SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-K
[ X ] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-7619
----------------------------------
HENG FAI CHINA INDUSTRIES, INC.
(Name of small business issuer in its charter)
Delaware 93-063633
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
650 West Georgia Street, Suite 588, Vancouver
British Columbia, Canada V68 4N8
(604) 685-8318
(Address and telephone number of principal executive offices)
----------------------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $.01 par value per share.
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 twelve 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 [ ] NO [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The Registrant's revenues for the fiscal year ended December 31, 1995 totaled
$633,574.
As of June 14, 1996, the aggregate market value of the voting stock held by
non-affiliates of the Registrant (assuming for this purpose that only directors
and officers of the Registrant are affiliates of the Registrant), based on the
average of the closing bid and asked prices of $3.875 on that date, was
approximately $25,897,009.
As of June 14, 1996, the Registrant had outstanding 10,959,542 shares of Common
Stock.
Documents incorporated by reference: Other than certain exhibits hereto which
have been specifically incorporated by reference herein in Item 13 under Part
III hereof, no other documents are incorporated by reference.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
<PAGE>
INDEX TO FORM 10-K
OF
HENG FAI CHINA INDUSTRIES, INC.
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
Item 1. Business...........................................................................1
General - The Company..............................................................1
The Business.......................................................................2
The Cement Industry................................................................2
Cement Customers...................................................................3
Real Estate........................................................................3
Employees..........................................................................6
Government Regulation..............................................................6
Item 2. Description of Property............................................................6
Item 3. Legal Proceedings..................................................................6
Item 4. Submission of Matters to a Vote of Security Holders................................6
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...........................7
Item 6. Selected Financial Data............................................................8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................................9
Item 8. Financial Statements.............................................................F-1
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.............................................9
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act................................9
Management Biographies.............................................................9
Indemnification of Directors and Officers.........................................11
Committees of the Board of Directors..............................................11
Compliance with Section 16(a) of the Exchange Act of 1934.........................11
ii
<PAGE>
Page
----
Item 11. Executive Compensation............................................................12
Summary Compensation Table........................................................12
Stock Option Plans................................................................12
Option/SAR Grants in Last Fiscal Year.............................................13
Aggregate Option/SAR Exercises in Last Fiscal Year
And Fiscal Year-End Option/SAR Values.............................................13
Employment Agreements.............................................................14
Remuneration of Directors.........................................................14
Item 12. Security Ownership of Certain Beneficial Owners and Management....................14
Item 13. Certain Relationships and Related Transactions....................................16
Item 14. Exhibits and Reports on Form 8-K..................................................16
(a) Exhibits.....................................................................16
(b) Reports on Form 8-K..........................................................16
</TABLE>
iii
<PAGE>
PART I
Item 1. Business
General - The Company
Heng Fai China Industries, Inc. (the "Company") was originally
organized on March 24, 1958 as Time Saver Markets, Inc. pursuant to the laws of
the State of California. On October 29, 1973, Alpine International Corporation,
a private Oregon corporation, merged with and into Time Saver Markets, Inc.
Subsequent thereto, Time Saver Markets, Inc. changed its name to Alpine
International Corporation. In August 1994, Alpine International Corporation
changed its name to Alpine Merger Corporation ("Alpine-California") after having
entered into a merger agreement with a Delaware corporation named Alpine
International Corporation ("Alpine-Delaware") which was formed for the purpose
of facilitating the reincorporation of Alpine-California in the State of
Delaware through a merger with and into Alpine-Delaware. Subsequently, in
November 1994, Alpine-Delaware changed its name to Heng Fai China Industries,
Inc. Alpine-California and Alpine-Delaware may be collectively referred to
hereinafter as "Alpine."
Alpine conducted no significant operations between April 1992, when it
emerged from reorganization under Chapter 11 of Title II of the U.S. Bankruptcy
Code, and June 1994, when it acquired Vancouver Hong Kong Properties Limited
("Vancouver Hong Kong") which owns an apartment building in North Vancouver,
British Columbia. In connection therewith, Alpine obtained equity financing of
US$120,000 and issued 258,943 shares of its common stock (the "Common Stock")
and 258,943 common stock purchase warrants, which are exercisable through
September 2, 1999 at an exercise price of US$3.20 per share (the "Warrants"). In
addition, concurrent therewith, the Company also issued 37,500 shares of Common
Stock and 37,500 Common Stock Purchase Warrants. The foregoing share and per
share numbers reflect the effects of a one-for-four and a one-for-ten reverse
stock split undertaken by the Company subsequent to the acquisition of Vancouver
Hong Kong. See Note 1 of the Notes to the Consolidated Financial Statements
included elsewhere herein.
In January 1995, the Company acquired its wholly-owned subsidiary, Heng
Fai China & Asia Industries Limited ("Asia"), a company incorporated in Hong
Kong, along with Asia's two wholly-owned subsidiaries, Heng Fai China Industries
Limited ("China") and Heng Fai Light Products Limited ("Light"). China and Light
were incorporated in Hong Kong and the Peoples' Republic of China (the "PRC"),
respectively. China and Light, through China's wholly-owned subsidiary, Cangzhou
Min You Cement Company, Ltd. (formerly Cangzhou Citizen Cement Product Co., Ltd.
and referred to hereinafter as "Min You") obtained the rights to acquire direct
or joint venture operating lease interests for three cement factories in the
Hebei province of the PRC: (i) the Hebei Cangzhou City Chemical Corporation
Factory (the "Cangzhou Factory"); (ii) the Qingxian Cement Factory (the
"Qingxian Factory"); and (iii) the Hebei Cangzhou Area Construction Materials
Factory (the "Hebei Factory"). See Note 1 of the Notes to the Consolidated
Financial Statements included elsewhere herein.
1
<PAGE>
On April 17, 1995, Min You exercised its option to lease a production
line at the Cangzhou Factory. From April through June 1995, Min You suspended
its operations at the Cangzhou Factory to facilitate the Company's expansion and
modernization of such factory as required pursuant to the provisions of the
agreement governing the Company's exercise of its options. Operations at the
factory resumed at the end of June 1995 upon completion of the expansion and
modernization of such factory. As of December 31, 1995, neither the Company nor
its subsidiaries had exercised the options to acquire the interests in the
Qingxian Factory or the Hebei Factory, which options expired unexercised. See
Note 1 of the Notes to the Consolidated Financial Statements included elsewhere
herein.
The Business
The Company's business consists primarily of operation by Min You of
the Cangzhou Factory and operation of the apartment building in North Vancouver,
British Columbia. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 below.
The Cement Industry
The cement industry in the PRC consists of over 7,000 small, medium and
large cement plants. Most of the cement plants in the PRC are small, use
relatively old technology, have an average production scale of less than 50,000
tons per year and supply a customer market located within close proximity.
Historically, the cement industry in the PRC developed around the concept of
cement plants utilizing vertical kiln technology imported from Eastern Europe
and the former Soviet Union. The manufacturing of cement involves the following:
(i) the quarrying of raw materials; (ii) the crushing, grinding and blending of
these raw materials into either a powder (the "dry process") or a mud-like
mixture of slurry (the "wet process"); (iii) the burning of raw material mix in
kilns to produce pellets called "clinker"; and (iv) the grinding of the clinker
with gypsum and other products, such as slag from steel mills, to produce
cement. The "burning" phase is the key phase of production and is primarily
responsible for the quality of the cement. The "burning" phase consumes most of
the fuels used in the production of cement, while the "grinding" of the raw
materials and production of "clinker" consumes most of the electricity used in
the production of cement. The type of production process, "wet process" or "dry
process", determines the type and design characteristics of the kiln. Vertical
kiln and rotary kiln technologies are employed in the manufacturing of cement
products. Vertical kiln is an older technology that utilizes the "dry process"
of cement production. When technology transfers from Eastern Europe and the
former Soviet Union were restricted in the late 1980s, the PRC was forced to
develop its own technology. The PRC continued to utilize vertical kilns, largely
due to their: (i) lower investment costs; (ii) simplicity of design, shorter
construction time and production goals; and (iii) relatively less sophisticated
technological requirements.
As the cement industry in the PRC matures and demand for higher grade
cement increases, the Company believes that there will be a greater shift to
rotary kiln technology because vertical kilns are not expected to be able to
satisfy significantly increased demand.
2
<PAGE>
Rotary kiln technology is able to use the "wet process", "dry process" or a
combination for the production of cement. Rotary kilns can be built to any
desired capacity and are capable to replace multiple vertical kilns with a
single production line. It is uncertain how long it will be before vertical
kilns are replaced by more technologically modern kilns, such as rotary kilns.
Factors which limit the shift to rotary kiln technology include the difficulty
in obtaining the necessary capital to acquire rotary kiln technology and
equipment, the paucity of technical expertise in the PRC necessary to operate
and maintain rotary kilns, and the poor infrastructure in the PRC which inhibits
the ability to distribute the volume of products necessary to justify the higher
investment. The Company believes that vertical kilns will most likely continue
to be used in the PRC for the foreseeable future.
Cement in the PRC is categorized on the basis of its compressive
strength so that, for example, #425 cement has a minimum strength of 425kg/cm2.
The common grades of cement include #325, #425, #525 and #625. In the PRC: #325
is commonly used for basic construction with long fixation periods and minimal
weight requirements, such as plastering; #425 is commonly used for buildings of
up to 20 to 30 stories (depending on each building's specifications); bridges
and city roads; #525 is commonly used for infrastructure projects, such as
airports, railways and highways and for buildings requiring stronger cement than
#425; and #625 is commonly used for specialized purposes such as providing
support for certain structures such as power plants and where extremely quick
fixation times are necessary. The term "higher grades of cement" generally refer
to grades for #425 cement or above.
Vertical kiln technology is employed by Min You and only cement #325 is
produced there.
Cement Customers
All cement production by Min You at the Cangzhou Factory is #325
cement, accounting for 100% of the cement sales in Fiscal 1995. Products are
primarily sold to over 5 distributors (approximately 50% of the cement sales in
Fiscal 1995). The balance of sales are made directly to end-users, such as
framers or small-size developers located in the Hebei Province, PRC. In 1995,
NamDaguang No. 1 Building Materials Company, Limited was the largest customer of
Min You, representing approximately 23% of total cement sales. However, the
amount of sales to each customer may vary from quarter to quarter depending upon
the customer's particular construction activities or, in case of distributors,
those of its customers. Min You has resisted entering into fixed price sales
contracts due to its expectation that cement prices will continue to escalate
for as long as demand exceeds supply.
Real Estate
The apartment building operated by the Company is located within the
Central Lonsdale area of the City of North Vancouver, British Columbia.
Developments in the immediate area consist primarily of low to medium density
residential units, with commercial development focused along Lonsdale Avenue to
the west and the more prominent cross streets such as 13th
3
<PAGE>
Street and 15th Street. Loins Gate Hospital, a principal medical facility, is
located just north of the apartment building at the intersection of East 13th
Street and St. George Avenue.
The Central Lonsdale corridor serves as the primary commercial centre
for the city and the surrounding areas of North Vancouver. Residential
development in the surrounding areas consist of a variety of 3-story rental and
strata tiled apartments, plus lower density townhouse developments. The area
also has signs of higher density development spotted throughout the area.
Thus, the apartment building is located within a desirable and stable
multiple residential oriented neighborhood, located in close proximity to local
retail, recreational and public amenities.
The following information has been extracted from the Canada Mortgage
Housing Corporation's ("CMHC") Vancouver CMA Rental Market Report.
VACANCY RATES
REGION 10/94 10/95
- ------------- ------------- ----------
City of North 0.5% 0.2%
Vancouver
District of North 0.4% 0.5%
Vancouver
Metro Vancouver 0.8% 1.2%
APARTMENT RENTAL RATES
City of North Vancouver 10/94 10/95
- ----------------------- ----- -----
Bachelor CDN$523 CDN$552
One Bedroom CDN$650 CDN$661
Two Bedroom CDN$779 CDN$798
The apartment building improvements in North Vancouver consist of a
three story wood frame rental apartment building constructed in the late 1960's.
The building has a below grade basement containing the mechanical rooms, various
storage rooms, workshops and recreational areas.
The apartment building has a total of 60 suites consisting of one
bachelor suite, 38 one bedroom suites and 21 two bedroom suites. Twelve of the
two bedroom suites located on the corners of the building offer wood burning
fireplaces. The suites are generally larger than
4
<PAGE>
average and on the whole, have been well maintained. General finishing details
include hardwood floors or wall-to-wall carpeting with vinyl flooring in the
kitchens and bathrooms, adequate cabinet/counter space in the kitchens with two
appliances, partly tiled shower surrounds in the bathrooms and covered balconies
or patios.
Paved open parking for 60 vehicles is provided at the rear of the
apartment building. Access/egress is available by a paved rear service lane off
St. Andrews Avenue.
Overall, the property provides well maintained rental accommodations,
consistent with the quality of other projects located within the general area.
The roof was replaced in 1992. Since then, there has been no major upgrading,
but day to day maintenance as required.
Market Rental Rates:
- --------------------
The current monthly rents* are as follows:
SUITE TYPE MONTHLY RENT
Bachelor CDN$540
One Bedroom CDN$600-$665
Two Bedroom CDN$745-$800
-------------------
* Rent includes heat, hot water, parking and cablevision.
By way of comparison, average apartment rents in the City of North
Vancouver and surrounding District of North Vancouver were as follows, based on
the CMHC Rental Market Survey:
CMHC Rental Market Survey
October 1995 Bachelor 1Bdrm 2Bdrm
------------ -------- ----- -----
City of North Vanouver CDN$552 $661 CDN$798
District of North Vancouver CDN$600 $679 CDN$887
The above survey would tend to support the conclusion that the monthly
rents within the subject are reasonably in line with market rents, taking into
account the size and condition of the units plus the inclusions in the monthly
rent.
5
<PAGE>
Employees
The Company currently employs approximately 146 persons, 4 of whom are
in management, 2 of whom oversee operation of the apartment building in North
Vancouver, British Columbia and 140 of whom are employed full time at Min You
(29 of such employees are in management). Pursuant to the articles of
association governing the activities of Min You pursuant to the laws of Hong
Kong, the employees at such factory have established a trade union to protect
the rights of the employees. The Company believes that its relationship with its
employees at Min You are good and that establishment of the trade union
facilitates the fulfillment of the economic goals of Min You and provides
effective assistance in resolution through mediation of disputes between those
employees in management of Min You and the other employees at the factory.
Government Regulation
The Company is not aware of any governmental regulations in the United
States which materially adversely affect its business or operations in the
United States. The Company's participation in operation of Min You is subject to
significant governmental regulation in Hong Kong and the Company believes it is
in compliance with such regulations to the extent the same are applicable to the
Company.
Item 2. Description of Property
The apartment building which the Company operates in Vancouver is
composed of 60 individual residential units in a three story frame building
situated at the corner of East 12th Street and St. Andrews Avenue in North
Vancouver, British Columbia, Canada. The apartment building consists of
approximately 57,340 square feet and is situated on approximately 1.109 acres of
land. The apartment building is owned by the Company, subject to first and
second mortgages. The land underlying the apartment building is leased pursuant
to a lease which terminates on May 31, 2032, subject to earlier termination in
certain circumstances. The annual lease cost for the land is fixed at
CDN$110,000 (US$80,321) until the year 2010, after which time it will be
renegotiated for the remaining term.
Item 3. Legal Proceedings
The Company is not a party to any pending or ongoing litigation.
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1995, no matters were placed
before the stockholders of the Company for consideration.
6
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is currently quoted on the Nasdaq OTC
Electronic Bulletin Board. The following table sets forth, for the periods
indicated, the reported high and low bid and asked price quotations for the
Common Stock for the periods such securities have been reported on the Nasdaq
OTC Electronic Bulletin Board. Such quotations reflect inter-dealer prices, but
do not include retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.
Common Stock
---------------------------------------
Bid ($) Asked ($)
------------------- ----------------
Period of Quotation High Low High Low
------------------------ ------ ------- ------ -----
Fiscal 1994: First Quarter * * * *
- -----------
Second Quarter 1/100 1/200 1/10 1/20
Third Quarter 1/50 1/100 1/10 1/10
Fourth Quarter 1/100 1/10000 1/10 1/10
Fiscal 1995: First Quarter 5 1/8 8 5
- -----------
Second Quarter 8 2 11-3/4 4
Third Quarter 9-3/8 4-3/4 13-1/4 8-1/2
Fourth Quarter 9-1/2 1 15 5-7/8
- --------------------
* The Company's Common Stock commenced quotation on the Nasdaq OTC Electronic
Bulletin Board (the "Bulletin Board") in March 1994. Prior thereto, the
Common Stock was quoted in the so-called "Pink Sheets" issued by the
National Quotation Bureau. Information relating to that period of time that
the Company's Common Stock has been quoted on the Bulletin Board, was
received from NASDAQ Market Research. Information relating to the prior
period was provided by the National Quotation Bureau.
As of June 14, 1996, there were approximately 1,370 holders of record
of the Common Stock based upon information furnished by OTR/Oxford Transfer &
Registrar Securities Agent, the transfer agent for the Common Stock. The Company
believes, based upon security positions listings, that there are more than 1200
beneficial owners of the Common Stock. The closing bid and asked prices of the
Common Stock as reported on the Nasdaq OTC Electronic Bulletin Board on June 14,
1996 were: US$3.25 and US$4.50 per share of Common Stock, respectively. As of
June 14, 1996, there were 10,959,542 shares of Common Stock outstanding.
The Company has never paid and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The Company intends to
retain all earnings for use in the Company's business operations and in the
expansion of its business.
7
<PAGE>
Item 6. Selected Financial Data
The selected financial data set forth below for the four and three
years, respectively, ended December 31, 1995 have been derived from the
Consolidated Financial Statements of the Company included elsewhere herein and
should be read in conjunction with such financial statements (including the
notes thereto) and with Management's Discussion and Analysis of Results of
Operations and Financial Condition, also included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
Statement of Operations Data:* 1995 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues................ $ 633,574 $ 333,319 $336,377 $320,514
Land Lease.............. 80,321 80,533 83,226 83,226
Interest on long-term debt 89,650 79,165 115,912 119,434
Depreciation............ 43,573 46,442 47,801 49,233
Administrative expenses. 185,712 150,017 89,438 68,621
Net income (loss)....... (1,972,726) (22,838) (43,822) (42,580)
Net income (loss) per share (0.190) (0.021) (0.167) (0.162)
Weighted average number of
shares outstanding.... 10,624,064 1,108,037 262,149 262,149
- ----------------------------
</TABLE>
* Operating results are presented for only the past four years since these
are the only years for which the Company has Consolidated Financial
Statements.
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------
Balance Sheet Data:* 1995 1994 1993
-------------------------------------------------------------
<S> <C> <C> <C>
Working capital.................. $ 41,985 $ 85,182 $ 336,377
Total Assets..................... 1,723,856 1,129,696 988,256
Total Liabilities................ 1,765,841 1,132,568 1,188,290
Stockholders' Equity (Deficit)... (41,985) (2,872) (200,034)
- -------------------------
</TABLE>
* Balance sheet figures are presented for only the past three years since
these are the only years for which the Company has Consolidated Balance
Sheets.
No dividends were paid or declared during the five years ended December
31, 1995.
8
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
The Company was originally incorporated in 1958, and until June 1994,
had been engaged in businesses other than those it presently operates, or, since
its April 1992 emergence from reorganization under Chapter 11 of the U.S.
Bankruptcy code, had been inactive.
In June 1994, the Company (which was operating under the name Alpine)
completed the acquisition of and merger with Vancouver Hong Kong, pursuant to
which the Company acquired 100 percent of the ownership of Vancouver Hong Kong
in exchange for the issuance of 258,943 shares of Common Stock and 258,943
Warrants exercisable through September 2, 1999 at a price of US$3.20 per share.
Concurrently, the Company issued 37,500 shares of common stock, 37,500 Warrants
exercisable through September 2, 1999 and received cash proceeds of US$120,000.
The foregoing share and per share numbers reflect the effects of a one-for-four
and a one-for-ten reverse stock split undertaken by the Company subsequent to
the acquisition of Vancouver Hong Kong.
The Company's acquisition of Vancouver Hong Kong was accounted for as a
reverse acquisition. As a result, for accounting purposes, Vancouver Hong Kong
was deemed to have acquired the Company, and is the continuing accounting
entity. Therefore, the results of operations and cash flows presented in the
accompanying consolidated financial statements for the periods prior to June
1994 are those of Vancouver Hong Kong.
Vancouver Hong Kong owns and operates an apartment building in North
Vancouver, British Columbia, and until June 1995 the Company's operations were
comprised of that single segment. As described in Note 1 of the Notes to the
Consolidated Financial Statements, in January 1995, the Company acquired from
Fai Chan (an officer, director and principal stockholder of the Company) the
ownership of 100% of the common stock of Asia and Asia's wholly-owned
subsidiaries, China and Light. Light, through its subsidiary Min You, obtained
the right to acquire the use, for a period of five years commencing January 1,
1995, of a production line at Min You in the PRC. Min You was entitled to lease
the production line for five years by expending Renmibi ("RMB"), the currency of
the PRC, RMB1.2 million on the expansion and modernization of Min You. The
option was exercised and the required RMB1.2 million was expended in fiscal
1995, and beginning in June 1995 the Company's operations included a second
business segment, the production and sale of cement.
9
<PAGE>
Results of Operations
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 increased to US$633,574
from US$333,319 for the year ended December 31, 1994, principally the result of
the revenues derived in the second half of fiscal 1995 from the Company's cement
operation.
The Company's net loss for fiscal 1995 was US$1,972,726, a change of
US$2,000,041 compared to net income of US$27,315 for fiscal 1994. The increase
in the net loss was due to: (i) the operating loss for the cement segment; and
(ii) higher general corporate expenses. The following table sets forth the
components of the fiscal 1995 and 1994 net losses:
1995 1994
------------- -----------
Operating Profit (Loss)
Rental Operations $ 110,608 $125,119
Cement Operations (75,107) --
Investments (52,612) --
General Corporate Expenses (1,833,233) (18,639)
Interest Expense (105,435) (79,165)
----------- --------
$(1,955,779) $ 27,315
=========== ========
The operating profit for the Company's North Vancouver, British
Columbia property decreased by US$14,511 due to increased operating costs.
The Company's cement operations incurred an operating loss of US$75,107
in fiscal 1995, comprised of the following:
Sales $ 278,622
Cost of Sales (235,711)
Rental (14,418)
Salaries (11,185)
Bad Debts (48,420)
Other (43,995)
---------
$ (75,107)
=========
For the months of June through December 1995, the leased production
line operated at less than full capacity while the modernization of the Cangzhou
Factory was completed. As a result, Min You's sales and gross profit margin in
1995 were lower than the levels management believes can be achieved under normal
operating conditions. Management believes that under normal operating
conditions, Min You's sales and gross profit margin should be sufficient to
recover its other operating costs.
10
<PAGE>
During fiscal 1995 the Company purchased shares of the common stock of
three companies traded on the Stock Exchange of Hong Kong Limited. As of
December 31, 1995, the quoted market price of the shares are, in the aggregate,
US$43,941 less than their initial costs. The securities are classified as
available for sale and, accordingly, the decline in their market value has been
charged directly to stockholders' equity as a separate component thereof.
General corporate expenses increased in fiscal 1995 by US$1,814,594 as
the result of consulting fees of US$1,620,433, and a US$110,251 increase in
legal, professional and audit fees. The consulting fees relate to an agreement
the Company entered into in June 1995 for investor relations and financial
advisory services (see Note 7 of the Notes to the Consolidated Financial
Statements). Legal and professional fees increased in fiscal 1995 for expenses
related to the Company's commencement of new business activities through
investments in the PRC.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
The Company's operations during fiscal 1994 and fiscal 1993 were
comprised solely of the operation of the North Vancouver, British Columbia,
property. Net income for fiscal 1994 of US$27,315 represented a US$71,137 change
from the fiscal 1993 net loss of US$43,822 due to a decrease in interest
expense, which resulted from the amortization of the mortgage principal and a
decline in interest rates and a foreign exchange gain. Revenues and expenses
other than interest expense, did not fluctuate significantly between fiscal 1994
and fiscal 1993.
Liquidity and Capital Resources
Operating cash flows for fiscal 1995 were a negative US$365,018, due
principally to the operations of the company's cement production segment. The
Company financed the negative fiscal 1995 operating cash flow from: (i) cash on
hand at the end of fiscal 1995 of US$191,731; (ii) proceeds of US$334,540
obtained from margin and other short-term borrowings; and (iii) US$300,000
obtained from the sale of shares of its common stock. The cash on hand at the
end of fiscal 1994 was the result of the sale of shares of common stock during
fiscal 1994 for proceeds of US$220,000.
As discussed in Note 2 of the Notes to the Consolidated Financial
Statements, the Company's operating losses and net asset deficiency raise
substantial doubts concerning the Company's ability to continue as a going
concern. However, the Company's principal shareholder has agreed to continue to
provide the Company with necessary financial support.
A significant portion of the Company's current operations are conducted
in the PRC and its expenses are paid and revenues received in RMB. Prior to
1994, the foreign currency exchange system in the PRC functioned as a two-tiered
system with different effective exchange rates for the purchase or sale of RMB.
Reforms enacted in 1994 have had the effect of essentially replacing the
two-tiered system with a single exchange system which functions on exchange
rates for the RMB against the Hong Kong Dollar, and against other major
currencies, set by the People's Bank of China on the basis of inter-bank
exchange rates.
11
<PAGE>
Additionally, prior to 1994, there was significant volatility in the
exchange rate between the RMB and the Hong Kong Dollar. The exchange rate
between the RMB and the Hong Kong Dollar has been relatively stable since 1994,
and the PRC government has stated its intentions to intervene, when necessary,
to maintain such stability. However, there can be no assurance that such support
will in fact occur, or that the exchange rate will not fluctuate and cause a
loss in the value of the RMB.
12
<PAGE>
Item 8. Financial Statements
HENG FAI CHINA INDUSTRIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholder's Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to the Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the shareholders and
Board of Directors of
Heng Fai China Industries, Inc.
We have audited the accompanying consolidated balance sheets of Heng
Fai China Industries, Inc. (the "Company") and subsidiaries as of December 31,
1995 and 1994 and the related consolidated statements of operations, changes in
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the consolidated financial position of Heng Fai China
Industries, Inc. and subsidiaries as of December 31, 1995 and 1994 and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 1995 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring loss from operations and
deficiency in net tangible assets raise doubt about its ability to continue as a
going concern.The financial support from the shareholder is described in Note 2.
/s/Deloitte & Touche
- --------------------
Deloitte & Touche
Hong Kong
F-2
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(United States Dollars)
<TABLE>
<CAPTION>
As at As at
Notes December 31, 1995 December 31, 1994
------ ----------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 55,001 $ 191,731
Available-for-sale securities 4 480,835 --
Accounts receivable 29,307 2,231
Prepaid and other current assets 31,365 2,024
Inventories 5 154,370 --
------- ---------
750,878 195,986
PROPERTY, net 6 857,548 933,710
PREPAID RENTAL 1 115,430 --
------- ---------
Total Assets $ 1,723,856 $1,129,696
=========== ==========
CURRENT LIABILITIES
Accounts payable 165,652 20,545
Short-term borrowings 8 60,120 --
Margin loan payable 9 274,420 --
Interest payable 32,983 19,733
Security deposits payable 10,095 11,071
Accrued expenses 116,718 --
Unearned rent -- 12,053
Due to related parties 10 22,005 32,617
Current portion of mortgage 11 17,325 14,785
------ --------
699,318 110,804
LONG-TERM LIABILITIES
Mortgages payable 11 975,108 971,611
Long-term payable 1 91,415 --
------ ---------
Total liabilities 1,765,841 1,082,415
---------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $10 par value,
500,000 shares authorized, none issued -- --
Common Stock, $.01 par value,
30,000,000 shares authorized
10,859,542 and 10,384,542 shares issued
and outstanding 12 108,595 103,845
Contributed surplus 12 2,812,546 193,296
Unrealized loss on available-for-sale securities 4 (43,941) --
Cumulative exchange adjustments 6,968 --
Accumulated deficit (2,222,586) (249,860)
---------- ----------
661,582 47,281
Common stock issued for consulting services
to be received 7 (703,567) --
---------- ----------
Total stockholders' equity (deficit) (41,985) 47,281
------------ ----------
Total liabilities and stockholders' equity (deficit) $ 1,723,856 $1,129,696
=========== ==========
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-3
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(United States Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
Notes 1995 1994 1993
----- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
Rental income $ 347,034 $327,381 $ 333,654
Sales of cement 278,622 -- --
Interest and other income 7,918 5,938 2,723
----------- -------- --------
Total Revenues 633,574 333,319 336,377
----------- -------- --------
Expenses
Cost of Sales of Cement 235,711 -- --
Bad Debts 48,420 -- --
Machinery lease rental 1 28,570 -- --
Depreciation 43,573 46,442 47,801
Legal and professional expenses 133,101 22,350 9,946
Consulting fees 7 1,620,433 -- --
Interest on long-term debt 89,650 -- --
Interest on short-term debt 15,785 79,165 115,912
Utilities 41,871 43,995 43,818
Foreign exchange loss (gain) 12,025 (50,153) --
Land lease 80,321 80,533 83,226
Real estate management fees 15,845 12,373 11,916
Travelling 38,336 -- --
Other operating and administrative expenses 185,712 71,299 67,580
------------- --------- ----------
Total expenses 2,589,353 306,004 380,199
----------- ------- -------
Net (loss) income before income taxes (1,955,779) 27,315 (43,822)
----------- ------- --------
Provision for income taxes 13 16,947 -- --
------------- -----------
Net (loss) income $(1,972,726) $ 27,315 $(43,822)
------------ -------- ---------
Net (loss) income per share $(.19) $.02 $(.17)
====== ==== ======
Weighted average number of shares of
common stock outstanding 10,624,064 1,108,037 262,149
========== ========= =======
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-4
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31
(United States Dollars)
<TABLE>
<CAPTION>
Common Stock
Number of Contributed Accumulated
Shares Amount Surplus Deficit
--------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
At December 31, 1993 3,335,820 $167,000 $ 1,435,000 $(1,602,000)
Elimination of deficit
and net assets at date
of acquisition -- -- (1,602,000) 1,602,000
---------- --------- ----------- -------------
3,335,820 167,000 (167,000) --
Issued to effect the
acquisition of
Vancouver Hong
Kong (Note 1) 10,357,700 517,885 (440,744) (277,175)
Issued for cash
(Note 1) 1,500,000 75,000 45,000 --
---------- --------- ------------- --------------
15,193,520 759,885 (562,744) (277,175)
Reverse stock split
(Note 12b) (11,395,140) (569,757) 569,757 --
---------- -------- ------------ --------------
3,798,380 190,128 7,013 (277,175)
Reverse stock split
(Note 12c) (3,413,838) (186,283) 186,283 --
--------- -------- ------------ --------------
384,542 3,845 193,296 (277,175)
Private placement
(Note 12d) 10,000,000 100,000 -- --
---------- ----------------------- --------------
10,384,542 103,845 193,296 (277,175)
Net income -- -- -- 27,315
----------- ----------------------- --------------
At December 31, 1994 10,384,542 103,845 193,296 (249,860)
Issued to effect the
Consulting
Agreement (Note
12e) (Note 7) 400,000 4,000 2,320,000 --
Amortization of
consulting fees -- -- -- --
---------- ---------- ------------- ------------
10,784,542 107,845 2,513,296 (249,860)
Private placement
(Note 12f) 75,000 750 299,250 --
---------- ---------- ------------- ------------
10,859,542 108,595 2,812,546 (249,860)
Foreign exchange
translation
adjustments -- -- -- --
Net loss -- -- -- (1,972,726)
----------- ------------------------ -----------
10,859,542 108,595 2,812,546 (2,222,586)
Unrealized loss on -- -- --
securities available
for-sale -- -- -- --
----------- --------- ---------- ------------
At December 31, 1995 10,859,542 $ 108,595 $2,812,546 $ (2,222,586)
========== ========= ========== ============
<PAGE>
Common Stock Unrealized
Issued for Loss on
Consulting Available Cumulative
Services to be for-Sale Exchange
Received Securities Adjustments Total
--------------- ------------ ----------- --------
<S> <C> <C> <C> <C>
At December 31, 1993 $-- $-- $ -- $--
Elimination of deficit
and net assets at date
of acquisition -- -- -- --
-------- -------- -------- --------
-- -- -- --
Issued to effect the
acquisition of
Vancouver Hong
Kong (Note 1) -- -- -- (200,034)
Issued for cash -- -- -- 120,000
(Note 1) -------- - -------- -------- --------
-- -- -- (80,034)
Reverse stock split -- -- -- --
(Note 12b) -------- -------- -------- -------
-- -- -- (80,034)
Reverse stock split -- -- -- --
(Note 12c) -------- -------- -------- --------
-- -- -- (80,034)
Private placement -- -- -- 100,000
(Note 12d) -------- -------- -------- ---------
-- -- -- 19,966
-- -- -- 27,315
Net income -------- -------- -------- ---------
-- -- -- 47,281
At December 31, 1994 (2,324,000) -- -- --
Issued to effect the
Consulting
Agreement (Note
12e) (Note 7)
Amortization of
consulting fees 1,620,433 -- -- 1,620,433
---------- --------- -------- ---------
Private placement (703,567) -- -- 1,667,714
(Note 12f) -- -- -- 300,000
---------- --------- -------- ---------
(703,567) -- -- 1,967,714
Foreign exchange
translation -- -- 6,968 6,968
adjustments -- -- -- (1,972,726)
---------- --------- --------- -----------
Net loss (703,567) -- 6,968 1,956
Unrealized loss on
securities available
for-sale -- (43,941) -- (43,941)
---------- ---------- --------- -----------
At December 31, 1995 $ (703,567) $(43,941) $6,968 $ (41,985)
========== ======== ====== ==========
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-5
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(United States Dollars)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net (loss) gain $(1,972,726) $ 27,315 $(43,822)
Adjustments to reconcile net (loss) gain to net cash
(used in) provided by operating activities:
Depreciation and amortization 43,573 46,442 48,351
Consulting fees 1,620,433 -- --
Changes in working capital components:
Accounts receivable (27,024) (2,002) (228)
Prepaid and other current assets (29,293) (166) (1,239)
Inventories (62,955) -- --
Accounts payable 164,646 (13,510) 12,634
Interest payable 12,490 4,902 10,290
Security deposits payable (1,208) (538) 974
Other payable 116,327 -- --
Unearned rent (12,053) 12,053 --
Due to related parties (10,383) (32,617) (11,101)
Exchange difference -- (60,717) --
Prepaid rental (115,430) -- --
----------- ----------- -----------
Net cash (used in) provided by operating activities (273,603) (18,838) 15,859
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities (480,835) -- --
----------- ----------- -----------
Net cash used in investing activities (480,835) -- --
CASH FLOW FROM FINANCING ACTIVITIES
Capital stock issued for cash 300,000 220,000 --
Margin loan payable 274,420 -- --
Short-term loan 60,120 -- --
Repayment of mortgage (16,832) (15,449) (12,522)
-------- ---------- -----------
Net cash provided by (used-in) financing activities 617,708 204,551 (12,522)
Net (decrease) increase in cash and cash equivalents (136,730) 185,713 3,337
Cash and cash equivalents:
Beginning of the period 191,731 6,018 2,681
---------- --------- ---------
End of the period $ 55,001 $191,731 $ 6,018
========== ======== =========
Cash paid during the year for:
Interest $ 89,650 $84,399 $103,753
Income taxes -- -- --
Non-cash financing activities:
Issuance of common stock for consultancy services $2,324,000 -- --
Inventories (see Note 1) $91,415 -- --
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-6
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
In June 1994, Heng Fai China Industries, Inc., then known as Alpine
International Corporation ("Alpine") entered into a business combination with
Vancouver Hong Kong Properties Limited ("Vancouver Hong Kong"), which owns and
operates a residential rental property in North Vancouver, British Columbia. The
business combination resulted in the shareholders of Vancouver Hong Kong being
issued 10,357,700 shares of common stock (the "Common Stock") and 10,357,700
common stock purchase warrants (the "Warrants") of Alpine. As a part of the
business combination a company related to Vancouver Hong Kong agreed to
subscribe for 1,500,000 shares of Common Stock and 1,500,000 common stock
purchase warrants for an aggregate of US$120,000 in cash. The foregoing share
numbers are before the effects of the Company's subsequent one-for-four reverse
stock split and a one-for-ten reverse stock split. The business combination was
accounted for as a reverse acquisition whereby the purchase method of accounting
was used with Vancouver Hong Kong being the accounting parent. Accordingly,
results of operations for periods prior to the reverse acquisition are those of
Vancouver Hong Kong, and the results of Alpine's operations are included only
from the date of such reverse acquisition. Subsequent to the business
combination the name of the legal parent Alpine was changed to Heng Fai China
Industries Inc. (the "Company").
On January 9, 1995, the Company acquired from Fai H. Chan, an officer,
director and stockholder of the Company, 100% of the common stock of Heng Fai
China & Asia Industries, Limited ("Asia") in exchange for nominal consideration.
Asia's wholly-owned subsidiaries, Heng Fai China Industries Limited ("China")
and Heng Fai Light Products Limited ("Light"), had options to acquire lease
interests or ownership interests in an operating joint venture with independent
parties to manufacture cement in the People's Republic of China (the "PRC").
Asia, China and Light did not have any material assets and liabilities at the
time of this acquisition by the Company.
Light, through its wholly-owned subsidiary, Cangzhou Min You Cement
Company Limited (formerly known as Cangzhou Citizen Cement Product Co., Ltd. and
referred to hereinafter as "Min You") exercised its option to enter into a
lease, for a period of five years commencing January 1, 1995, of a production
line at the Hebei Cangzhou City Chemical Corporation Factory (the "Cangzhou
Factory"). Min You was entitled to lease the production line for five years for
a rental of RMB1.2 million (US$144,288) payable through expenditures to renovate
and modernize Min You. The expenditures were made in fiscal 1995 and the
resulting prepaid rental is being amortized over the five year term of the
lease. Amortization was US$28,750 for fiscal 1995. At the initiation of the
Cangzhou Factory lease, the lessor furnished Min You with certain raw materials
and finished goods for US$91,415, which amount is payable, without interest, at
the expiration of the lease in December 1999.
F-7
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
In addition to the foregoing option, China had an option to acquire an
interest in a joint venture, the Cangzhou Jiuhe Cement Co., Ltd. ("Jiuhe"),
which would acquire the use of the existing facilities of the Qingxian Cement
Factory for 30 years. In exchange for contributing RMB17 million (US$2,043,000)
for the expansion and modernization of the existing factory, China would be
entitled to 100% of the profits of the joint venture until China recovered its
contribution, and thereafter 70% of the profits of the joint venture. The
control of Jiuhe would be shared by China and the PRC government, which would
contribute a 30 year lease on the existing facilities for its interest. The
assets of the joint venture would revert to the PRC government at the
termination of the joint venture. China did not exercise the option, which
expired in fiscal 1995.
China also had an option to acquire an interest in a joint venture, the
Hebei Iron Lion Cement Co., Ltd. ("Hebei"), which would acquire the use of the
existing facilities of the Hebei Cangzhou Area Construction Materials Factory
for 30 years. In exchange for contributing RMB70 million (US$8,190,000) for the
expansion and modernization of the existing factory, China would be entitled to
100% of the profits of the joint venture until China recovered its contribution,
and thereafter 52% of the profits of the joint venture. The control of Hebei
would be shared by China and the PRC government, which would contribute a 30
year lease on the existing facilities for its interest. The assets of the joint
venture would revert to the PRC government at the termination of the joint
venture. China did not exercise the option, which expired in fiscal 1995.
Since the conditions of the joint venture contracts for Jiuhe and Hebei
have not been fulfilled, the contracts signed lapsed in accordance with the PRC
Joint Venture Law and regulations. Based on advice from the Company's PRC legal
adviser, the Company does not anticipate any further liabilities, including
legal and financial liabilities arising from the lapse of the option and joint
venture contracts signed for Jiuhe and Hebei.
2. CONTINUING OPERATIONS
These consolidated financial statements have been prepared on the going
concern basis of accounting which assumes the Company will realize its assets
and discharge its liabilities in the normal course of business. The Company is
currently operating at a loss and has a deficiency in net tangible assets.
Should the Company be unable to continue as a going concern it may be required
to realize its assets and settle its liabilities at amounts substantially
different from the current carrying values.
F-8
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
The Company's ability to continue as a going concern is dependent on
continued financial support from its principal shareholder who has signed a
letter of financial support to the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States. The following sets forth the significant accounting principles utilized
in the preparation of the consolidated financial statements:
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 the disclosures of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
The Company holds certain investments in marketable equity securities,
which are carried at fair value. Future changes in the market value of these
securities could materially affect the Company's financial position.
Risks of concentration -- As discussed in Note 1, the Company's
operations are comprised principally of the operation of a rental property in
North Vancouver, British Columbia, and of a cement production operation in the
PRC. As a result, changes in the economic environment in which either of these
operations exist, including changes in the cost or availability of labor or
materials, could have a material impact on the Company. See Note 14 for
information on the geographic location of the Company's accounts.
Principles of consolidation -- The consolidated financial statements
include the accounts of Heng Fai China Industries, Inc. and all significant
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
Cash and cash equivalents -- Cash and cash equivalents include cash on
hand and short-term bank deposits.
Inventories -- Inventories relating to the Company's cement operations
are stated at the lower of cost (determined by the weighted average method) or
market. Cost includes material and conversion cost.
F-9
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
Investment securities -- The Company has classified the marketable
equity securities it holds as available-for-sale. Accordingly, pursuant to
Statement of Financial Accounting Standard No. 115 the securities are measured
at fair value, with unrealized gains and losses, net of applicable taxes,
reported as a separate component of equity.
Depreciation and amortization of building and leasehold improvements --
Building and leasehold improvements are recorded at cost and depreciation is
provided as follows:
Building 5% declining balance
Leasehold improvements amortized over the term of the lease which
expires May 31, 2032 using the straight line
method
Foreign currency translation -- Financial statements of international
subsidiaries are translated into U.S. dollars using the exchange rate at each
balance sheet date for assets and liabilities and a weighted average exchange
rate for each period for revenue and expenses. Where the local currency is the
functional currency, translation adjustments are recorded as a separate
component of shareholders' equity. Where the U.S. dollar is the functional
currency, the financial statements of international subsidiaries are translated
at historical rates and translation adjustments are recorded in income.
Revenue recognition -- Sales of cement are recognized when merchandise
is shipped and title passes to the customer. Rental income is recognized on a
straight-line basis over the periods of the leases.
Income taxes -- Certain items are treated differently for financial
reporting purposes than for income tax purposes. Pursuant to the provision of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", deferred tax is provided, under the liability method, for the
resulting temporary differences between the financial reporting and tax bases of
assets and liabilities, using the tax rates expected to be in effect when the
related temporary differences reverse.
Reclassifications -- Certain prior years' amount have been reclassified
to conform to current year presentation.
F-10
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
4. AVAILABLE-FOR-SALE SECURITIES
The cost and approximate market value of investment securities at
December 31 were as follows:
<TABLE>
<CAPTION>
Cost Gross Unrealized Losses Estimated Fair Value Carrying Value
------- ------------------------- -------------------- --------------
<S> <C> <C> <C> <C>
Corporate equity securities $524,776 $43,942 $480,835 $480,835
========= ======= ======== ========
</TABLE>
The Company acquired the investment securities for cash financed
partially by a margin loan (see Note 9).
In July 1995, the Company acquired 7,100,000 common stock purchase
warrants of Heng Fung Holdings Company Limited ("Heng Fung") in the Hong Kong
stock market. These warrants were exercised to acquire 7,100,000 shares of
common stock of Heng Fung, and the Company acquired an additional 392,000 shares
of common stock of Heng Fung during the third quarter of fiscal 1995. The
shareholding represents 2.7 percent of the total outstanding shares of common
stock of Heng Fung (see Note 10 below).
In July 1995, the Company began acquiring shares of common stock of
Shun Cheong Holdings Limited ("Shun Cheong") in the Hong Kong stock market. At
December 31, 1995, the Company held 754,000 shares of common stock of Shun
Cheong, which represents 0.3 percent of the total outstanding shares of common
stock of Shun Cheong.
In October 1995, the Company began acquiring shares of common stock of
Lippo Limited ("Lippo") in the stock market. At December 31, 1995, the Company
held 20,000 shares of common stock of Lippo, which represents less than 0.1
percent of the total outstanding shares of common stock of Lippo.
The common stock of Heng Fung, Shun Cheong and Lippo are not subject to
any contractual or statutory resale restrictions and any portion of these stocks
can be reasonably expected to qualify for sale within one year.
F-11
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
5. INVENTORIES
Inventories by major categories are summarized as follows:
1995
-----
Raw Materials and supplies $ 67,253
Work-in-progress 67,591
Finished goods 19,526
---------
Total inventories $154,370
6. PROPERTY
The components of property at December 31, are as follows:
1995 1994
---- ------
Building $ 722,538 $ 722,538
Leasehold improvements 548,333 580,922
---------- ----------
Total 1,270,871 1,303,460
Less: accumulated depreciation and
amortization 413,323 369,750
---------- ----------
$ 857,548 $ 933,710
========== ==========
All premises and equipment are pledged to secure banking facilities
extended to the Company (see Note 11).
7. DEFERRED EXPENDITURE
In June 1995, the Company entered into a consulting agreement with a
previously unaffiliated party pursuant to which it receives various investor
relations and financial advisory services. The consulting agreement has a term
of 12 months, subject to earlier termination thereof or renewal for subsequent
periods. Pursuant to the terms of the agreement, the Company: (a) in June 1995,
issued to the consultant an aggregate of 260,000 shares of Common Stock; and (b)
is obligated to issue to the consultant 20,000 shares of Common Stock each month
during the term of the agreement.
The value attributable to the 260,000 shares of Common Stock initially
issued to the consultant pursuant to the consulting agreement, $1,510,600, has
been capitalized and is being
F-12
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
amortized over the 12 month term of the consulting agreement. The value
attributable to the shares of Common Stock being issued on a monthly basis is
being charged to expenses as such shares of Common Stock are issued. The
unamortized portion of the amount recorded for the 260,000 shares of Common
Stock initially issued is presented as a reduction of shareholders' equity.
8. SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1995 represent bank overdrafts on
which the Company pays interest based on the "best lending" rate in the PRC. The
effective interest rate at December 31, 1995 was 14.42%.
9. MARGIN LOAN PAYABLE
The margin loan payable is to a third party and is collateralized by
the Company's investment securities with a carrying value of $480,835. The loan
is repayable on demand and bears interest at Hong Kong best lending rate (8.75%
at December 31, 1995) plus 3.5 per cent per annum.
10. RELATED PARTY TRANSACTIONS
(a) The second mortgage of $87,623 (1994: $85,604) and related interest
payable of $27,743 (1994: $16,293) are payable to the Silverstein Foundation,
Inc., a Panama company, in which Fai Chan's children have beneficial ownership
interests. The related interest expense was $11,066 (1994: $9,463, 1993:
$9,076).
(b) Due to related parties includes amounts owed to directors and
parties related to them. These amounts are unsecured, interest-free and
repayable on demand.
(c) Cash and cash equivalents include $704 (1994: $54,698) held on
deposit at American Pacific Bank. Certain of the officers and/or directors of
such bank are also officers and/or directors of the Company.
(d) The Company owns 7,492,000 shares (2.7 percent) of the outstanding
common stock of Heng Fung (see Note 4). Fai H. Chan and Robert H. Trapp,
directors of Heng Fung, are also officers, directors and/or stockholders of the
Company.
F-13
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
(e) Prepaid and other current assets include $11,639 due from related
companies owned and controlled by certain directors of the Company. Such amount
is unsecured, interest-free and repayable on demand.
11. MORTGAGES PAYABLE
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
First mortgage, principal due monthly through June 15, 1998 with
fixed interest at 8.75%. $904,810 $900,792
Second mortgage, principal due September 1, 1997 with variable
interest at Canadian prime plus 4% (11.5% as at December 31, 1995) 87,623 85,604
-------- ---------
992,433 986,396
Less: Current portion 17,325 14,785
-------- ---------
$975,108 $971,611
======== ========
</TABLE>
The mortgages are denominated in Canadian dollars. Principal repayments
required in each of the next five years are as follows:
1996 $ 17,325
1997 106,526
1998 868,582
1999 and after --
-----------
$992,433
===========
The Company has pledged property and premises with net book value of
$857,548 at December 31, 1995 to secure mortgage loans granted.
12. SHARE CAPITAL
(a) Authorized share capital consists of 30,000,000 (1994: 10,000,000)
shares of Common Stock, par value $0.01, and 500,000 shares of preferred stock,
par value $10.00. No shares of preferred stock have been issued.
F-14
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
In 1994,
(b) the Company changed its state of incorporation through a merger of
the Company with and into its wholly-owned Delaware subsidiary. A reverse stock
split of four old shares for one new share effected the merger.
(c) the Company effected a reverse stock split of ten old shares for
one new share.
(d) the Company issued 10,000,000 shares of Common Stock at $0.01 per
share pursuant to a private placement for proceeds of $100,000.
In 1995,
(e) the Company issued 400,000 shares of Common Stock at $5.81 per
share pursuant to a consulting agreement (see Note 7).
(f) the Company issued 75,000 shares of Common Stock at $4 per share
pursuant to private placements for proceeds of $300,000.
As of December 31, 1995, there were outstanding Warrants to purchase an
aggregate of 296,443 shares of Common Stock, at an exercise price of $3.20 per
share through September 2, 1999. No warrants were issued or exercised during the
fiscal year 1995.
13. INCOME TAXES
The fiscal 1995 provision for income taxes consists of current Canadian
taxes. There were no deferred taxes in fiscal 1995, or current or deferred taxes
in fiscal 1994 or fiscal 1993.
Deferred income taxes reflect the net tax effect of temporary
differences between the amounts of assets and liabilities for income tax
purposes compared with the respective amounts for financial statement purposes.
At December 31, 1995 and 1994, no deferred income tax was recorded because there
were no significant temporary differences.
Under current PRC regulations, Min You receives a full exemption from
enterprise income tax for two years starting from the first profitable year,
followed by 50% reduction in income taxes for the next three profitable years.
In fiscal 1995, Min You reported an operating loss.
F-15
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
14. SEGMENT INFORMATION
The following is a summary of information regarding the Company's
operations by principal activities for each of the three years ended December
31, 1995:
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------
Rental Cement Investment
Income Sales Income Consolidated
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $347,034 $278,622 $7,918 $633,574
Income (Loss) from operations 110,608 (75,107) (52,612) (17,111)
General Corporate Expenses -- -- -- (1,833,233)
Interest Expense -- -- -- (105,435)
------------
Loss before income taxes -- -- -- (1,955,779)
===========
Identifiable assets 877,265 299,107 492,483 1,668,855
Corporate assets -- -- -- 55,001
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------------------------------
Rental Cement Investment
Income Sales Income Consolidated
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $327,381 -- $5,938 $333,319
Income from operations 125,119 -- -- 125,119
General corporate expenses -- -- -- (18,639)
Interest expense -- -- -- (79,165)
--------
Profit before income taxes -- -- -- 27,315
========
Identifiable assets 939,734 -- -- 939,734
Corporate assets -- -- -- 189,962
</TABLE>
<TABLE>
<CAPTION>
1993
----------------------------------------------------------------
Rental Cement Investment
Income Sales Income Consolidated
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $333,654 -- $2,723 $ 336,377
Income from operations 84,611 -- -- 84,611
General corporate expenses -- -- -- (12,521)
Interest expense -- -- -- (115,912)
----------
Loss before income taxes -- -- -- (43,822)
==========
Identifiable assets 988,257 -- -- 988,257
Corporate assets -- -- -- --
</TABLE>
F-16
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
The following is a summary of information regarding the Company's
operations by geographical area for each of the three years ended December 31,
1995:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
North America $ 349,698 $333,319 $ 336,377
PRC 279,251 -- --
Hong Kong 4,625 -- --
----------- -------- ---------
$ 633,574 $333,319 $ 336,377
=========== ======== =========
Operating Income (Loss)
North America $ 104,640 $125,119 $ 84,611
PRC (74,480) -- --
Hong Kong (47,271) -- --
----------- -------- ---------
$ (17,111) $125,119 $ 84,611
General Corporate Expenses $(1,833,233) $(18,639) $ (12,521)
Interest Expenses $ (105,435) $(79,165) $(115,912)
------------ -------- ---------
Income (Loss) from continuing operations
before income taxes $(1,955,779) $ 27,315 $ (43,822)
=========== ======== ==========
Identifiable Assets
North America $ 877,265 $939,734 $ 988,257
PRC 299,107 -- --
Hong Kong 492,483 -- --
----------- -------- ---------
$ 1,668,855 $939,734 $ 988,257
=========== ======== =========
Corporate Assets $ 55,001 $189,962 --
----------- -------- ---------
</TABLE>
15. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of the SFAS No. 107
"Disclosure about Fair Value of Financial Instruments". The estimated fair value
amounts have been determined by the Company, using available market information
and appropriate valuation methodologies. However, considerable judgement is
necessarily required in interpreting market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange.
F-17
<PAGE>
HENG FAI CHINA INDUSTRIES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
The carrying amounts of cash and cash equivalents and short-term
borrowings and margin loan payable, are a reasonable estimate of their fair
value due to the short maturity of those instruments. The fair value for the
available for sale securities are based primarily on quoted market prices; such
securities are carried at fair value.
The fair value for the mortgages payable and long-term payable were
estimated based on the current rates available to the Company for debt of the
same remaining maturities. At December 31, 1995 mortgages payable and long-term
payable with book values of $975,108 and $91,415 had fair value of approximately
$807,688 and $53,237 respectively.
16. LEASING ACTIVITIES AND COMMITMENTS
The Company leases a piece of land in North Vancouver, British Columbia
on which the Company's rental property is located. The annual rent of
CDN$110,000 (US$80,321) is fixed until May 31, 2010. The Company has the option
to extend the lease to May 31, 2032 at a rent to be negotiated. The Company also
leases certain manufacturing equipment under operating leases for its cement
operation for a period of five years commencing January 1, 1995. All amounts due
under this lease were prepaid (see Note 1).
Total rental expenses charged to operations were $108,891 in 1995,
$80,533 in 1994 and $83,226 in 1993.
At December 31, 1995, the minimum future rental commitments under
non-cancellable leases payable over the remaining lives of the leases are:
Minimum Future
Rental Commitment
----------------
1996 $ 80,321
1997 80,321
1998 80,321
1999 80,321
2000 80,321
2001 through 2010 803,210
----------
$1,204,815
==========
F-18
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
There have been no changes in or disagreements with accountants on
accounting, financial disclosure or other matters which would require disclosure
herein.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The names and ages of all directors and executive officers of the
Company are as follows:
Name Age Position with the Companye
- ----- --- ---------------------------
Fai H. Chan 51 President, Chief Executive Officer and Director
Ronald M. Lau 26 Director
Robert H. Trapp 40 Secretary, Treasurer and4Director
Tong Wan Chan(1) 21 Director
David T. Chen(2) 59 Director
-----------
(1) The noted director resigned on June 27, 1995.
(2) The noted director resigned on August 1, 1995.
Management Biographies
Fai H. Chan has been the president and a director of the Company since
June 1994 and has served as the Company's Chief Executive Officer since June
1995. Since January 1995, Mr. Chan has been an executive director and director
of Hua Jian International Finance Company Limited (a member of China Huaneng
Holdings). Since June 1993, Mr. Chan has been a director of Inter-Asia Equities,
Inc., a Canadian company. Since September 1992, Mr. Chan has also been an
executive director and director of Heng Fung Holdings Co., Ltd., a public
company in Hong Kong which is listed on the Hong Kong Stock Exchange. Since
March 1988, Mr. Chan has been the chairman of the board of directors of American
Pacific Bank, a bank in Oregon, and between April 1991 and April 1993, he was
the chief executive officer of such bank.
Ronald M. Lau has been a director of the Company since July 1995. Since
June 1995, Mr. Lau has been the financial controller of Heng Fung Holdings Co.,
Ltd., a public company in Hong Kong which is listed on the Hong Kong Stock
Exchange. Prior thereto, from August
9
<PAGE>
1991 until October 1994, Mr. Lau worked as an auditor at Deloitte Touche
Tohmatsu in Hong Kong.
Robert H. Trapp has been the secretary and treasurer and a director of
the Company since June 1994. Since May 1995, Mr. Trapp has been a director of
Heng Fung Holding Co., Ltd., a public company in Hong Kong which is listed on
the Hong Kong Stock Exchange. Since April 1994, Mr. Trapp has been the secretary
of the Company. Since February 1995, Mr. Trapp has been a director of Inter-Asia
Equities, Inc., a Canadian company. Since July 1991, he has also been the
Canadian operational manager for Pacific Concord Holding (Canada) Ltd.,
responsible for management, marketing, and financial reporting operations of
such company to Pacific Concord Holding Ltd. of Hong Kong. Between March and
June 1991, Mr. Trapp was a securities trainee at Pacific International
Securities in Vancouver, B.C., Canada. Between September 1985 and June 1989, Mr.
Trapp served as an executive officer and a director of Inter-Asia Equities, Inc.
Tong Wan Chan served as a director of the Company from June 2, 1995
until June 27, 1995. He is currently attending the University of British
Columbia in Vancouver, B.C., Canada. During the summers of 1993 and 1994, he was
a office/computer assistant of Heng Fung Holding Co., Ltd. During the summer of
1995, Mr. Chan worked for Peregrine Investments Holdings Ltd. in Hong Kong as an
assistant to the manager of the derivative securities division. Tong Wan Chan is
the son of Fai H. Chan, the Company's president, chief executive officer and a
director.
David T. Chen served as a director of the Company from June 1994 until
August 1995. Since April 1993, he has been the chief executive officer of
American Pacific Bank and, since September 1993, the president of American
Pacific Bank. Between March 1990 and December 1991, he was the associate
administrator of the Farmers Home Administration ("FHA") of the U.S. Department
of Agriculture, and was Oregon State Director of the FHA between October 1986
and March 1990.
All officers of the Company are elected to serve in such capacities
until the next annual meeting of the Board of Directors of the Company and until
their successors are duly elected and qualified.
The Board of Directors met twice during the fiscal year ended December
31, 1995. No incumbent director attended fewer than all of the meetings held by
the Board of Directors.
There are no material proceedings to which any director, officer or
affiliate of the Company, any owner of record or beneficially of more than 5% of
any class of voting securities of the Company, or any associate of any such
director, officer, affiliate of the Company or security holder is a party
adverse to the Company or any of its subsidiaries or has a material interest
adverse to the Company or any of its subsidiaries.
10
<PAGE>
Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law empowers a
corporation to indemnify its directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as directors
and officers provided that this provision shall not eliminate of limit the
liability of a director: (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) arising under Section 174 of the Delaware general Corporation Law; or (iv)
for any transaction from which the director derived an improper personal
benefit. The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's by-laws, any agreement, vote of shareholders or otherwise. The
Company's Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by Section 102(b)(7) of the Delaware
General Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such persons
in their official capacities if such person acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
Committees of the Board of Directors
The Board of Directors has not established any committees.
Compliance with Section 16(a) of the Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership of equity
securities of the Company with the Securities and Exchange Commission (the
"Commission") and NASDAQ. Officers, directors and greater-than-ten percent
stockholders are required by regulation to furnish the Company with copies of
all Section 16(a) forms that they file.
Based solely upon a review of Forms 3, Forms 4 and Forms 5 furnished to
the Company pursuant to Rule 16a-3 under the Exchange Act, it is the Company's
belief that, other than as
11
<PAGE>
set forth below, any such forms required to be filed pursuant to Section 16(a)
of the Exchange Act were timely filed, as necessary, by the officers, directors
and securityholders required to file the same.
Item 11. Executive Compensation
Summary Compensation Table
The Company did not pay any cash compensation to the Company's Chief
Executive Officer for services rendered to the Company during the fiscal year
indicated. None of the Company's executive officers who served as such at the
end of the last fiscal year earned in excess of $100,000 during the fiscal years
indicated.
<TABLE>
<CAPTION>
Long-Term Compensation
- ------------------------------------------------------------------------------------------------------------------
Annual Compensation Awards Payouts
- -------------------------------------------------------------------------------------------------------------------
All
Name and Other Annual Restricted Other
Principal Salary Bonus Compensation Stock Options/ LTIP Compen-
Position Year ($) ($) ($) Awards ($) SARs (#) Payouts (#) sation ($)
-------- ---- --- --- --- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fai H. Chan, 1995 -- -- -- -- -- -- --
President and 1994 -- -- -- -- -- -- --
Chief 1993 -- -- -- -- -- -- --
Executive
Officer
Robert H. Trapp, 1995 -- -- -- -- -- -- --
Secretary, 1994 -- -- -- -- -- -- --
Treasurer and 1993 -- -- -- -- -- -- --
Director
</TABLE>
Stock Option Plans
The Company currently has no stock option plans.
12
<PAGE>
Option/SAR Grants in Last Fiscal Year
There were no options granted during the fiscal year ended December 31,
1995 as set forth below.
<TABLE>
<CAPTION>
Number of Securities Percent of Total
Underlying Options/SARs Exercise or
Options/SARs Granted to Employees Base Price Expiration
Name Granted (#) in Fiscal Year ($/Sh) Date
---- ----------- -------------- ------ ----
<S> <C> <C> <C> <C>
Fai H. Chan, -- -- -- --
President and
Chief Executive
Officer
Robert H. Trapp, -- -- -- --
Secretary,
Treasurer and
Director
Aggregate Option/SAR Exercises in Last Fiscal Year And Fiscal Year-End Option/
SAR Values
No options were exercised during the fiscal year ended December 31,
1995 as set forth below and there exist no unexercised options as of the end of
the fiscal year ended December 31, 1995.
</TABLE>
<TABLE>
<CAPTION>
Shares
Acquired Number of Securities Value of Unexercised in the
On Value Underlying Unexercised Money Options/SARs at
Exercise Realized Options/SAR at FY-End FY-End
Name (#) ($) (#)
---- --- --- --- ------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Fai H. Chan, -- -- -- -- -- --
President and
Chief Executive
Officer
Robert H. Trapp, -- -- -- -- -- --
Secretary,
Treasurer and
Director
</TABLE>
13
<PAGE>
Employment Agreements
There exist no employment agreements to which the Company is a party.
Remuneration of Directors
Directors do not receive compensation for attendance at meetings of the
Board of Directors. All directors are entitled to reimbursement of reasonable
travel and lodging expenses related to attending meetings of the Board of
Directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of the date hereof, certain
information with respect to stock ownership of: (i) all persons known by the
Company to be beneficial owners of five percent or more of its outstanding
Common Stock; (ii) each of the Company's directors and executive officers; and
(iii) all directors and executive officers as a group (3 persons). Unless
otherwise indicated, the beneficial owners have sole voting and investment power
over the shares of Common Stock listed below.
14
<PAGE>
<TABLE>
<CAPTION>
% of Outstanding Shares
Name and Address Number of Shares of Common Stock
of Beneficial Owner(1) Beneficially Owned(1) Beneficially Owned(1)
---------------------- --------------------- ---------------------
<S> <C> <C>
Fai H. Chan
Unit B, 13/Floor
Lippo Leighton Tower
103-109 Leighton Road
Causeway Bay
Hong Kong 2,296,443(2) 21%
Keow Y. Chan
Unit B, 13/Floor
Lippo Leighton Tower
103-109 Leighton Road
Causeway Bay
Hong Kong 1,980,000(3) 18%
Ebly Profit Limited
24 Raffles Place
18-01/03 Clifford Center
Singapore 2,000,000 18.2%
Robert H. Trapp
Suite 2103
1651 Harwood Street
Vancouver, British Columbia
Canada V6C 142 -- *
Ronald M.T. Lau
Room 204, Block West
Upper Wong Tai
Sin Estate, Kowloon -- *
All Executive Officers & Directors
as a Group (5 Persons)(4) -- 57.2%
--------------------
<FN>
* Less than one percent.
(1) Unless otherwise noted, the Company believes that all of such shares are
owned of record by each individual named as beneficial owner and that such
individual has sole voting and dispositive power with respect to the shares
of Common Stock owned by each of them. Such person's percentage ownership is
determined by assuming that the options or convertible securities that are
held by such person which are exercisable within 60 days from the date
hereof have been exercised or converted, as the case by be.
(2) Includes 2,000,000 shares owned of record directly by the noted stockholder.
Also includes 37,500 shares of Common Stock and 37,500 shares of Common
Stock underlying Warrants owned of record by Inter-Asia Equities, Inc.
("Inter-Asia") and 258,943 shares of Common Stock and 258,943 shares of
Common Stock underlying Warrants owned by the Excess Pension Fund, Inc. (the
"Fund"). The noted stockholder is an officer, director and stockholder of
Inter-Asia and a beneficial owner of the Fund. The stockholder's wife is the
president of Inter-Asia and a beneficial owner of the Fund. Excludes
1,980,000 shares owned of record by the wife of the noted stockholder. See
Footnote (3) below.
(3) Excludes 2,000,000 shares owned of record by the husband of the noted
stockholder, 258,943 shares of Common Stock and 258,943 Warrants owned by
the Fund and 37,500 shares and 37,500 shares of Common Stock underlying
Warrants owned by Inter-Asia. See Footnote (2) above.
</FN>
</TABLE>
15
<PAGE>
(4) In the event that the noted stockholder was deemed to beneficially own all
of the shares owned of record by the spouse of the noted stockholder, such
stockholder would be deemed to beneficially own 4,572,886 shares or
approximately 42% of the outstanding Common Stock of the Company.
There are no agreements or other arrangements or understandings known
to the Company concerning the voting of the Common Stock of the Company or
otherwise concerning control of the Company which are not disclosed herein.
There are no pre-emptive rights applicable to the Company's securities.
Item 13. Certain Relationships and Related Transactions
The Company maintains deposits in accounts at American Pacific Bank.
Fai Chan (an officer, director and stockholder of the Company) is an officer
and/or director of such bank. See Note 10 of the Notes to the Consolidated
Financial Statements.
The Company owns 7,492,000 shares of common stock of Heng Fung Holdings
Company Limited. Messrs. Chan and Trapp (officers, directors and/or stockholders
of the Company) are directors of such company. See Notes 4 and 10 of the Notes
to the Consolidated Financial Statements included elsewhere herein.
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
There were no Current Reports on Form 8-K filed by the Company during
the last quarter of the fiscal year ended December 31, 1995.
16
<PAGE>
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, on July __, 1996.
HENG FAI CHINA INDUSTRIES, INC.
By: /s/ Fai H. Chan
____________________________
Fai H. Chan
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the Registrant, in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Fai H. Chan
_______________________ ______________________ July __, 1996
Fai H. Chan
/s/ Ronald M. Lau
_______________________ ______________________ July __, 1996
Ronald M. Lau
/s/ Robert H. Trapp
_______________________ ______________________ July __, 1996
Robert H. Trapp
