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 June 30, 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 June 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 JUNE 30, 2002 AND DECEMBER 31, 2001
June 30, 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
$1,704,725 at June 30, 2002 and
$1,348,515 at December 31, 2001 $ 23,288,575 $ 32,513,101
Real estate held for development and sale 4,083,472 2,285,143
Cash 423 253
Due from related companies 16,705,482 15,674,533
Investment in affiliates 12,793,914 13,616,339
Property and equipment, net 1,370,125 1,387,965
Deferred tax asset 705,502 544,668
Other assets 771,026 761,553
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Total assets $ 59,718,519 $ 66,783,555
========== ==========
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June 30, December 31,
2002 2001
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Unaudited Audited
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities $ 7,036,708 $ 7,131,131
Bank loans 10,027,633 17,268,635
Due to related companies 15,287,760 15,287,772
Income taxes payable 3,117,376 2,773,238
Deferred income taxes payable 878,922 758,097
Deferred interest income 596,724 521,202
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Total liabilities 36,945,123 43,740,075
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MINORITY INTEREST 1,125,021 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 15,398 17,347
Retained earnings 3,186,670 3,463,701
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Total shareholders' equity 21,648,375 21,927,355
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Total liabilities
And shareholders' equity $ 59,718,519 $ 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 AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2002 2001 2002 2001
Unaudited Unaudited Unaudited Unaudited
--------- --------- --------- ---------
REVENUES:
Real estate sales $ 396,382 $ - $ 396,382 $ -
Real estate rental income 539,421 1,093,812 1,074,639 2,161,301
Interest income 151,046 151,046 302,092 302,092
--------- --------- --------- ---------
Total revenues 1,086,849 1,244,858 1,773,113 2,463,393
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of real estate sold 308,670 - 308,670 -
Real estate operating expenses 49,631 10,600 167,957 76,015
Depreciation 148,038 203,142 356,281 406,057
Interest expense 240,372 324,505 566,691 640,287
Other operating expenses - 24,316 - 71,929
--------- --------- --------- ---------
Total costs and expenses 746,711 562,563 1,399,599 1,194,288
--------- --------- --------- ---------
LOSS FROM INVESTMENT IN AFFILIATES 464,358 460,776 821,778 831,932
--------- --------- --------- ---------
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (124,220) 221,519 (448,264) 437,173
PROVISION FOR INCOME TAXES 94,153 320,369 235,354 627,517
--------- --------- --------- ---------
LOSS BEFORE MINORITY INTEREST (218,373) (98,850) (683,618) (190,344)
MINORITY INTEREST (18,619) (14,371) (8,896) (25,390)
--------- --------- --------- ---------
NET LOSS BEFORE EXTRAORDINARY ITEM (236,992) (113,221) (692,514) (215,734)
GAIN ON EXTRAORDINARY ITEM, NET OF
INCOME TAX EFFECT 415,483 - 415,483 -
--------- --------- --------- ---------
NET INCOME (LOSS) AFTER
EXTRAORDINARY ITEM 178,491 (113,221) (277,031) (215,734)
OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation
adjustments (1,949) (1,315) 1,949 (1,315)
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 176,542 $ (114,536) $ (275,082) $ (217,049)
NET INCOME (LOSS) PER SHARE
(basic and diluted, based on
total outstanding shares of
7,500,807) $ 0.02 $ (0.02) $ (0.04) $ (0.03)
====== ====== ====== ======
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 SIX MONTHS ENDED JUNE 30, 2002 AND 2001
2002 2001
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Unaudited Unaudited
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (277,031) $ (215,734)
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sales of real estate (87,712) -
Net cash proceeds from sales of real estate 396,382 -
Net gain on debt extinguishment (415,483) -
Real estate development costs (962,648) 199,136
Depreciation 356,281 406,057
Loss from investment in affiliates 821,778 831,932
Change in investment in affiliates due to
currency translation 647 (10,846)
Increase in deferred tax assets (160,834) (225,091)
Decrease (increase) in other assets (9,473) (134,796)
Increase in accounts payable and accrued liabilities 1,057,056 1,581,333
Increase in deferred income taxes payable 120,825 96,381
Increase in deferred interest income 75,522 75,522
Increase in income taxes payable 139,501 483,406
Change in accumulated other comprehensive income (1,949) 12,797
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Net cash provided by operating activities 1,052,862 3,100,097
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (29,793) (383,430)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Change in bank loan due to currency translation (834) 1,461
Repayments to related companies (1,030,961) (2,743,558)
Increase in minority interest 8,896 25,390
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Net cash used in financing activities (1,022,899) (2,716,707)
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NET INCREASE (DECREASE) IN CASH 170 (40)
CASH, beginning of period 253 851
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CASH, end of period $ 423 $ 811
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ - $ 2,479
========= =========
Income taxes paid $ - $ -
========= =========
NON-CASH FINANCING AND INVESTING ACTIVITIES:
During the six months ended June 30, 2002, the Company transferred title to office space
recorded under the caption "Real estate held for development and sale" in the amount of
$7,838,030 to satisfy bank loan obligations in the amount of $7,240,148 plus accrued
interest of $1,800,386.
The accompanying notes are an integral part of this statement.
- - 5 -
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 June 30, 2002, the results of operations
for the three and six months ended June 30, 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 the following as of June 30, 2002 and December 31, 2001:
June 30, December 31,
2002 2001
------------ ------------
Share of net assets $ 4,402,514 $ 5,224,939
Advances made 8,391,400 8,391,400
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Totals $12,793,914 $ 13,616,339
============ ============
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 June 30, 2002:
BUSINESS
HOTEL CENTER GARAGE Total
------------ ------------ ------------ -------------
Balance Sheet
Assets $ 60,283,741 $ 41,089,373 $ 22,746,213 $ 124,119,327
Liabilities 58,294,670 31,692,708 12,116,874 102,104,252
------------ ------------ ------------ -------------
Equity 1,989,071 9,396,665 10,629,339 22,015,075
Other shareholders'
equity 1,591,257 7,517,332 8,503,972 17,612,561
------------ ------------ ------------ -------------
HIHI, equity $ 397,814 $ 1,879,333 $ 2,125,367 $ 4,402,514
============ ============ ============ =============
Revenue $ 724,107 $ 554,892 $ - $ -
Depreciation (723,137) (428,183) (252,630) (1,403,950)
General expenses (3,315,961) (633,442) (34,536) (3,983,939)
------------ ------------ ------------ -------------
Net loss $ (3,314,991) $ (506,733) $ (287,166) $ (5,387,889)
============ ============ ============ =============
HIHI share of loss $ (662,998) $ (101,347) $ (57,433) $ (821,778)
============ ============ ============ =============
The Hotel Group had a soft opening in April 2002 and has generated
minimum revenues for the three months ended June 30, 2002. 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 six months ended June 30, 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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Note 5 - Debt extinguishment
In April 2002, Haitong reached an agreement with Housing Fund Management
Center to settle loans in the amount of $7,240,168 plus accrued interest
of $1,800,386. Haitong has tranferred title to certain office space in
full satisfaction of the loans due to Housing Fund Management Center.
Haitong had recorded the office space at historical cost which amounted
to $7,838,030. As a result of this transaction, the Company recorded an
extraordinary gain of $415,483, net of related income tax of $204,637.
Net gain per share, net of related income tax effect, amounted to
approximately $0.06.
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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 economic, political, legal and social conditions in
China, general global economic conditions, the availability for
additional funds, dependence upon key management personnel, 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 June 30, 2002 were $1,086,849,
down 12.7% from $1,244,858 over the three months ended June 30,
2001. This decrease was primarily attributable to a 50.1% drop in
revenues from real estate rental income, caused mostly by loss of a
major tenant, and partly offset by real estate sales. The second
quarter's revenues from real estate rental income in 2002 were
$539,421, compared to $1,093,812 over the second quarter of 2001.
As of June 30, 2002, the net real estate rental property was
$23,288,575. Interest income was $151,046 for second quarter of 2002,
the same as in the second quarter of 2001. Real estate sales in the
second quarter of 2002 were $396,382, compared to none in the second
quarter of 2001.
For the three months ended June 30, 2002, total costs and expenses
were $746,711, 32.7% higher than $562,563 in the same period of
2001. The increase was primarily due to the increase of cost of real
estate sold, offset partly by the decreases in depreciation and
interest expenses. The depreciation expenses dropped 27.1% to $148,038
in 2002 from $203,142 in 2001, interest expenses dropped 25.9% to
$240,372 in 2002 from $324,505 in 2001, and real estate operating
expenses increased to $49,631 in 2002 from $10,600 in 2001. Other
operating expenses were $0 in the second quarter of 2002, compared to
$24,316 in the same period of 2001.
The Hotel Group had a soft opening in April 2002 and has generated
minimum revenues for the three months ended June 30, 2002. The Company
booked a loss of $464,358 for the second quarter of 2002, compared to
a loss of $460,776 in the second quarter of 2001.
- 10 -
In April 2002, Haitong reached an agreement with Housing Fund Management
Center to settle loans in the amount of $7,240,168 plus accrued interest
of $1,800,386. Haitong has tranferred title to certain office space in
full satisfaction of the loans due to Housing Fund Management Center.
Haitong had recorded the office space at historical cost which amounted
to $7,838,030. As a result of this transaction, the Company recorded an
extraordinary gain of $415,483, net of related income tax of $204,637.
Net gain per share, net of related income tax effect, amounted to
approximately $0.06. The Company will continue its efforts to further
reduce its existing debts.
For the three months ended June 30, 2002, net income before taxes
and minority interest, after the loss from investment in the Hotel
Group but before the extraordinary gain from debt settlement, was a loss
of $124,220, compared to an income of $221,519 over the same period of
2001. The Company's net loss for the second quarter, excluding the
extraordinary gain from debt settlement, was $236,992 in 2002, a 109.3%
increase from $113,221 of the net loss for the same period of 2001.
Net income per share, including the extraordinary gain of $0.06 from debt
settlement, was $0.02, compared to a loss of $0.02 over the same period
a year ago. Factors causing these changes include the extraordinary gain
from debt settlement, additional real estate sales, and a drop in revenues
from real estate rental income, caused mostly by loss of a major tenant
late last year.
On June 27, 2002, the Company announced the execution of a letter of
intent to acquire a controlling interest in Jiahe Medicine Group, a
pharmaceutical company based in China. Subject to a number of
conditions, including execution of a definitive acquisition agreement,
satisfactory completion of Jiahe's due diligence and regulatory
clearances, the acquisition is expected to close within two months from
the execution of the letter of intent.
The proposed transaction with Jiahe Medicine Group is the first step
of the Company's strategic plan to enter the technology sector in China.
The Company will continue such efforts and expand its operations to other
technology sector."
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity consists of cash, receivables, real estate held for
development and sale and receipts from rental activities. As of June
30, 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.
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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 June 30,
2002, we had total bank debt of $10,027,633. We also owed $15,287,760
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 June 30,
2002, our lenders held an aggregate of $10,027,633 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.
The Company signed an agreement with China Construction Bank to settle
certain loans totaling $4,923,314 plus accrued interest. The bank
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 bank 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
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China Merchant Bank in the amount of $5,104,319 remained past due as
of June 30, 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 six months ended June 30, 2002 was immaterial. The exchange
rate between RMB and US Dollars has been relatively stable for the
last few years. We do not believe that fluctuations in the foreign
exchange rates will have a Material effect on our financial
statements. The RMB exchange rates, however, are fixed by the Chinese
government, and a change in the exchange rate by the PRC could have a
material adverse effect on our financial statements.
The Company has not entered into any derivative financial instruments
to manage interest rate risk or for speculative purpose and is not
currently evaluating the future use of such financial instruments.
The Company does not hold cash equivalents or marketable securities as
of June 30, 2002 and has no plans to do so within the next twelve
months.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
During the three months ended June 30, 2002, the Company filed the following
reports on Form 8-K:
(1) Press release of June 3, 2002, announcing the opening of Sheraton Shenyang
Lido Hotel.
(2) Press release of June 27, 2002, announcing the execution of a letter of
intent to acquire a controlling interest in Jiahe Medicine Group, a
pharmaceutical company based in China.
- 14 -
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: August 12, 2002 /s/ Gao WanJun
-----------------
Name: Gao WanJun
Title: President and Chief
Executive Officer
Date: August 12, 2002 /s/ Wang Yufei
-----------------
Name: Wang Yufei
Title: Director, CFO and Secretary
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