans bear interests at a rate of 6.44% per annum and
are secured by the Company's real estate and guaranteed by its subsidiary
HAITONG. The bank loans are currently in default and management is working
with the respective banks to extend the repayment terms or sell certain
properties to offset the loan balance with the proceeds. According to the
terms in of the loan agreements, the banks have the right to impose default
interests at a daily rate of 0.021%.
6
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share is computed similar to basic
earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if the
potential common shares have been issued and if the additional common
shares were dilutive. There are no differences between basic and diluted
EPS as of March 31, 2004 and 2003 as the effect would be anti-dilutive.
9. TAXES
Taxes are calculated on a separate entity basis because consolidation is
not allowed for tax purposes in the PRC. Any tax benefit arising from the
operating losses in the United States of America is fully offset by a
valuation allowance.
It is management's intention to reinvest all the income attributable to the
Company earned by its operations outside the United States of America.
Accordingly, no United States of America corporate income taxes have been
provided in these consolidated financial statements, companies with
operations in the PRC may be subject to PRC income tax. The PRC statutory
income tax rate for the company is 33%. There are no income taxes on
capital gains.
In addition, the Company is required to pay Business Tax (5%) and Land
Value Added Tax (1%) on certain real estate sales. The Company is required
to pay Business Tax (5%) and Real Estate Tax (12%) on rental income.
7
Item 2. Management's Discussion and Analysis or Plan of Operation
FORWARD-LOOKING STATEMENTS
The following discussion of the financial condition and results of operations
should be read in conjunction with our consolidated financial statements and
related notes thereto. The following discussion contains forward-looking
statements. Huayang International Holdings, Inc. is referred to herein as "the
Company", "we" or "our." The words or phrases "would be," "will allow," "intends
to," "will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements". Such statements include those concerning our
expected financial performance, our corporate strategy and operational plans.
Actual results could differ materially from those projected in the
forward-looking statements as a result of a number of risks and uncertainties,
including: (a) our attempt to enter into the technology sector and whether we
can successfully incorporate such business into our operations; (b) our low cash
balances which may impede our ability to grow our business and compete against
our competitors and other liquidity related risks discussed below under
"Liquidity and Capital Resources"; (c) any economic, political, regulatory,
legal and social conditions in China that may negatively affect our business;
and (d) our dependence upon funding from related companies. Statements made
herein are as of the date of the filing of this period report with the
Securities and Exchange Commission and should not be relied upon as of any
subsequent date. Unless otherwise required by applicable law, we do not
undertake, and we specifically disclaim any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statements.
FIRST QUARTER OVERVIEW
During the first quarter of 2004, the Company continued its business to sell and
lease its real estate properties in the Huayang International Mansion
("Mansion"). The Company conducts its real estate business primarily through its
95% owned subsidiary Shenyang Haitong House Properties Development Co., Ltd.
("Haitong").
RESULTS OF OPERATIONS - Three months ended March 31, 2004
Revenues
Real estate rental income for the three months ended March 31, 2004 were
$84,055, down 42.5% from $146,221 for the three months ended March 31, 2003.
The reasons for the significant drop included (1) the average rent per square
meter has decreased due to competition from two new office towers near the
Company's property; and (2) the total area leased out decreased by 24% due to
the declining property market condition following the outbreak of Severe Acute
Respiratory Syndrome (or known as SARS, an atypical pneumonia which was first
reported and recognized in February 2003) in China around mid 2003.
8
Costs and Expenses
Total costs and expenses in the three months ended March 31, 2004 were $235,362,
which decreased slightly by 1.5% from $238,832 of total costs and expenses in
the three months ended March 31, 2003.
For the three months ended March 31, 2004, depreciation expenses increased by
8.1% to $98,676 from $91,312 for the same period in 2003. Interest expenses for
the three months ended March 31, 2004 was $62,344, which increased only slightly
by 0.3% from $62,178 for the three months ended March 31, 2003, because bank
loans remain at the same level. On the other hand, real estate operating
expenses decreased by 12.9% to $74,342 from $85,342 in the same period in 2003
because the Company refurbished the lobby of its real estate in 2003.
Net Loss
For the three months ended March 31, 2004, net loss was $145,374, as compared to
$89,980 for the three months ended March 31, 2003. Net loss per share, basic
and diluted, was $0.02 for the three months ended March 31, 2004, as compared to
$0.01 for the same period in 2003. The widening of loss was caused by the
significant decrease in rental income as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's condensed consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
Company has a net loss of $145,374 for the three months ended March 31, 2004,
and has an accumulated deficit of$13,666,113 as of March 31, 2004. These matters
raise substantial doubt its ability to continue as a going concern.
Our liquidity consists of cash, receivables and receipts from rental activities.
As of March 31, 2004, our cash balance was $350,405. Our past operations were
supported by related companies which from time to time lent funds to us.
However, such financing from related companies may not always be available, and
the Company may need to secure further financing to support its operations.
Future cash needs may 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 or may not be available to us.
As of March 31, 2004, a related company owed to us in the amount of $2,412,052
(net of allowance for doubtful accounts of $9,196,457), against which the
related company has signed and executed a promissory note for an amount of
$2,532,000 dated January 30, 2004 in favor of the Company. The promissory note
is repayable by installments as follows:
9
Period Installment payment schedule
------ ----------------------------
Year 2004 Monthly installments of $24,000
Year 2005 Quarterly installments of $121,000
Year 2006 Quarterly installments of $181,000
First three quarters of year 2007 Quarterly installments of $266,000
Fourth quarter of year 2007 Final payment of $238,000
The promissory note bears interest at 5.5% per annum. In addition, the
promissory note is secured by a security agreement dated January 30, 2004
executed by the related company for the benefit of the Company whereby the
related company grants and conveys to the Company a security interest in all of
its fixed and current assets which it owns. According to the related company's
management accounts, the related company had unaudited total assets and
unaudited net assets of approximately $17.9 million and $6.2 million,
respectively as of December 31, 2003.
We do not have any material commitments for capital expenditures for the year
ending December 31, 2004. We anticipate, based on the scale of our existing
operations and apart from the requirement to repay our bank loans as discussed
below, that our projected cash flows from operations would be sufficient to
support our planned operations for the next twelve months.
Our projection of future cash requirements is affected by numerous factors,
including but not limited to, changes in customer receipts, real estate industry
trends, operating cost fluctuations, and unplanned capital spending.
As of March 31, 2004, we had total bank debt of $3,298,257. We also owed
$1,760,770 to related parties. 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 our 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 bank debt is secured by properties in the Mansion. As of March 31,
2004, our lenders held an aggregate of $3,298,257 of liens against the Mansion
as security for bank loans of the same amount. We are in default under such bank
loans. The loans are immediately due and payable and the bank may foreclose on
the Mansion, which would have a material adverse effect on us. We are currently
working with the respective banks to extend the repayment terms or sell certain
properties to offset the loan balance with the proceeds.
10
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
consolidated 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 consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of change in the value of short term investments
and financial instruments caused by fluctuations in investment prices, 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 vary, these results, when translated, may vary from expectations
and adversely impact overall expected profitability.
The effect of foreign exchange rate fluctuations on the Company for the three
months ended March 31, 2004 was immaterial.
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, 2004 and has no plans to do so within the next twelve months.
Item 3. Controls and Procedures
As of the end of the period covered by this report, the Company conducted an
evaluation under the supervision and with the participation of the principal
executive officer and principal financial officer, of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation,
the principal executive officer and the principal financial officer concluded
that the Company's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to, nor are any of our respective properties the subject of,
any material pending legal or arbitration proceeding.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon 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
(a) Exhibits
Exhibit
Number Description
------- -----------
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer Pursuant to Rule
13a-14(b) and 18 U.S.C. Section 1350
32.2 Certification by Chief Financial Officer Pursuant to Rule
13a-14(b) and 18 U.S.C. Section 1350
(b) Reports on Form 8-K
There was no report filed on the Form 8-K during the three months ended
March 31, 2004.
12
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
authorized.
Huayang International Holdings, Inc.
/s/ Gao Wanjun
------------------------------------
Name: Gao Wanjun
Title: Chairman, President and
Chief Executive Officer
Date:
/s/ Wang Yufei
------------------------------------
Name: Wang Yufei
Title: Secretary, Chief Financial
Officer and Director
Date:
13