<PAGE> 1
AMENDMENT NO. 1 TO
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1997
Commission file number 000-21919
DRANSFIELD CHINA PAPER CORPORATION
(Exact name of Registrant as specified in its charter)
Territory of the British Virgin Islands
(Jurisdiction of incorporation or organization)
36-42 Pok Man Street, 2/F
Mongkok, Kowloon, Hong Kong
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Stock, no par value
--------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
Common Stock, no par value
--------------------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report.
Common Stock - 9,800,000 Shares
-------------------------------------------
Series A Preferred Stock - 2,300,000 Shares
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark which financial statement item the registrant
has elected to follow.
Item 17 X Item 18
----- -----
<PAGE> 2
TABLE OF CONTENTS
Item 1. Description of Business ...................................1
Item 2. Description of Property ...................................4
Item 3. Legal Proceedings .........................................4
Item 4. Control of Registrant .....................................4
Item 5. Nature of Trading Market ..................................5
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders ..........................................5
Item 7. Taxation ..................................................7
Item 8. Selected Financial Data ...................................8
Item 9. Management's Discussion and Analysis of Financial
Conditions and Results of Operations ......................9
Item 10. Directors and Officers of the Company ....................19
Item 11. Compensation of Directors and Officers ...................22
Item 12. Options to Purchase Securities from the Company ..........22
Item 13. Interest of Management in Certain Transactions ...........22
Item 14. Description of Securities to be Registered ...............23
Item 15. Defaults Upon Senior Securities ..........................23
Item 16. Changes in Securities and Changes in Security for
Registered Securities ....................................23
Item 17. Financial Statements .....................................24
Exhibit List .........................................................24
SIGNATURES ...........................................................25
Exhibit 1
ii
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
The Company is currently a 95%-owned subsidiary of Dransfield Holdings
Limited ("Dransfield Holdings"), a Cayman Islands company which was founded by
Sir Kenneth Fung, CBE, JP, in the 1940s to market and to distribute consumer
products in Hong Kong. Dransfield Holdings has four business divisions - a
consumer electronics division which distributes household appliances under the
brand names of AIWA and Turbo; a paper business conducted by the Company, which
bought and sold a Proctor & Gamble "Tempo" brand-name paper handkerchief, which
the Company distributed to retailers until June 1997, and which business
division is expanding its operations to include paper manufacturing and
distribution of its own brand-name paper products; a food and beverage division
which has breweries in China and the United Kingdom, an edible oil factory in
China, and which distributes alcoholic and non-alcoholic beverages in Hong
Kong; and a logistics and services division which provides warehousing,
deliveries, repair, exhibition and buying-program services to affiliated and
non-affiliated companies in Hong Kong and China.
The Company's parent, Dransfield Holdings, has been listed on the Hong
Kong Stock Exchange since April 1993.
The business of the Company was conducted until February 26, 1997, by
Dransfield Paper Holdings Limited, which merged with the Company on that date.
The purpose of the merger was to transfer, from the Hong Kong Stock
Exchange to the Nasdaq Stock Market in the U.S., Dransfield Holdings' equity in
its paper business division. The paper business dates back to 1975, when A
Dransfield & Co. Ltd., a wholly-owned subsidiary of Dransfield Holdings Limited
(the parent of the Company), secured the exclusive distribution for Tempo paper
handkerchiefs in Hong Kong and Macau. In 1994 Dransfield Paper, before its
merger with the Company, succeeded to this business from its sister company and
continued to develop a substantial distribution network principally through
supermarkets, drug stores and newspaper stands for Tempo handkerchiefs.
The Company's earlier ability to consistently achieve market share of
more than 40% of the paper handkerchiefs market in Hong Kong, through its sales
of Tempo-brand handkerchiefs, represented an excellent base for the Company's
preparation to manufacture and distribute its own "D&F" branded paper products
which commenced in August 1997, and thus, in June 1997, the Company ceased
distributing the Proctor & Gamble's Tempo product. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Outlook."
In November 1994, the Company undertook to establish business contacts
and to gain experience in buying waste paper, which it did both on an indent
basis (a pre-sold basis) and on an agency basis, all in support of its plan to
expand its business to that of an integrated manufacturer and distributor of
hygienic paper products for consumers. See below, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Sales, and
Outlook." This paper merchanting operation was
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organized through the formation of a subsidiary company named C.S. Paper
Holdings (International) Limited, which conducted the following operations:
o A paper agency company, Central National Hong Kong Limited,
through a joint venture with Central National Gottesman,
Inc., a U.S. company, which paper agency company was sold
pursuant to an agreement dated March 27, 1997, to one of its
beneficial owners, and
o A paper trading company in Hong Kong, Dransfield Paper (HK)
Trading Limited, which sold and still sells packaging grade
papers on an indent basis or from stock.
In August 1997, the Company commenced production of its D&F brand-name
paper products at a paper converting facility it established situated in
Conghua in the city of Guangzhou, Guangdong Province in Southern China a major
step in its plan to expand its operations to those of a vertically-integrated
hygienic paper producer and distributor in some of the largest population and
fastest growing economies of China as well as in Hong Kong. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Outlook."
THE PAPER INDUSTRY IN CHINA
China has more than 5,000 paper mills with the majority of them
producing less than 10,000 metric tons a year. In 1992 there were 16.2 million
metric tons of paper and paper boards produced and 1.2 million metric tons of
hygienic paper produced by these paper mills.
Annual per capita consumption of hygienic paper in China is only a
small fraction of that in the West. For instance, the annual per capita
consumption of hygienic paper in the U.S. is 18.6 kilograms, in Hong Kong is 5
kilograms, and in China is less than 1 kilogram.
It is the Company's belief that most of the paper mills that are
producing hygienic paper in China are under-financed, poorly managed, and
producing low-quality products. The Company is building two paper mills that
target the medium- and premium-quality paper products markets in which there is
little competition. The only competition in these markets from an international
company is Scott Shanghai (now owned by Kimberly-Clark), which has a plant with
an output of 14,000 metric tons a year.
Despite recent double-digit economic growth in China and projected
annual growth of 8%, the Company's management assumes that the majority of
consumers in China will not afford themselves the luxury and expense of hygiene
paper products sold at premium prices for several more years to come.
Nevertheless, the Company proposes to position itself in the premium-priced
products market at the same time it develops the medium-priced and
medium-quality market, because of the huge size of these two markets. The paper
market targeted by the Company covers 10% of the population of China, which is
equivalent to a market base almost half the size of that of the U.S.
DEPENDENCE ON MAJOR CUSTOMERS AND SUPPLIERS. The Company distributes its
paper products through two sister companies, Dransfield Trading Limited and
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<PAGE> 5
Dransfield Pacific Limited, neither of which relies on any single customer for
10% or more of its consolidated revenues. It does not have and does not
anticipate significant backlogs, because orders are usually met out of stock
within four days after receipt of an order. The indent business consists of
orders received in advance at least 30 days on a back-to-back basis. The
Company did depend entirely on Proctor & Gamble and its manufacturers for the
supply of Tempo paper handkerchiefs the Company distributed, but this business
activity ceased in June 1997.
As for business in the PRC, because raw materials are subject to
import duty, profits could be affected for a short period of time when the
government raises the duty. However, the current direction of the PRC
government is for a reduction in duties, not an increase.
RESEARCH AND DEVELOPMENT. The Company has not incurred any significant
expenditures on research and development activities.
ENVIRONMENTAL CONTROLS. It is anticipated that the Chinese Government will
increase its requirements for environmental controls. With this in mind, the
Company is installing and employing environmental control standards that meet
U.S. standards, which are higher than those currently required by the PRC.
With respect to Paper Mill No. 2, the environmental controls proposed
by and being installed by the Company have been approved by the Provincial
authorities and the Central Government. The paper mills will use an enzymatic
process as the deinking agent, which employs a biological agent rather than the
traditional chemical process. Approximately 90% less chemicals will be used.
The entire deinking process has been designed by in-house U.S. and European
experts assisted by an independent consultant. The effluent output is mostly
clay, which can be used as a construction material, and the effluent water will
be treated in lagoons. Similar environmental controls are proposed for Paper
Mill No. 1 and are expected to be approved by the Provincial authorities and
the Central Government.
The effluent water, after treatment, will meet the standards set by
the Chinese Government for biological oxygen demand (BOD), chemical oxygen
demand (COD), suspended solids (SS) and pH.
The Company's waste treatment process and plants have been designed by
specialists in the U.S. but are being built locally in China.
The Company does not anticipate having to pay any significant
environmental clean-up costs in its operations other than as part of its
regular operating requirements, because prior to actual installation of the
equipment, the company's environmental procedures will have met the local
authority requirements and approval.
NUMBER OF EMPLOYEES. On March 31, 1997 the Company employed 85 persons. Once
the operation in Conghua goes into full operation, the number of employees will
increase substantially, as it will when installation of the deinking and tissue
making operations commence at the paper mills.
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<PAGE> 6
VENUE OF SALES. Less than 10% of sales during the year ended March 31, 1997
were attributable to exports to China. Most of the sales for the last three
fiscal years were in Hong Kong.
PATENTS, COPYRIGHTS AND INTELLECTUAL PROPERTY.
The Company holds no patents, copyrights or intellectual property
other than trade marks established for its new paper products for the consumer
market. The Company is not aware of any patents, trademarks, licenses,
franchises and concessions that would affect its business and production
described herein.
ITEM 2. DESCRIPTION OF PROPERTY.
CONGHUA - PAPER MILL NO. 1.
The Company has the land use rights to 16,011 square meters in a
development zone in Conghua, Guangzhou, PRC on which it has constructed a paper
conversion plant and warehouse, a conference center, and a 52-room guest house.
The recycled pulp production and paper making facilities are planned to be
located on a tract of approximately 35,000 square meters in Xinhui, near
Guangzhou, on a major river with ready access to road and river transportation
facilities, near other manufacturers of tissue and industrial grades of paper,
and with an abundant supply of electricity.
JIANGYIN - PAPER MILL NO. 2.
The Company and its joint venture partners have a 50-year land use
agreement with the local authority in Jiangyin for a 65,000 square meters tract
on which Paper Mill No. 2 is being constructed. The tract is adjacent to a
navigable river, accessible to a nearby major highway, near other manufacturers
of industrial grade papers, and adequate to meet medium-term expansion needs.
Electricity is provided by Jiangsu Huaxi Holdings Corporation, a PRC government
corporation, one of the joint venture partners.
OFFICE FACILITIES.
The Company rents office facilities in Hong Kong from another
subsidiary corporation of its parent, Dransfield Holdings, and shares these
facilities with other subsidiary corporations of Dransfield Holdings.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor any of its property is a party to or the
subject of any material pending legal proceedings other than ordinary routine
litigation incidental to its business.
ITEM 4. CONTROL OF REGISTRANT.
The Company is a 95%-owned subsidiary of Dransfield Holdings Limited
("Dransfield Holdings"), a Cayman company which is listed on the Hong Kong
Stock Exchange.
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<PAGE> 7
The following table sets forth, as of September 19, 1997, information
with respect to any person known to the Company to be the beneficial owner of
more than ten percent of the Company's Common Stock and the total amount of the
Company's Common Stock beneficially owned by the officers and directors as a
group:
<TABLE>
<CAPTION>
Percent
Owner Amount Owned of Class
----- ------------ --------
<S> <C> <C>
Dransfield Holdings Limited 13,600,000(1) 95.4%
Officers and Directors as a
Group (11 persons) 13,626,786 95.6%
</TABLE>
- -------------------------
(1) Represents sole voting and investment powers with respect to
these shares.
ITEM 5. NATURE OF TRADING MARKET.
OUTSIDE THE UNITED STATES
There is currently no trading market outside the United States for the
Company's Common Stock or its Callable Warrants.
INSIDE THE UNITED STATES
The Company's Common Stock is listed for trading on the Nasdaq
SmallCap Market under the symbol DCPCF. There is no trading market for the
Callable Warrants.
The Common Stock commenced trading in the U.S. on April 2, 1997. The
reported high and the low sales prices have been as follows:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
1997, 2nd Quarter $5.25 $2.50
1997, 3rd Quarter $4.875 $3.25
</TABLE>
There have been no reported trades in the Company's Callable Warrants.
Of the 14,250,000 outstanding shares of Common Stock, 550,000 shares
are held in the United States by approximately 1,350 record holders and
13,700,000 shares are held in Hong Kong by three shareholders, one of whom,
Dransfield Holdings Limited, a Cayman corporation, owns 13,600,000 shares. Of
the 946,004 Callable Warrants, 500,000 warrants are held in the United States
by eight record holders and 446,004 warrants are held in Hong Kong by one
record holder, Dransfield Holdings Limited.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS.
The business of the Company is conducted in and from Hong Kong and the
People's Republic of China ("the PRC") in Hong Kong dollars and the PRC
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<PAGE> 8
Renminbi. Periodic reports made to U.S. shareholders are expressed in U.S.
dollars using the then-current exchange rates.
The PRC Government imposes control over its foreign currency reserves
in part through direct regulation of the conversion of Renminbi into foreign
exchange and through restrictions on foreign trade. The conversion of the
Renminbi into U.S. dollars must be based on the People's Bank of China ("PBOC")
Rate. The PBOC Rate is set based on the previous day's PRC interbank foreign
exchange market rate and with reference to current exchange rates on the world
financial markets. In line with the unification of the two exchange rates, the
Renminbi was revalued at HK$1.00=RMB1.12 and US$1.00=RMB8.70 on January 3,
1994. Since revaluation, the exchange rate has fluctuated between a range of
US$1.00 = RMB8.30 and US$1.00 = RMB8.70.
The following table sets forth certain information concerning exchange
rates between Renminbi and U.S. dollars for the periods indicated:
<TABLE>
<CAPTION>
NOON BUYING RATE(1)
------------------------------------------
PERIOD PERIOD END AVERAGE(2) HIGH LOW
- ------ ---------- ---------- ---- ---
(EXPRESSED IN RMB PER US$)
<S> <C> <C> <C> <C>
1989 4.7339 3.8149 4.7339 3.7314
1990 5.2352 4.8175 5.2352 4.7334
1991 5.4478 5.3431 5.4478 5.2352
1992 5.7662 5.5309 5.9007 5.4124
1993 5.8145 5.7769 5.8245 5.7076
1994 8.6044 8.6402 8.7128 8.5999
1995 8.3374 8.3692 8.3993 8.3543
1996 8.3284 8.3395
1997 8.3264 8.3495
</TABLE>
- ------
Source: The Noon Buying Rate in New York for cable transfers payable in
foreign currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
Notes:
(1) The Noon Buying Rate did not differ significantly from the Official
Rate prior to January 1, 1994, the date on which the Official Rate was
abolished. Prior to the adoption of the PBOC Rate, there was a
significant degree of variation between the Official Rate and the
rates obtainable at Swap Centers, such as the Shanghai Swap Center.
After January 1, 1994 and the unification of the foreign currency
exchange system there have not been significant differences between
the Noon Buying Rate, the PBOC Rate and the Shanghai Swap Center Rate.
As of March 28, 1997, the Noon Buying Rate was US$1.00 = RMB8.33.
(2) Determined by averaging the rates on the last business day of each
month.
The Hong Kong dollar is freely convertible into the U.S. dollar. Since
October 17, 1983, the Hong Kong dollar has been linked to the U.S.
dollar at the rate of HK$7.80 to US$1.00. The central element in the
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<PAGE> 9
arrangements which give effect to the link is an agreement between the Hong
Kong government and the three Hong Kong banknote issuing banks, the Hongkong
and Shanghai Banking Corporation Limited, Standard Chartered Bank and the Bank
of China, whereby certificates of indebtedness, which are issued by the Hong
Kong Government Exchange Fund to the banknote issuing bank to be held as cover
for their banknote issues, are issued and redeemed only against payment in U.S.
dollars, at the fixed exchange rate of US$1.00 = HK7.80. When the banknotes are
withdrawn from circulation, the banknote issuing banks surrender the
certificates of indebtedness to the Hong Kong Government Exchange Fund and are
paid the equivalent of U.S. dollars at the fixed rate. Exchange rates between
the Hong Kong dollar and other currencies are influenced by the linked rate
between the U.S. dollar and the Hong Kong dollar.
The market exchange rate of the Hong Kong dollar against the U.S.
dollar continues to be determined by the forces of supply and demand in the
foreign exchange market. However, against the background of the fixed rate
system which applies to the issue of Hong Kong currency in the form of
banknotes, as described above, the market exchange rate has not deviated
significantly from the level of HK$7.80 to US$1.00. See "Selected Financial
Data." The Hong Kong government has stated its intention to maintain the link
at that rate. The Hong Kong government has stated that is has no intention of
imposing exchange controls in Hong Kong and that the Hong Kong dollar will
remain freely convertible into other currencies (including the U.S. dollar).
The PRC and the United Kingdom agreed in 1984 pursuant to the Joint Declaration
of the Government of the United Kingdom of Great Britain and Northern Ireland
and the Government of the People's Republic of China on the Question of Hong
Kong ("the Joint Declaration") that, after Hong Kong became a special
administrative region of the PRC on July 1, 1997 (the "SAR"), the Hong Kong
dollar will continue to circulate and remain freely convertible. However, no
assurance can be given that the SAR government will maintain the link at
HK$7.80 to US$1.00, if at all.
The Company is organized under the laws of the British Virgin Islands
("the BVI"). The relevant BVI law imposes no limitations on the rights of
nonresidents or foreign owners to hold or vote securities of the Company, nor
are there any charters or other constituent documents of the Company that would
impose similar limitations.
ITEM 7. TAXATION.
There are no British Virgin Islands ("BVI") governmental laws, decrees
or regulations affecting the remittance of dividends or other payments to
nonresident holders of the Company's securities. U.S. holders of the securities
of the Company are subject to no taxes or withholding provisions under existing
BVI laws and regulations. By reason of the fact that the Company conducts no
business operations within the BVI, there are no applicable reciprocal tax
treaties between the BVI and the U.S. that would affect the preceding statement
that there are no BVI taxes, including withholding provisions, to which U.S.
security holders are subject under existing laws and regulations of the BVI.
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<PAGE> 10
ITEM 8. SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended March
31, 1997, are derived from the audited consolidated financial statements of the
Company and of Dransfield Paper Holdings Limited, with whom the Company merged
on February 26, 1997. The data should be read in conjunction with the
consolidated financial statements and the related notes, which are included
elsewhere in this annual report.
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000(1) US$'000(1)
------- ------- ------- ------- ------- -------
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C>
Net Sales(2) 65,322 78,387 94,359 307,047 147,244 19,000
Income before interest and
income taxes and minority 2,049 4,809 6,951 13,443 2,144 274
interests
Interest income/(expenses),
net(2) (131) 60 (198) (5,603) (1,810) (234)
Provision for income taxes (336) (960) (1,130) (1,391) (309) (40)
Income after income
taxes but before minority
interests 1,582 3,909 5,623 6,449 (1,790) (231)
Net income(2) 1,582 3,909 5,215 5,034 (24) (3)
Pro forma income per share ($) N/A N/A N/A N/A __ __
</TABLE>
<TABLE>
<CAPTION>
As at March 31,
--------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1997
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000(1) US$'000(1)
------- ------- ------- ------- ------- -------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C>
Fixed assets(3) 12,644 12,780 25,467 57,880 123,161 15,892
Total assets(3) 41,629 69,216 91,518 176,577 209,466 27,027
Long term liabilities(4) -- -- -- 73,459 120,652 15,569
</TABLE>
- -------------------------
(1) The translation from Hong Kong dollars into U.S. dollars for the 1997
data is at US$1.00 equals HK$7.7497, the conversion rate prevailing
on March 31, 1997.
(2) For a discussion of the reasons for the significant changes in certain
selected financial data between fiscal years 1995, 1996 and 1997, see
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<PAGE> 11
below, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the subsections thereof as follows:
for "Net Sales" in the table above, see "Sales" below; for "Interest
income/(expenses), net" above, see "Interest Expense" below; and for
"Net income" above, see "Net income" below.
(3) Total assets increased to US$27.8 million in 1997, an increase of US$5
million over 1996 which had seen an increase of US$11 million over
1995. The 1996 increase over 1995 was mainly attributable to
increased accounts receivable of US$5.4 million, increased inventories
of US$1.2 million and fixed assets acquisition of US$3.7 million. The
1997 increase of US$5 million over 1996 is mainly attributable to
US$3.9 million due the Company from fellow subsidiaries and an
increase of US$9.2 million in fixed assets.
(4) Long-term liabilities are composed mainly of US$13.8 million owed to
the Company's parent, Dransfield Holdings Limited. In 1995 this loan
was classified as a current liability.
The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods presented,
expressed in HK$ per US$:
<TABLE>
<CAPTION>
Calendar
Period Period End Average High Low
------ ---------- ------- ---- ---
<S> <C> <C> <C> <C>
1991 7.7800 7.7713 7.8025 7.7155
1992 7.7430 7.7412 7.7765 7.7237
1993 7.7280 7.7348 7.7650 7.7230
1994 7.7375 7.7284 7.7530 7.7225
1995 7.7323 7.7354 7.7665 7.7300
1996 7.7330 7.7348 7.7440(1) 7.7310(1)
</TABLE>
- -------------------------
Source: Federal Revenue Bank of New York.
Note: The average rates were determined by averaging the noon buying rate in
New York for cable transfers payable in New York in foreign currencies on the
last business day of each month.
(1) Average High and Low are through 9/17/96; average highs and lows are
no longer published and, therefore, not available for 12/31/96.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the financial statements and the accompanying notes thereto and is
qualified entirely by the foregoing and by other more detailed financial
information appearing elsewhere. See "Financial Statements." All dollar amounts
are in Hong Kong dollars unless otherwise noted.
9
<PAGE> 12
OVERVIEW
The Company had no business until it merged on February 26, 1997, with
Dransfield Paper Holdings Limited ("Dransfield Paper"). The financial
statements included herein (see "Financial Statements") and the references
below to the Company's business operations refer also to Dransfield Paper's
financial statements and business operations before the merger, to which the
Company succeeded upon its merger with Dransfield Paper. Further, the financial
information appearing in the financial statements for the year ended March 31,
1994 are almost entirely the results of operations of a predecessor company, A.
Dransfield & Co. Ltd., which also is a wholly-subsidiary of Dransfield
Holdings, the parent of the Company, and relate almost entirely to the paper
distribution business conducted that year by A. Dransfield & Co. Ltd.
Dransfield Paper succeeded to this business and then merged with the Company.
Certain vertical integration activities (see "Outlook" below) are reflected in
the statements of operation and cash flows for the fiscal years ended March 31,
1995, 1996 and 1997.
RESULTS OF OPERATIONS.
The following table presents, as a percentage of sales, certain
selected consolidated financial data for each of the three years in the period
ended March 31, 1997:
<TABLE>
<CAPTION>
Year ended March 31 1995 1996 1997
- ------------------- ---- ---- ----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0
Cost of sales 80.9 89.6 90.2
----- ----- -----
Gross margin 19.1 10.4 9.8
----- ----- -----
Selling, general and
administrative expenses 11.5 7.7 11.0
Interest expense 0.1 1.8 1.3
Other income and expenses, net 2.0 (0.7) (2.5)
----- ----- -----
13.6 8.8 9.8
----- ----- -----
Net income 5.5% 1.6% (0.0%)
----- ----- -----
</TABLE>
SALES.
Sales for 1997 decreased approximately HK$159.8 million (US$20.6
million) or 52% from the prior year as compared with an increase of HK$212.7
million (US$27.5 million) or 225% in 1996 over 1995. The fluctuations were due
to the institution and, then, contraction of paper merchanting activities, in
an effort to obtain experience and establish business contacts for a planned
expansion into hygienic paper manufacturing. These paper merchanting activities
were commenced in November 1994 and amounted to HK$24.4 million (US$3.1
million) in the five months of operations in fiscal 1995, increased markedly by
HK$207.2 million (US$26.7 million), or 851%, in 1996 and then decreased by
HK$164.5 million (US$21.2 million), or 71%, in 1997. The expansion in 1996 and,
then, contraction in 1997 in sales in paper merchanting activities was the
result of decisions made regarding the selection of suppliers and customers,
decisions based upon the experiences of 1995 and 1996. Sales of the Tempo brand
handkerchief for 1997 increased approximately HK$4.7 million (US$606,000) to
HK$80.2 million (US$10.3 million), or 6%, over 1996 as
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<PAGE> 13
compared with an increase of HK$5.5 million (US$707,600) to HK$75.5 million
(US$9.7 million), or 8%, over 1995. In June 1997 the Company terminated its
distributorship of Proctor & Gamble's Tempo paper handkerchiefs, preparatory to
the Company's distributing its own manufactured "D&F" branded products, which
commenced in August 1997.
GROSS MARGIN.
Gross margin decreased by HK$17.6 million (US$2.3 million) in 1997 or
55% from 1996 as compared with an increase of HK$14.1 million (US$1.8 million)
in 1996 or 78% over 1995. As a percentage of sales, however, the 1997 gross
margin decreased to 9.8% of sales from 10.4% of sales in 1996 and 19.1% of
sales in 1995. The 1997 decrease from the 1996 level was due largely to a
decrease in the gross margin of sales of Tempo-brand paper handkerchiefs as a
result of a new distribution agreement with a fellow subsidiary of Dransfield
Holdings Limited (see Item 13), the earlier prospect of which being a major
reason for the Company's decision to integrate its activities and develop its
own brand of paper products, but due also to a decrease in the gross margin of
the paper merchanting business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses for fiscal 1997 decreased
by HK$7.6 million (US$975,000) or 32% below 1996. In 1996 these expenses
increased HK$12.9 million (US$1.7 million) or 119% over 1995. The 1996 increase
was attributable to an increase in business activities in paper merchanting.
The 1997 decrease was due to a reduction in the paper merchanting business and
a new distribution arrangement with a fellow subsidiary of Dransfield Holdings
Limited (see Item 13). The two-year disparity reflected a continuation of the
expenses noted above for 1996 associated with expanding the Company's paper
business to a vertically-integrated, hygienic paper producer and distributor.
INTEREST EXPENSE.
The interest expenses of $62,000 in fiscal 1995, $736,000 in fiscal
1996 and $238,000 in fiscal 1997 were attributable mainly to the financing of
the Company's paper merchanting activities. The substantial increase in
interest expense in fiscal 1996 over fiscal 1995 was due to the substantial
increase in such trading, and the 68% decrease in 1997 from 1996 reflected a
reduction in bank loans caused by reduced activities in paper merchanting.
NET INCOME.
The Company had a net loss of HK$24,000 (US$3,000) in 1997 compared
with net income of HK$5.0 million (US$650,000) in 1996 and net income of HK$5.2
million (US$673,000) in 1995. The Company had earlier projected net earnings
for fiscal 1997 of HK$2.7 million (US$350,000), which projection had been
taking into account $354,000 in compensation received from a minority
shareholder. This compensation ultimately was accounted for, however, as a
capital contribution in accordance with U.S. generally accepted accounting
principles ("U.S. GAAP"). The 1997 decrease also reflects HK$1.8 million
(US$234,000) in reorganization expenses associated
11
<PAGE> 14
with the Company's merger in late fiscal 1997 with Dransfield Paper Holdings
Limited and losses in paper merchanting activities not overcome by modest gains
in profits from sales of Tempo paper handkerchiefs. Dransfield Paper's
management has reduced its paper merchanting activities to the initial needs of
its planned paper mills. Yet the activities, begun in November 1994 and
conducted during a period of great volatility in prices, are believed by
Dransfield Paper to have been successful in establishing its credibility and
business contacts among suppliers of waste paper. Sourcing raw materials will
be a critical part of Dransfield Paper's planned vertical integration of its
paper business.
BALANCE SHEET ITEMS. Significant changes in several balance sheet items
occurred from 1996 to 1997, in particular accounts receivable, inventories,
fixed assets, and shareholders' equity. These changes reflect the reduction of
the Company's operations of the high volume, large inventory, and low gross
margin paper merchanting activities. The increase in "Amount Due from
Subsidiary" is the result of a new distribution arrangement with respect to
paper products, as detailed in Item 13. The increase in fixed assets from
HK$57.8 million (US$7.5 million) in 1996 to HK$123.1 million (US$15.9 million)
in 1997 reflecting the acquisition of plant and equipment for Paper Mill Nos. 1
and 2, and the conversion into capital stock of HK$26.6 million (US$3.4
million) in debt owed to the Company's parent, Dransfield Holdings Limited.
Shareholders' equity increased to HK$33.3 million (US$4.3 million) in fiscal
year 1997 from HK$5.1 million (US$0.6 million) in fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES.
The Company had positive cash flows from operations of HK$17.3 million
(US$2.2 million) in 1997 compared with negative cash flows from operations of
HK$5.6 million (US$0.7 million) in 1996 and HK$10.9 million (US$1.4 million) in
1995. The improvement in 1997 was attributable primarily to decreases in
accounts receivable of HK$64.2 million (US$8.3 million) and in inventories of
HK$9.4 million (US$1.2 million). The acquisition of fixed assets and equipment
for its planned paper business expansion (see "Outlook" below) reduced cash
flow by HK$5.9 million (US$767,000) in 1997 and by HK$6.0 million (US$772,000)
in 1996. The 1995 and 1996 shortfalls in liquidity were provided by advances
from Dransfield Holdings and bank loans, with loans from one also being used to
pay down the other in succeeding years. Fiscal 1997, however, saw a HK$23.8
million (US$3.1 million) reduction in bank loans, and a HK$26.6 million (US$3.4
million) conversion of debt to capital stock. Significant capital expenditures
have been both made and committed with respect to the acquisition,
refurbishment, and installation of equipment, land and buildings for the
Company's planned paper business expansion. Additional capital expenditures of
HK$79 million (US$10.2 million) must be made to complete the first two paper
mills, and additional capital expenditures of approximately HK$233 million
(US$30 million), not yet obtained or committed, must be made should the Company
be able to complete its proposed third and fourth paper mills, as follows:
12
<PAGE> 15
<TABLE>
<CAPTION>
$000s
---------------------------------------------
To Be
Capital Requirement Purchased Purchased Timing
- ------------------- --------- --------- ------
<S> <C> <C> <C>
MILL NO. 1:
Used Deink Line (Belgium) Apr 96
Used Paper Making Machine (USA) Nov 96-Apr 97
Used Paper Converting (USA, Japan) Jan 96
Land & Building (USA) Jan 95-Oct 95
-------
Sub-Total $ 7,020
New Auxiliary Equipment (China) $ 1,900 Jan 97-Oct 97
New Environmental Control
Equipment (China/USA) 1,400 Jan 97-Oct 97
Infrastructure (China) 1,000 1,000 Dec 96-Oct 97
------- -------
Sub-Total $ 8,020 $ 4,300
MILL NO. 2:
Used Deink Line (USA) Jan 96
Used Paper Making Machine (Belgium) Jan 96
Used Paper Converting (USA, Japan) Apr 96
Land & Building (USA) Sep 96-Dec 97
-------
Sub-Total $ 4,900
New Auxiliary Equipment (China) $ 3,200 Nov 96-Nov 97
New Environmental Control
Equipment (China/USA) 2,000 Jan 97-Nov 97
Infrastructure (China) 800 700 Nov 96-Sep 97
------- -------
Sub-Total $ 5,700 $ 5,900
MILL NO. 3:
Used Paper Making Machine $ 1,000 Nov 96-Apr 97
-------
(USA)
Sub-Total $ 1,000
MILL NO. 4:
Used Paper Making Machine $ 1,000 Nov 96-Apr 97
-------
(USA)
Sub-Total $ 1,000
------- -------
TOTAL $15,720 $10,200
</TABLE>
The source of funds for these capital expenditures for Paper Mill Nos.
1 and 2 was as follows:
o $10 million advance from parent, Dransfield Holdings in
November 1996 and April 1997, and
o $6.5 million advance from Dransfield Holdings from January
through August 1997.
The proposed sources of funds for Paper Mill Nos. 3 and 4 are as
follows:
o $2.75 million by November 1997 from the exercise of 500,000 U.S.
Callable Warrants distributed to 8 persons in the Spinoff-Merger
transaction between Dransfield Paper and the Company,
13
<PAGE> 16
o $2.45 million by December 1997 from the exercise of 446,004
Merger Callable Warrants distributed to Dransfield Holdings
in the Spinoff-Merger transaction between Dransfield Paper
and the Company, and
o $30 million by December 1997 from the sale of shares of the
Company in a rights offering with standby underwriters.
Of the advances from Dransfield Holdings to complete Paper Mills Nos.
1 and 2, $5 million were converted into Common Stock of the Company in May 1997
at $5 a share. The proposed source of funds for Plant Nos. 3 and 4 would
involve the issuance of equity securities by the Company and, accordingly,
represent potential dilution to the Company's shareholders.
OUTLOOK.
The statements contained in this Outlook are based on current
expectations. These statements are forward looking, and actual results may vary
materially.
The Company's earlier ability to consistently achieve a market share
of more than forty percent of the paper handkerchiefs market, through its sale
of Tempo-brand handkerchiefs, represented an excellent base from which a
vertically-integrated, multi-products, consumer hygienic paper manufacturing
and distribution business could be built. Such a business expansion began to be
planned in 1993. Business contacts in the buying and selling of unfinished
paper were made. Business alliances for two plants in China were made. Material
capital expenditures were both made and committed, and the first paper
converting plant is operational.
In June 1997 the distributorship agreement with Proctor & Gamble for
Tempo-brand handkerchiefs was terminated in preparation for the introduction by
the Company of its own "D&F"-brand paper products in August 1997. As part of
this distribution termination, Proctor & Gamble purchased from the Company the
right to use the Company's name as its distributor to September 1997.
Paper merchanting activities were started in November 1994 for the
purpose of establishing business contacts and acquiring skill in buying raw
materials, the quality and mix of which would bear directly on the Company's
competitiveness and profitability later in recycling waste paper into pulp,
making tissue paper, converting tissue paper into finished hygienic paper
products and selling the products to consumers. After a year - fiscal 1996 - of
high volume in sales and highly volatile paper prices, the Company reduced its
paper merchanting activities to the initial needs of its planned paper mills.
From average monthly turnover volume of $2.5 million in 1996 and an operating
profit of $1,192,000 for fiscal 1996, the Company had average monthly turnover
of only $721,000 in fiscal 1997 and an operating loss of $362,000 for fiscal
1997. Yet the activities were successful in establishing credibility and
business contacts among suppliers of office waste paper. Current paper
merchanting activities are breaking even or are marginally profitable.
14
<PAGE> 17
The Company's vertical integration plans embrace the following
activities, one of which is operational but all of which are still in the
development stage:
o Recycled pulp production. Waste paper will be processed into
recycled pulp. Until needed for its own further processing,
approximately half of this would be offered for sale to other
companies in China with paper mills and approximately half
would be supplied to the Company's own paper making
operation.
o Paper making. Paper making machines will process recycled
pulp into jumbo rolls. Until needed for its own further
processing, approximately half of the production would be
offered for sale to other companies in China with paper
converting plants and approximately half would be supplied to
the Company's own paper converting plants.
o Paper converting. Jumbo rolls of paper will be converted into
finished paper products, such as bathroom tissue, facial
tissue, napkins and handkerchiefs, which finished paper
products will be packaged and distributed to customers.
TIMING OF THE EXPANSION. The business expansion is planned to take
place in two phases, Phase One being the development and completion of
Paper Mills No. 1 and No. 2 and Phase Two being the development and
construction of Paper Mills No. 3 and No. 4. The projected dates for the
completion and commencement of operations of the plants in each of the four
paper mills are as follows:
<TABLE>
<CAPTION>
Recycled Pulp Paper Paper
Production Making Converting
---------- ------ ----------
<S> <C> <C> <C>
Phase 1: Under construction
- -------- ------------------
Paper Mill No. 1 February 1998 March 1988 Operational
Paper Mill No. 2 December 1997 December 1997 February 1998
Phase 2: Planned. Not under construction
- -------- -------- ----------------------
Paper Mill No. 3 December 1998 December 1998 December 1998
Paper Mill No. 4 June 1999 June 1999 June 1999
</TABLE>
PAPER MILL NO. 1. The Company invested $6 million in
establishing a paper conversion plant, a conference center, and a research and
development center in Conghua in the city of Guangzhou, Guangdong Province in
southern China. The paper conversion plant tested production in August 1996,
came on stream in August 1997, and converts jumbo rolls of paper into such
products as toilet tissue, paper handkerchiefs, napkins and facial tissue. Its
maximum capacity is approximately 30 metric tons a day. It will also serve as a
training and as a research and development center to develop the Company's
paper business. An expert plant manager with 30 years' experience was brought
from the U.S. to manage and supervise this plant and to develop a capable
production team to spearhead the Company's expansion.
Distribution of paper products from the paper conversion plant
commenced in August 1997 under the Company's brand name "D&F."
15
<PAGE> 18
Distribution of Proctor & Gamble's "Tempo"-brand paper handkerchiefs ceased in
June 1997 due to the conflict in interest which would exist once distribution
of D&F products commenced. The Company cannot provide assurance that this
transition from distributing a product manufactured by another company to
manufacturing and distributing its own branded products will be successful or
that profitable operations, if achieved, will come quickly.
A used de-inking plant for recycled pulp production was purchased in
Belgium, dismantled, shipped to China in May 1996, and is planned to commence
operations by February 1998 with an output capacity of approximately 90 metric
tons a day. The targeted customers for half of the recycled pulp production of
this plant are located in the Pearl River delta area, which is within 8 miles
from this mill, which customers have present annual demand exceeding 800,000
metric tons.
PAPER MILL NO. 2. The Company will invest approximately $13
million for a 60 percent controlling voting interest and a 48 percent equity
interest in a paper mill to be established in the city of Jiangyin in Jiangsu
Province 90 minutes west of Shanghai, China.
Paper Mill No. 2 is owned by a Sino-foreign equity joint venture among
the Company, Jiangsu Huaxi Holdings Corporation and Broadsino Investment
Company Ltd. ("Broadsino"). The joint venture company, Jiang Ying
Dransfield Paper Co. Ltd. ("Jiang Ying") is 40 percent owned by Jiang Su
Huaxi Holdings Corporation and 60 percent owned by Dransfield Broadsino
Paper Holdings Limited ("Dransfield Broadsino Paper"), a company 80 percent
owned by the Company and 20 percent owned by Broadsino. The Company has
agreed to provide Broadsino's equity contribution (approximately $1.8
million) to the joint venture through a loan to Broadsino bearing compound
interest at the rate of 6% a year.
The project site is located adjacent to a tributary of the Yangtze
River, which tributary will supply water to the paper mill. The Chinese
partners are contributing a 12,000-kilowatt-hour, coal-fired, power plant for
their 40% interest in the joint venture. The power plant is currently supplying
electricity to other plants nearby and will supply the required amount of
electricity and steam to the paper mill.
Unsorted office waste will be purchased directly from U.S. suppliers
such as Weyerhaeuser, Smurfit, Allan & Co., and Rock-Tenn. The Company will
also make use of other grades of waste paper to reduce its cost of production.
A used 120-metric-tons-a-day de-inking plant for recycled pulp
production has been purchased from Georgia Pacific Company in the U.S., and a
used 28-metric-tons-a-day paper making plant has been purchased from VPK in
Belgium. Both arrived in China in May and July 1996.
Until needed for its own end products, it is estimated that less than
half of the 120-metric tons-a-day recycled pulp production will be used in
Paper Mill No. 2's own tissue paper plant and more than half of the production
shall be offered for sale to other paper mills in the Jiangsu and Zhejiang
Provinces, which have an annual demand of 1,400,000 metric tons.
16
<PAGE> 19
Operations are scheduled to commence at the recycled pulp production
plant by December 1997, at the paper conversion plant by February 1998, and at
the paper making plant by December 1997.
PAPER MILLS NO. 3 AND 4. Complete paper mills - plants for
recycled pulp production, paper making, and paper conversion - are planned for
two other areas. One is in northern China in the Tianjin area, and the other is
in western China in the Sichuan area. These two paper mills will be installed
after the first two mills, now under construction, are operational. Subject to
funding, the Company's plans envision the commencement of full operations at
Paper Mills No. 3 and 4 by the last quarter of 1998 and the first quarter of
1999, respectively. Considerable equipment has already been acquired for the
paper conversion plants for Paper Mills No. 3 and No. 4.
The Company's plans include recycling waste paper into pulp, which is
against the trend in China of importing virgin fiber. The Company estimates
that, until needed for its own end products, approximately half of its recycled
paper will be allocated to its own paper converting and tissue making
facilities and half will be allocated for sale to other China paper mills that
produce packaging grade cartons and hygienic paper. The Company's survey
indicates that the present annual demand for recycled pulp and jumbo rolls,
such as the Company expects to produce, in the areas that would be served by
its 4 planned paper mills, and the annual production of these 4 planned paper
mills, are as follows:
<TABLE>
<CAPTION>
The Company's
Planned
Potential Maximum
Demand Production
Phase I Province/City (Metric Tons) (Metric Tons)
------- ------------- ------------- -------------
<S> <C> <C> <C>
No. 1 Guangdong Province 861,022 60,000
No. 2 Jiangsu Province 767,050 72,000
No. 2 Zhejiang Province 679,100
No. 2 Shanghai Municipality 234,547
--------- -------
Total 2,541,719 132,000
</TABLE>
<TABLE>
<CAPTION>
The Company's
Planned
Potential Maximum
Demand Production
Phase II Province/City (Metric Tons) (Metric Tons)
-------- ------------- ------------- -------------
<S> <C> <C> <C>
No. 3 Tianjin Municipality 221,400 60,000
No. 3 Beijing Municipality 101,000
No. 3 Heibei Province 128,000
No. 4 Sichuan Province 238,750 60,000
--------- --------
Total 689,150 120,000
</TABLE>
The Company's planned production represents only 4 percent of the
annual requirements of the targeted markets.
17
<PAGE> 20
Over recent years the price of virgin pulp has ranged from $390 to
$960 a metric ton. The price of office waste paper in the U.S. has ranged from
$20 to $250 a metric ton. For instance, prices in September 1996 were $610
(cost and freight from U.S. West Coast to China) for virgin pulp plus $12.20
duty, or $622.20 a metric ton, compared with $165 (cost, freight and duty) for
office waste paper. Recycling costs in China are estimated to average $200 a
ton and not to exceed $250 a metric ton. There is little recycled fiber in
China, which fiber sells at prices 5 to 10 percent cheaper than virgin fiber.
The Company expects that the net operating margin of its paper recycling
division will range from 10 to 15 percent.
The Company has purchased equipment and is planning to make, into
jumbo rolls, various grades of hygienic paper from approximately half of its
recycled pulp. Until needed for its own end products of consumer hygienic
paper, it plans to offer for sale to other paper mills in China approximately
half of the production of jumbo rolls of hygienic paper it makes. It expects
that the net operating margin of this division will range from 11 to 16
percent.
With reference to the volatility of the prices of virgin pulp and
office waste paper and the plans of the Company to offer to other China paper
mills, until required for its own needs, approximately half of its production
both of recycled fiber and of jumbo rolls of hygienic paper, the table below
illustrates, pro forma, how its planned integrated facilities would dampen the
effects of price volatility with respect to profit margins:
<TABLE>
<CAPTION>
($ a Metric Ton)
August 1995 March 1996 March 1997
----------- ---------- ----------
<S> <C> <C> <C>
1. Virgin Pulp Cost $960 $390 $520
2. Secondary Fiber
-Raw Material
(Office Waste) $170-250 $ 20-70 $ 30-100
-Freight Cost 80 80 50
-Processing Cost
(Average) 200 200 200
-------- -------- --------
$450-530 $300-350 $280-350
3. Profit Margin
-Recycled Pulp(1) High Low Medium
-Jumbo Roll(1) Medium Low Medium
-Finished Products Low High Medium
</TABLE>
- --------------------------
(1) Until needed for its own production of consumer hygienic paper
products, approximately half of this production is planned to be
available for sale to other paper mills in China.
From mid-1994 through March 1997, the price of virgin pulp experienced
the most volatility in the last thirty years.
Finally, the Company's paper converting facility in Plant No. 1 is in
operation and the equipment for Plant No. 2's paper converting facility has
18
<PAGE> 21
been purchased and is expected to be operating in February 1998. It plans to
convert and market relatively high grade hygienic paper, using the distribution
channels it developed for the Tempo paper handkerchiefs and expanding its
distribution network through working with small paper converter companies who
have established distribution networks for lower grade products. The Company
expects its net operating margin in this division to range from 18 to 23
percent.
The expansion into manufacturing and distribution commenced August
1997 of its own branded paper products is the first exposure in the market
place for the Company's long-planned and partially-executed vertical business
expansion. It is accompanied by the cessation of the distribution of Proctor &
Gamble's Tempo-brand paper handkerchief, which has been the backbone of the
Company's business since inception.
The Company's D&F branded products are initially being manufactured by
it in its Paper Mill No. 1. Four products will be made for distribution by the
Company, with the mill capacity for each product initially set as follows:
<TABLE>
<CAPTION>
Product Percent
------- -------
<S> <C>
Paper handkerchiefs 9
Tissues 21
Napkins 18
Toilet rolls 52
</TABLE>
The Company expects its gross margins on sales to be greater than the margins
it received distributing Proctor & Gamble's manufactured Tempo-brand paper
handkerchief. Further, the Company will be distributing four products, not one.
In any event, past operating results, which are based on distributing Tempo
products, are not indicative of future results, which will be influenced to a
major extent by still unproven manufacturing operations.
The Company's future results of operations and the other
forward-looking statements contained in this Outlook, in particular the
statements regarding achievement of its expansion plans, capital spending,
costs of office waste paper and virgin fiber, and marketing, involve a number
of risks and uncertainties. In addition to the factors discussed above, among
the other factors that could cause actual results to differ materially are the
following: volatility of prices of office waste paper and virgin fibers, risk
of nonpayment of accounts receivable, inability of the Company to obtain its
necessary capital, political instability in China, inflation, unforeseen
competition, weather, loss of personnel as a result of accident or for health
reasons, funding delays, supply interruption, currency fluctuation, market
changes, government interference, or change of laws.
ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY.
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
Set forth below are the names, and terms of office of each of the
directors, executive officers and significant employees of the Company and a
description of the business experience of each.
19
<PAGE> 22
<TABLE>
<CAPTION>
Office
Held Term of
Person Office Since Office(1)
------ ------ ------ ---------
<S> <C> <C> <C>
Horace YAO Yee Cheong, 51 Deputy Chairman Apr 1994 Apr 1998
and Chief Executive
Officer
Warren MA Kwok Hung, 40 Treasurer and Apr 1994 Apr 1998
Secretary, Director
Jeremy LU Yuen Tong, 39 Assistant to Feb 1996 Apr 1998
Chief Executive
Officer, Director
Thomas J. KENAN, 65 Director Mar 1997 Apr 1998
Jan YANG, Ph.D., 36 Director Apr 1997 Apr 1998
James MADISON, 47 General Manager May 1996 Apr 1998
of Pulp
and Paper
CHOW Yeung Chee, 56 Plant Manager of Jan 1996 Apr 1998
Guangzhou Dransfield
Paper Ltd.
Manuel ALVAREZ, 61 General Manager Apr 1995 Apr 1998
of paper con-
verting operations
Eddy WU, 38 General Manager Dec 1996 Apr 1998
of Tissue Paper
Distribution
Joseph PANKRATZ, 42 Technical Manager Sep 1996 Apr 1998
of Pulp and Paper
Making
</TABLE>
- --------------------------
(1) Subject to earlier removal without cause by the directors of
Dransfield.
EXECUTIVE DIRECTORS.
HORACE YAO YEE CHEONG. Mr. Yao spent 17 years with Arthur Young &
Company, international accountants, where he worked in accounting and
business advisory services and rose to managing partner covering Hong Kong
and the PRC. Mr. Yao's responsibilities include strategic planning,
business development, administration and management of the Group. Mr. Yao
holds a master of business administration degree from a university in the
U.S. and is a certified public accountant in the U.S., Australia and Hong
Kong.
20
<PAGE> 23
WARREN MA KWOK HUNG. Mr. Ma is a fellow of the Association of
Chartered Certified Accountants and an associate of the Hong Kong Society
of Accountants. He spent 16 years in the accounting profession of which
10 years are with Dransfield Holdings. He holds a Higher Diploma in
Accountancy from Hong Kong Polytechnic University.
JEREMY LU YUEN TONG. Mr. Lu has over sixteen years of international
experience in banking, general management and direct investment in Hong
Kong, Southeast Asia, Canada and China. He graduated from the University
of Southern California in Finance and Accounting. Mr. Lu is an Executive
Director of the Company, assisting Mr. Horace Yao in corporate planning and
finance.
NONEXECUTIVE DIRECTORS.
THOMAS J. KENAN. Mr. Kenan has 34 years experience as a practicing
attorney in the United States, primarily in securities, corporation, and
business reorganization law. He holds a master's of comparative laws degree
from New York University.
JAN YANG, PH.D. Dr. Yang is the founder, president and technical
director of EDT, a bioindustrial company based in Georgia specializing in
providing products and technical service to the pulp and paper industry. Dr.
Yang holds a bachelor of science degree in chemical engineering from Tianjin
University of Light Industry in China, and a doctor of philosophy degree in
biotechnology from Royal (Swedish) Institute of Technology. He has published
over 20 scientific articles and holds numerous patents related to pulp and
paper manufacturing. He is also an honorary professor at Tianjin University of
Light Industry.
SENIOR EXECUTIVES.
JAMES MADISON. Mr. Madison has more than 24 years experience in
tissue paper making and converting. He holds a bachelor of science degree
in mechanical engineering from a university in the U.S.
CHOW YEUNG CHEE. Mr. Chow has more than 31 years experience chemical
engineering and managing manufacturing plants. He has a bachelor of
science degree in chemistry.
MANUEL ALVAREZ. Mr. Alvarez has more than 30 years experience in the
paper converting business in the U.S. Prior to joining the Group, he was
the Vice President of Production of a major paper company in the U.S.
EDDY WU. Mr. Wu has a master's of business administration degree and
more than 13 years' experience in managing factories and being responsible for
sales and marketing for several Chinese consumer product companies, the last of
which was a large company listed on the Hong Kong Stock Exchange.
JOE PANKRATZ. Mr. Pankratz has more than 24 years' experience in
recycled pulp and paper making, working for Fort Howard Paper and for
Pope & Talbot. He specializes in the design of effluent treatment
processes.
21
<PAGE> 24
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
The directors and officers of the Company received from it and its
subsidiaries an aggregate of US$564,241 of compensation in the last fiscal year
for their services in all capacities. There are no present plans, arrangements,
or understandings concerning any change in compensation for them. The Company
has no pension, retirement or similar benefits for directors and officers
pursuant to a plan contributed to by the Company.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY.
WARRANTS. The Company has outstanding 946,004 Callable Common Stock
Purchase Warrants (the "Callable Warrants"). Each Callable Warrant entitles the
holder to purchase one share of Common Stock of the Company for $5.50 and
expires August 26, 1998. The Company can accelerate the expiration date by
"calling" the warrants, on not less than 30 days' notice, provided the closing
bid price of the Common Stock as reported on the Nasdaq Stock Market averages
$8.00 a share or higher for the ten consecutive trading days ending the day
before the date notice of the call is given.
Directors of the Company hold 20,000 of the Callable Warrants, as of
August 31, 1997.
STOCK OPTION PLAN. The Company has adopted a stock option plan ("the
Plan"), the major provisions of which Plan are as follows:
Nontransferable options may be granted by the directors to employees
and executive officers of the Company. The options are for 4-year terms but may
not be exercised during the first year. The exercise price for each option
shall be set by the directors but may not be less than 80 percent of the
average or closing price of the Company's Common Stock during the five trading
days prior to the grant of the option or, if the Common Stock is not trading,
not less than the net book value per share of the Company's Common Stock as
reflected in the Company's most recent balance sheet. The total number of
shares of Common Stock which can be subject to the options at any time, both
under this plan and otherwise, shall not exceed 10 percent of the number of
shares of Common Stock then outstanding. No person can be granted options
which, if fully exercised, would result in that person's owning more than 25%
of the outstanding shares of Common Stock after such exercise. Some 625,000
options have been granted under the Plan by the Company in September 1997 at an
exercise price of $2.80, of which 467,000 options were granted to and are held
by directors and officers of the Company.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
Since its inception in March 1994, the Company's predecessor,
Dransfield Paper, and since the merger on February 26, 1997, between Dransfield
Paper and the Company, the Company have had transactions with fellow subsidiary
companies (that is, companies which are subsidiaries of Dransfield Holdings
Limited) in which Mr. Horace Yao, chief executive officer and a director
earlier of Dransfield Paper and now of the Company, had a direct or indirect
interest as a director or as a beneficial shareholder. The fellow subsidiary
companies provided accounting services,
22
<PAGE> 25
electronic data processing, and building lease and management services, all at
rates believed by the directors of Dransfield Paper and now the Company to be
at approximately normal commercial rates. It is proposed that such transactions
will continue during the present fiscal year. The amounts involved are not
deemed to be material by the Company.
Similarly, the Company and its predecessor have had, since April 1996,
and still have, transactions with Dransfield Trading Limited, a subsidiary of
Dransfield Holdings Limited which employs and accounts for the activities of the
sales personnel and for the distribution in Hong Kong and Macau not only of the
Company's Tempo products but of the consumer products distributed by other
business divisions of Dransfield Holdings Limited (see "Business - General").
Under a new distribution agreement, Dransfield Trading Limited is responsible
for marketing and administration of the sales of paper handkerchief products.
The Company believes that its use of Dransfield Trading Limited in this manner
results in lower distribution costs for a sales force. The Company has continued
to make use of Dransfield Trading Limited for the sales and distribution of its
own D&F- branded paper products, distribution of which products commenced in
August 1997.
Mr. Jan Yang was elected a director of the Company in May, 1997. He is
the president of EDT (Enzymatic Deinking Technologies) of Norcross, Georgia.
EDT is a specialty chemical provider to the pulp and paper industry. It
produces and sells naturally occurring enzymatic products for specific
applications in pulp and paper mills with emphasis on the deinking process. The
Company, after consideration of EDT's products and different products offered
by EDT's competitors, initially proposes to use EDT's enzymatic products in the
Company's paper mills. To the knowledge of the Company, EDT's enzymatic product
cannot be obtained elsewhere in the volume expected to be needed. Other,
competing types of chemicals are available at less cost per pound but generally
at more total cost, due to the need for more pounds of product to achieve a
desired result. No purchases have yet been made by the Company of EDT's
enzymatic products.
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED. Inapplicable.
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
There has been no material default in the payment of principal,
interest, a sinking or purchase fund installment, or any other material default
not cured within 30 days, with respect to any indebtedness of the Company or
any of its significant subsidiaries exceeding five percent of the total assets
of the Company and its consolidated subsidiaries.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
Information describing the registered securities of the Company is
contained in a Form F-1 Registration Statement filed with the Securities and
Exchange Commission, Commission file number 333-11641. There are no material
modifications, limitations, or changes that have occurred with respect to such
information.
23
<PAGE> 26
ITEM 17. FINANCIAL STATEMENTS.
The financial statements of the Company appear as follows:
Report of Independent Auditors .................................. F-1
Consolidated Balance Sheets as of March 31, 1996 and
March 31, 1997 ............................................. F-2
Consolidated Statements of Income for the years ended
March 31, 1995, March 31, 1996, and
March 31, 1997 ............................................. F-3
Consolidated Statements of Cash Flows for the years ended
March 31, 1995, March 31, 1996, and
March 31, 1997 ............................................. F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended March 31, 1995,
March 31, 1996, and March 31, 1997 ......................... F-5
Notes to Consolidated Financial Statements ...................... F-6
EXHIBITS. The following exhibits are filed as a part of this annual
report:
Exhibit No.
1 Modification to Exhibit 21 previously filed as part of Form
S-1 (Commission File No. 333-11637) - List of all
subsidiaries of Dransfield China Paper Corporation.*
2 Contracts and other documents of a character required to be
filed as an exhibit to an original registration statement
which were executed or in effect during the last fiscal year
and not previously filed.
None.
3 List of all parents or subsidiaries of the registrant. This is
filed as Exhibit 1 above as a modification to a previously filed
exhibit.
* Previously filed with the Registrant's Form 20-F (SEC File No. 000-21919);
incorporated herein.
24
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DRANSFIELD CHINA PAPER CORPORATION
Date: September 30, 1997 By /s/ Horace Yao Yee Cheong
--------------------------------
Horace Yao Yee Cheong,
Chief Executive Officer
25
<PAGE> 28
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Dransfield China Paper Corporation
We have audited the accompanying consolidated balance sheets of
Dransfield China Paper Corporation and subsidiaries as of March 31, 1996 and
1997 and the related statements of income, cash flows and changes in
shareholders' equity for each of the years in the three-year period ended March
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Dransfield China Paper Corporation and subsidiaries at March 31, 1996 and 1997,
and the consolidated results of their operations and cash flows for each of the
years in the three-year period ended March 31, 1997, in conformity with
accounting principles generally accepted in the United States of America.
/s/ ERNST & YOUNG
ERNST & YOUNG
Hong Kong
25 August 1997
F-1
<PAGE> 29
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1996
AND MARCH 31, 1997
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1996 1997 1997
HK$ HK$ US$
----- -------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and bank balances 853 3,254 420
Accounts receivable, net 6 85,480 21,255 2,743
Inventories, net 7 21,866 12,441 1,605
Prepaid expenses 2,392 4,359 562
Due from fellow subsidiaries 8 -- 29,902 3,858
-------- -------- --------
Total current assets 110,591 71,211 9,188
Fixed assets 9 57,880 123,161 15,892
Loan to a related company 10 6,230 13,366 1,725
Deposit for fixed assets 1,510 1,011 131
Deferred tax asset 5 166 517 67
Other assets 200 200 26
-------- -------- --------
176,577 209,466 27,029
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank loans and overdrafts, secured 11 40,530 16,718 2,157
Accounts payable 19,198 8,050 1,039
Accrued liabilities 3,741 7,007 904
Income tax payable 5 1,028 719 93
Due to holding company 12 1,884 -- --
Due to fellow subsidiaries 8 17,724 15,851 2,045
Due to a minority shareholder 13 7,000 2,103 271
-------- -------- --------
Total current liabilities 91,105 50,448 6,509
Minority interests 6,944 5,101 658
Due to holding company 12 67,229 107,286 13,844
Loan from a related company 10 6,230 13,366 1,725
-------- -------- --------
171,508 176,201 22,736
Commitments and contingencies 14 -- -- --
Shareholders' equity:
Common stock, no par value,
40,000,000 shares authorized;
9,800,000 (1996: 9,300,000) issued, and fully paid up 3,001 3,004 388
Preferred stock, no par value,
10,000,000 shares authorized;
Convertible preferred stock - Series A; 22
2,300,000 shares issued and outstanding -- 26,687 3,444
Contributed surplus 23 -- 1,530 197
Retained earnings 2,068 2,044 264
-------- -------- --------
Total shareholders' equity 5,069 33,265 4,293
-------- -------- --------
Total liabilities and shareholders' equity 176,577 209,466 27,029
======== ======== ========
</TABLE>
The accompanying notes form an integral part
of these consolidated financial statements.
F-2
<PAGE> 30
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1995, MARCH 31, 1996 AND MARCH 31, 1997
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1995 1996 1997 1997
HK$ HK$ HK$ US$
----- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales:
Paper handkerchiefs
- third parties 64,693 68,011 -- --
- fellow subsidiaries 15 5,314 7,480 80,180 10,346
Other paper products to third parties 24,352 231,556 67,064 8,654
-------- -------- -------- --------
94,359 307,047 147,244 19,000
Cost of sales:
Paper handkerchiefs (54,099) (61,086) (68,705) (8,866)
Other paper products (22,266) (213,917) (64,107) (8,272)
-------- -------- -------- --------
(76,365) (275,003) (132,812) (17,138)
Gross profit 17,994 32,044 14,432 1,862
Commission income -- 5,644 3,966 512
Selling, general and administrative expenses 3
- third parties (2,471) (12,938) (9,582) (1,236)
- fellow subsidiaries 15 (8,366) (10,822) (6,626) (855)
-------- -------- -------- --------
(10,837) (23,760) (16,208) (2,091)
Interest income 284 94 32 4
Interest expense 11 (482) (5,697) (1,842) (238)
Other expenses, net (206) (485) (46) (6)
Reorganization expenses 19 -- -- (1,815) (234)
-------- -------- -------- --------
Income/(loss) before income taxes 6,753 7,840 (1,481) (191)
Provision for income taxes: 5
- Current (1,113) (965) (660) (85)
- Deferred (17) (426) 351 45
-------- -------- -------- --------
(1,130) (1,391) (309) (40)
-------- -------- -------- --------
Income/(loss) before minority interests 5,623 6,449 (1,790) (231)
Minority interests (408) (1,415) 1,766 228
-------- -------- -------- --------
Net income/(loss) 5,215 5,034 (24) (3)
======== ======== ======== ========
Earnings/(loss) per common and common
equivalent share (cents) 2 56.1 54.1 (0.2) --
======== ======== ======== ========
Pro forma loss per common and
common equivalent share (cents) 2 N/A N/A (0.2) --
======== ======== ======== ========
</TABLE>
The accompanying notes form an integral part
of these consolidated financial statements.
F-3
<PAGE> 31
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1995, MARCH 31, 1996 AND MARCH 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
1995 1996 1997 1997
HK$ HK$ HK$ US$
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss) 5,215 5,034 (24) (3)
Adjustments to reconcile income to net
cash provided by operating activities:
Minority interests 408 1,415 (1,766) (228)
Depreciation 192 456 439 57
Deferred income taxes 17 426 (351) (45)
Loss/(profit) on disposal of fixed assets -- 113 (72) (9)
Other -- 209 -- --
(Increase) decrease in current assets:
Accounts receivable (21,881) (41,286) 64,225 8,287
Inventories 5,583 (9,165) 9,425 1,216
Prepaid expenses 5,335 (1,406) (1,967) (254)
Due from fellow subsidiaries (1,268) 5,736 (29,902) (3,858)
Increase (decrease) in current liabilities:
Accounts payable (6,333) 16,967 (11,148) (1,439)
Accrued liabilities 3,098 583 3,266 421
Income tax payable 212 704 (762) (98)
Due to fellow subsidiaries (1,481) 14,587 (14,076) (1,816)
-------- -------- -------- --------
Net cash provided by operating activities (10,903) (5,627) 17,287 2,231
-------- -------- -------- --------
Cash flows from investing activities:
Acquisition of fixed assets (3,844) (5,013) (5,047) (651)
Payment of deposit for purchase of fixed assets -- (1,510) (1,011) (130)
Proceeds from disposal of fixed assets -- -- 111 14
Proceeds from disposal of other assets -- 557 -- --
-------- -------- -------- --------
Net cash used in investing activities (3,844) (5,966) (5,947) (767)
-------- -------- -------- --------
Cash flows from financing activities:
Capital contribution from a minority
shareholder of a subsidiary 5,000 -- -- --
Advances from a minority shareholder 1,000 6,000 -- --
Advances from holding company 27,053 19,930 17,861 2,305
Repayment of loan to a minority shareholder -- -- (2,158) (279)
Repayment of loan to holding company (9,335) (40,320) -- --
Bank loans and overdrafts, secured (11,571) 25,275 (23,812) (3,073)
New issue of common stock -- -- 3 --
Dividend paid to a minority shareholder -- -- (833) (107)
-------- -------- -------- --------
Net cash provided by financing activities 12,147 10,885 (8,939) (1,154)
-------- -------- -------- --------
Net increase/(decrease) in cash and cash equivalents (2,600) (708) 2,401 310
Cash and cash equivalents, at beginning of year 4,161 1,561 853 110
-------- -------- -------- --------
Cash and cash equivalents, at end of year 1,561 853 3,254 420
======== ======== ======== ========
</TABLE>
The accompanying notes form an integral part
of these consolidated financial statements.
F-4
<PAGE> 32
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1995, MARCH 31, 1996 AND MARCH 31, 1997
(Amounts in thousands)
<TABLE>
<CAPTION>
Retained
earnings/
Preferred Common Contributed (accumulated
stock stock surplus deficit)
HK$ HK$ HK$ HK$
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 -- 3,001 -- (4,160)
Net income -- -- -- 5,215
Distribution to parent (Note 1) -- -- -- (4,021)
------------ ------------ ------------ ------------
Balance at March 31, 1995 -- 3,001 -- (2,966)
Net income -- -- -- 5,034
------------ ------------ ------------ ------------
Balance at March 31, 1996 -- 3,001 -- 2,068
New issue -- 3 -- --
New issue on conversion of amount due to
holding company (Note 1) 26,687 -- -- --
Capital contribution from minority shareholder -- -- 1,530 --
Net loss -- -- -- (24)
------------ ------------ ------------ ------------
Balance at March 31, 1997 26,687 3,004 1,530 2,044
============ ============ ============ ============
</TABLE>
The accompanying notes form an integral part
of these consolidated financial statements.
F-5
<PAGE> 33
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION
Dransfield China Paper Corporation ("the Company") was
incorporated in the British Virgin Islands on June 24, 1996 for the
purpose of merging with Dransfield Paper Holdings Limited ("DPHL"), a
wholly-owned subsidiary of Dransfield Holdings Limited ("DHL"), a
company incorporated in the Cayman Islands and the shares of which are
listed for trading on the Hong Kong Stock Exchange.
Pursuant to an agreement executed on August 20, 1996 and
amended on November 15, 1996 (the Merger Agreement") with DPHL and
SuperCorp Inc. ("SuperCorp"), the then controlling shareholder of the
Company, the Company merged with DPHL on February 26, 1997 and became
a subsidiary of DHL. The officers and directors of DPHL became the
officers and directors of the Company, the surviving corporation.
Prior to the merger, the Company distributed 500,000 shares
of its no par value common stock to shareholders outside the DHL
group. On February 26, 1997, DHL exchanged its 80 shares of common
stock in DPHL for a total of 9.3 million shares of common stock in the
Company and the 2.3 million shares of Series A convertible preferred
stock of DPHL issued and outstanding were exchanged for 2.3 million
shares of Series A convertible preferred stock of the Company.
The Company was a corporate shell and had no business
operations at the time it merged with DPHL on February 26, 1997. The
merger transaction has been treated as a recapitalization of DPHL with
DPHL as the acquirer (reverse acquisition). The historical financial
statements of the Company prior to February 26, 1997 are those of
DPHL.
DPHL was incorporated in the British Virgin Islands on March
11, 1994 and was inactive until May 19, 1994 when it acquired 100% of
the issued share capital of Grandom Dransfield (International) and
Company Limited ("GDI") and Holdsworth Investments Limited
("Holdsworth") from DHL. DPHL, in consideration for the above
acquisition, issued 1 share of common stock at a par value of US$1 to
DHL.
The Company and its subsidiaries (hereinafter aggregately
referred as the "Group") is principally engaged in a single product
segment of trading of various types of paper in Hong Kong, Macau and
the People's Republic of China ("PRC"). The Group is mainly engaged in
the trading of paper handkerchiefs and fine paper which includes box
board, art paper and woodfree paper.
The acquisition by DPHL of GDI and Holdsworth has been
accounted for as a combination of companies under common control in a
manner similar to a pooling of interests and accordingly, the
historical basis has been used to record the assets and liabilities of
GDI and Holdsworth as of March 31, 1995 and 1996 and retroactive
effect has been given to account for the operations of GDI and
Holdsworth in these financial statements at the historical cost of
DHL. Intercompany balances and transactions have been eliminated on
consolidation.
F-6
<PAGE> 34
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
1. ORGANIZATION AND BASIS OF PRESENTATION (continued)
The consolidated financial statements have been prepared on a
"stand-alone" basis that reflects all costs incurred by the Group in
operating the business. Such expenses have been adjusted in the income
statements to reflect all of the cost of doing business. The net
effect of the above adjustments for the years ended March 31, 1995 and
1996 is reflected as a distribution to parent in the statement of
changes in shareholders' equity.
The consolidated financial statements were prepared in
accordance with U.S. GAAP. This basis of accounting differs from that
used in the statutory accounts of the Group which were prepared in
accordance with the accounting principles and the relevant financial
regulations applicable to accounting principles and practices
generally accepted in Hong Kong.
The principal adjustments made to conform with the statutory
accounts to U.S. GAAP included the following:
o Write-off of advertising expenses deferred;
o Compensation from related parties; and
o Deferred taxation.
The financial information has been prepared in Hong Kong
dollars ("HK$"), the official currency of Hong Kong. Solely for the
convenience of the reader, the financial statements have been
translated into United States dollars ("US$") prevailing on March 31,
1997 which was US$1.00 = HK$7.7497. No representation is made that the
Hong Kong dollar amounts could have been, or could be, converted into
United States dollars at that rate or any other certain rate on March
31, 1997.
F-7
<PAGE> 35
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Cash and bank balances
Cash and bank balances include cash on hand and demand
deposits with banks with an original maturity of three months or less.
None of the Group's cash is restricted as to withdrawal or use.
(b) Inventories
Inventories comprising raw materials held for production and
goods held for resale, are stated at lower of cost, on a first-in,
first-out basis, or market.
(c) Fixed assets and depreciation
Property, machinery and equipment are stated at cost less
accumulated depreciation. Depreciation of property, machinery and
equipment is computed using the straight-line method over the assets'
estimated useful life. The principal annual rates used are as follows:
Land and buildings held in the PRC Over the period of the
land use rights
Buildings 4%
Leasehold improvements 20% or over the lease terms,
whichever is shorter
Furniture, fixtures and
office equipment 20%
Machinery and equipment 20 - 50%
Motor vehicles 20 - 25%
(d) Income taxes
Income taxes are accounted for under Statement of Financial
Accounting Standards No.109, "Accounting for Income Taxes", which
requires the use of the liability method of accounting for income
taxes. The liability method measures deferred income taxes by applying
enacted statutory rates in effect at the balance sheet date to the
differences between the tax bases of assets and liabilities and their
reported amounts in the financial statements.
(e) Foreign currency translation
Foreign currency transactions are translated into Hong Kong
dollars at the approximate rates of exchange ruling at the transaction
dates. Monetary assets and liabilities denominated in foreign
currencies at the balance sheet date are translated into Hong Kong
dollars at the approximate rates of exchange ruling at that date.
Exchange differences are accounted for in the statement of income.
On consolidation, the assets and liabilities of overseas
subsidiaries are translated to Hong Kong dollars at the approximate
rates of exchange ruling at the balance sheet date and the income and
expenses of overseas subsidiaries are translated to Hong Kong dollars
at the average rate. The resulting translation differences are
included in the exchange fluctuation reserve.
F-8
<PAGE> 36
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(f) Operating leases
Leases where substantially all the rewards and risks of
ownership of assets remain with the leasing company are accounted for
as operating leases. Rentals applicable to such operating leases are
charged to income on the straight-line basis over the lease terms.
(g) Revenue recognition
Revenue from sales of goods are recognized on delivery to
third party customers. Commission income is recognized as the services
are provided.
(h) Advertising expenses
Advertising expenses, net of cooperative advertising
reimbursements, are charged to the statement of income when incurred.
(i) Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Actual results could
differ from stated estimates.
F-9
<PAGE> 37
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(j) Earnings/(loss) per common and common equivalent share
The earnings per common share for the years ended March 31,
1995 and 1996 were computed by dividing net income by 9.3 million
shares of common stock on the assumption that such shares issued to
DHL upon the effectiveness of the merger had existed at April 1, 1994.
The loss per common and common equivalent share for the year
ended March 31, 1997 was computed by dividing net loss applicable to
common and common equivalent shares by the weighted average number of
9,606,849 shares of common stock and common stock equivalents
outstanding during the year on the assumption that the 9.3 million
shares of common stock issued to DHL upon the effectiveness of the
merger had existed at April 1, 1996. The number of shares issuable on
conversion of the Series B preferred stock was added to the number of
shares of common stock. The conversion of the 2.3 million shares of
Series A preferred stock and the exercise of warrants were not assumed
in the calculation of loss per common and common equivalent share
because the effect would have been antidilutive.
The pro forma loss per common and common equivalent share for
the year ended March 31, 1997 is based on the net loss applicable to
common and common equivalent share of HK$24, the weighed average
number of shares of common stock and common stock equivalents as set
out above, the issuance of one million shares of common stock to
DHL at US$5 per share on conversion of HK$38,685 (US$5,000) of the
amount due to the holding company, and the issuance of one million
shares of common stock to DHL at US$4.25 per share on conversion of
HK$32,936 (US$4,250) of the amount due to the holding company (see
note 24). The pro forma loss per common and common equivalent share is
determined on the assumption that the two million shares of common
stock issued to DHL on conversion of the amount due to the holding
company had existed at April 1, 1996.
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, "Earnings per share" ("FAS 128"), which is
required to be adopted on March 31, 1998. At that time, the Company
will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive
effect of stock options will be excluded. The impact of FAS 128 on the
calculation of earnings per share for the year ended March 31, 1997 is
not expected to be material
3. SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Year ended March 31,
1995 1996 1997 1997
HK$ HK$ HK$ US$
------ ------ ------ ------
<S> <C> <C> <C> <C>
Selling, general and administrative expenses:
Depreciation 192 456 94 12
Advertising expenses 1,383 599 825 106
Exchange loss/(gain), net (36) (680) 187 24
====== ====== ====== ======
</TABLE>
F-10
<PAGE> 38
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended March 31,
1995 1996 1997 1997
HK$ HK$ HK$ US$
------ ------ ------ ------
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest 687 6,805 4,687 605
Income taxes 901 149 1,422 183
====== ====== ====== ======
Non cash investing and financing activities:
Loan from a related company
financed by a loan to a
related company - note 10 -- 6,230 7,136 921
Fixed assets paid by
holding company 9,035 27,698 46,999 6,065
Fixed assets paid by certain
fellow subsidiaries -- -- 12,203 1,575
Issuance of preferred stock on
conversion of the amount
due to holding company -- -- 26,687 3,444
Compensation from a minority
shareholder - note 23 -- -- 2,747 354
====== ====== ====== ======
</TABLE>
5. INCOME TAXES
The Company was incorporated in the British Virgin Islands
and, under current law of the British Virgin Islands, is not subject
to tax on income or on capital gains.
Grandom Dransfield (International) and Company Limited and
Dransfield Paper (HK) Trading Limited ("DPT"), wholly-owned
subsidiaries of the Company, were incorporated in Hong Kong and under
the current Hong Kong tax law, any income arising in and deriving from
business carried on in Hong Kong is subject to Hong Kong tax. No tax
is charged on dividends received and capital gains earned.
Dransfield Paper (S.E.A.) Pte. Limited ("DPSEA"), a 66.7%
subsidiary of the Company, was incorporated in the Republic of
Singapore and is subject to Singapore tax and under the current
Singapore tax law, any income accrued in, derived from or received in
Singapore is subject to Singapore tax at a rate of 27%.
F-11
<PAGE> 39
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
5. INCOME TAXES (continued)
Guangzhou Dransfield Paper Limited, a co-operative joint
venture formed in the PRC in which the Company has a 100% interest,
and Jiang Ying Dransfield Paper Co. Ltd. ("JYDP"), an equity joint
venture formed in the PRC in which the Company has a 48% interest, are
subject to PRC income taxes at the applicable tax rate of 33% for
Sino-foreign joint venture enterprises. These two joint ventures are
eligible for full exemption from joint venture income tax for the
first two years starting from its first profitable year of operations
followed by a 50% deduction from the third to fifth year. Under the
Income Tax Law applicable to Sino-foreign joint ventures, no PRC
income tax was levied on the above companies as they have not
commenced operation as at March 31, 1997.
Total income tax expense differs from the amount computed by
applying Hong Kong statutory income tax rate of 16.5% (1996: 16.5%
and 1995: 16.5%) to income before taxes as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1995 1996 1997 1997
HK$ HK$ HK$ US$
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Computed expected income taxes (1,114) (1,294) 244 31
Non-deductible losses of subsidiaries (31) (126) (522) (67)
Difference between Hong Kong statutory
rate and Singapore statutory tax rate -- (10) (40) (5)
Other 15 39 9 1
-------- -------- -------- --------
(1,130) (1,391) (309) (40)
======== ======== ======== ========
</TABLE>
The deferred tax asset arises from temporary difference
associated with tax losses carried forward.
6. ACCOUNTS RECEIVABLE, NET
<TABLE>
<CAPTION>
Accounts receivable are comprised of: March 31,
1996 1997 1997
HK$ HK$ US$
-------- -------- --------
<S> <C> <C> <C>
Accounts receivable - trade 85,480 21,305 2,749
Less: Allowance for doubtful debts -- (50) (6)
-------- -------- --------
Accounts receivable, net 85,480 21,255 2,743
======== ======== ========
Movement of allowance for doubtful debts
Balance as at April 1, -- -- --
Provided during the year -- 50 6
-------- -------- --------
Balance as at March 31, -- 50 6
======== ======== ========
</TABLE>
F-12
<PAGE> 40
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
7. INVENTORIES, NET
<TABLE>
<CAPTION>
Inventories are comprised of: March 31,
1996 1997 1997
HK$ HK$ US$
-------- -------- --------
<S> <C> <C> <C>
Raw materials 1,299 2,207 285
Finished goods 21,269 11,496 1,483
Less: Allowance for obsolescence (702) (1,262) (163)
-------- -------- --------
Inventories, net 21,866 12,441 1,605
======== ======== ========
Movement of allowance for obsolescence
Balance as at April 1, -- 702 91
Provided during the year 702 710 92
Deduction during the year -- (150) (20)
-------- -------- --------
Balance as at March 31, 702 1,262 163
======== ======== ========
</TABLE>
8. DUE FROM (TO) FELLOW SUBSIDIARIES
Balances with fellow subsidiaries are unsecured,
interest-free and repayable within one year. The Group utilized the
banking facilities of certain fellow subsidiaries and the interest
incurred on the banking facilities were reimbursed by the Group.
9. FIXED ASSETS
<TABLE>
<CAPTION>
March 31,
1996 1997 1997
HK$ HK$ US$
-------- -------- --------
<S> <C> <C> <C>
Land and buildings 18,325 38,304 4,943
Leasehold improvement 132 278 36
Machinery and equipment 38,596 81,803 10,555
Motor vehicles 819 797 103
Furniture, fixtures and office equipment 1,303 3,533 456
-------- -------- --------
59,175 124,715 16,093
Less: Accumulated depreciation (1,295) (1,554) (201)
-------- -------- --------
57,880 123,161 15,892
======== ======== ========
</TABLE>
F-13
<PAGE> 41
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
9. FIXED ASSETS (continued)
The Group's land and buildings are located in the PRC and
held under land use rights of 50 years from December 1, 1992 to
November 30, 2041.
During the year, no depreciation was provided on the
machinery and equipment as they have not been put into use at the
balance sheet date. No depreciation was provided on the land and
buildings and machinery and equipment in 1995 and 1996 as they had not
been put into use at the respective balance sheet dates. The carrying
value of assets which are under construction at the balance sheet date
amounted to HK$101,339 (1996: HK$56,921).
10. LOANS WITH A RELATED COMPANY
In May 1995, the Company entered into an agreement with a
third party, Broadsino Investment Company Limited ("Broadsino") to
establish Dransfield Broadsino Paper Holdings Limited ("DBPHL"), a
company which is 80% owned by the Company. DBPHL then entered into an
agreement to establish a Sino-foreign equity joint venture company,
JYDP, which is 60% owned by DBPHL and is principally engaged in paper
manufacturing. DBPHL has committed to contribute an amount of US$9.26
million (approximately HK$72 million) to JYDP, to be financed by a
shareholders' loan.
The Company, DBPHL and Broadsino entered into a loan
agreement whereby the Company and Broadsino agreed to make an
interest-free shareholders' loan of US$9.26 million (approximately
HK$72 million) (the "Shareholders' Loan") to DBPHL. Pursuant to
another agreement, the Company agreed to make a loan of US$1,852
(approximately HK$14 million) to Broadsino, bearing compound interest
at the rate of 6 percent per annum, to finance its share of the
Shareholders' Loan to DBPHL. DBPHL has pledged all its assets with the
Company and Broadsino for the repayment in full of the Shareholders'
Loan. In addition, DBPHL also undertakes to apply any amounts,
including dividends, which may be distributed by JYDP to it to repay,
in full, the Shareholders' Loan. Broadsino has pledged both its 20 per
cent shareholding in DBPHL and any amount it may receive from DBPHL as
repayment of its proportion of the Shareholders' Loan to secure the
repayment, in full, of the loan from the Company. A promissory note
has been issued by a wholly owned subsidiary of Broadsino in favour of
the Company.
As at March 31, 1997, the Company advanced HK$13,366
(US$1,725) to Broadsino for the capital injection in JYDP, which is
classified as a loan to a related company. The same amount of
HK$13,366 (US$1,725) is recorded in the consolidated financial
statements as long term loan payable to Broadsino by DBPHL. The loan
to and loan from a related company have no fixed repayment terms.
F-14
<PAGE> 42
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
11. BANK BORROWINGS
The Company and its principal subsidiaries obtained certain
working capital credit facilities from a banker, representing letters
of credit of HK$115 million (US$14.8 million). As at March 31, 1997,
the unutilized credit facilities amounted to HK$107 million (US$13.8
million). The credit facilities are collateralized by:
(a) corporate guarantees given by DHL to the extent of HK$79
million (US$10.2 million);
(b) personal guarantees given by a minority shareholder of a
subsidiary to the extent of HK$40 million (US$5.2 million);
and
(c) a charge over a bank deposit of HK$3 million (US$387) plus
accrued interest held by the above minority shareholder of a
subsidiary.
In addition, the Company and its principal subsidiaries also
obtained working capital credit facilities from several banks which
are shared with DHL and certain of the Company's fellow subsidiaries
(the "Shared Facilities"). These facilities comprise short-term loans
and overdrafts of HK$35 million (US$4.5 million) and letters of credit
of HK$52 million (US$6.7 million). As at March 31, 1997, the
unutilized amount of the Shared Facilities amounted to HK$61 million
(US$7.9 million) representing short-term loans and overdrafts of HK$22
million (US$2.8 million) and letters of credit of HK$39 million (US$5
million). As at March 31, 1997, the Company and its subsidiaries have
not drawn down the Shared Facilities. The Shared Facilities are
collateralized by:
(a) a corporate guarantee given by DHL to the extent of HK$60
million (US$7.7 million);
(b) a corporate guarantee given by a fellow subsidiary to the
extent of HK$21 million (US$2,710); and
(c) unlimited cross guarantees given by certain subsidiaries of
the Company and a fellow subsidiary.
The weighted average interest rates on bank borrowings as at
the balance sheet date are as follows:
<TABLE>
<CAPTION>
March 31,
1996 1997
---- ----
<S> <C> <C>
Interest on bank loans and overdrafts 9% 9%
</TABLE>
F-15
<PAGE> 43
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
11. BANK BORROWINGS (continued)
Interest expense on bank loans, net of the amounts
capitalized, is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1995 1996 1997 1997
HK$ HK$ HK$ US$
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest incurred 687 6,805 4,687 605
Interest capitalized (205) (1,108) (2,845) (367)
-------- -------- -------- --------
Interest expense 482 5,697 1,842 238
======== ======== ======== ========
</TABLE>
12. DUE TO HOLDING COMPANY
The holding company has agreed that it will not demand
payment of the amount prior to April 1, 1998. The Group utilized the
banking facilities of the holding company and the interest incurred on
the banking facilities were reimbursed by the Group.
13. DUE TO A MINORITY SHAREHOLDER
The balance at March 31, 1997 represents a loan from a
minority shareholder. The balance is unsecured, interest-free and is
repayable within one year. The balance at March 31, 1996 represented
loans from a minority shareholder and a director of a subsidiary,
amounting to HK$5 million (US$646) and HK$2 million (US$259),
respectively. The balances were unsecured and interest-free.
14. COMMITMENTS AND CONTINGENCIES
Capital commitments
As of March 31, 1997, the Group had outstanding capital
commitments of HK$7.5 million (US$968).
Contingencies
A subsidiary provided guarantees to certain banks for banking
facilities granted to DHL and DHL group of companies for an unlimited
amount as at March 31, 1997. The amount of banking facilities utilized
by DHL group of companies as at March 31, 1997 is HK$46.9 million
(US$6.1 million). Besides, another subsidiary also provided a
guarantee to a bank for a supplier for an amount of HK$2 million
(US$258) which was not utilized by the supplier as at March 31, 1997.
F-16
<PAGE> 44
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
15. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
The major related party transactions are described in further
detail below. Management believes that the methods used in allocating
costs are reasonable.
<TABLE>
<CAPTION>
Year ended March 31,
Nature of transactions Notes 1995 1996 1997 1997
HK$ HK$ HK$ US$
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Sales of products (a) 5,314 7,480 80,180 10,346
====== ====== ====== ======
Expenses:
Electronic data processing and
accounting services charges (b) 1,425 2,312 801 103
Storage and delivery charges (c) 4,436 7,069 5,561 718
Equipment rental (d) 434 105 55 7
Operating lease rental for land
and building (e) 2,071 1,336 209 27
------ ------ ------ ------
8,366 10,822 6,626 855
====== ====== ====== ======
</TABLE>
(a) Sales of products
The Group sold products to Victorison Marketing Limited and
Dransfield Pacific Limited, fellow subsidiaries of the Company at cost
plus 3% (3% to 6% in 1995 and 3% in 1996). Commencing April 1, 1996,
the Group sold products to Dransfield Trading Limited ("DTL") at cost
plus 18%. Under this arrangement, DTL is responsible for the marketing
and distribution of the Group's paper handkerchief products. The
mark-up is established based on the margins achieved by DTL on sales
to ultimate customers after taking into account marketing and
distribution costs incurred by DTL.
(b) Electronic data processing and accounting services charges
Dransfield Secretarial & Administrative Services Limited, a
fellow subsidiary of the Company, provides various administrative
services to the Group including electronic data processing,
accounting, shipping, personnel, legal and general administrative
services. The service fee charged by the fellow subsidiary is based on
apportioned salary costs on the basis of estimated time incurred and
cost of other resources consumed to provide these services to the
Group.
(c) Storage and delivery charges
Victorison Logistics Limited, a fellow subsidiary of the
Company, provide storage and delivery services to the Group at agreed
prices, which, in the opinion of the management, approximate prices
negotiated with third parties on an arm's length basis.
F-17
<PAGE> 45
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
15. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(d) Equipment rental
The equipment rental is paid to A. Dransfield & Company,
Limited, a fellow subsidiary of the Company, at the rate equivalent to
the depreciation of the equipment over its estimated useful live.
(e) Operating lease rental for land and building
The rental under operating leases is paid to Well Assessed
Limited, a fellow subsidiary of the Company based on the actual floor
area occupied by the Group at agreed rates, which, in the opinion of
the management, approximate rates negotiated with third parties on an
arm's length basis.
16. FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash and bank balances
approximate their fair value because of the short maturity of those
instruments. The carrying amounts of the Company's borrowings
approximate their fair value based on the borrowing rates currently
available for borrowings with similar terms and average maturities,
except for the loans from holding company, which, due to their nature,
the fair value is not determinable.
The carrying amount reported in the balance sheet for
accounts receivable and accounts payable approximate their fair value.
17. CONCENTRATION OF RISK
Concentration of credit risk:
The Group's principal activities are distribution of fine
paper and paper handkerchiefs. The Group has long standing
relationships with most of its customers. The Group performs ongoing
credit evaluation of its customers' financial conditions and,
generally does not require collateral.
The allowance for doubtful accounts the Group maintains is
based upon the expected collectibility of all accounts receivable.
F-18
<PAGE> 46
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
17. CONCENTRATION OF RISK (continued)
Current vulnerability due to certain concentrations:
The Group has investments in the PRC. The value of the
Group's investment may be adversely affected by significant political,
economic and social uncertainties in the PRC. Although the PRC
government has been pursuing economic reform policies for the past 18
years, no assurance can be given that the PRC government will continue
to pursue such policies or that such policies may not be significantly
altered, especially in the event of a change in leadership, social or
political disruption or unforeseen circumstances affecting the PRC's
political, economic and social life. There is also no guarantee that
the PRC government's pursuit of economic reforms will be consistent or
effective.
18. PENSION SCHEME
The Group is a member of a defined contribution pension
scheme of DHL (the "Scheme"). All the full time permanent staff in
Hong Kong, after completion of one year's service, are eligible to
join the Scheme. The participants contribute 5% of their basic monthly
salaries to the Scheme while the Group contributes 5% to 6.5% of the
basic monthly salaries of the participants depending on the number of
years of employment of individual participants and such contributions
are charged to the profit and loss account as they become payable in
accordance with the rules of the Scheme. When an employee leaves the
Scheme prior to his/her interest in the Group employer contributions
vesting fully, the ongoing contributions payable by the Group may be
reduced by the relevant amount of forfeited contributions. Pension
scheme expenses, net of forfeited contributions, is HK$62, HK$44 and
HK$15 for the years ended March 31, 1995, 1996 and 1997.
19. REORGANIZATION EXPENSES
The amount represents the costs incurred in connection with
the reverse acquisition transaction.
F-19
<PAGE> 47
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
20. SEGMENT REPORTING AND MAJOR SUPPLIERS
The Group operates in three industry segments, paper
distribution, paper merchanting and paper manufacturing. Operations in
paper distribution include the distribution of paper handkerchiefs.
Operations in paper merchanting include the buying and selling of
paper both on an indent basis and on an agency basis. Management
believes that the operations in paper merchanting activities are
incidental to the core business. The Group is in the process of
setting up a paper manufacturing facility and operations have not
commenced.
Operating profit is total revenue less operating expenses,
excluding interest expense and general corporate expenses.
Identifiable assets by industry segment include assets directly
identified with those operations. Corporate assets consist primarily
of prepayments and deposits. Information about the Group's operations
in different industry segments were as follows:
<TABLE>
<CAPTION>
1995 1996 1997 1997
HK$ HK$ HK$ US$
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES AND OTHER INCOME
Distribution of paper handkerchiefs
- third parties 64,829 68,062 -- --
- fellow subsidiaries 5,314 7,480 80,180 10,346
-------- -------- -------- --------
70,143 75,542 80,180 10,346
Paper merchanting 24,500 237,243 67,064 8,654
-------- -------- -------- --------
TOTAL REVENUE 94,643 312,785 147,244 19,000
======== ======== ======== ========
OPERATING PROFIT
Distribution of paper handkerchiefs 5,706 4,296 5,961 769
Paper merchanting 1,529 9,241 (2,926) (377)
Paper manufacturing -- -- (591) (76)
-------- -------- -------- --------
TOTAL OPERATING PROFIT 7,235 13,537 2,444 316
Corporate office expenses -- -- (268) (35)
Reorganization expenses -- -- (1,815) (234)
Interest expense (482) (5,697) (1,842) (238)
-------- -------- -------- --------
INCOME/(LOSS) BEFORE INCOME TAXES 6,753 7,840 (1,481) (191)
======== ======== ======== ========
</TABLE>
F-20
<PAGE> 48
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
20. SEGMENT REPORTING AND MAJOR SUPPLIERS (continued)
<TABLE>
<CAPTION>
1995 1996 1997 1997
HK$ HK$ HK$ US$
-------- -------- -------- --------
<S> <C> <C> <C> <C>
IDENTIFIABLE ASSETS
Distribution of paper handkerchiefs 35,967 20,499 22,979 2,965
Paper merchanting 29,990 90,594 44,350 5,723
Paper manufacturing 25,561 64,308 141,944 18,316
-------- -------- -------- --------
91,518 175,401 209,273 27,004
General corporate assets -- 1,176 193 25
-------- -------- -------- --------
TOTAL ASSETS 91,518 176,577 209,466 27,029
======== ======== ======== ========
DEPRECIATION AND AMORTIZATION
Distribution of paper handkerchiefs 185 143 29 4
Paper merchanting 7 313 65 8
Paper manufacturing -- -- 345 45
CAPITAL EXPENDITURES
Distribution of paper handkerchiefs 679 6 -- --
Paper merchanting 73 381 493 64
Paper manufacturing 12,999 32,468 65,213 8,415
General corporate assets -- -- 53 7
</TABLE>
The Group's business is conducted in Hong Kong, Macau and the
other parts of the PRC. The sales to Macau and the other parts of the
PRC during the three years ended March 31, 1997 were insignificant.
There is no single customer who accounted for more than 10% of net
sales for the three years ended March 31, 1997.
In 1995, the Group purchased substantially all of its
merchandise from two suppliers. In 1996, the Group had three suppliers
who accounted for approximately 57% of total purchases. In 1997, the
Group had three suppliers who accounted for approximately 75% of total
purchases.
F-21
<PAGE> 49
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
21. COMMON STOCK OPTIONS AND WARRANTS
Prior to the merger, the Company issued to the then existing
shareholders, 500,000 callable common stock purchase warrants which
entitle the registered holders to purchase common stock of the Company
at a price of US$5.50 per share at any time on or before August 23,
1998. 446,004 common stock purchase warrants of the Company were
issued to DHL on February 26, 1997 in accordance with the terms of the
Merger Agreement. The callable warrants are subject to call by the
Company on not less than 30 days' notice provided that the closing bid
price of the common stock of the Company as reported on the Nasdaq
Stock Market averages US$8 a share or above for the ten consecutive
trading days ending on the day prior to the date on which the notice
of call is given.
At the balance sheet date, the Company had 946,004 common
stock purchase warrants outstanding.
On November 20, 1996, the then sole director of the Company
adopted a stock option plan (the "Plan") whereby nontransferable
options may be granted by the directors to employees and executive
officers of the Company. The options are for 4-year terms but may not
be exercised during the first year. The exercise price for each option
shall be set by the directors but may not be less than 80 percent of
the average or closing price of the Company's common stock during the
five trading days prior to the grant of the option. The total number
of shares of common stock which can be subject to the options at any
time, both under this plan and otherwise, shall not exceed 10 percent
of the number of shares of common stock then outstanding. No person
can be granted options which, if fully exercised, would result in that
person owning more than 25 percent of the outstanding shares of common
stock after such exercise. No options have been granted under the Plan
by the Company during the year.
22. PREFERRED STOCK
The holders of the Series A convertible preferred stock are
entitled to receive, out of surplus, a cumulative dividend at the rate
of US$0.15 per share per annum and, after the payment of this
dividend, they are entitled to participate in dividends set apart or
paid on other capital stock of the Company on the same basis as the
holders of the Company's common stock. In case of liquidation of the
Company, these preferred stock holders shall be entitled to receive
US$1.50 for each share of the Series A convertible preferred stock
before any distribution of the assets of the Company to other capital
stock holders, plus all accrued and unpaid dividends declared hereon
and other considerations before the other capital stockholders share
in the liquidation of the assets. This class of preferred stock is
convertible at the option of the holders into one share of common
stock of the Company and has equal voting rights with the common
stockholders.
At the balance sheet date, the aggregate and per share amount
of the cumulative dividends in arrears was HK$1,531 (US$198) and
HK$0.67 (US$0.09), respectively.
F-22
<PAGE> 50
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. CONTRIBUTED SURPLUS
The amount represents a compensation from a minority
shareholder of HK$2,747, net of related tax expense of HK$453 and
minority interests thereon of HK$764, which has been accounted for as
a capital transaction during the year.
24. SUBSEQUENT EVENTS (UNAUDITED)
(A) On May 30, 1997, the Company issued 2.3 million shares of
common stock to DHL on conversion of its 2.3 million shares
of Series A convertible preferred stock and issued an
additional one million shares of common stock to DHL at US$5
per share on conversion of HK$38,685 (US$5,000) of the amount
due to the holding company.
On September 19, 1997, the Company issued one million
shares of common stock to DHL at US$4.25 per share on
conversion of HK$32,936 (US$4,250) of the amount due to the
holding company.
(B) In early June 1997, the Company issued 150,000 new shares of
common stock at US$5 per share and is currently in the
progress of a public offering of 150,000 additional new
shares of common stock of the Company at US$5 per share. The
Company filed a registration statement on Form F-1 with the
Securities and Exchange Commission on June 12, 1997 to
register these 300,000 new shares of common stock, 38,428
shares of common stock held by two shareholders, 946,004
callable common stock purchase warrants and 946,004 shares of
common stock of issuable upon exercise of the callable common
stock purchase warrants.
(C) Acquisition and disposal of subsidiaries
On March 27, 1997, the Company entered into a sale
and purchase agreement to acquire the remaining 33.3%
interest in CS Paper Holdings (International) Limited, a
66.7% subsidiary of the Company, and certain of its
wholly-owned subsidiaries (collectively the "CSP Group") and
to dispose of Dransfield Paper (S.E.A.) Pte. Limited
("DPSEA") and Central National Hong Kong Limited ("CN"),
subsidiaries in which the group have 66.7% and 34% equity
interests, respectively. The consideration for the disposal
of DPSEA was HK$0.001. The consideration for the acquisition
of the CSP Group and the disposal of CN was based on the net
book value of the respectively companies as at 30 September
1996.
The amount of consideration payable to the minority
shareholder of HK$3,000 was settled in cash subsequent to the
balance sheet date.
As at the balance sheet date, the net book values of
minority interests being acquired and the subsidiaries being
disposed of amounted to HK$5,212 and HK$234, respectively.
The CSP Group contributed revenues of HK$65,166 and net loss
of HK$3,833 to the group in the current year. The
subsidiaries being disposed of contributed revenues of
HK$5,276 and net income of HK$130 to the group in the current
year.
F-23
<PAGE> 51
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
24. SUBSEQUENT EVENTS (UNAUDITED)(continued)
The agreement was conditional on the shareholders of the DHL
passing, at an extraordinary general meeting, an ordinary
resolution approving the agreement and the transactions. The
agreement was declared unconditional on 9 May 1997 pursuant
to a shareholders resolution.
25. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform
with the current year presentation.
F-24
