U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 000-30173
HUAYANG INTERNATIONAL HOLDINGS, INC.
(Exact name of Company as specified in its charter)
Nevada 58-1667944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
386 Qing Nian Avenue, Shenyang, China 110003
(Address of principal executive offices) (Zip code)
011 (86)(24) 2318-0688
(Issuer's telephone number, including area code)
The number of shares of common stock, par value $0.02,
outstanding on April 30, 2002, was 7,500,807.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Condensed Format)
HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2002 AND DECEMBER 31, 2001
March 31, December 31,
2002 2001
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Unaudited Audited
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ASSETS
ASSETS:
Real estate rental property, net of
accumulated depreciation of
$1,556,629 at March 31, 2002 and
$1,348,515 at December 31, 2001 $ 33,136,860 $ 32,513,101
Real estate held for development and sale 2,566,408 2,285,143
Cash 284 253
Due from related companies 15,234,216 15,674,533
Investment in affiliates 13,258,478 13,616,339
Property and equipment, net 1,362,614 1,387,965
Deferred tax asset 651,030 544,668
Other assets 705,126 761,553
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Total assets $ 66,915,016 $ 66,783,555
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March 31, December 31,
2002 2001
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Unaudited Audited
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 7,514,366 $ 7,131,131
Bank loans 17,267,177 17,268,635
Due to related companies 15,287,758 15,287,772
Income taxes payable 2,892,588 2,773,238
Deferred income taxes payable 818,495 758,097
Deferred interest income 558,963 521,202
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Total liabilities 44,339,347 43,740,075
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MINORITY INTEREST 1,106,402 1,116,125
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SHAREHOLDERS' EQUITY:
Common Stock, $0.02 par value, authorized
50,000,000 shares, 7,500,807 shares
issued and outstanding 150,016 150,016
Paid-in-capital 18,296,291 18,296,291
Accumulated other comprehensive income 14,783 17,347
Retained earnings 3,008,177 3,463,701
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Total shareholders' equity 21,469,267 21,927,355
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Total liabilities and
shareholders' equity $ 66,915,016 $ 66,783,555
========== ==========
The accompanying notes are an integral part of this statement.
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HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
2002 2001
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Unaudited Unaudited
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REVENUES:
Real estate rental income $ 535,218 $ 1,067,488
Interest income 151,046 151,046
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Total revenues 686,264 1,218,534
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COSTS AND EXPENSES:
Real estate operating expenses 118,326 65,416
Depreciation 208,243 202,915
Interest expense 326,320 315,782
Other operating expenses - 47,614
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Total costs and expenses 652,889 631,727
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LOSS FROM INVESTMENT IN AFFILIATES 357,420 371,156
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(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (324,045) 215,651
PROVISION FOR INCOME TAXES 141,202 307,149
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LOSS BEFORE MINORITY INTEREST (465,247) (91,498)
MINORITY INTEREST 9,723 (11,019)
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NET LOSS (455,524) (102,517)
OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation
adjustments (2,564) (1,315)
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COMPREHENSIVE LOSS $ (458,088) $ (103,832)
========= =========
NET LOSS PER SHARE
(basic and diluted) $ (0.06) $ (0.01)
========= =========
The accompanying notes are an integral part of this statement.
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HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
2002 2001
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Unaudited Unaudited
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (455,524) $ (102,517)
Adjustments to reconcile net income to net
Cash provided by operating activities:
Real estate development costs (905,024) (1,056,035)
Depreciation 208,243 202,915
Loss from investment in affiliates 357,420 371,156
Change in investment in affiliates due
to currency translation 441 469
Increase in deferred tax assets (106,362) (113,552)
Decrease (increase) in other assets 56,427 (34,888)
Increase in accounts payable and accrued
liabilities 383,235 755,800
Increase in deferred income taxes payable 60,398 44,265
Increase in deferred interest income 37,761 37,761
Increase in income taxes payable 119,350 241,517
Decrease in comprehensive income (2,564) (1,315)
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Net cash provided by operating activities (246,199) 345,576
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (182,892) (191,082)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank loan due to currency translation (1,458) (627)
Repayments to related companies 440,303 (165,507)
Increase in minority interest (9,723) 11,019
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Net cash used in financing activities 429,122 (155,115)
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NET INCREASE (DECREASE) IN CASH 31 (621)
CASH, beginning of period 253 851
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CASH, end of period $ 284 $ 230
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SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ - $ 2,479
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Income taxes paid $ - $ -
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The accompanying notes are an integral part of this statement.
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HUAYANG INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Reporting entity
The financial statements of Huayang International Holdings, Inc. and
Subsidiary (HIHI) reflect the activities and financial transactions
of its subsidiary Shenyang Haitong House Properties Development Ltd.
(HAITONG). HIHI has a 95% ownership interest in HAITONG. HIHI also
has a less than majority ownership interest in three other companies,
Shenyang Lido Hotel Company Limited, formerly Changyang International
Hotel (Shenyang) Co. Ltd. (HOTEL), Shenyang Lido Park Company Limited,
formerly Changyuan (Shenyang) Park Ltd. (GARAGE) and Shenyang Lido
Business Company Limited, formerly Changhua (Shenyang) Business Co.
Ltd. (BUSINESS CENTER), collectively referred to as HOTEL GROUP.
HIHI is incorporated under the laws of the State of Nevada in the
United States. HAITONG, HOTEL, GARAGE and BUSINESS CENTER are
incorporated under the laws of the People's Republic of China (PRC).
Note 2 - Condensed financial statements and footnotes
The interim consolidated financial statements presented herein have
been prepared by the Company and include the unaudited accounts of
HIHI and its subsidiary HAITONG. All significant inter-company
accounts and transactions have been eliminated in the consolidation.
These condensed financial statements have been prepared in accordance
with generally accepted accounting principles for interim
financial information and the instructions to Form 10-QSB and Article
10 of Regulation S-X. Certain information and footnote disclosures
normally included in financial statements presented in accordance
with generally accepted accounting principles have been condensed or
omitted. The Company believes the disclosures made are adequate to
make the information presented not misleading. The condensed
consolidated financial statements should be read in conjunction
with the Company's consolidated financial statements for the year
ended December 31, 2001 and notes thereto included in HIHI's Form
10-KSB, dated April 1, 2002.
In the opinion of management, the unaudited condensed consolidated
financial statements reflect all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position of the Company as of March 31, 2002, the results of operations
for the three months ended March 31, 2002 and 2001, respectively.
Interim results are not necessarily indicative of full year performance
because of the impact of seasonal and short-term variations.
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Note 3 - Investment in affiliates
Investments in which the Company owns a 20% interest are accounted
for using the equity method. These investments collectively
referred to as HOTEL GROUP consists of following as of March 31, 2002
and December 31, 2001:
March 31, December 31,
2002 2001
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Share of net assets $ 4,867,078 $ 5,224,939
Advances made 8,391,400 8,391,400
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Totals $ 13,258,478 $ 13,616,339
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Place of Ownership Principal
Name Incorporation Interest Activity
----------------- --------- ---------
Shenyang Lido Hotel The People's 20% Hotel
Company Limited (Hotel) Republic of China operation
Shenyang Lido Business The People's 20% Business
Company Limited Republic of China center,
(Business Center) commercial
retail
Shenyang Lido Park The People's 20% Car
Company Limited Republic of China Parking
(Garage)
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Shown below is summarized financial information relative to the
investments at March 31, 2002:
BUSINESS
HOTEL CENTER GARAGE Total
------------ ------------ ------------ -------------
Balance Sheet
Assets $ 64,747,464 $ 38,732,945 $ 22,312,701 $ 125,793,110
Liabilities 60,420,131 29,354,902 11,682,103 101,457,136
------------ ------------ ------------ -------------
Equity 4,327,333 9,378,043 10,630,598 24,335,974
Other shareholders'
equity 3,461,866 7,502,434 8,504,596 19,468,896
------------ ------------ ------------ -------------
HIHI, equity $ 865,467 $ 1,875,609 $ 2,126,002 $ 4,867,078
============ ============ ============ =============
Revenue $ - $ - $ - $ -
Depreciation 364,235 205,536 124,565 694,336
General expense 612,315 319,490 160,960 1,092,765
------------ ------------ ------------ -------------
Net loss $ (976,550) $ (525,026) $ (285,525) $ (1,787,101)
============ ============ ============ =============
HIHI share of loss $ (195,310) $ (105,005) $ (57,105) $ (357,420)
============ ============ ============ =============
The Hotel Group has not yet commenced operations as of March 31,
2002 and has not generated revenues for the three months then
ended. In accordance with Financial Accounting Standards no. 67,
the project changes from non-operating to operating when it is
substantially completed and held available for occupancy or
operations upon completion of improvements but no later than one
year from cessation of major construction activities. Starting
from January 1, 2001, all carrying costs, including interest,
have been charged to expense when incurred and depreciation
expense has been provided for the three months ended March 31,
2002 and 2001.
Note 4 - Segment reporting
The Company currently is engaged in only one business segment.
The Company's net investment in and the operating results of its
various real estate activities may be derived directly from the
accompanying consolidated financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion of the financial condition and results
of operations should be read in conjunction with the consolidated
financial statements and related notes thereto. The following
discussion contains certain forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially
from the discussions herein. Factors that could cause or contribute
to such differences include, but not limited to, risks and
uncertainties related to the general economic situations in China and
in the world, the availability for additional funds, whether we can
successfully manage the growth of the operations and our ability to
operate profitably after the initial growth period is completed.
RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 2002 were $686,264,
down 43.7% from $1,218,534 over the three months ended March 31,
2001. This decrease was primarily attributable to a 50.0% drop in
revenues from real estate rental income, caused mostly by loss of a
major tenant. The first quarter's revenues from real estate rental
income in 2002 were $535,218, compared to $1,067,488 over the first
quarter of 2001. As of March 31, 2002, the net real estate rental
property was $33,136,860. Interest income was $151,046 for the first
quarter of 2002, the same as in the first quarter of 2001.
For the three months ended March 31, 2002, total costs and expenses
were $652,889, slightly higher than $631,727 in the same period of
2001. The first quarter's depreciation expenses increased to $208,243
in 2002 from $202,915 in 2001, interest expenses increased to $326,320
in 2002 from $315,782 in 2001, and real estate operating expenses
increased to $118,326 in 2002 from $65,416 in 2001. Other operating
expenses were $0 in the first quarter of 2002, compared to $47,614 in
same period of 2001.
As of March 31, 2002, the Hotel Group has not yet commenced operations
and has not generated revenues for the three months then ended. In
accordance with Financial Accounting Standards no. 67, the Company
booked a loss of $357,420 for the first quarter of 2002, compared to
a loss of $371,156 in the first quarter of 2001.
For the three months ended March 31, 2002, net income before taxes
and minority interest, after the loss from investment in the Hotel
Group, was a loss of $324,045, compared to a gain $215,651 over
the same period of 2001. The Company's net loss for the first quarter
was $455,524 in 2002, a 344.3% increase from $102,517 of the net loss
for the first quarter of 2001. Net loss per share was $0.06, compared
to $0.01 over the same period a year ago. These changes were
primarily attributable to the drop in revenues from real estate rental
income, caused mostly by loss of a major tenant.
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LIQUIDITY AND CAPITAL RESOURCES
Our liquidity consists of cash, receivables, real estate held for
development and sale and receipts from rental activities. As of March
31, 2002, our cash balance was very low. Our past operations were
supported by related companies, which from time to time lend 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 a result of future cash payments required to retire bank loans and
debts owed to its related companies, management believes that it will be
necessary to secure additional financing to sustain our operations and
to fund our anticipated growth.
We do not have any material commitments for capital expenditures for the
year ending December 31, 2002.
Our projection of future cash requirements is affected by numerous
factors, including but not limited to, changes in customer receipts,
consumer industry trends, operating cost fluctuations, and unplanned
capital spending.
As of the date hereof, we have consolidated indebtedness that is
substantial in relation to our stockholders equity. As of December 31,
2001, we had total bank debt of $17,268,635. We also owed $15,287,772
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 its indebtedness, selling material assets or operations,
or seeking to raise additional debt or equity capital. There can be no
assurance that any of these actions could be effected on satisfactory
terms, that they would enable us to continue to satisfy our capital
requirements or that they would be permitted by the terms of existing or
future debt agreements.
All of our bank debt is secured by the Commercial Towers. As of December
31, 2001, our lenders held an aggregate of $17,268,635 of liens against
the Commercial Towers as security for bank loans of the same amount. If
we are unable to meet the terms of our bank loans, resulting in default
under such bank loans, the lenders may elect to declare all amounts
outstanding under the loans to be immediately due and payable and
foreclose on the Commercial Towers, which would have a material adverse
effect on us.
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The Company signed several agreements with China Construction Bank
and China Merchant Bank to settle certain loans totaling $12,164,070
plus accrued interest. The banks agreed to accept ownership of
certain floor space in Tower A and Podium A as payment for the
outstanding loans and accrued interest. The Company and the banks are
currently having an appraisal performed on the floor space to
determine its value. Once the valuation has been completed and both
parties agree upon the value, title of the floor space will be
transferred to China Construction Bank in full satisfaction of the
obligation. The remaining loans due to China Construction Bank and
China Merchant Bank in the amount of $5,104,565 remained past due as
of March 31, 2002 and the Company is currently in negotiations with
these banks to settle these loan obligations. If we are unable to
settle these bank loan obligations, the lenders may elect to declare
all amounts outstanding under the loans to be immediately due and
payable and foreclose on the Commercial Towers, which would have a
material adverse effect on us.
EFFECT OF FLUCTUATIONS IN FOREIGN EXCHANGE RATES
We operate in the People's Republic of China, maintain our financial
control center in Shenyang, PRC, and record most of our operating
activities in Renminbi ("RMB"), the Chinese currency. The exchange
rate between RMB and US Dollars has been relatively stable for the
last few years. We do not believe that fluctuations in the foreign
exchange rates will have a material effect on our financial
statements. The RMB exchange rates, however, are fixed by the
government of the PRC, and a change in the exchange rate by the PRC
could have a material adverse effect on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market 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 fiscal year ended December 31, 2001 was immaterial. The exchange
rate between RMB and US Dollars has been relatively stable for the
last few years. We do not believe that fluctuations in the foreign
exchange rates will have a Material effect on our financial
statements. The RMB exchange rates, however, are fixed by the Chinese
government, and a change in the exchange rate by the PRC could have a
material adverse effect on our financial statements.
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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 December 31, 2001 and has no plans to do so within the next twelve
months.
PART II. OTHER INFORMATION
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Huayang International Holdings, Inc.
Date: May 11, 2002 /s/ Gao WanJun
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Name: Gao WanJun
Title: President and Chief
Executive Officer
Date: May 11, 2002 /s/ Wang Yufei
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Name: Wang Yufei
Title: Director, CFO and Secretary
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