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 June 30, 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
Incorporation) Identification No.)
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 June 30,
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 4-8
Item 2. Management's Discussion and Analysis or Plan of Operation 9-14
Item 3. Controls and Procedures 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
(Unaudited)
------------- --------------
ASSETS
- ------
Real estate rental property, net $ 6,585,716 $ 6,681,080
Real estate held for development and sale 2,487,164 2,603,586
Cash and cash equivalents 258,636 302,172
Accounts receivable 33,919 520
Note receivable from related company 2,388,000 -
Due from related company, net 175,504 2,505,987
Property and equipment, net 1,233,572 1,252,909
Other assets 25,800 25,995
------------- --------------
TOTAL ASSETS $ 13,188,311 $ 13,372,249
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
LIABILITIES:
Accounts payable and accrued liabilities $ 54,370 $ 155,833
Accrued interest 730,339 605,650
Bank loans 3,298,456 3,298,416
Due to related parties 1,778,157 1,778,157
Taxes payable 2,359,227 2,348,849
Minority interest 176,019 183,905
------------- --------------
TOTAL LIABILITIES 8,396,568 8,370,810
------------- --------------
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 (13,730,595) (13,520,739)
Accumulated other comprehensive income 26,031 25,871
------------- --------------
TOTAL SHAREHOLDERS' EQUITY 4,791,743 5,001,439
------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 13,188,311 $ 13,372,249
============= ==============
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
REVENUES
Real estate sales $ 48,532 $ - $ 48,532 $ -
Real estate rental income 78,221 144,877 162,276 291,098
Interest income 69,930 - 69,930 -
----------- ----------- ----------- -----------
Total Revenues 196,383 144,877 280,438 291,098
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Cost of real estate sold 116,452 - 116,452 -
Real estate operating expenses 67,895 129,023 142,237 214,365
Depreciation expense 16,120 102,132 114,796 193,444
Interest expense 62,351 63,547 124,695 125,725
Other operating expenses - 723 - 723
----------- ----------- ----------- -----------
Total Costs and Expenses 262,818 295,425 498,180 534,257
----------- ----------- ----------- -----------
Loss Before Income Taxes (66,435) (150,548) (217,742) (243,159)
Income taxes - - - -
----------- ----------- ----------- -----------
Loss Before Minority Interest (66,435) (150,548) (217,742) (243,159)
Minority interest in loss of
subsidiary 1,953 5,527 7,886 8,158
----------- ----------- ----------- -----------
Net Loss (64,482) (145,021) (209,856) (235,001)
Other comprehensive income
Foreign currency translation 427 - 160 -
----------- ----------- ----------- -----------
Comprehensive Loss $ (64,055) $ (145,021) $ (209,696) $ (235,001)
=========== =========== =========== ===========
Weighted average shares
outstanding:
Basic and diluted 7,700,807 7,700,807 7,700,807 7,700,807
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.01) $ (0.02) $ (0.03) $ (0.03)
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(209,856) $(235,001)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 114,796 193,444
Minority interest in loss of subsidiary (7,886) (8,158)
Changes in operating assets and liabilities:
Decrease in real estate held for development and sale 116,422 -
Increase in accounts receivable (33,399) -
Decrease (increase) in other assets 195 (122,605)
(Decrease) increase in accounts payable and accrued
liabilities (101,463) 75,876
Increase in accrued interest 124,689 -
Increase (decrease) in taxes payable 10,378 (90,652)
---------- ----------
Net cash provided by (used in) operating activities 13,876 (187,096)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in amount due from related parties (201,517) 310,276
Repayment of note receivable 144,000 -
Purchase of equipment - (2,676)
---------- ----------
Net cash (used in) provided by investing activities (57,517) 307,600
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES - -
---------- ----------
NET (DECREASE) INCREASE IN CASH (43,641) 120,504
Effect of exchange rate changes on cash 105 -
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 302,172 110
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 258,636 $ 120,614
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ - $ 125,725
========== ==========
Income taxes paid $ - $ -
========== ==========
<FN>
In January 2004, the Company exchanged net amounts due from a related party for
a $2,532,000 note receivable.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
(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 that report.
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 June 30, 2004, the results of
operations for the three and six months ended June 30, 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
AS OF JUNE 30, 2004
(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. LOSS PER SHARE
Basic loss per share is computed by dividing loss available to common
shareholders by the weighted-average number of common shares outstanding
during the period. Diluted loss per share is computed similar to basic loss
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 loss per share
as of June 30, 2004 and 2003 as the effect of additional common share
equivalents would be anti-dilutive.
5. 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 June 30, 2004 and December 31, 2003 due to
the relatively short-term nature of these instruments.
6. 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 $209,856 and a negative
cash flow of $43,641 for the six months ended June 30, 2004, and has an
accumulated deficit of $13,730,595 as of June 30, 2004. These matters raise
substantial doubt its ability to continue as a going concern.
5
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
(UNAUDITED)
6. GOING CONCERN (CONTINUED)
The Company is dependent on the management company to collect revenues and
to make payments on a timely basis. As of June 30, 2004, the management
company owed the Company $11,760,517 in aggregate, against which $9,197,013
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. This amount was previously disclosed as due from related company
in the condensed consolidated balance sheet at December 31, 2003. 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
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 management company for the benefit of the Company whereby
the management company grants and conveys to the Company a security
interest in all of its fixed and current assets which it owns. According to
the management company's management accounts, the management company had
unaudited total assets and unaudited net assets of approximately $17.9
million and $6.2 million, respectively as of December 31, 2003.
During the six months ended June 30, 2004, the management company repaid
$144,000 to the Company in accordance with the installment payment schedule
as above. However, no interest payment was made by the management company.
As of June 30, 2004, the balance of the note receivable was $2,388,000.
Accrued interest income of $69,930 has been recorded in amount due from
related company.
During the six months ended June 30, 2004, the Company made further
advances of $306,142 to the management company for its payment to the
maintenance fund of the real estate.
6
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
(UNAUDITED)
6. GOING CONCERN (CONTINUED)
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.
7. REAL ESTATE RENTAL PROPERTY AND REAL ESTATE HELD FOR DEVELOPMENT AND SALE
As of June 30, 2004, real estate comprised the following:
Held for Rental Held for Sale
----------------- ---------------
Cost $ 17,771,030 $ 3,671,954
Less: Accumulated depreciation and
amortization (1,523,788) -
Provision for impairment (9,661,526) (1,184,790)
----------------- ---------------
Real estate, net $ 6,585,716 $ 2,487,164
================= ===============
8. 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 of the loan agreements, the banks have the right to impose default
interests at a daily rate of 0.021% and the Company is accruing interest at
the default rate.
9. SUBSEQUENT EVENT
On August 5, 2004, the Company completed a share exchange (the "Exchange")
with the stockholders of China Carbon Black Holding Company Limited, a Hong
Kong corporation ("CCB") pursuant to the terms of an Agreement for Share
Exchange, dated July 15, 2004. In the Exchange, the Company acquired all of
the issued and outstanding stock of CCB in exchange for the issuance of
36,000,000 shares of its common stock.
7
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2004
(UNAUDITED)
9. SUBSEQUENT EVENT (CONTINUED)
At the time of execution of the Agreement for Share Exchange, and
immediately prior to completion of the Exchange, the Company had a total of
7,700,807 shares issued and outstanding. However, in conjunction with, and
as a condition to, completion of the Exchange, a principal shareholder of
the Company, Gao Wan Jun, agreed to surrender a total of 5,460,000 of his
shares following completion of the Exchange.
The Exchange resulted in a change of voting control of the Company. Upon
completion of the Exchange and the related share cancellation and share
issuances described above, the Company has a total of 38,240,807 shares
issued and outstanding, of which 30,178,382, or approximately 78.92%, are
owned by persons who were previously stockholders of CCB.
There has not yet been any change in the officers and directors of the
Company subsequent to completion of the Exchange.
CCB owns 100% of Xin Jiang YaKeLa Carbon Black Limited ("YaKeLa"), a
leading energy company in China engaged in natural gas and natural gas
by-product production. Located at the Xin Jiang desert region at the North
Western China, YaKeLa has obtained the license right to extract natural gas
in Xin Jiang - YaKeLa natural gas field, one of the biggest natural gas
field in China with over 50 billion cubic meters natural gas reserve.
Xin Jiiang - YaKeLa natural gas field provides one of the best quality
natural gas in China without any contamination by impurities of carbon
dioxide and nitride compounds.
With its own extraction facilities established at the center of the
XinJiang-YaKeLa natural gas field, YaKeLa is capable of a full scale
extraction of natural gas to sell to various provinces in China. YaKeLa
also produces fine quality carbon black as a by-product of natural gas.
Furthermore, YaKeLa supplies hot air through its air tunnels to nearby
factories and offices to support their warmers and heaters during winter
seasons.
10. RECLASSIFICATION
Certain 2003 balances have been reclassified to conform to the 2004
presentation.
8
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.
SECOND QUARTER OVERVIEW
During the second 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 June 30, 2004
Revenues
During the three months ended June 30, 2004, the Company recorded real estate
sales of $48,532. No real estate sales were made during the three months ended
June 30, 2003.
Real estate rental income for the three months ended June 30, 2004 was $78,221,
down 46% from $144,877 for the three months ended June 30, 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 20% 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.
9
For the three months ended June 30, 2004, the Company recorded interest income
of $69,930 on the promissory note receivable from the related company. While the
promissory note was executed on January 30, 2004, there was no interest income
for the same period in 2003.
Costs and Expenses
Total costs and expenses for the three months ended June 30, 2004 were $262,818,
which decreased by 11% from $295,425 of total costs and expenses in the three
months ended June 30, 2003.
For the three months ended June 30, 2004, $116,452 was recorded as the cost of
real estate sold. As the corresponding sales were only $48,523, there was a
gross loss of $67,920 on the sale of real estate for the three months ended June
30, 2004. There was no real estate sold during the three months ended June 30,
2003.
For the three months ended June 30, 2004, depreciation expense decreased by
84.2% to $16,120 from $102,132 for the same period in 2003 because the carrying
values of the investment properties and properties held for sale were written
down for impairment by an aggregate amount of approximately $10.8 million at the
end of year 2003. Interest expense for the three months ended June 30, 2004 was
$62,351, which decreased only slightly by 1.9% from $63,547 for the same period
in 2003, because bank loans remain at the same level. On the other hand, real
estate operating expenses for the three months ended June 30, 2004 decreased by
47.4% to $67,895 from $129,023 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 June 30, 2004, the net loss was $64,482, as compared
to $145,021 for the three months ended June 30, 2003. Net losses per share,
basic and diluted, for the three months ended June 30, 2004 was $0.01 as
compared to $0.02 for 2003. The decrease in net loss was mainly due to the
interest income on the promissory note receivable from the related company.
10
RESULTS OF OPERATIONS - Six months ended June 30, 2004
Revenues
During the six months ended June 30, 2004, the Company recorded real estate
sales of $48,532. No real estate sales were made during the six months ended
June 30, 2003.
Real estate rental income for the six months ended June 30, 2004 was $162,276,
down 44.3% from $291,098 for the six months ended June 30, 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 22% 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.
For the six months ended June 30, 2004, the Company recorded interest income of
$69,930 on the promissory note receivable from the related company. While the
promissory note was executed on January 30, 2004, there was no interest income
for the same period in 2003.
Costs and Expenses
Total costs and expenses for the six months ended June 30, 2004 were $498,180,
which decreased by 6.8% from $534,257 of total costs and expenses in the six
months ended June 30, 2003.
For the six months ended June 30, 2004, $116,452 was recorded as the cost of
real estate sold. As the corresponding sales were only $48,523, there was a
gross loss of $67,920 on the sale of real estate for the six months ended June
30, 2004. There was no real estate sold during the six months ended June 30,
2003.
For the six months ended June 30, 2004, depreciation expense decreased by 40.7%
to $114,796 from $193,444 for the same period in 2003 because the carrying
values of the investment properties and properties held for sale were written
down for impairment by an aggregate amount of approximately $10.8 million at the
end of year 2003. Interest expense for the six months ended June 30, 2004 was
$124,695, which decreased only slightly by 0.8% from $125,725 for the same
period in 2003, because bank loans remain at the same level. On the other hand,
real estate operating expenses for the six months ended June 30, 2004 decreased
by 33.6% to $142,237 from $214,365 in the same period in 2003 because the
Company refurbished the lobby of its real estate in 2003.
Net Loss
For the six months ended June 30, 2004, the net loss was $209,856, as compared
to $235,001 for the six months ended June 30, 2003. Net losses per share, basic
and diluted, for the six months ended June 30, 2004 and 2003 were both $0.03.
11
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 $209,856 and a negative cash flow of $43,641 for the
six months ended June 30, 2004, and has an accumulated deficit of $13,730,595 as
of June 30, 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 June 30, 2004, our cash balance was $258,636. 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 June 30, 2004, the management company owed the Company $11,760,517 in
aggregate, against which $9,197,013 has been provided as an allowance for
doubtful accounts. On January 30, 2004, the related company signed and executed
a promissory note for an amount of $2,532,000 in favor of the Company. This
amount was previously disclosed as due from related company in the condensed
consolidated balance sheet at December 31, 2003. 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
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.
During the six months ended June 30, 2004, the management company repaid
$144,000 to the Company in accordance with the installment payment schedule as
above. However, no interest payment was made by the management company. As of
June 30, 2004, the balance of the note receivable was $2,388,000. Accrued
interest income of $69,930 has been recorded in due from related company.
12
During the six months ended June 30, 2004, the Company made further advances of
$306,142 to the management company for its payment to the maintenance fund of
the real estate.
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 June 30, 2004, we had total bank debt of $3,298,456 which is in default.
We also owed $1,778,158 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 June 30,
2004, our lenders held an aggregate of $3,298,456 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.
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.
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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
and six months ended June 30, 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 June
30, 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.
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.
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Item 3. Defaults Upon Senior Securities
As of June 30, 2004, we had total bank debt of $3,298,456 which is in default.
All of our bank debt is secured by properties in the Mansion. As of June 30,
2004, our lenders held an aggregate of $3,298,456 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.
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
During the six months ended June 30, 2004, the Company filed the following
reports on the Form 8-K:
Form Filing date Event reported
- ---- ----------------- -------------------------------------
8-K February 19, 2004 A report on Form 8-K (item 4), which
announced the change in the Company's
certifying accountants
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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: August 19, 2004
/s/ Wang Yufei
------------------------------------
Name: Wang Yufei
Title: Secretary, Chief Financial
Officer and Director
Date: August 19, 2004
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