UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 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 No. 0-29015
HUAYANG INTERNATIONAL HOLDINGS, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 58-1667944
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
386 Qingnian Avenue, Shenyang, China 110004
(Address of principal executive offices)
(86)(24) 2318-0688
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [X] No [ ]
The number of shares outstanding of each of the issuer's class of equity as of
the latest practicable date is stated below:
Title of each class of Common Stock Outstanding as September 30, 2004
- --------------------------------------------------------------------------------
Common Stock, $0.02 par value 38,240,807
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
HUAYANG INTERNATIONAL HOLDINGS, INC.
FORM 10-QSB
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet 1
Condensed Consolidated Statements of Operations and
Comprehensive Loss 2
Consolidated statement of shareholder's equity 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5-18
Item 2. Management's Discussion and Analysis or Plan of Operation 19-23
Item 3. Controls and Procedures 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
------
SEPTEMBER 30,
2004
------------
UNAUDITED
------------
Current assets:
Cash and cash equivalents $ 182,701
Accounts receivable 1,410,228
Inventory 384,371
Notes receivable 506,399
Other receivable 12,463
Advance to suppliers 73,093
Due from related parties 1,514
------------
Total current assets 2,570,769
Property, plant and equipment, net 2,866,474
------------
Total assets $ 5,437,243
============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Current liabilities:
Accounts payable $ 683,278
Customer deposits 128,120
Other payable 68,421
Taxes payable 102,847
Payroll and welfare payable 63,225
Due to related parties 196,994
------------
Total current liabilities 1,242,885
------------
Total liabilities 1,242,885
------------
Shareholders' equity:
Common stock, par value $0.02 per share;
authorized 50,000,000 shares; issued and
outstanding 38,240,807 shares 764,816
Additional paid-in capital 4,513,556
Accumulated deficit (1,084,282)
Accumulated other comprehensive income 268
------------
Total shareholders' equity 4,194,358
------------
Total liabilities and shareholders' equity $ 5,437,243
============
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 INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 and 2003 (UNAUDITED)
------------- ------------- ------------- -------------
2004 2004 2003 2003
------------- ------------- ------------- -------------
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
------------- ------------- ------------- -------------
REVENUES $ 967,511 $ 2,762,858 $ 1,317,754 $ 3,060,376
COST OF GOODS SOLD 708,532 1,998,978 888,559 2,053,748
------------- ------------- ------------- -------------
GROSS PROFIT 258,979 763,880 429,195 1,006,628
General and administrative expenses 38,645 177,627 40,819 125,122
Selling and distribution expenses 104,473 338,025 81,446 205,904
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 115,861 248,228 306,930 675,602
Interest income 127 248 81 108
Other income/(loss), net (60) 45,087 (110) 66,745
------------- ------------- ------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
DISCONTINUED OPERATIONS 115,928 293,563 306,901 742,455
Income taxes -- -- -- --
------------- ------------- ------------- -------------
INCOME BEFORE DISCONTINUED OPERATIONS 115,928 293,563 306,901 742,455
Loss from discontinued operations (73,694) (223,535) -- --
Loss from disposal of discontinued operations (1,580,032) (1,580,032) -- --
------------- ------------- ------------- -------------
Loss from discontinued operations, net (1,653,726) (1,803,567) -- --
NET LOSS (1,537,798) (1,510,004) 306,901 742,455
FOREIGN CURRENCY TRANSLATION LOSS -- (218) 26 134
------------- ------------- ------------- -------------
COMPREHENSIVE (LOSS) INCOME $ (1,537,798) $ (1,510,222) $ 306,927 $ 742,589
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 37,388,326 36,466,153 36,000,000 36,000,000
BASIC AND DILUTED LOSS PER SHARE
Income per common share from continuing
operations, basic and diluted -- 0.01 0.01 0.02
Net loss per common share from discontinued
operations, basic and diluted (0.04) (0.05) -- --
Net income/(loss) per common share,
basic and diluted (0.04) (0.04) 0.01 0.02
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
2
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
ACCUMULATED
ACCUMULATED OTHER
COMMON STOCK ADDITIONAL EARNINGS COMPREHENSIVE
SHARES AMOUNT PAID-IN CAPITAL (DEFICIT) INCOME TOTAL
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AS OF JANUARY 1,2004 36,000,000 $ 720,000 $ 4,558,372 $ 425,722 $ 50 $ 5,704,144
Reverse merger adjustment 2,240,807 44,816 (44,816) -- -- --
Net loss -- -- -- (1,510,004) -- (1,510,004)
Foreign currency translation gain -- -- -- -- 218 218
------------ ------------ ------------ ------------ ------------ ------------
BALANCE AS OF SEPTEMBER 30, 2004
38,240,807 $ 764,816 $ 4,513,556 $(1,084,282) $ 268 $ 4,194,358
============ ============ ============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,510,004) $ 742,455
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Loss from discontinued operations, net 1,803,567 --
(Gain)/loss from non-monetary transactions (29,165) 38,324
Depreciation 251,060 1,056,804
CHANGES IN OPERATING ASSETS AND LIABILITIES
DECREASE (INCREASE) IN
Accounts receivable (515,221) (1,263,042)
Other receivable and advance to suppliers 33,370 129,415
Inventory 276,681 52,055
INCREASE (DECREASE) IN
Accounts payable (136,224) 1,005,079
Customer deposits 51,939 (68,648)
Other payable and accrued liabilities 122,584 7,989
Taxes payables (31,444) 91,757
Payroll & welfare payables 4,377 31,835
------------ ------------
Net Cash Provided By Operating Activities 321,520 1,824,023
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (12,190) (730,190)
------------ ------------
Net Cash Used In Investing Activities (12,190) (730,190)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes receivable (494,317) (327,987)
Funds (advanced) received from related parties 184,430 (728,376)
------------ ------------
Net Cash Provided By Financing Activities (309,887) (1,056,363)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (557) 37,470
Effect of exchange rate changes on cash 50 134
Cash and cash equivalents, beginning of year 183,208 53,889
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR 182,701 91,493
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
During the first to third quarter of 2004, the Company had the following
non-monetary transactions.
- - Received inventories valued at $109,779 in settlement of outstanding
accounts receivable of $109,779.
- - Inventories, with a book value of $109,779 were exchanged for motor
vehicles, valued at $138,944 resulting in a gain of $29,165.
During the nine months ended September 30, 2003, the Company received
inventories, valued at $1,190,883 for settling an outstanding balance of
accounts receivable, of $1,190,883 and inventories, with a book value of 123,237
were exchanged for motor vehicles, valued at $84,913 resulting in loss of
38,324.
5
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The interim condensed consolidated financial statements presented
herein have been prepared by the Company and include the unaudited
accounts of Huayang International Holdings, Inc. and Subsidiary (the
"Company" or "HIHI") and its subsidiary China Carbon Black Holdings
Company Limited ("CCB"). All significant inter-company accounts and
transactions have been eliminated in the consolidation.
On September 20, 2004 and September 30, 2004, the Company filed a
preliminary schedule 14C information statement pursuant to section
14(c) of the Securities Exchange Act of 1934 and definite schedule
14C information statement pursuant to section 14(c) of the Securities
Exchange Act of 1934, respectively, to file an Amendment with the
Nevada Secretary of State to change the name of the Company to "China
Energy and Carbon Black Holdings, Inc."
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 financial statements should be read in
conjunction with the company's annual report Form 10KSB.
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 September 30,
2004, the results of operations for the three and nine months ended
September 30, 2004 .
Interim results are not necessarily indicative of full year
performance because of the impact of seasonal and short-term
variations.
NOTE 2 - NATURE OF COMPANY
HIHI was incorporated under the laws of the State of Nevada in the
United States. The condensed consolidated financial statements of the
Company reflect the activities of its subsidiary CCB, a Company
incorporated under the laws of Hong Kong SAR ("Hong Kong").
CCB was a new subsidiary currently acquired by HIHI during the
current quarter. On August 5, 2004, the Company completed a share
exchange (the "Exchange") with the stockholders of 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. The Exchange resulted in a change of voting control of
the Company. Also see Note 10.
6
CCB owns 100% of Xin Jiang YaKeLa Carbon Black Limited ("YaKeLa").
From 2002 to 2004, YaKeLa mainly engaged in the business of sales and
manufacturing of carbon black, a black powder made partly from the
burning of natural gas. The product is used for making rubber tires
and other rubber products. Starting in 2005 YaKeLa, with its own
extraction facilities, will be capable of a full-scale extraction of
natural gas to generate electricity and supply it to a nearby factory
through its own power generators and power transmission networks.
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
and which provides one of the best quality natural gas in China
without any contamination by impurities of carbon dioxide and nitride
compounds.
On September 30, 2004, the Company entered into an Agreement for Sale
of Stock (the "Sales Stock Agreement") with Mr. Gao Wan Jun, a
shareholder of the Company and former Chief Executive Officer of the
Company. Pursuant to the Sales Stock Agreement, the Company agreed to
sell the 95% ownership interest in HAITONG owned by the Company to
Mr. Gao Wan Jun. The closing under the Sale Stock Agreement was
completed on September 30, 2004 and the Company transferred the 95%
ownership interest in HAITONG to Mr. Gao Wan Jun and on this closing
date and thereafter, HAITONG ceased to be a consolidated subsidiary
of the Company and is reported as discontinued operations in the
condensed consolidated finaincial statement.
Therefore, as a result of the Exchange of CCB and Sales Stock
Agreement for HAITONG, the Company reported CCB as a 100% owned
subsidiary of the Company while HAITONG as a business unit on
discontinued operations in all of the Company's condensed
consolidated financial statements. Also see Note 11.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Economic and Political Risks
The Company's operations are conducted in the PRC. Accordingly, the
Company's business, financial condition and results of operations may
be influenced by the political, economic and legal environments in
the PRC, and by the general state of the PRC economy.
The Company's operations in the PRC are subject to special
considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks
associated with, among others, the political, economic and legal
environments and foreign currency exchange. The Company's results may
be adversely affected by changes in the political and social
conditions in the PRC, and by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation,
among other things.
(b) Concentration of credit risk
The Company has four major customers who accounted for the following
percentage of total sales and total accounts receivable as of
September 30, 2004 and for nine months ended September 30, 2004 and
2003:
7
Sales Accounts Receivable
Major Customers 2004 2003 September 30, 2004
- --------------- ---- ---- ------------------
Company A 22% 21% 19%
Company B 0% 11% 0.1%
Company C 5% 9% 0%
Company D 35% 24% 42%
The Company has two major suppliers of natural gas who accounted for
the following percentage of total purchases and total accounts
payable as of September 30, 2004 and for nine months ended September
30, 2004 and 2003:
Purchases Accounts Payable
Major Suppliers 2004 2003 September 30, 2004
- --------------- ---- ---- ------------------
Company E 54% 11% 14%
Company F 0% 35% 56%
(c) Property, Plant and Equipment
Property, plant and equipment are carried at cost less accumulated
depreciation. Depreciation is provided over their respective
estimated useful lives, using the straight-line method. Estimated
useful lives of the property, plant and equipment are as follows:
Buildings 20 years
Machinery and equipment 10 years
Motors vehicles 5 years
Furniture and fixtures 5 years
The cost and related accumulated depreciation of assets sold or
otherwise retired are eliminated from the accounts and any gain or
loss is included in the statement of operations. The cost of
maintenance and repairs is charged to income as incurred, whereas
significant renewals and betterments are capitalized.
(d) Impairment of Long-Term Assets
Long-term assets of the Company are reviewed annually as to whether
their carrying value has become impaired, pursuant to the guidelines
established in Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets". The Company also re-evaluates the periods of amortization to
determine whether subsequent events and circumstances warrant revised
estimates of useful lives.
(e) Accounts and Other Receivables
Accounts and other receivables are recognized and carried at original
invoice amount less allowance for any uncollectible amounts. An
estimate for doubtful accounts is made when collection of the full
amount is no longer probable. Bad debts are written off as incurred.
There was no reserve for doubtful accounts at September 30, 2004.
8
(f) Inventories
Inventories are stated at the lower of cost and net realizable value.
Finished goods are determined on the weighted average cost basis and
are comprised of direct materials, direct labor and an appropriate
proportion of overhead. The cost of packing materials and supplies is
determined on the basis of weighted average.
Net realizable value is based on estimated selling prices less any
further costs expected to be incurred for completion and disposal.
(g) Cash and Cash Equivalents
For financial reporting purpose, the Company considers all highly
liquid investments purchased with original maturity of three months
or less to be cash equivalents. The Company maintains no bank
accounts in the United States of America.
(h) Fair Value of Financial Instruments
The Company's financial instruments include cash and cash
equivalents, accounts receivable, notes receivable, other
receivables, advances to customers, accounts payable, accrued
expenses, customer deposits and amounts due to/from related parties.
Management has estimated that the carrying amount approximates fair
values due to their short-term nature.
(i) Revenue Recognition
Revenue represents the sale of carbon black and other non-monetary
transactions, which is recognized upon the delivery of goods to
customers, and acceptance by the customers.
(j) Retirement Benefits
Retirement benefits are charged to operation at 14% of the payroll
cost in the form of contributions under defined contribution
retirement plans to the relevant authorities. As of September 30,
2004 and December 31 2003, the accrued retirement benefits payable
were $ 48,958 and $34,314, respectively. The retirement benefits
charged to operations were $22,336 and $40,914 in 9 months ended
September 30 2004 and in year 2003, respectively.
(k) Foreign Currency Translation
The accompanying condensed consolidated financial statements are
presented in United States dollars. The functional currency of the
Company is the Renminbi (RMB). The financial statements are
translated into United States dollars from RMB at year-end exchange
rates as to assets and liabilities and average exchange rates as to
revenues and expenses. Capital accounts are translated at their
historical exchange rates when the capital transactions occurred.
September 30, 2004
-------------------
Year end RMB : US$ exchange rate 8.2766
Average yearly RMB : US$ exchange rate 8.2766
The RMB is not freely convertible into foreign currency and all
foreign exchange transactions must take place through authorized
institutions. No representation is made that the RMB amounts could
have been, or could be, converted into US$ at the rates used in
translation.
9
(l) Income Taxes
The Company accounts for income tax using an asset and liability
approach and allows for recognition of deferred tax benefits in
future years. Under the asset and liability approach, deferred taxes
are provided for the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is more
likely than not these items will either expire before the Company is
able to realize their benefits, or that future utilization is
uncertain.
(m) Reserve Funds
In accordance with the PRC Companies Law, the Company is required to
transfer a percentage of its profit after taxation, as determined in
accordance with PRC accounting standards and regulations, to the
surplus reserve funds. The surplus reserve funds are comprised of the
statutory surplus reserve fund and the public welfare fund. Subject
to certain restrictions set out in the PRC Companies Law, the
statutory surplus reserve fund may be distributed to stockholders in
the form of share bonus issues and/or cash dividends. The public
welfare fund is non-distributable and must be used for capital
expenditures on staff welfare facilities.
(n) 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.
(o) Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, established standards
for the reporting and display of comprehensive income, its components
and accumulated balances in a full set of general purpose financial
statements. SFAS No. 130 defines comprehensive income to include all
changes in equity except those resulting from investments by owners
and distributions to owners. Among other disclosures, SFAS No. 130
requires that all items that are required to be recognized under
current accounting standards as components of comprehensive income be
reported in a financial statement that is presented with the same
prominence as other financial statements. The Company's only current
component of comprehensive income is foreign currency translation
adjustment.
(p) Non-Monetary Transactions
In the normal course of operations, and in accordance with industry
custom, the Company trades its inventories or machineries with some
of its customers and suppliers. These transactions are recorded at
fair market value or relative market value, which uses retail price
netting of relative depreciated amounts, when fair market value is
not available. Gains or losses are recognized for the differences
between the book value of the assets given up and the fair market
value or relative market value of the assets traded in.
10
When the assets traded in are considered held for re-sale, the cost
method is used to record these transactions. No gain or loss is
recognized for the assets traded in.
(q) Recent Accounting Pronouncements
In January 2003, (as revised in December 2003) The Financial
Accounting Standards Board ("FASB") issued Interpretation No. 46,
"Consolidation of Variable Interest Entities", an interpretation of
Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial
Statements". Interpretation No. 46 addresses consolidation by
business enterprises of variable interest entities, which have one or
both of the following characteristics: (i) the equity investment at
risk is not sufficient to permit the entity to finance its activities
without additional subordinated support from other parties, which is
provided through other interest that will absorb some or all of the
expected losses of the entity; (ii) the equity investors lack one or
more of the following essential characteristics of a controlling
financial interest: the direct or indirect ability to make decisions
about the entities activities through voting rights or similar
rights; or the obligation to absorb the expected losses of the entity
if they occur, which makes it possible for the entity to finance its
activities; the right to receive the expected residual returns of the
entity if they occur, which is the compensation for the risk of
absorbing the expected losses.
Interpretation No. 46, as revised, also requires expanded disclosures
by the primary beneficiary (as defined) of a variable interest entity
and by an enterprise that holds a significant variable interest in a
variable interest entity but is not the primary beneficiary.
Interpretation No. 46, as revised, applies to small business issuers
no later than the end of the first reporting period that ends after
December 15, 2004. This effective date includes those entities to
which Interpretation 46 had previously been applied. However, prior
to the required application of Interpretation No. 46, a public entity
that is a small business issuer shall apply Interpretation 46 or this
Interpretation to those entities that are considered to be
special-purpose entities no later than as of the end of the first
reporting period that ends after December 15, 2003.
Interpretation No. 46 may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first
applied or by restating previously issued financial statements for
one or more years with a cumulative-effect adjustment as of the
beginning of the first year restated.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149
amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives)
and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The changes in SFAS
No. 149 improve financial reporting by requiring that contracts with
comparable characteristics be accounted for similarly. This statement
is effective for contracts entered into or modified after June 30,
2003 and all of its provisions should be applied prospectively.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150,
"Accounting For Certain Financial Instruments with Characteristics of
both Liabilities and Equity". SFAS No. 150 changes the accounting for
certain financial instruments with characteristics of both
liabilities and equity that, under previous pronouncements, issuers
could account for as equity. The new accounting guidance contained in
SFAS No. 150 requires that those instruments be classified as
liabilities in the balance sheet.
11
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily
redeemable shares, which the issuing company is obligated to buy back
in exchange for cash or other assets. A second type includes put
options and forward purchase contracts, which involves instruments
that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instruments that
are liabilities under this Statement is obligations that can be
settled with shares, the monetary value of which is fixed, tied
solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. SFAS No. 150
does not apply to features embedded in a financial instrument that is
not a derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the
existing definition of liabilities in FASB Concepts Statement No. 6,
"Elements of Financial Statements". The remaining provisions of this
Statement are consistent with the FASB's proposal to revise that
definition to encompass certain obligations that a reporting entity
can or must settle by issuing its own shares. This Statement shall be
effective for financial instruments entered into or modified after
May 31, 2003 and otherwise shall be effective at the beginning of the
first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of a non-public entity,
as to which the effective date is for fiscal periods beginning after
December 15, 2004.
In March 2004, the U.S. Securities and Exchange Commission's Office
of the Chief Accountant and the Division of Corporate Finance
released Staff Accounting Bulletin ("SAB") No. 105, "Loan Commitments
Accounted for as Derivative Instruments". This bulletin contains
specific guidance on the inputs to a valuation-recognition model to
measure loan commitments accounted for at fair value, and requires
that fair-value measurement include only differences between the
guaranteed interest rate in the loan commitment and market interest
rate, excluding any expected future cash flows related to the
customer relationship or loan servicing. In addition, SAB105 requires
the disclosure of the accounting policy for loan commitments,
including methods and assumptions used to estimate the fair value of
loan commitments, and any associated hedging strategies. SAB105 is
effective for derivative instruments, entered into subsequent to
March 31, 2004 and should also be applied to existing instruments as
appropriate.
The implementation of the above pronouncements are not expected to
have a material effect on the Company's financial statement
presentation or disclosures.
(r) Reclassification
Certain 2003 balances have been reclassified to conform to the 2004
presentation.
NOTE 4 - INVENTORIES
Inventories consist of the following:
September 30, 2004
-------------------
Finished goods $ 223,170
Packing materials and supplies 161,201
-------------------
$ 384,371
===================
12
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30, 2004
------------------
At cost:
Buildings $ 793,021
Machinery and equipment 2,576,867
Motor vehicles 245,087
Furniture and fixtures 11,420
------------------
3,626,395
------------------
Less : Accumulated depreciation
Buildings 67,335
Machinery and equipment 562,444
Motor vehicles 125,433
Furniture and fixtures 4,709
------------------
759,921
------------------
Property, plant and equipment, net $ 2,866,474
==================
Depreciation expense for nine months ended September 30, 2004 and
2003 was $212,252 and $1,056,804, respectively.
In 2003, the Company sold machinery with a net book value of $128,368
for $207,200. A gain of $78,836 has been recognized as other income.
NOTE 6 - DUE FROM / TO RELATED PARTIES AND RELATED PARTY TRANSACTIONS
Due from related parties:
September 30, 2004
------------------
Daxin Petrolic Tech. Co., Ltd. $ 1,514
==================
Due to related parties:
September 30, 2004
------------------
Guozhuang Wang $ 74,607
Guoyuan Wang 9,666
Daxin Petrolic Tech Co., Ltd. 110,909
Tabei Carbon Black Co., Ltd. 1,812
------------------
$ 196,994
==================
All the balances are unsecured, interest-free and have no fixed
repayment terms.
As of September 30, 2004, the Company purchased materials amounting
to $62,042 from Wang Guo Zhuang, who is the president of the Company.
13
In nine months ended September 2004 Daxin Petrolic Tech Co., Ltd.,
another company owned by the president of the Company, paid rental
fees amounting to $30,206 on behalf of the Company, which were all
repaid by the Company in 2004. In 2004, the Company paid rental fees
of $36,247 to Daxin Petrolic Tech Co., Ltd. for a leased dynamotor.
In addition, the Company loaned $32,296 to Daxin Petrolic Tech Co.,
Ltd. during nine months ended September 30, 2003, which has been
fully written off when Daxin Petrolic Tech Co., Ltd. liquidated its
business.
NOTE 7 -INCOME TAXES
(a) Corporation Income Tax ("CIT")
In accordance with the relevant tax laws and regulations of PRC, the
applicable corporation income tax rate for the Company is 33%. The
Company is entitled to full exemption from CIT from 2002 to 2004 due
to the approval of local government. No provision for CIT was made
for 9 months ended September 30, 2004 as the Company enjoyed the CIT
exemption.
The Company's tax expense differs from the "expected" tax expense for
the nine months ended September 30, 2004 (computed by applying the
CIT rate of 33 percent to net profit) as follows:
September 30, 2004
------------------
Computed "expected" expense $ (498,301)
Non-taxable income net of non-deductible expenses 588,021
Unused net operating loss carried forward --
CIT exemption (89,720)
------------------
Income tax expense $ --
==================
The tax effects of temporary differences that give rise to the
Company's net deferred tax assets as of September 30, 2004 are as
follows:
September 30, 2004
------------------
Deferred tax assets:
Depreciation $ 12,948
Expenses not yet deducted for tax purposes 10,179
------------------
Total deferred tax assets 23,127
Valuation allowance (23,127)
------------------
Net deferred tax assets $ --
==================
(b) Value Added Tax ("VAT")
In accordance with the relevant tax laws in the PRC, VAT is levied at
17% on the invoiced value of sales and is payable by the consumer.
The Company is required to remit the VAT collected to the tax
authority, but may deduct therefrom the VAT it has paid on eligible
purchases. As of September 30, 2004, the VAT payable was $102,430.
14
NOTE 8 -NON-MONETARY TRANSACTIONS
During first to third quarter of 2004, the Company received 485 sets
of tires, valued at $109,779 from Hangzhou Zhongce Tire Co. for
settlement of the outstanding balances of accounts receivable
$109,779. The Company considers that all inventories traded in will
be used for future sales. Thus, all tires received are valued based
on cost method and no gain or loss has been recognized in first to
third quarter of 2004.
In February 2004, the Company exchanged sets of tires with a book
value of $109,779 for 5 loading machines with a relative market value
of $138,944. A gain of 29,165, which represents the excess of
relative market values of assets traded in over the book values of
the inventories exchanged, had been recognized as other income in
2004. As of September 30, 2004, the 485 sets of tires have been
delivered, the Company have received the 5 loading machines.
During 2003, the Company received 6,819 sets of tires, valued at
$1,545,942 and 2,500 sets of tires, valued at $329,570 from Hangzhou
Zhongce Tire Co. & Guizhou Tires Co. Ltd., respectively for
settlement of the outstanding balances of accounts receivable
$1,545,942 and $329,570. The Company considers that all inventories
traded in will be used for future sales. Thus, all tires received are
valued based on cost method and no gain or loss has been recognized
in 2003.
In April 2003, the Company exchanged 760 sets of tires with a book
value of $94,240 for two motor vehicles with a relative market value
of $60,410 and $24,503. A loss of $9,327, which represents the excess
of book values of the inventories exchanged over the relative market
values of assets traded in, had been recognized as other expense in
2003. The legal titles of the motor vehicles received are in the name
of the president, Mr Wang Guo Zhuang. Mr Wang and the Company
mutually agreed that Mr Wang held the motor vehicles on behalf of the
Company and the Company's legal counsel has confirmed that they are
the Company's assets. Currently, the Company is in the process of
transferring the legal titles of the motor vehicles over to the
Company. Such transfer procedures are expected to be completed in
late 2004 or early 2005.
In April 2003, the Company exchanged 455 sets of tires with a book
value of $28,997 for a motor vehicle, which the re-saleable value
cannot be reasonably estimated due to the lack of second hand market
information in the PRC. A loss of $28,997 had been recognized as
other expense. The legal title of the motor vehicle received is in
the name of the president, Mr Wang Guo Zhuang. Mr Wang and the
Company mutually agreed that Mr Wang held the motor vehicle on behalf
of the Company and the Company's legal counsel has confirmed that
they are the Company's assets. Currently, the Company is in the
process of transferring the legal title of the motor vehicle over to
the Company. Such transfer procedures are expected to be completed in
late 2004 or early 2005.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company leased three manufacturing production lines from a third
party and a dynamotor from a related party in year 2004. Accordingly,
for the nine months ended September 30, 2004, the Company recognized
rental expense in the amount of $308,096.
As of September 30, 2004, the Company has outstanding commitments in
respect of non-cancellable operating leases for factory land use
right, which fall due as follows:
15
The minimum lease payments under non-cancellable operating
leases:
Within one year $ 102,699
================
The Company leased the land use right from the landlord, an
independent third party, on a year to year renewal basis. The Company
has obtained a representation from the landlord that the landlord has
a 50 year land use right with the PRC and the landlord has guaranteed
to lease the land use right to the Company as long as the Company
wants to continue the lease within the period of the land use rights
the landlord processes.
NOTE 10 - BUSINESS COMBINATION
On August 5, 2004, the Company acquired China Carbon Black Holdings
Company Limited ("CCB") and its 100% subsidiary, Yakela Carbon Black
Co. Ltd.(Yakela) by exchanging 36,000,000 shares of its common stock
for all of the common stock of CCB pursuant to the terms of an
Agreement for Share Exchange, dated July 15, 2004.
In connection with the acquisition of CCB, the Company issued to
CCB's shareholders a total of 36,000,000 shares, valued at $1,800,000
($0.05 each, according to 3-day average stock price after the
contract date, July 15, 2004). The excess of the fair market value of
the net assets acquired over the aggregate purchase price of
$2,991,743 was recorded as negative goodwill. The negative goodwill
amount was applied to the non-current assets of the accounting
acquiree, HIHI. The acquisition was accounted for as a purchase and
accordingly, the operating results of the acquired company have been
included in the Company's financial statements since the date of
acquisition.
The following summarizes the acquisition:
Issuance of 36,000,000 shares of common stock $ 1,800,000
Assets acquired (13,188,311)
Liabilities assumed 8,396,568
Negative goodwill 2,991,743
-----------------
$ --
=================
NOTE 11 - DISCONTINUED OPERATIONS
On September 30, 2004, the Company entered into a Sales Stock
Agreement with Mr. Gao Wan Jun, a shareholder of the Company and
former Chief Executive Officer. Pursuant to the Sales Stock
Agreement, the Company agreed to sell all of its ownership interest
in HAITONG to Mr. Gao and as consideration, Mr. Gao and HAITONG have
agreed to assume and pay, and to hold the Company harmless from
liability on the Company's obligation to Huayang International
Investment, Ltd., a British Virgin Islands corporation, in the amount
of $1,710,773, which has been shown on the Company's balance sheet as
an amount due to a related party. In conjunction with the transfer of
16
the Company's ownership interest in HAITONG to Mr. Gao, the Company
have also agreed to write off a total of $175,505 in accounts
receivable from Huayang Industry (Shenyang) Group, a company which is
owned and controlled by Mr. Gao, and to cancel and write off a
promissory note with a net value of $2,388,000 executed by Huayang
Industry (Shenyang) Group. In association with the Sales Stock
Agreement, HAITONG has ceased to become a consolidated subsidiary of
the Company.
Also, as a result of the sales, the following assets and liabilities
of HAITONG have been removed from the consolidated balance sheet of
the Company:
o The $175,505 in accounts receivable from Huayang Industry
(Shenyang) Group and the associated promissory note with a
net value of $2,388,000 executed by Huayang Industry
(Shenyang) Group, which have been assigned by HAITONG to
the Company through a unanimous board consent from
HAITONG, were written off.
o Income taxes payables of $6,600, other taxes payables of
$5,000 and other payables & accrued liabilities of $33,501
as of August 5, 2004, were transferred to Mr. Gao from the
books of the Company as of September 30, 2004 to reflect
that Gao Wan Jun and HAITONG assumed all the liabilities
of the Company as of August 5, 2004
o All the assets and liabilities of HAITONG as of September
30, 2004, were written off from the books of the Company
on September 30, 2004, including:
MAJOR ASSETS:
Real estate rental property, net $ 6,519,561
Real estate held for development and sale $ 2,480,152
Cash and cash equivalents $ 354,321
Accounts receivable $ 19,120
Notes receivable from related company $ 2,309,471
Due from related company, net $ 531,823
Other asset / Investment in subsidary $ 32,964
MAJOR LIABILITIES:
Accounts payable and accrued liabilities $ 790,445
Bank loan $ 3,289,157
Advance from customers $ 5,817
Amount due to related parties $ 719,062
Taxes payable $ 2,329,620
NOTE 12 - BANK LOANS
The Company formerly had bank loans bearing interests at a rate of
6.44% per annum and were secured by the Company's real estate owned
through HAITONG and guaranteed by its subsidiary HAITONG. The bank
loans were in default. 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 had accrued interest at the default rate.
Pursuant to the Sales Stock Agreement, the Company agreed to sell all
of its ownership of HAITONG to Mr. Gao. and as a results, the debt
was also transfer to Mr. Gao.
17
NOTE 14 - SUBSEQUENT EVENT
On November 8, 2004, the Company has filed a Form S-8 registration
statement under the Securities Act of 1933 to register a total of
40,000 shares for an individual. The Company has signed a consultant
agreement with the individual on October 30, 2004 to employ her to
assist the Company to provide updated market information and data
analyses for the Company in greater China region from October 30,
2004 to October 29, 2004.
18
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
information contained in the condensed consolidated financial statements of the
Company and the notes thereto appearing elsewhere herein and in conjunction with
the Management's Discussion and Analysis set forth in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 2003 and Quarterly Report
on Form 10-QSB for the quarter ended September 30, 2003.
PRELIMINARY NOTE REGARDING 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- ------------------------------------------
Our discussion and analysis of operations is based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Areas where significant estimation judgments are made and where
actual results could differ materially from these estimates are:
A. Inventory reserves
B. Reserve for uncollectible receivables
C. Impairment losses on long-lived assets
19
We believe the following are among the most critical accounting
policies that impact our consolidated financial statements. We suggest that our
significant accounting policies, as described in our consolidated financial
statement footnotes be read in conjunction with this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
A. We account for our inventories at the lower of cost or market on the
first-in, first-out basis.
B. We evaluate impairment of our long-lived assets under the provisions
of Statement of Financial Accounting Standards No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets.
C. We recognize revenue when merchandise is shipped and title passes to
the customer and collectibility is reasonably assured.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2004 AS COMPARED TO
- ----------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, 2003
- -------------------------------------
For the quarter ended September 30, 2004 revenues decreased by $350,243 or 27%
to $967,511 from $1,317,754 as compared to the corresponding period of the prior
year. This decrease was attributed primarily to the decrease in sales volume of
the existing product of carbon black.
Cost of sales decreased by $180,027 or 20% to $708,532 from $888,559 for the
three months ended September 30, 2004, as compared to the corresponding period
of the prior year. This decrease resulted from the decreased product costs
incurred as associated with decrease in sales of the existing product of carbon
black of the Company.
The gross profit margin has decreased from 33% to 27%. This was mainly due to
increase in the raw material usage rate and wastage rate as a result of less
effective usage of raw materials that was resulted from lower production scale
in associated with decrease in sales volume.
Selling and administrative expenses increased by $23,027 or 28% to $104,473 as
compared to the corresponding period of the prior year. This increase was
attributed primarily to increase selling and marketing in order to stimulate the
sales activities of the Company in the forth quarter especially the Company
experienced a reduction in sales volume in the current quarter.
General and administrative expenses decreased by $2,174 or 5% to $38,645 as
compared to the corresponding period of the prior year. This decrease is
attributed to decrease in sales volume that resulted in decrease in
administrative activities.
Our income from continued operations has decreased by $190,973 or 62% to
$115,928 from $306,901.
We reported a loss from discontinued operations of $73,694 and from disposal of
discontinued operations of $4,571,775 in the current quarter as a result of
disposal of Shenyang Haitong House Properties Development Limited ("HAITONG").
RESULTS OF OPERATION - NINE MONTHS ENDED SEPTEMBER 30, 2004 AS COMPARED TO NINE
- -------------------------------------------------------------------------------
MONTHS ENDED SEPTEMBER 30, 2003
- -------------------------------
For the nine months ended September 30, 2004 revenues decreased by $297,518 or
10% to $2,762,858 from $3,060,376 as compared to the corresponding period of the
prior year. This decrease is attributed primarily to the decrease in sales
volume of our existing product of carbon black.
20
Cost of sales decreased by $54,770 or 3% to $1,998,978 from $2,053,748 for the
nine months ended September 30, 2004, as compared to the corresponding period of
the prior year. This decrease resulted from the decreased product costs incurred
as associated with decrease in sales of our product of carbon black.
The gross profit margin has decreased from 33% to 28%. This was mainly due to
increase in the raw material usage rate and wastage rate as a result of less
effective usage of raw materials that was resulted from lower production scale
in associated with decrease in sales volume.
Selling and administrative expenses increased by $132,121 or 64% to $338,025 as
compared to the corresponding period of the prior year. This increase was
attributed primarily to increased selling and marketing efforts as compared to
the same period of the prior year.
General and administrative expenses increased by $52,505 or 42% to $177,627 as
compared to the corresponding period of the prior year. This is mainly due to
increase in administrative activities in associated with corporate developments
and expansion of business.
Our income from continued operations decreased by $448,892 to $293,563 from
$742,455
We reported a loss from discontinued operations of $223,535 and from disposal of
discontinued operations of $4,571,775 in the current quarter as a result of
disposal of Shenyang Haitong House Properties Development Limited ("HAITONG").
RECENT DEVELOPMENTS
- -------------------
On August 5, 2004, the Company completed a share exchange (the
"Exchange") with the stockholders of China Carbon Black Holdings Company Limited
("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. The Exchange resulted in a change of voting control of the Company.
CCB owns 100% of Xin Jiang YaKeLa Carbon Black Limited ("YaKeLa").
From 2002 to 2004, YaKeLa mainly engaged in the business of sales and
manufacturing of carbon black, a black powder made partly from the burning of
natural gas. The product is used for making rubber tires and other rubber
products. Starting in 2005 YaKeLa, with its own extraction facilities, will be
capable of a full-scale extraction of natural gas to generate electricity and
supply it to a nearby factory through its own power generators and power
transmission networks.
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 and which provides one of
the best quality natural gas in China without any contamination by impurities of
carbon dioxide and nitride compounds.
On September 30, 2004, the Company entered into an Agreement for Sale
of Stock (the "Sales Stock Agreement") with Mr. Gao Wan Jun. Pursuant to the
Sales Stock Agreement, the Company agreed to sell the 95% ownership interest in
HAITONG owned by the Company to Mr. Gao Wan Jun. The closing under the Sale
Stock Agreement was completed on September 30, 2004 and the Company transferred
the 95% ownership interest in HAITONG to Mr. Gao Wan Jun and on this closing
date and thereafter, HAITONG ceased to be a consolidating subsidiary of the
Company to be reported under its condensed consolidated financial statements.
For the quarter ended September 30, 2004 revenues has reached
$967,511 and the total revenue for nine months ended September 30, 2004 amounted
to $2,762,858. Revenue is attributed primarily to sales of our existing product
of carbon black.
21
Cost of sales increased by $708,532 for the three months ended
September 30, 2004 and totaled to $1,998,978 for the nine months ended September
30, 2004. This increase resulted from associated increase in production cost to
support increase in sales of the product of the Company.
The gross profit margin was 27% for the current quarter and 28% for
the nine months ended September 30, 2004.
Selling and administrative expenses increased by $104,473 for the
current quarter to $338,025 for the nine months ended September 30, 2004. This
increase is attributed primarily to increased selling and marketing overheads in
order to support increase in sales.
General and administrative expenses increased by $38,645 for the
current quarter to $177,627 for the nine months ended September 30, 2004. This
increase is attributed to increase in activity level as a result of increase in
sales the Company's product.
Our net loss was $4,529,541 for the current quarter and $4,501,965
for the nine months ended September 30, 2004 mainly due to loss from
discontinued operations of HAITONG.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
We have funded capital requirements through cash flow from
operations. As of September 30, 2004 we had a cash balance of $182,701 and a
working capital surplus of $1,327,884.
Cash flow generated from our existing operations will be sufficient
to fund our working capital needs of the Company. We have sufficient cash inflow
streams attributable from our cash flow from operations and we do not anticipate
any material liquidity issues in the near future.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In January 2003, (as revised in December 2003) The Financial
Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation
of Variable Interest Entities", an interpretation of Accounting Research
Bulletin ("ARB") No. 51, "Consolidated Financial Statements". Interpretation No.
46 addresses consolidation by business enterprises of variable interest
entities, which have one or both of the following characteristics: (i) the
equity investment at risk is not sufficient to permit the entity to finance its
activities without additional subordinated support from other parties, which is
provided through other interest that will absorb some or all of the expected
losses of the entity; (ii) the equity investors lack one or more of the
following essential characteristics of a controlling financial interest: the
direct or indirect ability to make decisions about the entities activities
through voting rights or similar rights; or the obligation to absorb the
expected losses of the entity if they occur, which makes it possible for the
entity to finance its activities; the right to receive the expected residual
returns of the entity if they occur, which is the compensation for the risk of
absorbing the expected losses.
Interpretation No. 46, as revised, also requires expanded disclosures
by the primary beneficiary (as defined) of a variable interest entity and by an
enterprise that holds a significant variable interest in a variable interest
entity but is not the primary beneficiary. Interpretation No. 46, as revised,
applies to small business issuers no later than the end of the first reporting
period that ends after December 15, 2004. This effective date includes those
entities to which Interpretation 46 had previously been applied. However, prior
to the required application of Interpretation No. 46, a public entity that is a
small business issuer shall apply Interpretation 46 or this Interpretation to
those entities that are considered to be special-purpose entities no later than
as of the end of the first reporting period that ends after December 15, 2003.
22
Interpretation No. 46 may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". The
changes in SFAS No. 149 improve financial reporting by requiring that contracts
with comparable characteristics be accounted for similarly. This statement is
effective for contracts entered into or modified after June 30, 2003 and all of
its provisions should be applied prospectively.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting For
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 changes the accounting for certain financial instruments
with characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting guidance
contained in SFAS No. 150 requires that those instruments be classified as
liabilities in the balance sheet.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash or other
assets. A second type includes put options and forward purchase contracts, which
involves instruments that do or may require the issuer to buy back some of its
shares in exchange for cash or other assets. The third type of instruments that
are liabilities under this Statement is obligations that can be settled with
shares, the monetary value of which is fixed, tied solely or predominantly to a
variable such as a market index, or varies inversely with the value of the
issuers' shares. SFAS No. 150 does not apply to features embedded in a financial
instrument that is not a derivative in its entirety.
Most of the provisions of Statement 150 are consistent with the
existing definition of liabilities in FASB Concepts Statement No. 6, "Elements
of Financial Statements". The remaining provisions of this Statement are
consistent with the FASB's proposal to revise that definition to encompass
certain obligations that a reporting entity can or must settle by issuing its
own shares. This Statement shall be effective for financial instruments entered
into or modified after May 31, 2003 and otherwise shall be effective at the
beginning of the first interim period beginning after June 15, 2003, except for
mandatorily redeemable financial instruments of a non-public entity, as to which
the effective date is for fiscal periods beginning after December 15, 2004.
In March 2004, the U.S. Securities and Exchange Commission's Office
of the Chief Accountant and the Division of Corporate Finance released Staff
Accounting Bulletin ("SAB") No. 105, "Loan Commitments Accounted for as
Derivative Instruments". This bulletin contains specific guidance on the inputs
to a valuation-recognition model to measure loan commitments accounted for at
fair value, and requires that fair-value measurement include only differences
between the guaranteed interest rate in the loan commitment and market interest
rate, excluding any expected future cash flows related to the customer
relationship or loan servicing. In addition, SAB105 requires the disclosure of
the accounting policy for loan commitments, including methods and assumptions
used to estimate the fair value of loan commitments, and any associated hedging
strategies. SAB105 is effective for derivative instruments, entered into
subsequent to March 31, 2004 and should also be applied to existing instruments
as appropriate.
The implementation of the above pronouncements are not expected to
have a material effect on the Company's financial statement presentation or
disclosures.
23
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.
24
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
Issuance of shares pursuant to the share exchange (the "Exchange")
- ------------------------------------------------------------------
On August 5, 2004, the Company completed the Exchange with the
stockholders of 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.
Cancellation and reissuance of stock to Gao Wan Jun and his designees
- ---------------------------------------------------------------------
As a condition to, completion of the Exchange, the designees of a
principal shareholder of the Company, Gao Wan Jun, agreed to surrender a total
of 5,460,000 of their shares for the Company to issue to Gao Wan Jun (but the
shares are issued to his designees instead of himself) a total of 3,240,000
shares of restricted stocks of the Company following completion of the Exchange.
The following table sets forth, as of August 5, 2004 (immediately
following the Exchange, cancellation and reissuance of stock), stock ownership
of each executive officer and director of the Company, of all executive officers
and directors of the Company, as a group, and of each person known by the
Company to be a beneficial owner of 5% or more of its Common Stock. Except as
otherwise noted, each person listed below is the sole beneficial owner of the
shares and has sole investment and voting power as to such shares. No person
listed below has any options, warrant or other right to acquire additional
securities of the Company except as may be otherwise noted.
NUMBER OF SHARES
NAME BENEFICAILLY OWNED PERCENTAGE OF CLASS
- ------------------------------------------------------------------------------------
Huayang International Trust 540,000 1.41%
Gao Wan Jun (1) (2) 540,000 1.41%
Guo Yuan Wang 30,178,382 78.92%
Wang Yufei (2) 0 0%
Wang Shao Hua (2) 0 0%
Yu Yingtian (2) 0 0%
Yin Liangpei (2) 0 0%
Wang Yunfen (2) 0 0%
All officers and directors as a group 540,000 1.41%
25
(1) Gao Wan Jun is the Trustee of the Huayang International Trust and he
and his family are the beneficiaries of the trust. Accordingly, they
may be deemed to be the beneficial owners of the shares owned by such
trust.
(2) The person listed is currently an officer, a director, or both, of
the Company.
Reverse Split in pursuant to Board of Directors approval
- --------------------------------------------------------
On September 17, 2004, the Board of Directors unanimously approved
and ratified, subject to the approval of the Company's stockholders, the Reverse
Split resulted in a reduction of the number of issued and outstanding shares of
the Company from 38,240,807 to approximately 6,373,379 shares. As of the
effective date of the Reverse Split, each previously outstanding share shall be
reduced to 0.1667 shares. However, no fractional shares will be created as a
result of the reverse split. Accordingly, the number of shares owned by any
shareholder who would otherwise receive a fractional share, will be rounded up
to the next nearest whole number. As a result, on September 20, 2004 and
September 30, 2004, the Company filed a preliminary schedule 14C information
statement pursuant to section 14(c) of the Securities Exchange Act of 1934 and
definite schedule 14C information statement pursuant to section 14(c) of the
Securities Exchange Act of 1934, respectively, to record such Reverse Split
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
As of June 30, 2004, the Company, though its subsidiary HAITONG, had
total bank debt of $3,298,456 which is in default. All of the bank debt of
HAITONG is secured by properties in the Mansion. As of June 30, 2004, the
lenders of HAITONG held an aggregate of $3,298,456 of liens against the Mansion
as security for bank loans of the same amount. HAITONG is in default under such
bank loans. The loans are immediately due and payable and the bank may foreclose
on the Mansion.
On September 30, 2004, the Company entered into an Agreement for Sale
of Stock (the "Sales Stock Agreement") with Mr. Gao Wan Jun. Pursuant to the
Sales Stock Agreement, we agreed to sell all of the Company's ownership of
HAITONG to Mr. Gao. As a result of the transfer of the Company's ownership
interest in HAITONG to Mr. Gao, HAITONG has ceased to become a subsidiary of the
Company and that the mentioned bank loans, which is under the possibility of
default, is no longer considered as a default on senior securities of the
Company and any future action that might be taken by the lender will not have
any material adverse effect on the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 17, 2004, the Board of Directors unanimously approved
and ratified, subject to the approval of the Company's stockholders, the Reverse
Split and the Amendment detailed as follows:
Description of Amendment
- ------------------------
The Amendment resulted in the name of the Company being changed from
"Huayang International Holdings, Inc." to "China Energy and Carbon Black
Holdings, Inc."
The purpose of the name change is to reflect the changed nature of
the Company's business following the Exchange. The name change is reflected in
the form of Amendment to Articles of Incorporation.
26
Description of the Reverse Split
- --------------------------------
The Reverse Split resulted in a reduction of the number of issued and
outstanding shares of the Company from 38,240,807 to approximately 6,373,379
shares. As of the effective date of the Reverse Split, each previously
outstanding share shall be reduced to 0.1667 shares. However, no fractional
shares will be created as a result of the reverse split. Accordingly, the number
of shares owned by any shareholder who would otherwise receive a fractional
share, will be rounded up to the next nearest whole number.
The purpose of the Reverse Split is to reduce the number of
outstanding shares in an effort to increase the market value of the remaining
outstanding shares.
The record date established by the Board for purposes of determining
the number of outstanding shares of voting stock entitled to vote on the Reverse
Split and the Amendment was September 30, 2004 (the "Record Date"). On the
Record Date, stockholders owning greater than a majority of the outstanding
shares of Common Stock approved the Reverse Split and the Amendment by action
taken without a meeting in accordance with Nevada law. No further vote of our
stockholders is required.
As a result, on September 20, 2004 and September 30, 2004, the
Company filed a preliminary schedule 14C information statement pursuant to
section 14(c) of the Securities Exchange Act of 1934 and definite schedule 14C
information statement pursuant to section 14(c) of the Securities Exchange Act
of 1934, respectively, to record such Reverse Split and Amendment.
On the effective date of the Reverse Split the number of issued and
outstanding shares of common stock of the Company will be reduced from a total
of 38,240,807 shares which were outstanding on the Record Date, to approximately
6,373,468 shares.
When filed with the Nevada Secretary of State, the Amendment will
change the name of the Company to "China Energy and Carbon Black Holdings, Inc."
ITEM 5 OTHER INFORMATION
Resignation of directors
- ------------------------
On August 5, 2004, the Company completed a share exchange (the
"Exchange") with the stockholders of China Carbon Black Holdings Limited, a Hong
Kong corporation ("CCB") pursuant to the terms of an Agreement for Share
Exchange, dated July 15, 2004 as described earlier in Part 1 Item 1 of this
report and the Exchange resulted in a change of voting control of the Company.
The Company has a total of 38,240,807 shares issued and outstanding after the
Exchange, 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 immediate change in the officers and
directors of the Company subsequent to completion of the Exchange however, on
September 29, 2004 the following directors of the Company resigned from the
Board of Directors:
o Wang Shao Hua
o Yu Yin Tian
o Yin Liang Pei
o Wang Yun Fen
o Wang Yu Fei
27
The resignations were not the result of any known disagreements with
the Company on any matter relating to the Company operations, policies or
practices.
Appointment of new directors
- ----------------------------
On September 29, 2004, Gao Wan Jun, the sole remaining member of the
Board of Directors, appointed the following persons to fill the vacancies on the
Board created by the resignations of the previous directors:
GUO YUAN WANG: Mr. Guo was the founder and President of Xin
Jiang YaKeLa Carbon Black Limited, a company he started in 1999.
Prior to 1999, he was a senior manager of an oil and gas production
division for China National Petroleum Corporation, the parent company
of PetroChina (NYSE: PTR). Mr. Guo began his career with China
National Petroleum Corporation in 1980. He obtained his bachelor's
degree in petroleum engineering in 1980 from the University of
Petroleum in China.
LUN XING: Mr. Xing began his career with Xin Jiang YaKeLa
Carbon Black Limited in 2000 as an assistant plant manager.
Currently, he is responsible for overall production, engineering,
research and development, quality control, procurement, and the
day-to-day operations of YaKeLa. Before joining YaKeLa, Mr. Xing
began his career at Chongqing Yongchuan as maintenance engineer in
1985. He spent fifteen years at the Chongqing Yongchuan Chemical
Production Company as operations manager, production manager and
maintenance manager for carbon black plant. He obtained his
bachelor's degree in Chemical Engineering from Sichuan Luzhou
Chemical College.
MEI QI ZHANG: Ms. Zhang has been the financial controller
of Xin Jiang YaKeLa Carbon Black Limited since 2001. Prior to that
time she held several positions with Xinjiang Tianke Chemical Company
as accountant, accounting directors, and financial controller. She
obtained her bachelor's degree in accounting from Xinjiang
Communication College in China.
LIANG MIN ZHOU: Mr. Zhou began his career with Xin Jiang
YaKeLa Carbon Black Limited as manager of quality control. Prior to
joining YaKeLa, he held various positions with the Chongqing
Yongchuan Chemical Production Company, including controls engineer
and manager of automation. Mr. Zhou obtained his bachelor's degree in
electrical engineering from Sichuan Chengdu Scientific University.
QING GUANG KONG: Mr. Kong began his career in 2001 with Xin
Jiang YaKeLa Carbon Black Limited as an engineering manager in the
production department. Subsequently he assumed the duties of manager
for quality control and new product research and development. He is
the Director of Production in YaKeLa and is responsible for
production engineering at the carbon black production plants. Prior
to joining YaKeLa, he held numerous positions at the Chongqing
Yongchuan Chemical Production Company, including process engineer,
associate director and director. Mr. Kong obtained his bachelor's
degree in Chemical Engineering from Chongqing Chemical College.
Resignation of officers and appointment of new officers
- -------------------------------------------------------
On September 30, 2004, following the appointment of the successor
members of the Board of Directors, Gao Wan Jun resigned from the Board of
Directors of the Registrant. The resignation of Gao Wan Jun was not the result
of any known disagreement with the Registrant on any matter relating to the
Registrant operations, policies or practices.
On the same day, Gao Wan Jun resigned also as the chief executive
officer of the Company while Wang Yu Fei resigned as the chief financial officer
of the Company. As a result, the Board of Directors of the Company has appointed
Gao Wan Jun and Mei Qi Zhang to fill the vacancies of chief executive officer
and chief financial officer, respectively.
28
The resignations were not the result of any known disagreements with
the Company on any matter relating to the Company's operations, policies or
practices.
Signing of material agreements and disposal of assets
- -----------------------------------------------------
On September 30, 2004, the Company entered into an Agreement for Sale
of Stock (the "Sales Stock Agreement") with Mr. Gao Wan Jun. Pursuant to the
Sales Stock Agreement, the Company agreed to sell all its ownership of 95%
interest in HAITONG owned by the Company to Mr. Gao Wan Jun.
As consideration for the sale of the Company's ownership interest in
HAITONG, Mr. Gao and HAITONG have agreed to assume and pay, and to hold the
Company harmless from liability on the obligation to Huayang International
Investment, Ltd., a British Virgin Islands corporation, in the amount of
$1,710,773, which has been shown on the balance sheet as an amount due to a
related party. In conjunction with the transfer of the ownership interest in
HAITONG to Mr. Gao, the Company have also agreed to write off a total of
$175,505 in accounts receivable from Huayang Industry (Shenyang) Group, a
company which is owned and controlled by Mr. Gao, and to cancel and write off a
promissory note with a net value of $2,388,000 executed by Huayang Industry
(Shenyang) Group.
The sale of the Company's ownership interest in HAITONG was for the
purpose of divesting the Company's interest in the real estate operations that
have been carrying on through that entity. Prior to completion of the
transaction with CCB, Mr. Gao was one of the Company's principal shareholders,
and also served as one of the officers and directors. He was also the owner of
the additional 5% ownership interest in HAITONG which the Company does not own.
As a result, he has been substantially involved in the business operations
carried on through HAITONG and has an interest in taking over the operations of
HAITONG.
The closing under the Agreement for Sale of Shares (the "Agreement")
with Gao Wan Jun was completed on September 30, 2004. On that date, the Company
transferred its 95% ownership interest in HAITONG to Mr. Gao in consideration of
the agreement of Mr. Gao and HAITONG to assume and pay and hold the Company
harmless from liability on the obligation to Huayang International Investment
Ltd., in the amount of $1,710,733. In conjunction with the transfer of the
Company's ownership interest in HAITONG to Mr. Gao, the Company also wrote off a
total of $175,505 in accounts receivable from Huayang Industry (Shenyang) Group,
a company which is owned and controlled by Mr. Gao, and have cancelled and
written off a promissory note with a net value of $2,388,000 executed by Huayang
Industry (Shenyang) Group.
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 nine months ended September 30, 2004, the Company filed the following
reports on the Form 8-K:
Form Filing date Event reported
---- ----------- --------------
8K August 19, 2004 Change in Control of Registrant
Pre 14C September 20, 2004 Preliminary Information Statement
8K September 29, 2004 Departure of Directors or Principal Officers
Election of Directors, Appointment of Officers
29
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/ Guo Yuan Wang
------------------------------------
Name : Guo Yuan Wang
Title : Chairman, President and
Chief Executive Officer
Date: November 22, 2004
/s/ Mei Qi Zhang
------------------------------------
Name : Mei Qi Zhang
Title : Chief Financial Officer
Date: November 22, 2004
30