SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-7619
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POWERSOFT TECHNOLOGIES INC.
(Name of issuer in its charter)
DELAWARE 93-063633
(State Or Other Jurisdiction (IRS Employer
Of Incorporation) Identification No.)
650 West Georgia Street, Suite 1600, P.O. Box 11586, Vancouver,
British Columbia, CANADA V6B 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, 1997 totaled
$571,921.
As of October 9, 1998 the aggregate market value of the voting and non-voting
common equity held by non-affiliates of the Registrant, based on the closing
price of $.08 on that date, was approximately $582,648.
As of October 9, 1998 the Registrant had outstanding 15,559,542 shares of common
stock.
Documents incorporated by reference: Other than certain exhibits here to which
have been specifically incorporated by reference herein in Item 14 under Part IV
hereof, no other documents are incorporated by reference.
Transitional Small Business Disclosure Format: YES [ ] NO [ X ]
<PAGE>
INDEX TO FORM 10-K
OF
POWERSOFT TECHNOLOGIES INC.
Page
PART I
------
Item 1. Business..............................................................1
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...............................................9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................9
Item 8. Financial Statements.................................................15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures........................15
Part III
--------
Item 10. Directors and Executive Officers of the Registrant..................16
Item 11. Executive Compensation..............................................19
Item 12. Security Ownership of Certain Beneficial Owners and Management......21
Item 13. Certain Relationships and Related Transactions......................22
Item 14. Exhibits and Reports on Form 8-K....................................23
(a) Exhibits
(b) Reports on Form 8-K
<PAGE>
Part I
Item 1. Business
Historical
Powersoft Technologies, Inc. ("Company") was originally organized in
California on March 24, 1958 as Time Saver Markets, Inc. From 1958 to 1994, the
Company effected numerous name changes and engaged in businesses other than
those it presently operates. In August 1994, the Company changed its corporate
domicile to Delaware. In November 1994, the Company, then known as Alpine
International Corp. changed its name to Heng Fai China Industries, Inc. On March
31, 1998, Heng Fai China Industries, Inc. changed its name to Powersoft
Technologies Inc.
As of October 12, 1998, the Company's subsidiaries are as follows:
Name % Owned State/Foreign Incorporation
- ---- ------- ---------------------------
Vancouver Hong Kong 100% Canada
Properties Ltd.
America & China Business 100% Canada
and Development Inc.
Heng Fai Management Inc. 100% British Virgin Islands
Heng Fai China & 100% Hong Kong
Asia Industries Limited
Heng Fai China 100% Hong Kong
Industries Limited
Worldwide Container 100% Hong Kong
Company Limited
Heng Fai China Industries 100% Hong Kong
Acquisition Limited
Greatly Hong Kong Limited 100% Hong Kong
Wuhan Monkey King 70%(1) People's Republic of China
Container Co., Ltd.
1
<PAGE>
Cangzhou Min You 100%(1) People's Republic of China
Cement Co., Ltd.
- -------------
(1) Represents ownership prior to the Divestiture, as described below. As of
July 24, 1998, the Company divested all ownership in Wuhan Monkey King
Container Co., Ltd., and 81% of its interest in Cangzhou Min You Cement
Co., Ltd.
In 1994, the Company acquired Vancouver Hong Kong Properties Ltd., a
Canadian corporation ("Vancouver Hong Kong"), which owns an apartment building
in North Vancouver, British Columbia ("Apartment Building").
In January 1995, the Company acquired a wholly-owned subsidiary, Heng Fai
China & Asia Industries Limited ("Asia"), a company incorporated in Hong Kong,
along with Asia's wholly-owned subsidiary, Heng Fai China Industries Limited
("China"). China is incorporated in Hong Kong and owned options ("Option") to
acquire, through its wholly owned subsidiary, Cangzhou Min You Cement Co., Ltd.,
a foreign-owned enterprise registered in the People's Republic of China
("PRC")("Min You"), direct or joint venture operating lease interests in the
following three cement factories in the Hebei province of PRC: (i) the Hebei
Cangzhou City Chemical Corporation Factory ("Cangzhou Factory"); (ii) the
Qingxian Cement Factory ("Qingxian Factory"); and (iii) the Hebei Cangzhou Area
Construction Materials Factory ("Hebei Factory"). Min You did not exercise its
Options to acquire interests in the Qingxian Factory and the Hebei Factory, and
such Options have since expired.
In April 1995, Min You exercised an Option to lease a production line at
the Cangzhou Factory. Such lease provided for the use of the production line at
Cangzhou Factory for a five year period commencing January 1, 1995.
In September 1996, the Company, through its wholly owned subsidiary,
Worldwide Container Company, Ltd. ("Worldwide"), acquired a 70% interest in
Wuhan Monkey King Container Co., Ltd. ("Wuhan"), in exchange for 727,272 shares
of the Company's restricted Common Stock. Wuhan is a sino-foreign equity joint
venture registered in PRC which is engaged in the design, manufacture, lease and
repair of standard and non-standard containers and related steel structure
products.
In January 1997, the Company acquired from Fai H. Chan, an officer,
director and shareholder of the Company, 100% of the outstanding common stock of
Greatly Hong Kong Limited ("Greatly HK") in exchange for nominal consideration.
Greatly HK had a 25% interest in Hebei Cherry Valley Duck Ltd. ("Duck Farm"), a
cooperative joint venture established in the PRC which was engaged in the
management and operation of a duck farm in PRC. The investment was wholly
financed by an interest free, short term advance from Fai H. Chan. Other than
the investment in the Duck Farm and advance from Fai H. Chan, Greatly HK had no
other material assets and liabilities, or operations at the time of acquisition.
2
<PAGE>
In March 1997, the Company acquired from Fai H. Chan, an officer, director
and shareholder of the Company, 100% of the outstanding common stock Heng Fai
China Industries Acquisition Limited ("Heng Fai Acquisition") in exchange for
nominal consideration. Heng Fai Acquisition had an option to form a cooperative
joint venture in PRC, but otherwise had no material assets and liabilities, or
operations at the time of acquisition. Heng Fai Acquisition entered into a
conditional agreement ("Agreement") with an unaffiliated party in PRC ("PRC
Party") to establish a joint venture, Heng Li (Zhangjiagang Free Trade Zone)
International Trading and Development Co., Ltd. ("Heng Li"), to develop and
construct a commercial building in Zhangjiagang Free Trade Zone, PRC. However,
the Agreement was not completed and an application has been submitted to cancel
the registration of Heng Li.
Reorganization
After several years of direct investments in PRC, as described above, the
Company believes the returns on such investments are unsatisfactory. The Company
believes its best course of action is to write-off or discontinue a substantial
part of its PRC operations ("Divestiture"). The Company intends to focus on the
acquisition of companies operating in the fields of computer technology and the
Internet, telecommunications, and financial software applications for the
securities industry. Pursuant to reorganization, the Company commenced the
Divestiture and entered into the following agreements to terminate or
substantially reduce its interest in its PRC operations as:
Min You
- -------
In December 1997, the Company, through China, transferred 81% of its
interest in Min You to two unrelated parties in Hong Kong and PRC. China retains
a 19% interest in Min You and full provisions have been made against the
remaining cost of investment in Min You. Applications for the change in
ownership in Min You have been submitted to the respective authorities in PRC
for consents and approval.
Wuhan
- -----
In December 1997, the Company effected an agreement to reverse the
acquisition by returning its 70% interest in Wuhan and to redeem the 727,272
shares of restricted Common Stock previously issued pursuant to the acquisition.
Applications for the change in ownership in Wuhan have been submitted to the
respective authorities for consents and approval.
Duck Farm
- ---------
In December 23, 1997, Greatly HK effected an agreement to dispose of its
25% interest in the Duck Farm. Applications for the change in ownership of the
Duck Farm have been submitted to the respective authorities for consents and
approval.
3
<PAGE>
Heng Li
- -------
Heng Fai Acquisition did not exercise its option to form Heng Li as certain
conditions of the joint venture agreement were not met. In December 1997, an
application was submitted to the respective authorities to cancel the
registration of Heng Li.
Real Estate
The Company operates an apartment building, Lord Highlands Apartments, 260
East 12 Street, North Vancouver, British Columbia, Canada V7L 2J6 ("Apartment
Building"), 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 Street and 15th Street. Lions 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 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 Housing
Corporation's ("CMHC") Vancouver CMA Rental Market Report.
Vacancy Rates
- -------------
Region 12/97 12/96
- ------ ----- -----
City of North 0.6% 0.6%
Vancouver
District of North 0.2% 0.2%
Vancouver
Metro Vancouver 1.5% 1.2%
4
<PAGE>
Apartment Rental Rates
- ----------------------
City of North Vancouver 12/97 12/96
- ----------------------- ----- -----
Bachelor CDN$574 CDN$572
One Bedroom CDN$703 CDN$688
Two Bedroom CDN$971 CDN$967
The Apartment Building is a 60 unit, three-story wood frame 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 bedrooms suites. Twelve
of the two bedrooms suites, located on the corners of the building offer wood
burning fireplaces. The suites are generally larger than 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 bathroom 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.
Apartment Building Rental Rates
- -------------------------------
The current monthly rents* are as follows:
Suite Type Monthly Rent
- ---------- ------------
Bachelor CDN$580
One Bedroom CDN$680
Two Bedroom CDN$800
- ------------
* Rent includes heat, hot water, parking and cable television.
The above survey supports 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 month rent.
5
<PAGE>
Employees
The Company currently employs 5 persons, 2 of which oversee the operations
of the Apartment Building, and 1 monitors the operations in PRC. The Company
believes that its relationship with its employees is good.
Government Regulation
The Company is not aware of any government regulations in the United States
or Canada which materially adversely affects its business or operations in
Canada. The Company's participation in the operations of the Apartment Building
are subject to significant governmental regulation in the Canada 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 Company maintains its principal executive offices at 650 West Georgia
Street, Vancouver, British Columbia, Canada. The Company believes that the
office space is satisfactory for its needs.
In June 1998, the Company transferred a lease for an office at 45 Wall
Street, New York, New York to Fronteer Financial Holdings, Ltd.
The Company also operates the Apartment Building, composed of 60 individual
residential units in a three story frame building situated at the corner of East
12 Street and St. Andrews Avenue in North Vancouver, British Columbia, Canada.
The Apartment Building is approximately 57,340 square feet and is situated on
approximately 1,109 acres of land. It is owned by the Company, subject to first
and second mortgages. The land underlying the Apartment Building is leased and
such lease terminates on May 31, 2032, subject to earlier termination in certain
circumstances. The annual lease cost for the land is fixed at $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, 1997, 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 quoted on NASDAQ OTC Electronic Bulletin
Board ("Bulletin Board"). The following table sets forth, for the periods
indicated, the reported high and low bid price quotations for the Common Stock
for the periods such securities have been reported on the 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
------------
High Bid Low Bid
-------- -------
Fiscal 1996:
- ------------
First Quarter 6.25 5.25
Second Quarter 7.50 1.50
Third Quarter 2.50 1.00
Fourth Quarter 1.375 .53
Fiscal 1997:
- ------------
First Quarter 1.875 .53
Second Quarter .813 .34
Third Quarter .60 .24
Fourth Quarter .265 .11
Fiscal 1998:
- ------------
First Quarter .245 .10
Second Quarter .21 .12
The Company's Common Stock commenced quotation on 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 October 9, 1998, there were approximately 1,438 holders of record of
the Common Stock based upon information furnished by OTR/Oxford Transfer &
Registrar Securities Agent,
7
<PAGE>
the transfer agent for the Common Stock. The number of record holders does not
include holders whose securities are held in street name. The closing price of
the Common Stock as reported on the Bulletin Board on October 9, 1998 was $.08.
As of October 9, 1998, there were 15,559,542 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.
8
<PAGE>
Powersoft Technologies, Inc.
December 31, 1997
Item 6. Selected Financial Data
The following table sets forth selected financial data of the Company and
its subsidiaries. The selected consolidated financial data in the table for the
Company's five fiscal years ended December 31, 1993, 1994, 1995, 1996 and 1997,
are derived from the consolidated financial statements included elsewhere
herein. The data should be read in conjunction with "Management's Discussion and
Analysis of Results of Operations and Financial Condition," the Consolidated
Financial Statements of the Company and related Notes thereto and other
financial information included elsewhere herein. All dollar amounts reflect U.S.
Dollars.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net operating revenues $571,921 $428,858 $354,952 $333,319 $336,377
(Loss) income from
continuing operations $(1,217,418) $(2,061,732) $(1,880,672) $27,315 $(43,822)
Total assets $2,388,062 $10,625,380 $1,723,856 $1,129,696 $988,256
Long-term obligations:
Mortgage loans payable $837,966 $865,594 $975,108 $971,611 $986,396
Long-term payable -- $88,744 $91,415 -- --
Per common share:
(Loss) income from
continuing operations $(0.08) $(0.18) $(0.18) $0.02 $(0.17)
Cash dividends per
common share -- -- -- -- --
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto, and
other financial information included elsewhere herein. The financial statements
of the Company are prepared in conformity with United States generally accepted
accounting principles.
Introduction
The Company was originally incorporated in 1958 and until June 1994 had
been engaged in business other than those it presently operates.
The Company owns an Apartment Building in North Vancouver, British
Columbia, and until June 1995 the Company's operations were comprised of that
single segment. In 1995 and 1996, the Company, through various subsidiaries,
acquired certain interests in PRC, including
9
<PAGE>
(i) Min You, which has an option to lease a production line in Cangzhou Factory
for cement manufacturing; (ii) a 70% interest in Wuhan, a PRC container
manufacturer; (iii) an interest in the Duck Farm pursuant to which the Company
operated a duck farm in PRC; and (iv) an option to form Heng Li in order to
develop a commercial building in Zhangjiagang Free Trade Zone, PRC.
In the fourth quarter of 1997, the Company determined that it would
discontinue substantially all of its operations in PRC. The Divestiture included
(i) the transfer of 81% of the Company's interest in Min You to two unrelated
parties; (ii) effecting an agreement to reverse the acquisition of a 70%
interest in Wuhan; (iii) the termination of the Company's interest in the Duck
Farm; and (iv) the termination of the Heng Li joint venture agreement.
As of July 25, 1998, the Company retains a 19% interest in Min You, but
full provisions have been made against the remaining cost of investment in Min
You, and 100% of the outstanding capital stock of Vancouver Hong Kong.
Results of Continuing Operations
Year Ended December 31, 1997 as Compared to the Year Ended December 31, 1996
The Company's net loss from continuing operations for the year ended
December 31, 1997 was $1,217,418, a change of $844,314 compared to a net loss of
$2,061,732 for the year ended December 31, 1996. The decrease in the net loss
was primarily due to (i) an increase in investment income; (ii) a decrease in
consulting fees paid.
Consolidated revenues increased to $571,921 for the year ended December 31,
1997, from $428,858 for the year ended December 31, 1996. This is due to the
gains that have been recorded in connection with its investment securities.
In the operation of Vancouver Hong Kong's real estate, the Company
experienced an increase in rental income of $9,884 from 1996 to 1997. Also
property expenses decreased by $20,637 in 1997 as compared to 1996. This is
because of cost controls applied to repairs, utilities and management fee
expenses.
Operating expenses decreased from $2,490,590 in 1996 to $1,789,339 in 1997.
The decrease is primarily due to the reduced use of consultants for investor
relations and financial advice. Such expenses have declined from $1,368,567 in
1996 to an aggregate of $272,250 in 1997.
In addition to the above consulting fees, there has been an increase in
interest expense, from $121,436 in 1996 to $309,201 in 1997. This is primarily
due to the increase in margin borrowings in 1997, from $489,193 at December 31,
1996, to $3,058,295 at December 31, 1997.
10
<PAGE>
The Company holds certain equity securities that are available for sale.
The Company records unrealized gains and losses, as a component of equity. The
net unrealized losses so recorded during 1997 amounted to $2,228,442. The
cumulative net losses charged to equity as of December 31, 1997 are $2,307,267.
Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995
The Company's net loss from continuing operations for the year ended
December 31, 1996 was $2,061,732, a change of $181,060 compared to a net loss of
$1,880,672 for the year ended December 31, 1995. The increase in the net loss
was primarily due to an increase in consulting fees.
Consolidated revenues increased to $428,858 for the year ended December 31,
1996, from $354,952 for the year ended December 31, 1995. The increase was due
to gains recorded in connection with its investment securities amounting to
$56,552, and other income amounting to $34,172.
In the operation of Vancouver Hong Kong's real estate, the Company
experienced a decline in rental income of $10,390 from 1995 to 1996. Also
property expenses increased by $14,335 in 1996 as compared to 1995.
Operating expenses increased from $2,235,624 in 1995 to $2,490,590 in 1996.
Although the consulting fees incurred to outside consultants decreased by
approximately $250,000, there was an increase in fees incurred to a related
company in the amount of $500,000 for services.
The Company holds certain equity securities that are available for sale.
The Company records unrealized gains and losses, net of applicable taxes, as a
component of equity. The cumulative net unrealized losses so recorded as of
December 31, 1996 amounted to $78,825.
Inflation
The general inflation rate in China was approximately 15%, 8% and 3% per
annum in 1995, 1996 and 1997, respectively. In recent years, the PRC Government
has taken steps to control inflation by means of credit restrictions, increase
in interest rates and open market operations, which in turn, lead to a slowdown
of the Chinese economy. The austerity measures implemented by the PRC Government
have continued to affect the operations of Min You and Wuhan Container. Although
there was a sign of easing in such austerity measures, both turnover and profit
margin of Min You and Wuhan Container were still severely affected.
11
<PAGE>
Discontinued Operations
Year Ended December 31, 1997 as Compared to the Year Ended December 31, 1996
In 1997, the cement operation of Min You recorded sales of $306,398
compared to $540,191 in the year ended December 31, 1996. At the same time the
net loss amounted to $157,117 in fiscal 1997 compared to a loss of $62,487 in
fiscal 1996.
In fiscal 1997, the container operation of Wuhan recorded sales of
$2,934,871 as compared to $1,082,317 in fiscal 1996. At the same time the net
loss amounted to $248,210 in fiscal 1997 compared to a loss of $241,208 in
fiscal 1996.
During 1997, the Company acquired and later disposed of a 25% interest in
the Duck Farm. The aggregate of the Company's share of the loss in the Duck Farm
and the loss on disposition was approximately $300,000.
Year Ended December 31, 1996 as Compared to the Year Ended December 31, 1995
The cement operation of Min You commenced in the second half of 1995.
Cement sales increased from $278,622 in 1995 to $540,191 in 1996. At the same
time the net loss decreased from $75,107 in 1995 to $62,487 in 1996.
Wuhan operated from September through December 1996. Sales amounted to
$1,082,317. The net loss for this period amounted to $241,208.
Liquidity and Capital Resources
The net cash used in operating activities cash flows for the year ended
December 31, 1997 amounted to $4,034,680. The discontinued operations were
responsible for the cash used in operating activities. The discontinued
operations experienced increases in receivables and inventories. Increases were
experienced in trade receivables, receivables from related parties and sales tax
receivable amounting and inventories.
The Company met its working capital requirements from the proceeds of bank
borrowings and the issuance of common shares.
The net cash used in investing activities amounted to $3,279,186 for year
ended December 31, 1997. This is primarily due to the use of cash to pay for the
purchase of available for sale securities.
The net cash provided by financing activities amounted to $7,179,780 for
the year ended December 31, 1997. This is due to the increases in short term
borrowings and margin loans and the issuance of common shares.
12
<PAGE>
On June 15, 1998, the Company renewed its mortgage obligation, in effect,
extending the obligation for a five year period under terms and conditions
similar to the existing note.
As discussed in Note 2 of the Notes to the Consolidated Financial
Statements, the Company's operating losses and deficiency in net tangible assets
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.
Exchange Rate Risk
At present, the Company's revenues and expenses are denominated in U.S.
dollars and Hong Kong dollars. In view of the exchange rate pegged between Hong
Kong dollars and U.S. dollars, the Company is not subject to any direct exposure
from the fluctuation of U.S. dollars. Also, the Company's disposal of its
operations in PRC nearly eliminates exposure to exchange rate risk with the PRC
Renminbi.
The Company is not involved in any hedging activities in foreign
currencies.
New Accounting Standards Not Yet Adopted
In June 1997 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130 "Reporting Comprehensive Income" which requires information on
comprehensive income to be provided in the financial statements. Results of
operations and financial position will not be affected by implementation of this
new standard.
Also, in June 1997, the FASB issued SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information", which supercedes SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise", and which
establishes standards for the way that public enterprises report information
about operating segments in financial statements issued to the public. It also
establishes standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines operating segments as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance. Results of
operations and financial position will not be affected by implementation of the
new standard.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, which amends the disclosure
requirements for pensions and other postretirement benefits. Adoption of the
standard will not significantly change the Company's financial statement
disclosures.
The above new standards not yet adopted are effective for financial
statements for periods beginning after December 15, 1997, and require
comparative information for earlier years to be restated.
13
<PAGE>
During April 1998, the AICPA Accounting Standards Executive Committee
issued Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities". Generally the Statement requires that the costs of start-up
activities shall be expensed as incurred, and that upon initial adoption an
adjustment to reflect the cumulative effect of a change in accounting principle
shall be recorded. This statement will be effective for periods beginning after
December 15, 1998, with earlier application permitted.
The Company believes that the effect of adopting these standards will not
be material to the Company's financial position or results of operations.
Regional Economic Developments
Several countries in Asia have recently experienced significant adverse
economic developments including substantial exchange rate fluctuations,
inflation, social unrest, increased interest rates, reduced economic growth
rates, corporate bankruptcies, declines in the market value of shares listed on
stock exchanges, emergency loan agreements with the International Monetary Fund
and government-imposed austerity measures. To date, neither the PRC nor Hong
Kong has experienced these developments to the same extent as many other major
Asian countries. However, there can be no assurance that these economic
developments in other countries will not adversely affect the economy of the PRC
or Hong Kong, or that similar adverse economic developments will not occur in
the PRC or Hong Kong in the future, which could have a material adverse effect
on a Company's financial condition or results of operations.
The Year 2000
The use of computer systems that rely on two-digit programs to perform
computations or other functions may cause such systems to malfunction with
respect to the year 2000 and subsequent years. Like many other entities, the
Company is currently assessing its computer software and database with respect
to its functionality beyond the turn of the century. The extent and estimated
cost of the modifications which will be required cannot yet be determined,
although it is expected that such expenditures will not have a material effect
on the financial condition and results of operations of the Company. There can
be no assurance, however, that the year 2000 problem will be resolved
successfully and in a timely fashion or that any failure or delay by the Company
or any third parties which interact with the Company in achieving year 2000
compliance will not have an adverse effect on its operations.
14
<PAGE>
Item 8. Financial Statements
The following financial statements are filed at the end of this report,
beginning on page F-1:
POWERSOFT TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENT PAGE(S)
REPORT OF INDEPENDENT AUDITORS......................................... F - 1
CONSOLIDATED BALANCE SHEETS............................................ F - 2
CONSOLIDATED STATEMENTS OF INCOME...................................... F - 4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
(DEFICIT) EQUITY..................................................... F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................. F - 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS......................... F - 7
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.
15
<PAGE>
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
- ---- --- --------
Fai H. Chan 53 President, Chief Executive Officer and Director
Robert H. Trapp 42 Secretary, Treasure and Director
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. In
1998, Mr. Chan was appointed president and chairman of the board of directors of
Fronteer Financial Holdings, Ltd., a securities broker/dealer located in
Colorado. From June 1993 to the present, he has been a director of Inter-Asia
Equities, Inc., a Canadian company. Since September 1992 to the present, he has
been a director of Heng Fung Holdings Co., Ltd. ("Heng Fung"), a public company
in Hong Kong which is listed on the Hong Kong Stock Exchange. In 1995, Mr. Chan
was appointed managing director and chairman of Heng Fung, for which he still
serves. In May 1998, he was appointed a director of Global Med Technologies,
Inc. Since March 1988, he has been 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 said bank.
Robert H. Trapp has been the secretary and treasurer and a director of the
Company sine June 1994. In 1997 and 1998, Mr. Trapp was appointed managing
director and director of Fronteer Financial Holdings, Ltd. 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 of 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.
On January 1, 1998, the Company accepted the resignation of a director,
Ronald M.T. Lau. There were no disputes or disagreements between the Company and
Mr. Lau.
16
<PAGE>
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 five times during the fiscal year ended December
31, 1997. 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.
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 shareholders; (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 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 Securities Act and is therefore
unenforceable.
Committees of the Board of Directors
The Board of Directors has not established any committees.
17
<PAGE>
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 Form 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 that as 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 security holders required to file the
same.
18
<PAGE>
Item 11. Executive Compensation
Summary Compensation Table
During the year ended December 31, 1997, Heng Fai Management, Inc., a
wholly owned subsidiary of the Company, paid $500,000 in consulting and
management fees to Tight Hold Investment Limited, a company wholly owned by Fai
H. Chan, the Company's chief executive officer.
For the Years Ended December 31, 1997, 1996 and 1995
Annual Compensation Awards Payouts
Other
Name Annual
and Compen- Compen-
Principal Year sation sation
Position Ended Salary ($)
- -------- ----- ------ -------
Fai H. Chan, 1997 $500,000
President, CEO 1996 $500,000
and Director 1995 --
Stock Option Plans
The Company currently has no stock option plans.
Option/SAR Grants in Last Fiscal Year
There were no options granted during the fiscal year ended December 31,
1997 as set forth below.
Aggregate Option/SAR Exercises in Last Fiscal Year And Fiscal Year-End
Options/SAR Values
No options were exercised during the fiscal year ended December 31, 1997 as
set forth below and there were no unexercised options as of the end of the
fiscal year ended December 31, 1997.
Employment Agreements
Heng Fai Management, Inc., a wholly owned subsidiary of the Company,
entered into a consultation and management agreement with Tight Hold Investment
Limited, a company
19
<PAGE>
wholly owned by Fai H. Chan, president and chief executive officer of the
Company. The term of this agreement is for ten years having commenced November
1, 1996 and ending October 31, 2006. The remuneration the Company shall pay for
services rendered pursuant to this agreement is as follows: (i) the sum of
$500,000 per year for the duration of employment, a rate of $41,666.67 per month
over 12 equal payments; and (ii) upon the Company meeting NASDAQ National Market
System ("NASDAQ") requirements of having $4,000,000 in net tangible assets, and
obtaining the other requirements which allow the Company's stock to be
marginable on NASDAQ and having declared at least a minimum $0.10 per share
earning and $0.05 dividend to common shareholders, the fee shall increase to
$1,000,000 per year for the duration of employment, a rate of $83,333.00 per
month.
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.
20
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 9, 1998, 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. Unless otherwise indicated, the beneficial
owners have sole voting and investment power over the shares of common stock
listed below.
% of Outstanding
Name and Address Number of Shares of Common Stock
of Beneficial Owner(1) Beneficially Owned(1) Beneficially Owned(1)
- ---------------------- --------------------- --------------------
Fai H. Chan 6,392,886(2)(4) 40.3%
Robert H. Trapp 100,000 **
Ronald M.T. Lau 100,000(5) **
Keow Y. Chan 2,772,886(3)(4) 17.5%
Unit B, 13/Floor
Lippo, Leighton Tower
103-109 Leighton Road
Causeway Bay, Hong Kong
All Executive Officers & Directors 6,492,886 40.9%
as a Group (2 Persons)(5)
- -------------
** Less than 1%
(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 October
9, 1998 have been exercised or converted, as the case may be.
(2) Includes 5,800,000 shares owned of record by Mr. Chan. Also includes (i)
37,500 shares of common stock held by Inter-Asia Equities, Inc.
("Inter-Asia"); (ii) 37,500 shares of common stock underlying warrants held
by Inter-Asia; (iii) 258,943 shares of common stock held by Excess Pension
Fund, Inc. ("Fund"); (iv) 258,943 shares of common stock underlying
warrants held by the Fund. Mr. Chan is an officer, director and stockholder
of Inter-Asia, and a beneficial owner of the Fund. Excludes the 2,180,000
shares owned of record by Mr. Chan's wife. See Footnote (3) below.
(3) Includes (i) 258,943 shares of common stock held by the Fund; (iii) 258,943
shares of common stock underlying warrants held by the Fund; (iv) 37,500
shares of common
21
<PAGE>
stock held by Inter-Asia; and (v) 37,500 shares of common stock underlying
warrants held by Inter-Asia. Ms. Chan is the president and a director of
Inter-Asia, and a beneficial owner of the Fund. Excludes (i) 5,800,000
shares owned of record by Ms. Chan's husband, Fai H. Chan. See Footnote (2)
above.
(4) In the event that Mr. Chan is deemed to beneficially own all of the shares
owned of record by his spouse, Mr. Chan would be deemed to beneficially own
8,572,886 shares or approximately 54% of the outstanding common stock of
the Company.
(5) Mr. Lau resigned as a director of the Company as of January 1, 1998. Mr.
Lau is not considered an officer or director of the Company for affiliate
computation purposes.
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 preemptive rights applicable to the Company's securities.
Item 13. Certain Relationships and Related Transactions
On February 1, 1997, the Company issued an aggregate of 1,700,000 shares of
common stock at $.60 per share to Fai H. Chan (1,300,000 shares), Ronald M. Lau
(100,000 shares), Robert H. Trapp (100,000 shares) and Keow Y. Chan (200,000
shares) pursuant to subscription agreements, for total proceeds of $1,020,000.
Except for Keow Y. Chan (Fai H. Chan's wife), all of the above parties are, or
were, directors of the Company.
On June 25, 1997, the Company issued 2,500,000 shares of common stock at
$.24 per share to Fai H. Chan pursuant to a subscription agreement, for total
proceeds of $600,000.
The Company maintains deposits in accounts at American Pacific Bank. Fai H.
Chan (an officer, director and stockholder of the Company) is an officer and/or
director of such bank. See Note 12 of the Notes to the Consolidated Financial
Statements.
The Company owns 48,535,276 shares of common stock of Heng Fung Holdings
Company Limited. Messrs. Chan, Trapp, and Lau (officers, directors and/or
stockholders of the Company) are officers, directors and /or stockholders of
such company. See Note 5 of the Notes to the Consolidate Financial Statements
included elsewhere herein.
22
<PAGE>
PART IV
Item 14. Exhibits and Reports on Form 8-K
(a)(1)(2) Financial Statements and Schedules - See Index to financial
statements and financial statement schedules on page 15 of this
Annual Report.
(a)(3) Exhibits marked with an (*) are filed herewith. Other exhibits,
incorporated by reference, were previously filed with the
Securities and Exchange Commission ("SEC") as indicated.
Exhibit No. Description
- ----------- -----------
3.1(a) Certificate of Incorporation of Registrant, as amended,
incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
3.1(b) Agreement and Plan of Merger, as amended, incorporated by
reference from the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
3.2 By-laws of Registrant, as amended, incorporated by reference from
the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
4.1 Specimen Certificate representing Registrant's Common Stock.
10.1 Wuhan Container Acquisition Agreement incorporated by reference
to Exhibit 2 of the Registrant's Current Report on Form 8-K filed
with the SEC on September 20, 1996, as amended.
10.2 Consulting Agreement between Registrant and Thomas E. Waite
incorporated by reference to Exhibit 4.1 of the Registrant's Form
S-8 filed with the SEC on March 20, 1997.
10.3 Consulting and Management Agreement between Heng Fai Management,
Inc. and Tight Hold Investment Limited dated November 4, 1996
incorporated by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
21* Subsidiaries of the Registrant.
27* Financial Data Schedule.
Reports on Form 8-K
-------------------
The Company had not filed any reports on Form 8-K during the last quarter
of the fiscal year ended December 31, 1997.
23
<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 October 22, 1998.
HENG FAI CHINA INDUSTRIES, INC.
By: s\ Fai H. Chan
--------------------------------
Fai H. Chan, President
In accordance with 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 President, CEO & Director October 22, 1998
- -----------------------
Fai H. Chan
s\ Robert H. Trapp Secretary, Treasurer & Director October 22, 1998
- -----------------------
Robert H. Trapp
24
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
Index to consolidated financial statements
For each of the three years in the period
ended December 31, 1997
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
CONTENT PAGE(S)
- ------- -------
REPORT OF INDEPENDENT AUDITORS.................................. F - 1
CONSOLIDATED BALANCE SHEETS..................................... F - 2
CONSOLIDATED STATEMENTS OF INCOME............................... F - 4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'
(DEFICIT) EQUITY.............................................. F - 5
CONSOLIDATED STATEMENTS OF CASH FLOWS........................... F - 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.................. F - 7 - F - 22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
We have audited the accompanying consolidated balance sheets of Powersoft
Technologies, Inc. (the Company) and its subsidiaries as of December 31, 1997
and 1996 and the related consolidated statements of income, shareholders'
(deficit) equity and cash flows for each of the three years in the period ended
December 31, 1997. 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 financial position of Powersoft Technologies, Inc. and
its subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and cash flows for each of the three years in the period ended
December 31, 1997 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 losses from operations and minimal
net tangible assets raise substantial doubt as to its ability to continue as a
going concern, however, the principal shareholder has commited to continue
providing financial support. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
s\ Deloitte Touche Tohmatsu
Hong Kong
June 30, 1998 (except for note 19 as to which the date is August 31, 1998)
F-1
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED BALANCE SHEETS
(United States Dollars)
ASSETS
As of December 31,
-------------------------
1997 1996
---- ----
Current assets:
Cash and cash equivalents ........................ $ 36,173 $ 170,259
Available-for-sale securities (note 5) ........... 1,507,345 682,331
Accounts receivable, trade, less allowance
for doubtful accounts of $nil in 1997 and
$70,258 in 1996 ................................ 7,521 980,172
Inventories (note 6) ............................. -- 4,403,682
Prepaid and other current assets ................. 32,153 151,722
Amounts receivable from related parties (note 12) 18,950 136,439
Value added taxes recoverable .................... -- 611,790
----------- -----------
Total current assets ............................... 1,602,142 7,136,395
Property, plant and equipment, net (note 7) ........ 785,920 3,402,238
Prepaid rental (note 3) ............................ -- 86,747
----------- -----------
Total assets ................................... $ 2,388,062 $10,625,380
============ ===========
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Short-term borrowings (note 9) ................... $ -- $ 2,403,026
Mortgage loans payable - current portion (note 13) 115,251 108,069
Accounts payable ................................. 48,701 837,596
Bills payable (note 10) .......................... -- 722,892
Margin loan payable (note 11) .................... 3,058,295 489,193
Interest payable ................................. 43,319 40,212
Other accrued expenses ........................... 100,247 360,749
Security deposits payable ........................ 11,190 11,992
Amounts payable to related parties (note 12) ..... 904,756 1,110,544
----------- -----------
Total current liabilities ...................... 4,281,759 6,084,273
----------- -----------
Long-term liabilities:
Mortgage loans payable (note 13) ................. 837,966 865,594
Long-term payable (note 3) ....................... -- 88,744
----------- -----------
Total long-term liabilities .................... 837,966 954,338
----------- -----------
F-2
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED BALANCE SHEETS
(United States Dollars)
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
As of December 31,
-------------------------
1997 1996
---- ----
Minority interests ................................. $ -- $ 3,583,399
----------- -----------
Commitments and contingencies (note 18)
Shareholders' (deficit) equity:
Preferred stock, $5 par value, 25,000,000 shares
authorized, unissued ........................... -- --
Common stock, $.01 par value, 30,000,000 shares
authorized; issued and outstanding 1997:
15,559,542 shares and 1996: 11,986,814 shares . 155,595 119,868
Additional paid-in capital ....................... 5,385,296 4,701,023
Unrealized loss on available-for-sale securities
(note 5) ....................................... (2,307,267) (78,825)
Cumulative exchange adjustments .................. 1,516 6,968
Accumulated deficit .............................. (5,904,303) (4,510,914)
----------- -----------
(2,669,163) 238,120
Common stock issued for consulting services to
be received (note 8) ........................... (62,500) (234,750)
----------- -----------
Total shareholders' (deficit) equity ............... (2,731,663) 3,370
----------- -----------
Total liabilities and shareholders' (deficit) equity $ 2,388,062 $10,625,380
=========== ===========
See accompanying notes to the Consolidated Financial Statements.
F-3
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(United States Dollars)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental income ................................. $ 346,528 $ 336,644 $ 347,034
Interest ...................................... 515 1,490 4,187
Investment income - securities ................ 210,380 56,552 3,731
Others ........................................ 14,498 34,172 --
----------- ----------- -----------
Total revenues .................................. 571,921 428,858 354,952
----------- ----------- -----------
Expenses:
Depreciation .................................. 41,161 41,815 43,573
Legal and professional fees ................... 149,900 82,831 133,101
Consulting fees (note 8) ...................... 272,250 1,368,567 1,620,433
Consulting fees paid to a related company
(note 12) ................................... 500,000 500,000 --
Interest on long-term debt .................... -- 85,990 89,650
Interest on short-term debt ................... 309,201 35,446 15,785
Investment bank fees .......................... 164,252 -- --
Utilities ..................................... 23,522 48,924 40,169
Foreign exchange (gain) loss .................. (1,695) 10,477 11,965
Land lease .................................... 80,321 80,321 80,321
Real estate management fees ................... 36,784 13,056 15,845
Salaries ...................................... 4,527 4,358 --
Travelling .................................... 17,717 40,841 35,147
Other operating and administrative expenses ... 191,399 177,964 149,635
----------- ----------- -----------
Total expenses .................................. 1,789,339 2,490,590 2,235,624
----------- ----------- -----------
Net loss from continuing operations ............. (1,217,418) (2,061,732) (1,880,672)
----------- ----------- -----------
Discontinued operations (note 3)
Loss from Cangzhou cement ..................... (157,117) (62,487) (75,107)
Gain on disposal of Cangzhou cement ........... 148,775 -- --
Loss from Wuhan ............................... (248,210) (241,208) --
Gain on reversal of Wuhan acquisition ......... 307,442 -- --
Share of loss for the investment in Duck Farm . (107,229) -- --
Loss on disposal of the investment in Duck Farm (194,095) -- --
----------- ----------- -----------
Net loss from discontinued operations ........... (250,434) (303,695) (75,107)
----------- ----------- -----------
Net loss before income taxes .................... (1,467,852) (2,365,427) (1,955,779)
Provision for income taxes (note 15) ............ -- -- 16,947
----------- ----------- -----------
Net loss before minority interest ............... (1,467,852) (2,365,427) (1,972,726)
Minority interest from discontinued operations .. 74,463 77,099 --
----------- ----------- -----------
Net loss ........................................ $(1,393,389) $(2,288,328) $(1,972,726)
=========== =========== ===========
Earnings per share (Basic)
From continuing operations .................... $ (0.08) $ (0.18) $ (0.18)
Effect of discontinued operations ............. (0.01) (0.02) (0.01)
----------- ----------- -----------
Net loss per share ............................ $ (0.09) $ (0.20) $ (0.19)
=========== =========== ===========
Weighted average number of shares of common
stock outstanding ............................. 14,873,091 11,223,288 10,624,064
=========== =========== ===========
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-4
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
(United States Dollars)
<TABLE>
<CAPTION>
Unrealized Common stock
Common stock loss on issued for
--------------------- Additional available Cumulative consulting
Number of paid-in Accumulated for sale exchange services to
shares Amount capital deficit securities adjustments be received Total
------ ------ ------- ------- ---------- ---------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1994.... 10,384,542 $103,845 $ 193,296 $ (249,860) $ - $ - $ - $ 47,281
Issued to effect a
consulting agreement
(notes 14a) (note 8a). 400,000 4,000 2,320,000 - - - (2,324,000) -
Amortization of
consulting fees....... - - - - - - 1,620,433 1,620,433
---------- ------- --------- --------- --------- ------ --------- ---------
10,784,542 107,845 2,513,296 (249,860) - - (703,567) 1,667,714
Private placement
(note 14b)............ 75,000 750 299,250 - - - - 300,000
---------- ------- --------- --------- --------- ------ --------- ---------
10,895,542 108,595 2,812,546 (249,860) - - (703,567) 1,967,714
Foreign exchange
translation
adjustments........... - - - - - 6,968 - 6,968
Net loss................ - - - (1,972,726) - - - (1,972,726)
---------- ------- --------- --------- --------- ------ --------- ---------
10,859,542 108,595 2,812,546 (2,222,586) - 6,968 (703,567) 1,956
Unrealized loss on
securities available-
for-sale.............. - - - - (43,941) - - (43,941)
---------- ------- --------- --------- --------- ------ --------- ---------
At December 31, 1995.... 10,859,542 108,595 2,812,546 (2,222,586) (43,941) 6,968 (703,567) (41,985)
Issued to effect
consulting agreements
(note 14c)(note 8b)... 400,000 4,000 895,750 - - - (899,750) -
Amortization of
consulting fees....... - - - - - - 1,368,567 1,368,567
Issued for acquisition of
a subsidiary (note 14d) 727,272 7,273 992,727 - - - -
1,000,000
---------- ------- --------- --------- --------- ------ --------- ---------
11,986,814 119,868 4,701,023 (2,222,586) (43,941) 6,968 (234,750) 2,326,582
Net loss................ - - - (2,288,328) - - - (2,288,328)
---------- ------- --------- --------- --------- ------ --------- ---------
11,986,814 119,868 4,701,023 (4,510,914) (43,941) - (234,750) 38,254
Unrealized loss on
securities available-
for-sale.............. - - - - (34,884) - - (34,884)
---------- ------- --------- --------- --------- ------ --------- ---------
At December 31, 1996.... 11,986,814 119,868 4,701,023 (4,510,914) (78,825) 6,968 (234,750) 3,370
Private placements
(note 14e)............ 1,700,000 17,000 1,003,000 - - - - 1,020,000
Private placement
(note 14f)............ 2,500,000 25,000 575,000 - - - - 600,000
Issue to effect a
consulting agreement
(notes 8c and 14g).... 100,000 1,000 99,000 - - - (100,000) -
Amortization of consulting
fees.................. - - - - - - 272,250 272,250
Redemption to reverse the
purchase of a subsidiary
(note 14h)............ (727,272) (7,273) (992,727) - - (5,452) - (1,005,452)
---------- ------- --------- --------- --------- ------ --------- ---------
15,559,542 155,595 5,385,296 (4,510,914) (78,825) 1,516 (62,500) 890,168
Net loss................ - - - (1,393,389) - - - (1,393,389)
---------- ------- --------- --------- --------- ------ --------- ---------
15,559,542 155,595 5,385,296 (5,904,303) (78,825) 1,516 (62,500) (503,221)
Unrealized loss on
securities available-
for-sale.............. - - - - (2,228,442) - - (2,228,442)
---------- ------- --------- --------- --------- ------ --------- ---------
At December 31, 1997 15,559,542 $155,595 $5,385,296 $(5,904,303) $(2,307,267) $1,516 $ (62,500) $(2,731,663)
========== ======== ========== =========== =========== ====== ========== ===========
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-5
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(United States Dollars)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flow from operating activities
Net loss.................................................... $(1,393,389) $(2,288,328) $(1,972,726)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest....................................... (74,463) (77,099) -
Depreciation and amortization........................... 208,214 194,939 43,573
Consulting fees......................................... 772,250 1,868,567 1,620,433
Allowance for doubtful accounts......................... - 70,258 -
Provision for stock obsolescence........................ - 52,322 -
Gain on disposal of a subsidiary........................ (148,775) - -
Gain on the reversal of the purchase of a
subsidiary............................................ (307,442) - -
Loss on investment in Duck Farm......................... 301,324 - -
Changes in working capital components:
Accounts receivable................................... (3,033,177) (1,021,123) (27,024)
Inventories........................................... 2,364,197 (1,935,180) (62,955)
Prepaid and other current assets...................... (799,162) 4,851 (17,654)
Amounts receivable from related parties............... (1,653,988) (124,800) (11,639)
Value added taxes recoverable......................... (177,674) (611,790) -
Accounts payable...................................... 649,881 576,792 164,646
Bills payable......................................... (481,928) 722,892 -
Interest payable...................................... 3,107 7,229 12,490
Other accrued expenses................................ 411,983 197,553 116,327
Security deposits payable............................. (802) 1,897 (1,208)
Unearned rent......................................... - - (12,053)
Amounts payable to related parties.................... (703,752) 487,258 (10,383)
Prepaid rental........................................ 28,916 28,683 (115,430)
----------- ----------- ------------
Net cash used in operating activities....................... (4,034,680) (1,845,079) (273,603)
----------- ----------- ------------
Cash flow from investing activities:
Purchase of available-for-sale securities................... (6,098,426) (264,688) (480,835)
Proceeds from sale of available-for-sale securities......... 3,044,970 28,308 -
Purchase of property, plant and equipment................... (91,414) (158,987) -
Cash paid on purchase of subsidiary (note 4)................ - 21,940 -
Cash given up on the reversal of the purchase of
a subsidiary.............................................. (142,973) - -
Proceeds from disposal of a subsidiary...................... 8,657 - -
----------- ----------- ------------
Net cash used in investing activities......................... (3,279,186) (373,427) (480,835)
----------- ----------- ------------
Cash flow from financing activities:
Common stock issued for cash................................ 1,620,000 - 300,000
Increase in margin loan payable............................. 2,569,102 243,081 274,420
Repayment of margin loan.................................... - (28,308) -
Increase in short-term borrowings........................... 3,056,287 1,092,930 60,120
Repayment of mortgage loans................................. (20,446) (18,770) (16,832)
Repayment of long-term payable.............................. (45,163) (2,671) -
Advance from a minority shareholder......................... - 1,047,502 -
----------- ----------- ------------
Net cash provided by financing activities..................... 7,179,780 2,333,764 617,708
----------- ----------- ------------
Net (decrease) increase in cash and cash equivalents.(134,086) 115,258 185,713
Cash and cash equivalents:
Beginning of the period..................................... 170,259 55,001 191,731
----------- ----------- ------------
End of the period........................................... $ 36,173 $ 170,259 $ 55,001
=========== =========== ============
Cash paid during the year for:
Interest.................................................... $ 301,972 $ 184,078 $ 89,650
Non-cash financing activities:
Advances from a related party for investment
in Duck Farm (note 3)..................................... 301,324 - -
Issuance of common stock for consulting services............ 100,000 1,368,567 2,324,000
Inventories (note 3)........................................ - - 91,415
=========== =========== ============
</TABLE>
See accompanying notes to the Consolidated Financial Statements.
F-6
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
1. ORGANIZATION AND BASIS OF FINANCIAL STATEMENTS
In June 1994, 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 $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 firstly changed to Heng Fai China Industries Inc and then to Powersoft
Technologies, Inc., on March 23, 1998. (the "Company").
At December 31, 1997, the Company and its subsidiaries' principal activity
is the operation of a rental property in North Vancouver, British Columbia
in Canada. As a result, changes in the economic environment in which the
operation exist, including changes in the cost or availability of labor or
materials, could have a material impact on the Company. See Note 16 for
information on the geographic location of the Company's accounts.
At December 31, 1997, details of the subsidiary companies are as follows:
<TABLE>
<CAPTION>
Percentage of
Place of equity interest
incorporation/ attributable to Principal
Name of subsidiary establishment the Company activities
- ------------------ ------------- ----------- ----------
<S> <C> <C> <C>
Heng Fai China & Asia Industries Hong Kong 100% Investment holding
Limited
Heng Fai China Industries Hong Kong 100% Inactive
Acquisition Limited
Heng Fai China Industries Limited Hong Kong 100% Investment holding
Greatly Hong Kong Limited Hong Kong 100% Investment holding
Worldwide Container Company Hong Kong 100% Investment holding
Limited trading
Vancouver Hong Kong Properties Canada 100% Property investment
Ltd. and management
America & China Business Development Canada 100% Inactive
Inc.
Heng Fai Management Inc. British Virgin 100% Provision of management
Islands services
</TABLE>
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.
F-7
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
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 minimal 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.
The Company's ability to continue as a going concern is dependent on the
continued financial support of its principal shareholder, Fai H. Chan, who
has signed a letter of financial support to the Company.
3. ACQUISITIONS, REVERSAL AND DISPOSAL
During 1996 and 1995 the Company made two acquisitions both of which have
either been reversed or disposed of in 1997. The acquisitions were
accounted for as a purchase and their operating results are included in the
consolidated statements of income from their respective dates of
acquisition.
On September 4, 1996, through a wholly-owned subsidiary, the Company
acquired a 70% interest in Wuhan Monkey King Container Co., Ltd. ("Wuhan")
in exchange for 727,272 shares of the Company's restricted common stock. No
goodwill arose on the acquisition. Wuhan is a joint venture incorporated in
the People's Republic of China ("PRC") which was formed to engage in the
design, manufacture, lease and repair of standard and non-standard
containers and related steel structure products.
As a result of the unsatisfactory performance of Wuhan in both 1996 and
1997, the Company effected an agreement on December 29, 1997 to reverse the
acquisition by returning a 70% interest in Wuhan to redeem the 727,272
shares of restricted common stock previously issued for the acquisition.
Applications for the change in ownership in Wuhan have been lodged to
respective authorities in PRC for consents and approval. The 1997 results
of Wuhan have been disclosed under discontinued operations and the
comparatives have been restated accordingly.
The 727,272 shares of restricted common stock were still outstanding at the
balance sheet date and appropriate procedures to cancel the restricted
common stock are to be made by the Company.
Revenue from the discontinued operation in Wuhan was $2,934,871, $1,082,317
and $nil in 1997, 1996 and 1995, respectively.
On January 9, 1995, the Company acquired from Fai H. Chan, an officer,
director and stockholder of the Company, 100% of the issued ordinary share
capital of Heng Fai China & Asia Industries Limited ("Heng Fai Asia") in
exchange for nominal consideration. Heng Fai Asia through its wholly-owned
subsidiaries had various options to acquire interests in various lease
interests or operating joint ventures in the PRC, but otherwise had no
material assets and liabilities or operations at the time of acquisition.
F-8
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
3. ACQUISITIONS, REVERSAL AND DISPOSAL - continued
Heng Fai Asia, through its wholly-owned subsidiary, Cangzhou Min You Cement
Co., Ltd. (the "Cangzhou Cement") formed in January 1995 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"). Cangzhou Cement was entitled
to lease the production line for five years for a rental of RMB1.2 million
($144,288) payable through expenditures to renovate and modernize the
Cangzhou Factory. The expenditures were made in 1995 and the resulting
prepaid rental is being amortized over the five years term of the lease.
Amortization was $28,683 in both 1997 and 1996, and $28,750 in 1995. At the
initiation of the Cangzhou Factory lease, the lessor provided certain raw
materials and finished goods totalling $91,415, payment of which is due,
without interest, at the expiration of the lease in December 1999. Heng Fai
Asia's other options lapsed in 1995.
On December 10, 1997, the Company disposed of a 75% and a 6% interest in
the Cangzhou Cement to the Chinese joint venture partner and an
unaffiliated company for a consideration of $nil and $8,657, respectively.
At December 31, 1997, the Company's interest in Cangzhou Cement has been
reduced from 100% to 19% and full provision was made against the remaining
cost of investment in the Cangzhou Cement. Applications for the change in
ownership in Cangzhou Cement have been lodged with the respective
authorities in PRC for consents and approval.
Revenue from discontinued operation in Cangzhou Cement was $306,398,
$540,191 and $278,622 in 1997, 1996 and 1995, respectively.
In January 1997, the Company acquired from Fai H. Chan, an officer,
director and stockholder of the Company, 100% of the issued ordinary share
capital of Greatly Hong Kong Limited ("Greatly HK") in exchange for nominal
consideration. Greatly HK had a 25% interest in HebeiCherry Valley Duck
Ltd. ("Duck Farm"), a cooperative joint venture established in the PRC
which was engaged in the management and operation of a duck farm in PRC.
The investment was wholly financed by an interest free, short term advance
of RMB2,500,000, from Fai H. Chan. Other than the investment in the Duck
Farm and the advance from Fai H. Chan, Greatly HK had no other material
assets and liabilities or operations at the time of acquisition.
As a result of the unsatisfactory performance of the Duck Farm, Greatly HK
effected an agreement in December 1997 to dispose of its 25% interest in
the Duck Farm at a consideration of $nil. Applications for the change in
ownership in the Duck Farm have been lodged with the respective authorities
in PRC for consents and approval.
The share of 1997 results and the loss on disposal of the Duck Farm have
been disclosed under discontinued operations.
On March 3, 1997, the Company acquired from Fai H. Chan, an officer,
director and stockholder of the Company, 100% of the issued ordinary share
capital of Heng Fai China Industries Acquisition Limited ("Heng Fai
Acquisition") in exchange for nominal consideration. Heng Fai Acquisition
had an option to form a cooperative joint venture in the PRC, but otherwise
had no material assets and liabilities or operations at the time of
acquisition.
Heng Fai Acquisition had entered into a conditional agreement (the
"Agreement") with an unaffiliated party in PRC, (the "PRC Party") to
establish a joint venture, in Zhangjiagang Free Trade Zone, PRC. However,
the Agreement was not completed and an application has been lodged to
cancel the registration of the joint venture during 1997.
F-9
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
4. 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:
Principles of consolidation - The consolidated financial statements of
Powersoft Technologies, Inc. include the assets, liabilities, revenues and
expenses of the Company and all its subsidiaries. All material intercompany
transactions and balances have been eliminated.
Cash and cash equivalents - The Company's cash and cash equivalents include
cash on hand and short-term bank deposits, with original maturities of
three months or less .
The following supplemental schedule summarizes the fair value of assets
acquired, cash paid net of cash acquired, common stock issued and the
liabilities assumed in conjunction with the acquisition of equity interests
in subsidiaries in 1997 and 1996:
As of December 31,
------------------
1997 1996
---- ----
Fair value of non-cash assets acquired.......... $ -- $5,083,943
Cash acquired................................... -- 21,940
Common stock issued............................. -- (1,000,000)
---------- ----------
Liabilities assumed............................. $ -- $4,105,883
========== ==========
Inventories - Inventories are stated at the lower of cost determined by the
weighted average method or market. Work-in-progress and finished goods
consist of raw materials, direct labor and overhead associated with the
manufacturing process.
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.
Properties, plant and equipment - Properties, plant and equipment are
stated at cost. Depreciation and amortization is based on the respective
estimated useful lives as calculated on the following bases:
Building in Canada 5% declining balance method
Buildings in the PRC 5% straight line method
Leasehold land Amortized over the term of the lease which expires
on May 31, 2032 using the straight line method
Plant and machinery 10% straight line method
Furniture and equipment 10% to 20% straight line method
Motor vehicles 20% straight line method
No depreciation is provided for construction in progress.
Upon sale or retirement, the costs and related accumulated depreciation or
amortization are eliminated from the accounts and any resulting gain or
loss is included in income.
F-10
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
Revenues recognition - Rental income is recognized on a straight-line basis
over the periods of the leases. Investment income from the sale of
securities is recognized on the transaction date when title of the
securities has passed. Dividend income from investments is recognized when
shareholders' rights to receive payment have been established.
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 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 difference reverse.
Earnings per share - Earnings per share are based on the weighted average
number of common stock outstanding during the year.
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.
Reclassifications - Certain prior year amounts have been reclassified to
conform to the current year's presentation.
New accounting standards not yet adopted
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income which requires information on
comprehensive income to be provided in the financial statements. Results of
operations and financial position will not be affected by implementation of
this new standard.
F-11
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
New accounting standards not yet adopted - continued
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, which supersedes SFAS No. 14,
Financial Reporting for Segments of Business Enterprise, and which
established standards for the way that public enterprises report
information about operating segments in financial statements issued to the
public. It also establishes standards for disclosures regarding products
and services, geographic areas and major customers. SFAS No. 131 defines
operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Results of operations and financial position will
not be affected by implementation of this new standard.
In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, which amends the
disclosure requirements for pensions and other postretirement benefits.
Adoption of the standard will not significantly change the Group's
financial statement disclosures.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which amends SFAS No. 52, Foreign
Currency Translation, to permit special accounting for a hedge of a foreign
currency forecasted transaction with a derivative. It supersedes SFAS No.
80, Accounting for Futures Contracts, No. 105, Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk, and No. 119, Disclosure
about Derivative Financial Instruments and Fair Value of Financial
Instruments. It amends SFAS No. 107 Disclosure about Fair Value of
Financial Instruments, to include in No. 107 the disclosure provisions
about concentrations of credit risk from No. 105. It also establishes
reporting standards for derivative instruments and for hedging activities.
Adoption of the standard will not significantly change the Group's
financial statement disclosures.
The new standards not yet adopted are effective for financial statements
for periods beginning after December 15, 1997 for SFAS No. 130, 131 and
132, and June 15, 1999 for SFAS No. 133 and require comparative information
for earlier years to be restated.
F-12
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
5. AVAILABLE-FOR-SALE SECURITIES
The cost and approximate market value of investment securities were as
follows:
As of December 31,
-------------------------
1997 1996
---- ----
Corporate equity securities:
Cost........................................... $3,814,612 $761,156
Less: Gross unrealized losses.................. (2,307,267) (78,825)
---------- --------
Estimated fair value........................... $1,507,345 $682,331
---------- --------
Carrying value................................. $1,507,345 $682,331
========== ========
All investment securities are pledged to secure the Company's margin loan
payable (See Note 11).
Included in the above securities are 48,535,276 shares at December 31, 1997
(1996: 7,492,000 shares) representing 3.9% (1996: 1.9%) of the outstanding
common stock of Heng Fung Holdings Company Limited, ("Heng Fung"). These
securities were acquired in 1997 at a cost of $3,814,612 (1996: $484,778)
and had a carrying value of $1,507,345 at December 31, 1997 and $426,342 at
December 31, 1996. Fai H. Chan and Robert H. Trapp, directors of Heng Fung,
are also officers, directors and/or shareholders of the Company.
The investment securities held by the Company are not subject to any
contractual or statutory resale restrictions and any portion of these
securities can be reasonably expected to qualify for sale within one year.
6. INVENTORIES
Inventories by major categories are summarized as follows:
As of December 31,
---------------------------
1997 1996
---- ----
Raw materials and supplies................... $ -- $3,176,209
Work-in-progress............................. -- 1,070,066
Finished goods............................... -- 157,407
---------- ----------
$ -- $4,403,682
=========== ==========
F-13
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
7. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
As of December 31,
------------------------
1997 1996
---- ----
Buildings........................................ $ 722,538 $2,316,819
Leasehold land................................... 580,922 548,333
Plant and machinery.............................. -- 1,276,853
Furniture and equipment.......................... 11,347 50,024
Motor vehicles................................... -- 55,816
Construction in progress......................... -- 1,231
----------- ----------
Total............................................ 1,314,807 4,249,076
Less: Accumulated depreciation and amortization.. (528,887) (846,838)
----------- ----------
$ 785,920 $3,402,238
=========== ==========
8. DEFERRED EXPENDITURE
(a) 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 had 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 unamortized portion of the amount recorded for the 260,000 shares
of common stock initially issued brought forward from 1995 of $703,567
was fully amortized in 1996 and recognized as consulting fees.
During 1996, 100,000 shares of common stock were issued to the
consultant pursuant to the terms of the agreement in (b) above. The
value attributable to the 100,000 shares of common stock issued of
$581,000 was charged to the statement of income in 1996 and recognized
as consulting fees.
F-14
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
8. DEFERRED EXPENDITURE - continued
(b) In September 1996, the Company entered into a consulting agreement
with another previously unaffiliated party pursuant to which it
receives various investor relations and financial advisory services.
The consulting agreement had a term of 12 months, subject to earlier
termination thereof or renewal for subsequent periods. Pursuant to the
terms of the agreement, the Company issued an aggregate of 300,000
shares of common stock to the consultant in September 1996. The value
attributable to the 300,000 shares of common stock issued was $319,500
which has been capitalized and is being amortized over the 12 months
term of the consulting agreement.
The unamortized portion of the amount recorded for the 300,000 shares
of common stock initially issued brought forward from 1996 of $234,750
was fully amortized in 1997 and recognized as consulting fees.
(c) In August 1997, 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 is obligated to issue 100,000 shares of
common stock to the consultant.
During 1997, 100,000 shares of common stock were issued to the
consultant pursuant to the terms of the agreement above. The value
attributable to the 100,000 shares of common stock issued was $100,000
which has been capitalized and is being amortized over the 12 months
term of the consulting agreement. The unamortized portion of the
amount recorded for the 100,000 shares of common stock issued is
presented as a reduction of shareholders' equity.
9. SHORT-TERM BORROWINGS
As of December 31,
--------------------
1997 1996
---- ----
Short-term borrowings consist of:
Unsecured bank overdraft................... $ -- $ 2,977
Unsecured bank borrowings.................. -- 2,400,049
--------- ----------
$ -- $2,403,026
========= ==========
The weighted average interest rate as of December 31, 1996 was 13.21% per
annum.
F-15
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
10. BILLS PAYABLE
Bills payable represented accounts payable in the form of bills of exchange
whose acceptances and settlements were handled by banks.
11. MARGIN LOAN PAYABLE
The margin loan payable is collateralized by the Company's investment
securities with a carrying value of $1,507,345. The loan is repayable on
demand and bears interest at Hong Kong best lending rate (10.25% at
December 31, 1997) plus 3.5% per annum.
12. RELATED PARTY TRANSACTIONS
At the balance sheet date the Company had the following balances with
related parties, which are interest-free, repayable on demand and unsecured
unless otherwise stated:
As of December 31,
-----------------------
1997 1996
---- ----
Amounts receivable from:
Certain directors........................... $ -- $ 12,409
Parties related to certain directors........ 18,950 124,030
-------- ----------
$ 18,950 $ 136,439
======== ==========
Amounts payable to:
A director.................................. $620,067 $ 688,987
Parties related to certain directors........ 284,689 421,557
-------- ----------
$904,756 $1,110,544
======== ==========
In addition at December 31, 1997 and 1996, the second mortgage of $87,623
and related interest payable of $38,623 and $3,522, respectively, are
payable to the Silverstein Foundation, Inc., a Panama company, in which Fai
H. Chan's children have beneficial ownership interests. The related
interest expense was $7,774 in 1997, $8,947 in 1996 and $11,066 in 1995.
On November 1, 1996, the Company entered into a 10 year consulting and
managerial agreement with Tight Hold Investment Limited ("Tight Hold"), a
company in which Fai H. Chan has a beneficial ownership interest.
According to the consulting and managerial agreement, Tight Hold shall
provide consulting and managerial services to the Company in return for an
annual consulting fees of $500,000.
Consulting fees paid to Tigh Hold during years ended December 31, 1997,
1996 an 1995 were $500,000, $500,000 and $0, respectively.
F-16
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
12. RELATED PARTY TRANSACTIONS - continued
On February 1, 1997, the Company issued an aggregate of 1,700,000 shares of
common stock at $0.6 per share to Fai H. Chan (1,300,000 shares), Ronald M.
Lau (100,000 shares), Robert H. Trapp (100,000 shares) and Keow Y. Chan
(200,000 shares) pursuant to private placements for aggregate proceeds of
$1,020,000. Except for Keow Y. Chan who is Fai H. Chan's wife, all of the
above parties are directors of the Company. (See note 14 (e))
On June 25, 1997, the Company issued 2,500,000 shares of common stock at
$0.24 per share to Fai H. Chan pursuant to a private placement for proceeds
of $600,000. (See note 14 (f))
The Company maintains deposits in accounts at American Pacific Bank and Fai
H. Chan is an officer and a director of such bank.
13. MORTGAGE LOANS PAYABLE
As of December 31,
------------------
1997 1996
---- ----
First mortgage, principal due monthly through
June 15, 1998 with fixed interest at 8.75%........ $865,594 $886,040
Second mortgage, principal repayable on demand
with interest at Canadian prime (6.00% and 4.75%
as at December 31, 1997 and 1996) plus 4%......... 87,623 87,623
-------- --------
953,217 973,663
Less: Current portion............................... (115,251) (108,069)
-------- --------
$837,966 $865,594
======== ========
On June 5, 1998, the first mortgage loan was renewed for another 5 years
and the principal is repayable monthly through June 15, 2003 at the
Canadian Government five year bond rate plus 1.45%
The mortgage loans are denominated in Canadian dollars. The maturities of
the mortgage loans as at December 31, 1997 are as follows:
1998............................................................ $115,251
1999............................................................ 35,668
2000............................................................ 37,947
2001............................................................ 40,683
2002............................................................ 43,454
2003............................................................ 680,214
--------
$953,217
========
The Company has pledged property with a net book value of $775,834 at
December 31, 1997 to secure the mortgage loans.
F-17
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
14. CAPITAL STOCK
During the three years ended December 31, 1997 there were several changes
of the Company's capital as set out below:
In 1995,
a) the Company issued 400,000 shares of common stock at $5.81 per share
pursuant to a consulting agreement. (see note 8).
b) the Company issued 75,000 shares of common stock at $4 per share
pursuant to private placements for proceeds of $300,000.
In 1996,
c) the Company issued 100,000 and 300,000 shares of common stock at $5.81
and $1.0625 pursuant to consulting agreements (See note 8).
d) the Company issued 727,272 shares of common stock at $1.375 to acquire
a 70% interest in a subsidiary (See note 3).
In 1997,
e) the Company issued 1,700,000 shares of common stock to related parties
at $0.6 per share pursuant to private placements for proceeds of
$1,020,000. (See note 12)
f) the Company issued 2,500,000 shares of common stock to Fai H. Chan at
$0.24 per share pursuant to a private placement for proceeds of
$600,000. (See note 12)
g) the Company issued 100,000 shares of common stock at $1.00 per share
pursuant to a consulting agreement (see note 8).
h) the Company redeemed 727,272 shares of common stock at $1.375 to
reverse the purchase of a 70% interest in a subsidiary (See note 3).
As of December 31, 1997, there were also 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 1997.
F-18
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
15. INCOME TAXES
No provision for income taxes for 1996 and 1997 has been made as the
Company and its subsidiaries made losses in those years. The 1995 provision
for income taxes consists of Canadian taxes for 1995.
Under current PRC regulations, the Company's subsidiaries receive 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. At December 31, 1997 the subsidiaries had not
reported any operating profits.
At December 31, 1997 certain of its subsidiaries had operating tax loss
carry forwards for income tax purposes which may be applied to reduce
future taxable income of the same company. At December 31, 1997 there were
tax loss carryforwards in Hong Kong Special Administrative Region ("Hong
Kong") of approximately $375,000 with no expiration date.
The Company has established a valuation allowance for the entire amount of
these losses. There were no other material temporary differences.
F-19
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
16. 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, 1997:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------- -------------------------------------------
Rental Investment Rental Investment
income income Consolidated income income Consolidated
------ ------ ------------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................ $346,528 $225,393 $ 571,921 $336,644 $ 92,214 $ 428,858
Income (loss) from operations........... 116,404 138,794 255,198 85,883 (59,955) 25,928
General corporate expenses.............. - - (1,163,415) - - (1,966,224)
Interest expense........................ - - (309,201) - - (121,436)
------------ -----------
Net loss from continuing
operations............................ - - (1,217,418) - - (2,061,732)
------------ -----------
Discontinued operations
- Cement.............................. - - (8,342) - - (62,487)
- Containers.......................... - - 59,232 - - (241,208)
- Investment in Duck Farm............. - - (301,324) - - -
------------ -----------
Net loss from discontinued
operations............................ - - (250,434) - - (303,695)
------------ -----------
Net loss before income taxes............ - - $ (1,467,852) - - $(2,365,427)
------------ -----------
Identifiable assets
Continuing operations................. 803,754 1,531,620 $2,335,374 787,920 710,307 $1,498,227
Discontinued operations
- Cement.............................. - - - - - 395,955
- Containers.......................... - - - - - 8,560,939
- Investment in Duck Farm............. - - - - - -
------------ -----------
- - 2,335,374 - - 10,455,121
Corporate assets........................ - - 52,688 - - 170,259
------------ -----------
$2,388,062 $10,625,380
------------ -----------
Supplemental information
Depreciation 40,320 841 $ 41,161 41,395 420 $ 41,815
Capital expenditures - - $ - - 3,363 $ 3,363
------------ -----------
</TABLE>
1995
-----------------------------------------
Rental Investment
income income Consolidated
------ ------ ------------
Revenues............................ $347,034 $ 7,918 $ 354,952
Income (loss) from operations....... 110,608 (52,612) 57,996
General corporate expenses.......... - - (1,833,233)
Interest expense.................... - - (105,435)
------------
Net loss from continuing
operations........................ - - (1,880,672)
------------
Discontinued operations
- Cement.......................... - - (75,107)
- Containers...................... - - -
- Investment in Duck Farm......... - - -
------------
Net loss from discontinued
operations........................ - - (75,107)
------------
Net loss before income taxes........ - - $ (1,955,779)
------------
Identifiable assets
Continuing operations............. 877,265 492,483 $ 1,369,748
Discontinued operations
- Cement.......................... - - 299,107
- Containers...................... - - -
- Investment in Duck Farm......... - - -
------------
- - 1,668,855
Corporate assets.................... - - 55,001
------------
$ 1,723,856
------------
Supplemental information
Depreciation 43,573 - $ 43,573
Capital expenditures - - $ -
------------
F-20
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
16. SEGMENT INFORMATION (Continued)
The following is a summary of information regarding the Company's
operations by geographical area for each of the three years ended December 31,
1997:
1997 1996 1995
---- ---- ----
Revenues
North America ........... $ 360,030 $ 342,112 $ 349,698
Hong Kong ............... 211,891 86,746 5,254
----------- ----------- -----------
$ 571,921 $ 428,858 $ 354,952
=========== =========== ===========
Operating income (loss)
North America ........... $ 116,404 $ 91,351 $ 104,640
Hong Kong ............... (170,407) (186,859) (152,079)
General corporate expenses (1,163,415) (1,966,224) (1,833,233)
----------- ----------- -----------
$(1,217,418) $(2,061,732) $(1,880,672)
=========== =========== ===========
Identifiable assets
North America ........... $ 803,754 $ 787,920 $ 877,265
PRC -- 8,956,894 299,107
Hong Kong ............... 1,531,620 710,307 492,483
Corporate assets .......... 52,688 170,259 55,001
----------- ----------- -----------
$ 2,388,062 $10,625,380 $ 1,723,856
=========== =========== ===========
17. 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
judgment 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.
The carrying amounts of cash and cash equivalents, short-term borrowings,
current portion of mortgage loans payable and margin loan payable, are a
reasonable estimate of their fair value due to the short maturity of the
instruments. The fair value for the available-for-sale securities is based
primarily on quoted market prices and such securities are carried at fair
value.
F-21
<PAGE>
POWERSOFT TECHNOLOGIES, INC.
(Formerly known as Heng Fai China Industries, Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(United States Dollars)
18. COMMITMENTS AND CONTINGENCIES
The Company had no capital commitments as of December 31, 1997.
The Company leases land in North Vancouver, British Columbia on which the
Company's rental property is located. The annual rent of CDN$110,000
($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.
Total rental expense charged to operations was $125,201 in 1997, $131,813
in 1996 and $108,891 in 1995.
At December 31, 1997, the minimum future rental commitments under non
cancelable leases payable over the remaining lives of the leases are:
1998......................................................... $ 105,171
1999......................................................... 80,321
2000......................................................... 80,321
2001......................................................... 80,321
2002......................................................... 80,321
2003 through 2010............................................ 642,568
----------
$1,069,023
==========
19. SUBSEQUENT EVENTS
As of August 31, 1998, the market value of the available-for-sale
securities held by the Company at the balance sheet date had fallen to
approximately US$350,000. These securities were carried at market value of
US$1,507,345 at the balance sheet date.
F-22
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name Place of Incorporation Percentage of Interest
- ---- ---------------------- ----------------------
Vancouver Hong Kong Canada 100%
Properties Ltd.
America & China Business Canada 100%
and Development Inc.
Heng Fai Management Inc. British Virgin Islands 100%
Heng Fai China & Hong Kong 100%
Asia Industries Limited
Heng Fai China Hong Kong 100%
Industries Limited
Worldwide Container Hong Kong 100%
Company Limited
Heng Fai China Industries Hong Kong 100%
Acquisition Limited
Greatly Hong Kong Hong Kong 100%
Limited
Cangzhou Min You People's Republic of China 19%
Cement Co., Ltd.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 36,173
<SECURITIES> 1,507,345
<RECEIVABLES> 26,471
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,602,142
<PP&E> 785,920
<DEPRECIATION> 41,161
<TOTAL-ASSETS> 2,388,062
<CURRENT-LIABILITIES> 4,281,759
<BONDS> 837,966
0
0
<COMMON> 155,595
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,388,062
<SALES> 0
<TOTAL-REVENUES> 571,921
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,789,339
<LOSS-PROVISION> (1,217,418)
<INTEREST-EXPENSE> 473,453
<INCOME-PRETAX> (1,467,852)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,467,852)
<DISCONTINUED> (250,434)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,393,389)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
