ITEM 1. BUSINESS
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. The Company has signed an agreement ("SAR Agreement"), to sell most of its subsidiaries, and as a result, most of its operations to SAR Trading Limited, ("SAR"), a company wholly owned by Fai H. Chan, an officer, director and shareholder of the Company. Upon shareholder approval of the SAR Agreement, the Company intends to focus its operations on the acquisition of companies operating in the fields of computer technology and the Internet, telecommunications and financial software applications for the securities industry.
As of December 31, 1998, the Company's investments were as follows:
Name % Owned State/Foreign Incorporation - ---------------------------- ------------- ---------------------------
Cangzhou Min You 19%(1) People's Republic of China Cement Co., Ltd.
Vancouver Hong Kong 100%(2) Canada Properties Ltd.
America & China Business 100% Canada and Development Inc.
Heng Fai Management Inc. 100%(2) British Virgin Islands
Heng Fai China & Asia 100%(2) Hong Kong Industries Limited
Heng Fai China 100%(2) Hong Kong Industries Limited
Worldwide Container 100%(2) Hong Kong Company Limited
Heng Fai China Industries 100%(2) Hong Kong Acquisition Limited
Greatly Hong Kong Limited 100%(2) Hong Kong
(1) As of July 24, 1998, the Company divested 81% of its interest in Cangzhou Min You Cement Co., Ltd.
(2) These subsidiaries are the subject of the SAR Agreement wherein SAR agreed to buy and the Company agreed to sell all of its interests in these subsidiaries for approximately $4,838,000 in the form of the assumption of certain liabilities. In consideration of the assumption of liabilities, the Company agreed to issue two notes payable to SAR in the amounts of $1,000,000 and $2,472,272, which is the $3,838,000 difference, net of related party accounts receivable of $1,365,278. The $1,000,000 note is
immediately convertible into 20,000,000 common shares of the Company. The $2,472,272 note can be converted into shares of common stock of the Company, in minimum increments of $250,000 each, at the average 15 day trading price of the Company's common stock at the option of the Company by giving seven trading days notice in writing to SAR. The agreement is subject to shareholder approval.
Agreement with CyberConstruction Company, Inc.
On February 12, 1999, the Company entered into a Technology License and Services Agreement (the "Agreement") with CyberConstruction Company, Inc. ("Cyber"). Cyber has developed and continues to develop certain software applications, methods, operating procedures, Internet infrastructure design and Internet site template development (collectively the "Technology"). The Agreement grants a nontransferable license to the Company to use and execute this Technology developed by Cyber, along with related services, for the Company's customers. The Company agrees to grant and transfer to Cyber, as a consideration of the license and related services, its preferred stock with a face value of $10 million, as part of an issuance of up to $50 million of its preferred shares. The Company has agreed that upon the sooner of (i) the licensing or acquisition of technologies utilizing the $50 million proceeds from the sale of preferred shares; or (ii) February 13, 2001. The transaction contemplated by the agreement has not yet been consummated and consequently, has not yet been recorded.
Historical Information
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.
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.
1997 Divestitures
After several years of direct investments in PRC, as described above, the Company believed the returns on such investments were unsatisfactory. The Company believed its best course of action was to write-off or discontinue a substantial part of its PRC operations ("Divestiture"). 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 follows:
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 retained 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 approved by the respective authorities in PRC.
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 approved by the respective authorities of PRC during 1998.
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 approved by the respective authorities in PRC during 1998.
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, the Company canceled the registration of Heng Li.
Segment Information
Information pertaining to the Company's two operating segments, Investments and Real Estate, are in Footnote 13 in the accompanying consolidated financial statements.
Real Estate Operations
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 center for the city and the surrounding areas of North Vancouver. Residential development in the surrounding areas consists of a variety of 3-story rental and strata tiled apartments, plus lower density townhouse developments. The area also has higher density development in the area. Thus, the apartment building is located within a 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 12/98 12/97 12/96 - ------------------------------ ---------- --------- ----------
City North of Vancouver 1.9% 0.6% 0.6% - ----------------------- ---- ---- ----
District North of Vancouver 1.2% 0.2% 0.2% - --------------------------- ---- ---- ----
Metro Vancouver 1.5% 1.5% 1.2% - --------------- ---- ---- ----
Apartment Rental Rates
City North of Vancouver 12/98 12/97 12/96 - ------------------------------ ---------- --------- ----------
Bachelor CDN$607 CDN$574 CDN$572 - -------- ------- ------- -------
One Bedroom CDN$705 CDN$703 CDN$688 - ----------- ------- ------- -------
Two Bedroom CDN$859 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.
Apartment Building Rental Rates
The current monthly rents* are as follows:
Suite Type Monthly Rent - ------------------------------- -----------------------------
Bachelor CDN$580 One Bedroom CDN$660
Two Bedroom CDN$805 - ------------- * 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 monthly rent.
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 could materially adversely affect its business or operations in Canada. The Company's participation in the operations of the Apartment Building are subject to significant governmental regulation in Canada and the Company believes it is in compliance with such regulations to the extent the same are applicable to the Company.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its principal executive offices at 650 West Georgia Street, Vancouver, British Columbia, Canada. The offices are suitable for the needs of the Company.
In June 1998, the Company transferred a lease for an office at 45 Wall Street, New York, New York to eVision USA.Com, Inc., formerly known as Fronteer Financial Holdings, Ltd., a company of which Fai H. Chan is an officer, director and shareholder.
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 $71,115 until the year 2010, after which time it will be renegotiated for the remaining term.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material pending or ongoing litigation.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1998, no matters were placed before the stockholders of the Company for consideration.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the OTC Bulletin Board ("OTC"). However, there is no established public trading market for the Company's common stock. 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 OTC. 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 ------------ ----------- Year ended December 31, 1998: - ----------------------------
First Quarter $ 0.245 $ 0.10
Second Quarter 0.210 0.12 Third Quarter 0.130 0.09 Fourth Quarter 0.085 0.05
Year ended December 31, 1997: - ----------------------------
First Quarter 1.875 0.53 Second Quarter 0.813 0.34 Third Quarter 0.600 0.24 Fourth Quarter 0.265 0.11
As of June 17, 1999, there were approximately 1,447 holders of record of the common stock based upon information furnished by OTR/Oxford Transfer & Registrar Securities Agent, the transfer agent for the common stock. The 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 June 17, 1999 was $0.022. As of June 17, 1999, there were 29,259,542 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.
Recent Issuance of Unregistered Securities
During 1996, 100,000 shares of common stock were issued pursuant to a consulting agreement with a previously unaffiliated party entered into during 1995. 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. The issuance of the common stock was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (1933 Act). The purchaser had access to full information concerning the Company and represented that it purchased the common stock for the purchaser's own account and not for the purpose of distribution. The common stock contains a restrictive legend advising that the securities represented by the common stock may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. No underwriters were involved in the transaction.
In September 1996, the Company entered into a consulting agreement with a previously unaffiliated party pursuant to which it received 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 had been capitalized and was amortized over the 12 months term of the consulting agreement. The issuance of the common stock was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (1933 Act). The purchaser had access to full information concerning the Company and represented that it purchased the common stock for the purchaser's own account and not for the purpose of distribution. The common stock contains a restrictive legend advising that the securities represented by
the common stock may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. No underwriters were involved in the transaction.
On February 1, 1997, the Company issued an aggregate of 1,700,000 shares of common stock at $0.60 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 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 were directors of the Company at that time. The issuance of the common stock was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (1933 Act). The purchaser had access to full information concerning the Company and represented that it purchased the common stock for the purchaser's own account and not for the purpose of distribution. The common stock contains a restrictive legend advising that the securities represented by the common stock may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. No underwriters were involved in the transaction.
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. The issuance of the common stock was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (1933 Act). The purchaser had access to full information concerning the Company and represented that it purchased the common stock for the purchaser's own account and not for the purpose of distribution. The common stock contains a restrictive legend advising that the securities represented by the common stock may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. No underwriters were involved in the transaction.
In August 1997, the Company entered into a consulting agreement with a previously unaffiliated party pursuant to which it received 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. During 1997, 100,000 shares of common stock were issued to the consultant pursuant to the terms of the agreement. The value attributable to the 100,000 shares of common stock issued was $100,000, which had been capitalized and was amortized over the 12-month term of the consulting agreement. The issuance of the common stock was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (1933 Act). The purchaser had access to full information concerning the Company and represented that it purchased the common stock for the purchaser's own account and not for the purpose of distribution. The common stock contains a restrictive legend advising that the securities represented by the common stock may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. No underwriters were involved in the transaction.
There were no issuances of the Company's common stock during 1998.
On January 18, 1999, the Company entered into an agreement with SAR Trading Limited ("SAR") wherein SAR agreed to buy and the Company agreed to sell all of its interests in the majority of its subsidiaries for approximately $4,838,000 in the form of the assumption of certain liabilities. In consideration of the assumption of liabilities, the Company agreed to issue two notes payable to SAR in the amounts of $1,000,000 and $3,838,000. The $1,000,000 note is immediately convertible into 20,000,000 common shares of the Company. The $3,838,000 note can be converted into shares of common stock of the Company, in minimum increments of $250,000 each, at the average 15 day trading price at the option of the Company by giving seven trading days notice in writing to SAR. SAR is owned 100% by Fai H. Chan. The agreement is subject to shareholder approval. The issuance of the note convertible into common stock was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (1933 Act). The purchaser had access to full information concerning the Company and represented that it purchased the common stock for the purchaser's own account and not for the purpose of distribution. The common stock will contain a restrictive legend advising that the securities represented
by the common stock may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. No underwriters were involved in the transaction.
On February 5, 1999, the Board of Directors approved a resolution to give 13,700,000 shares of common stock of the Company to SAR Trading Limited in exchange for the forgiveness of debt totaling $685,000. The issuance of the common stock was made in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended (1933 Act). The purchaser had access to full information concerning the Company and represented that it purchased the common stock for the purchaser's own account and not for the purpose of distribution. The common stock contains a restrictive legend advising that the securities represented by the common stock may not be offered for sale, sold or otherwise transferred without having first been registered under the 1933 Act or pursuant to an exemption from registration under the 1933 Act. No underwriters were involved in the transaction.
ITEM 6.
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 years ended December 31, 1998, 1997, 1996, 1995 and 1994, are derived primarily 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.
ITEM 7.
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:
(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 December 31, 1998, the Company retained 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.
On January 18, 1999, the Company entered into an agreement with SAR Trading Limited ("SAR") wherein SAR agreed to buy and the Company agreed to sell all of its interests in the majority of its subsidiaries for approximately $4,838,000 in the form of the assumption of certain liabilities. In consideration of the assumption of liabilities, the Company agreed to issue two notes payable to SAR in the amounts of $1,000,000 and $2,472,272, which is the $3,838,000 difference, net of related party accounts receivable of $1,365,278. The $1,000,000 note is immediately convertible into 20,000,000 common shares of the Company at a conversion price of $0.05 per share. The $3,838,000 note can be converted into shares of common stock of the Company, in minimum increments of $250,000 each, at the average 15 day trading price of the Company's common stock at the option of the Company by giving seven trading days notice in writing to SAR. The agreement is subject to shareholder approval. This transaction essentially liquidates the operations of the Company and transfers control of the Company to SAR.
On February 5, 1999, 13,700,000 shares of common stock of the Company were issued to SAR in exchange for forgiveness of debt of $685,000.
Results of Continuing Operations
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
There were no significant changes in the revenues and expenses attributable to the operation of Vancouver Hong Kong's real estate between the year ended December 31, 1998 and the year ended December 31, 1997.
Investment income decreased from income of $138,794 through December 31, 1997 to a loss of $25,154 through December 31, 1998. The Company has not engaged in investment activity during the year ended December 31, 1998. This is because of the uncertainty related to the international securities markets. The net investment loss in 1998 consists of the loss due to the expiration of the warrants, amounting to $145,800 and interest income.
Consulting expense decreased from an aggregate of $772,250 for the year ended December 31, 1997 to $562,500 for the year ended December 31, 1998, due to amortization period of certain consulting agreements expiring early in 1998. Interest expense increased from $309,201 for the year ended December 31, 1997 to $492,804 for the same period in 1998.
The Company's net loss from continuing operations was $1,077,133 for the year ended December 31, 1998, as compared to a net loss of $1,217,418 for the year ended December 31, 1997. The reasons for the trend are the reductions in the other operating administrative expenses and consulting fees during the year ended December 31, 1998.
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.
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.
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 effect on inflation on the Company's operations is not material and is not anticipated to have any material effect in the future.
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 1997 compared to a loss of $62,487 in 1996.
In 1997, the container operation of Wuhan recorded sales of $2,934,871 as compared to $1,082,317 in 1996. At the same time, the net loss amounted to $248,210 in 1997 compared to a loss of $241,208 in 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.
Liquidity and Capital Resources
The net cash used by operating activities for the year ended December 31, 1998 amounted to $26,606. The Company meets its working capital requirements from the proceeds of margin loans, described below and the collection of amounts from related parties.
During the year ended December 31, 1998, the Company did not make additional cash investments in securities or facilities.
The net cash provided by financing activities amounted to $56,682 for the year ended December 31, 1998. This is due primarily to the increase in the margin loan payable.
The net cash used in operating activities for year ended December 31, 1997 amounted to $4,034,680. This was primarily due to the operating losses experienced, increases in receivable from the container segment and the payment of amounts that were payable to related parties. The Company met its capital requirements from the proceeds of bank borrowings and the issuance of common shares.
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, margin loans, and the issuance of common shares.
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.
New Accounting Standards Not Yet Adopted
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments. It requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This statement is effective for years beginning after June 15, 1999, although early adoption is permitted.
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.
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 disclosure.
The Company believes that the effects 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 will not occur in the PRC or Hong Kong in the future, which could have a material effect on a Company's financial condition or results of operations.
The Year 2000
The Year 2000 issue refers to the fact that many computer systems were originally programmed using two digits rather than four digits to identify the applicable year. When the year 2000 occurs, these systems could interpret the year as 1900 rather than 2000. Unless hardware, system software and applications are corrected to be Year 2000 compliant, computers and the devices they control could generate miscalculations and create operational problems. Various systems could be affected ranging from complex information technology ("IT") computer systems to non-IT devices such as an individual machine's programmable logic controller.
To address this issue, the Company developed a corporate plan including the formation of a team consisting of internal resources and, as deemed necessary, third-party experts. The phases of the plan include: conducting inventory of the affected technology and assessing the impact of the Year 2000 issue; developing solution plans; modification or replacement; testing and certification; and developing contingency plans. All components of software and hardware of the Company are presently in various phases. The Company expects to have critical IT systems tested and installed, and expects to be Year 2000 compliant by mid-calendar year 1999.
The Company relies on third-party suppliers for many services and the Company will be adversely impacted if these suppliers do not make the necessary changes to their own systems and products successfully and in a timely manner. The Company has implemented a plan to communicate with its customers and suppliers on this issue in an effort to minimize any potential Year 2000 compliance impact; however, it is not possible to guarantee their compliance.
The total cost of the program is estimated to be less than $5,000, of which none has been spent through December 31, 1998.
Management of the Company believes it has an effective program in place to resolve the Year 2000 issues. Nevertheless, since it is not possible to anticipate all possible future outcomes, especially when third parties are involved, there could be circumstances in which the Company would be unable to take customer orders, or collect payments. In addition, disruptions in the economy generally resulting from Year 2000 issues could materially adversely affect the Company. The Company could be subject to litigation for computer systems product failure, for example, equipment shutdown or failure to properly date transaction records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time.
The Company has an informal contingency plan for its applications. The Company is working continually with the third party suppliers of software and related services in resolving Year 2000 issues. The Company's formal contingency plans are currently being developed in conjunction with these suppliers. Testing will be performed and completed by mid-calendar year 1999. The Company will continue to monitor the progress of the suppliers in the resolution of Year 2000 issues and continue to evaluate the necessity of an independent contingency plan.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest and currency exchange rates, equity and commodity prices, changes in the implied volatility of interest rate, foreign exchange rate, equity and commodity prices and also changes in the credit ratings of either the issuer of the financial instrument or its related country of origin. Market risk is inherent to many non-derivative financial instruments, and accordingly, the scope of the Company's market risk management procedures includes all market risk sensitive financial instruments.
The Company faces two types of market risk: foreign exchange rate risk and equity price risk.
Foreign Exchange Rate Risk. Foreign exchange rate risk arises from the possibility that changes in foreign exchange rates will impact the value of financial instruments. When the Company buys or sells a financial instrument denominated in a currency other than U.S. dollars, exposure exists from a net open currency position. The Company is then exposed to a risk that the exchange rate may move against it. At September 30, 1998, the currency creating foreign currency risk for the Company was the Hong Kong dollar.
Equity Price Risk. The Company is exposed to equity price risk as a consequence of making investments in equity securities. Equity price risk results from changes in the level or volatility of equity prices, which affect the value of equity securities or instruments that derive their value from a particular stock, a basket of stocks or a stock index. The Company attempts to reduce the risk of loss inherent in its inventory of equity securities by entering into transactions designed to mitigate the Company's market risk profile.
The Company utilizes a wide variety of market risk management methods, including: limits for each trading activity; marking all positions to market on a timely basis; timely profit and loss statements; and independent verification of pricing. The Company believes that these procedures, which stress timely communication, are the most important elements of the risk management process.
Efforts to further strengthen the Company's management of market risk are continuous, and the enhancement of risk management systems is a priority of the Company. This includes the development of quantitative methods, profit and loss and variance reports, and the review and approval of pricing models.
The table below provides a comparison of the carrying amount to the fair value of the securities owned by the Company that are classified as available-for-sale securities.
December 31, 1998 -----------------
Carrying Amount Fair Value --------------- ---------- Foreign Exchange Rate Risk: Equity securities denominated in $ 439,290 $ 439,290 Hong Kong dollars
Equity Price Risk: Equity securities* 439,290 439,290
*Includes equity securities denominated in Hong Kong dollars.
In accordance with generally accepted accounting principles, securities classified as available-for-sale securities are marked-to-market and the resulting unrealized gain or loss is reflected in the statement of comprehensive income. For the year ended December 31, 1998, the Company recognized unrealized losses of $1,048,813 on the equity securities denominated in Hong Kong dollars.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
The Consolidated Financial Statements that constitute Item 8 are attached at the end of this Annual Report on Form 10-K. An Index to these Consolidated Financial Statements is also included in Item 14 (a) of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
There have been no changes in or disagreements with accountants on accounting, financial disclosure or other matters, which would require disclosure herein.
PART III
ITEM 10.
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 54 President, Chief Executive Officer and Director
Robert H. Trapp 44 Secretary, Treasurer 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 eVision USA.Com, Inc., formerly known as Fronteer Financial Holdings, Ltd., a holding company which among other things, owns 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 since June 1994. In May 1998, he was appointed a director of Global Med Technologies, Inc. In 1997 and 1998, Mr. Trapp was appointed managing director and director of eVision USA.Com, Inc., formerly known as Fronteer Financial Holdings, Ltd. Since May 1995, Mr. Trapp has been a director of Heng Fung Holdings 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.
All officers of the Company are elected to serve in such capacities until the next annual meeting of the Board of Directors of the Company and until their successors are duly elected and qualified.
The Board of Directors met twice during the year ended December 31, 1998. 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.
Section 16(a) Beneficial Ownership Reporting Compliance
To the Company's knowledge, during the year ended December 31, 1998, there were no directors, officers or more than 10% shareholders of the Company that failed to timely file a Form 3, Form 4 or Form 5; other than Fai H. Chan who failed to timely file a Form 5.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
During the year ended December 31, 1998, 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.
Stock Option Plans
The Company currently has no stock option plans.
Option/SAR Grants in Last Year
There were no options granted during the year ended December 31, 1998.
Aggregate Option/SAR Exercises in Last Year And Year-End Options/SAR Values
No options were exercised during the year ended December 31, 1998 and there were no unexercised options as of the end of the year ended December 31, 1998.
Employment Agreements
There are no employment agreements between the Company and its executive officers.
Remuneration of Directors
Directors do not receive compensation for attendance at meetings of the Board of Directors. All directors are entitled to reimbursement of reasonable travel and lodging expenses related to attending meetings of the Board of Directors.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 17, 1999, 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) ---------------------- --------------------- ---------------------
SAR Trading Limited 13,700,000(5) 46.35% 10th Floor, Lippo Protective Tower 231-235 Gloucester Road Wanchai, Hong Kong 040
Fai H. Chan 20,092,886(2)(4)(5) 67.98% Lippo Protective Tower 10th Floor 231-235 Gloucester Road Wanchai, Hong Kong 040
Robert H. Trapp 100,000 ** 1700 Lincoln Street 32nd Floor Denver, Colorado 80203
Keow Y. Chan 2,772,886(3)(4) 9.38% Unit B, 13th Floor Lippo, Leighton Tower 103-109 Leigton Road Causeway Bay, Hong Kong
All Executive Officers & Directors As a Group (2 Persons)(5) 20,192,886 68.32% - ------------------------------- ** 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 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; (ii) 258,943 shares of common stock underlying warrants held by the Fund; (iii) 37,500 shares of common stock held by Inter-Asia; and (iv) 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 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 22,272,886 shares or approximately 75.36% of the outstanding common stock of the Company.
(5) SAR Trading Limited is owned 100% by Mr. Fai H. Chan. These 13,700,000 shares are beneficially owned by Mr. Chan.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
The Company owns 48,535,276 shares of common stock of Heng Fung Holdings Company Limited. Messrs. Chan, and Trapp (officers, directors and/or stockholders of the Company) are officers, directors and /or stockholders of such company.
At December 31, 1998 and 1997, the second mortgage of $77,579 and related interest payable of $25,368 and $38,623, respectively, were payable to the Silverstein Foundation, Inc., a Panama company, in which Mr. Fai H. Chan's children have beneficial ownership interests. The related interest expense was $8,269 in 1998, $7,774 in 1997 and $8,947 in 1996.
On January 18, 1999, the Company entered into an agreement with SAR Trading Limited ("SAR") wherein SAR agreed to buy and the Company agreed to sell all of its interests in the majority of its subsidiaries for approximately $4,838,000 in the form of the assumption of certain liabilities. In consideration of the assumption of liabilities, the Company agreed to issue two notes payable to SAR in the amounts of $1,000,000 and $3,838,000. The $1,000,000 note is immediately convertible into 20,000,000 common shares of the Company. The $3,838,000 note can be converted into shares of common stock of the Company, in minimum increments of $250,000 each, at the average 15 day trading price at the option of the Company by giving seven trading days notice in writing to SAR. SAR is owned 100% by Fai H. Chan. The agreement is subject to shareholder approval.
On February 5, 1999, 13,700,000 shares of the Company's common stock were issued to SAR in exchange for forgiveness of debt of $685,000. SAR is wholly-owned by Mr. Fai H. Chan.
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 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 the agreement, a rate of $41,667 per month; 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 the agreement, a rate of $83,333 per month. This agreement was terminated during June 1999.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Financial Statements and Financial Statement Schedules
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Page Independent Auditors' Report Consolidated Balance Sheets as of December 31, 1998 and 1997 Consolidated Statements of Income and Comprehensive Income for each of the three years in the period ended December 31, 1998 Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended December 31, 1998 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998 Notes to Consolidated Financial Statements
All schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the Consolidated Financial Statements and Notes thereto.
(a)(2) Financial Statement Schedules. None.
(a)(3) Exhibits. See "EXHIBIT INDEX" on page 22.
(b) Current Reports on Form 8-K
The Company had not filed any reports on Form 8-K during the last quarter of the year ended December 31, 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWERSOFT TECHNOLOGIES, INC.
By: /s/ Fai H. Chan ------------------------------------ Fai H. Chan, President
Date: July 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: July 29, 1999 By: /s/ Fai H. Chan ------------------------------------------------ Fai H. Chan, President, CEO & Director
Date: July 29, 1999 By: /s/ Robert H. Trapp ------------------------------------------------ Robert H. Trapp, Secretary, Treasurer & Director
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.)
Report and Financial Statements For the year ended December 31, 1998
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) REPORT AND FINANCIAL STATEMENTS For the Year Ended December 31, 1998
CONTENTS PAGES
Report of Independent Auditors F - 3
Consolidated Balance Sheets F - 4
Consolidated Statements of Income and Comprehensive Income F - 6
Consolidated Statements of Shareholders' Deficit F - 8
Consolidated Statements of Cash Flows F - 9
Notes to the Consolidated Financial Statements F - 11
F - 2
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, 1998 and 1997, and the related consolidated statements of income and comprehensive income, shareholders' deficit and cash flows for each of the three years in the period ended December 31, 1998. 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, the consolidated financial statements present fairly, in all material respects, the financial position of Powersoft Technologies, Inc. and its subsidiaries as of December 31, 1998 and 1997, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1998 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 committed to continue providing financial support. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Deloitte Touche Tohmatsu
Hong Kong April 16, 1999 (except as to note 16(a) as to which the date is June 18, 1999)
F - 3
See accompanying notes to the consolidated financial statements.
F - 4
See accompanying notes to the consolidated financial statements.
F - 5
See accompanying notes to the consolidated financial statements.
F - 7
See accompanying notes to the consolidated financial statements.
F - 8
See accompanying notes to the consolidated financial statements.
F - 10
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
On March 23, 1998, the Company changed its name from Heng Fai China Industries, Inc. to Powersoft Technologies, Inc. (the Company).
On December 31, 1998, the Company and its subsidiaries' principal activity is the operation of a rental property in North Vancouver, British Columbia in Canada. Changes in the property market in that location could have a material impact on the Company. See Note 13 for information on the geographic location of the Company's assets.
At December 31, 1998, details of the subsidiary companies, all of which are wholly-owned, are as follows:
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.
2. GOING CONCERN
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.
F - 11
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
3. GOING CONCERN-continued
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.
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 were 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. The 1997 results of Wuhan have been disclosed under discontinued operations and the comparatives have been restated accordingly. In 1998, the change in ownership in Wuhan had been approved by the relevant government authorities in PRC.
Revenues from the discontinued operation in Wuhan were $2,934,871 and $1,082,317 in 1997 and 1996, 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 - 12
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (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, which were made in 1995, to renovate and modernize the Cangzhou Factory.
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. The change in ownership in Cangzhou Cement has been approved by the relevant government authorities in PRC.
Revenues from the discontinued operation in Cangzhou Cement were $306,398 and $540,191 in 1997 and 1996, respectively.
Heng Fai Asia's other options lapsed in 1995.
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 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 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. In 1998, the change in ownership in the Duck Farm was approved by the relevant government authorities in PRC.
The share of 1997 results and the loss on disposal of the Duck Farm have been disclosed under discontinued operations.
F - 13
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
3. ACQUISITIONS, REVERSAL AND DISPOSAL-continued
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 the registration of the joint venture was canceled during 1997.
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 1996:
Fair value of non-cash assets acquired $ 5,083,943 Cash acquired 21,940 Common stock issued (100,000) -----------
Liabilities assumed $ 4,105,883 ===========
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.
F - 14
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-continued
Property, 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
Leasehold land Amortized over the term of the lease, which expires on May 31, 2032 using the straight line method.
Furniture and equipment 10% to 20% straight line method
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.
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' (deficit) 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 currently enacted tax rates.
Loss per common share - Basic earnings (loss) per common share has been calculated based upon the net earnings (loss) available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share would not be different than basic earnings (loss) per common share due to the fact that including the potential common shares would result in antidilution as a result of the loss from continuing operations.
F - 15
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
Effects of recent accounting standards - In 1998 the Company adopted Statement of Financial Accounting Standards (SFAS) No.130, "Reporting Comprehensive Income", SFAS No.131, "Disclosures about Segments of an Enterprise and Related Information" and SFAS No.132, "Employers' Disclosures about Pensions and Other Postretirement Benefits".
SFAS No. 130 requires that an enterprise reports, by major components and as a single total, the change in its net assets during the period from non-owner sources. The Company has presented its comprehensive income (loss) in the consolidated statements of income.
SFAS No. 131, which superseded SFAS No. 14, "Financial Reporting for Segments of Business Enterprise," 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. The adoption of SFAS No. 131 did not require any changes to the Company's existing financial statement disclosures.
SFAS No.132 amends the disclosure requirements for pensions and other postretirement benefits. The adoption of SFAS No.132 had no significant impact on the Company's current financial statement disclosures.
New accounting standards not yet adopted - The Financial Accounting Standards Board has issued a new standard SFAS No.133, "Accounting for Derivative Instruments and Hedging Activities." Management has not yet completed the analysis of the impact this would have on the financial statements of the Company.
F - 16
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
5. AVAILABLE-FOR-SALE SECURITIES
The cost and approximate market value of investment securities were as follows:
As of December 31, Corporate equity securities: 1998 1997 ---- ----
Cost $ 3,795,370 $ 3,814,612 Less: Gross unrealized losses (3,356,080) (2,307,267) ------------ ----------
Estimated fair value $ 439,290 $ 1,507,345 ============ ==========
Carrying value $ 439,290 $ 1,507,345 ============ ==========
All investment securities are pledged to secure the Company's margin loan payable (See note 8).
Included in the above securities are 48,535,276 shares at December 31, 1998 (1997: 48,535,276 shares) representing 3.9% (1997: 3.9%) 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 and had a carrying value of $439,290 at December 31, 1998 and $1,507,345 at December 31, 1997. 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.
F - 17
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
6. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
As of December 31, 1998 1997 ---- ----
Buildings $ 639,718 $ 722,538 Leasehold land 514,334 580,922 Furniture and equipment 11,347 11,347 ---------- ----------
Total 1,165,399 1,314,807 Less: Accumulated depreciation and amortization (503,594) (528,887) ---------- ----------
$ 661,805 $ 785,920 ========== ==========
7. DEFERRED EXPENDITURE
(a) In June 1995, the Company entered into a consulting agreement with a previously unaffiliated party pursuant to which it received 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) was 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 - 18
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
7. DEFERRED EXPENDITURE-continued
(b) In September 1996, the Company entered into a consulting agreement with another previously unaffiliated party pursuant to which it received 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 had been capitalized and was 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 received 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 was 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 was being amortized over the 12-month 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.
During 1998, the unamortized portion of the amount recorded for the 62,500 shares of common stock issued brought forward from 1997 was fully amortized and recognized as consulting fees.
8. MARGIN LOAN PAYABLE
The margin loan payable is collateralized by the Company's investment securities with a carrying value of $439,290 (1997: $1,507,345). The loan is payable on demand and bears interest at Hong Kong best lending rate (12.5% at December 31, 1998) plus 3.5% per annum.
F - 19
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
9. RELATED PARTY TRANSACTIONS
At the balance sheet date the Company had the following balances with related parties, which are interest-free, payable on demand and unsecured unless otherwise stated:
As of December 31, 1998 1997 ---- ----
Amounts receivable from: Parties related to certain directors $ 15,632 $ 18,950 ======== ========== Amounts payable to: Certain directors $ 901,097 $ 620,067 Parties related to certain directors 960,119 284,689 --------- ----------
$ 1,861,216 $ 904,756 ========= ==========
In addition at December 31, 1998 and 1997, the second mortgage of $77,579 and related interest payable of $25,368 and $38,623, respectively, are payable to the Silverstein Foundation, Inc., a Panama company, in which Mr. Fai H. Chan's children have beneficial ownership interests. The related interest expense was $8,269 in 1998, $7,774 in 1997 and $8,947 in 1996.
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 fee of $500,000. Consulting fees paid to Tight Hold during years ended December 31, 1998, 1997 an 1996 were $500,000, $500,000 and $500,000, respectively.
On February 1, 1997, the Company issued an aggregate of 1,700,000 shares of common stock at $0.60 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 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 were directors of the Company at that time. (See note 11 (c)).
F - 20
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
9. RELATED PARTY TRANSACTIONS-continued
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 11 (d)).
The Company maintains deposits in accounts at American Pacific Bank and Fai H. Chan is an officer and a director of such bank.
10. MORTGAGE LOANS PAYABLE
As of December 31, 1998 1997 ---- ---- First mortgage, principal due monthly through June 15, 2003 with fixed interest at 6.70% $ 741,857 $ 865,594
Second mortgage, principal payable on demand with interest at Canadian prime (6.00% as at December 31, 1998) plus 4% 77,579 87,623 -------- -------- 819,436 953,217 Less: current portion (109,159) (115,251) -------- --------
$ 710,277 $ 837,966 ======== ========
The mortgage loans are denominated in Canadian dollars. The maturities of the mortgage loans as of December 31, 1999 are as follows:
1999 $ 109,159 2000 33,596 2001 36,019 2002 38,474 2003 602,188 --------- $ 819,436 =========
The Company has pledged property with a net book value of $652,560 (1997: $775,834) at December 31, 1998 to secure the mortgage loans.
F - 21
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
11. CAPITAL STOCK
During the three years ended December 31, 1998 there were several changes of the Company's capital as set forth below:
In 1996, a) the Company issued 100,000 and 300,000 shares of common stock at $5.81 and $1.0625, respectively, pursuant to consulting agreements (See notes 7 (a) and (b)). b) 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, c) the Company issued 1,700,000 shares of common stock to related parties at $0.60 per share pursuant to private placements for proceeds of $1,020,000. (See note 9) d) 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 9) e) the Company issued 100,000 shares of common stock at $1.00 per share pursuant to a consulting agreement (see note 7(c)). f) 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).
There were no transactions in the Company's capital during 1998.
As of December 31, 1998, 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 1998.
F - 22
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
12. INCOME TAXES
No provision for income taxes has been made as the Company and its subsidiaries had losses for all years presented.
At December 31, 1998 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, 1998 there were tax loss carryforwards in Hong Kong Special Administrative Region ("Hong Kong") of approximately $455,000 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.
The Company has not filed corporate income tax returns in the United States for the periods ended June 30, 1996, June 30, 1997, June 30, 1998 and December 31, 1998. The returns are in the process of being completed and will be filed as soon as possible. The Company does not anticipate significant penalties, taxes or interest.
F - 23
F - 26
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
13. SEGMENT INFORMATION - continued
The following is a summary of information regarding the Company's continuing operations by geographical area for each of the three years ended December 31, 1998:
14. 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.
F - 27
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS-continued
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.
15. COMMITMENTS AND CONTINGENCIES
The Company had no capital commitments as of December 31, 1998.
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 ($71,115) 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 $85,365 in 1998, $125,201 in 1997 and $131,813 in 1996.
At December 31, 1998, the minimum future rental commitments under non-cancelable leases payable over the remaining lives of the leases are:
1999 $ 71,115 2000 71,115 2001 71,115 2002 71,115 2003 71,115 2004 through 2010 456,321 ---------
$ 811,896 =========
F - 28
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
16. SUBSEQUENT EVENTS
(a) On January 18, 1999, the Company entered into an agreement with SAR Trading Limited ("SAR") wherein SAR agreed to buy and the Company agreed to sell all of its interests in the majority of its subsidiaries for approximately $4,838,000 in the form of the assumption of certain liabilities. In consideration of the assumption of liabilities, the Company agreed to issue two notes payable to SAR in the amounts of $1,000,000 and $3,838,000. The $1,000,000 note is immediately convertible into 20,000,000 common shares of the Company. The $3,838,000 note can be converted into shares of common stock of the Company, in minimum increments of $250,000 each, at the average 15 day trading price at the option of the Company by giving seven trading days notice in writing to SAR. SAR is owned 100% by Fai H. Chan. The agreement is subject to shareholder approval. On June 18, 1999, the Company agreed to offset the amounts due from related parties resulting from the sale, of $1,365,278 with the $3,838,000 note payable.
(b) On February 5, 1999, 13,700,000 shares of common stock of the Company were issued to SAR in exchange for forgiveness of debt of $685,000.
At December 31, 1998, the unaudited pro forma effect of the above events as if they had occurred on that date and assuming all notes are converted into common stock is summarized as follows:
F - 29
POWERSOFT TECHNOLOGIES, INC. (Formerly known as Heng Fai China Industries, Inc.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS-continued (United States Dollars)
16. SUBSEQUENT EVENTS - continued
(1) To reflect the effect of the issuance of 13,700,000 shares of common stock of the Company in exchange for forgiveness of debt of $685,000.
(2) To reflect the effect of the sale of all the interests in majority of its subsidiaries by way of the assumption of the liabilities and the effect of the issuance of the note payable and the conversion of the $1,000,000 note into 20,000,000 common shares of the Company.
(3) To reflect the effect of setting off the amounts due from related parties with the $3,838,000 note payable. The amounts due from related parties arise from the de-consolidation of the subsidiaries sold and represented intercompany receivables.
(c) On February 12, 1999, the Company entered into a Technology License and Services Agreement (the "Agreement") with Cyber Construction Company, Inc. ("Cyber"). Cyber has developed and continues to develop certain software applications, methods, operating procedures, Internet infrastructure design and Internet site template development (collectively the "Technology"). The Agreement grants a nontransferable license to the Company to use and execute this Technology developed by Cyber, along with related services, for the Company's customers. The Company agrees to grant and transfer to Cyber, as a consideration of the license and related services, its preferred stock with a face value of $10 million, as part of an issuance of up to $50 million of its preferred shares. The Company has agreed that upon the sooner of (i) the licensing or acquisition of technologies utilizing the $50 million proceeds from the sale of preferred shares; or (ii) February 13, 2001. The transaction contemplated by the agreement has not yet been consummated and consequently, has not yet been recorded.
F - 30
EXHIBIT INDEX
Exhibit No. Description - ---------- ----------- 3.1(a) Certificate of Incorporation of registrant, as amended, incorporated by reference from 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 Bylaws of registrant, as amended, incorporated by reference from the Company's Annual Report on Form 10K for the year ended December 31, 1996..
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.
10.4 Agreement between the Company and SAR Trading Limited, dated January 18, 1999.
10.5 Agreement between the Company and Cyber Construction Co., dated February 12, 1999.
10.6 Assignment Agreement between the Company, SAR Trading Limited and Mr. Fai H. Chan, dated June 18, 1999.
10.7 Agreement to Cancel Management Contract between the Company and Heng Fung Management, Inc., dated June 18, 1999.
10.8 Amendment to Asset Sale Agreement between the Company and SAR Trading Limited, dated June 18, 1999.
21 Subsidiaries of the registrant.
27 Financial Data Schedule.