<PAGE> 1
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, 1998
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)
8th Floor, North Wing, Kwai Shun Industrial Centre
51-63 Container Port Road, Kwai Chung
New Territories, Hong Kong, China
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 - 15,585,000 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
<TABLE>
<S> <C>
Item 1. Description of Business 1
Item 2. Description of Property 4
Item 3. Legal Proceedings 5
Item 4. Control of Registrant 5
Item 5. Nature of Trading Market 5
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders 6
Item 7. Taxation 8
Item 8. Selected Financial Data 9
Item 9. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 11
Item 10. Directors and Officers of the Company 23
Item 11. Compensation of Directors and Officers 26
Item 12. Options to Purchase Securities from the Company 26
Item 13. Interest of Management in Certain Transactions 27
Item 14. Description of Securities to be Registered 28
Item 15. Defaults Upon Senior Securities 28
Item 16. Changes in Securities and Changes in Security for
Registered Securities 28
Item 17. Financial Statements 28
Exhibit List 28
SIGNATURES 29
</TABLE>
ii
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
The Company is currently a 95.8%-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 three business divisions
- - 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 and 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 service division now includes a small consumer electronics
department which distributes household appliances under the brand names of
"Turbo" and "D&F".
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 ("Dransfield Paper"), 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, 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 distribution commenced in August 1997. 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
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<PAGE> 4
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 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 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 1996 there were an estimated
28 million metric tons of paper and paper boards produced and approximately 1.8
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 slightly more 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, the
Company believes, 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
2
<PAGE> 5
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 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
have been approved by the local environmental protection agency. They 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.
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<PAGE> 6
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, 1998 the Company employed 98 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.
VENUE OF SALES. Less than 10% of sales during the year ended March 31, 1998 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
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<PAGE> 7
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 95.8%-owned subsidiary of Dransfield Holdings, a
Cayman company which is listed on the Hong Kong Stock Exchange.
The following table sets forth, as of August 31, 1998, 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 14,935,000(1) 95.8%
Officers and Directors as a
Group (14 persons) 14,961,786 96.0%
</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.
INSIDE THE UNITED STATES
The Company's Common Stock is listed for trading on the Nasdaq SmallCap
Market under the symbol DCPCF.
5
<PAGE> 8
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> <C> <C>
1997, 2nd Quarter $5.25 $2.50
1997, 3rd Quarter $4.875 $3.25
1997, 4th Quarter $5.00 $4.06
1998, 1st Quarter $4.375 $2.00
1998, 2nd Quarter $3.00 $1.875
1998, 3rd Quarter $2.25 $0.875
</TABLE>
There have been no reported trades in the Company's Callable Warrants.
Of the 15,585,000 outstanding shares of Common Stock, 550,000 shares
are held in the United States by approximately 1,189 record holders and
15,035,000 shares are held in Hong Kong by three shareholders, one of whom,
Dransfield Holdings Limited, a Cayman corporation, owns 14,935,000 shares.
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
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$1.00 = RMB8.70.
The following table sets forth certain information concerning exchange
rates between Renminbi and U.S. dollars for the periods indicated:
6
<PAGE> 9
<TABLE>
<CAPTION>
NOON BUYING RATE(1)
------------------------------------------------
PERIOD PERIOD END AVERAGE(2) HIGH LOW
- ------ ---------- ---------- ---- ---
(EXPRESSED IN RMB PER US$)
<C> <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 8.3700 8.3993 8.3543
1996 8.3284 8.3389 --(3) --(3)
1997 8.3093 8.3193 --(3) --(3)
1998 (Sept. 3) 8.3100
</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
September 3, 1998, the Noon Buying Rate was US$1.00 = RMB8.3100.
(2) 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.
(3) 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 and
thereafter.
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 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
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<PAGE> 10
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$1.00,
if at all.
The Company is organized under the laws of the British Virgin Islands
("the BVI"). The relevant BVI law imposes no limitations on the rights of
nonresidents or foreign owners to hold or vote securities of the Company, nor
are there any charters or other constituent documents of the Company that would
impose similar limitations.
ITEM 7. TAXATION.
There are no British Virgin Islands ("BVI") governmental laws, decrees
or regulations affecting the remittance of dividends or other payments to
nonresident holders of the Company's securities. U.S. holders of the securities
of the Company are subject to no taxes or withholding provisions under existing
BVI laws and regulations. By reason of the fact that the Company conducts no
business operations within the BVI, there are no applicable reciprocal tax
treaties between the BVI and the U.S. that would affect the preceding statement
that there are no BVI taxes, including withholding provisions, to which U.S.
security holders are subject under existing laws and regulations of the BVI.
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<PAGE> 11
ITEM 8. SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended March
31, 1998, are derived from the audited consolidated financial statements of the
Company and of Dransfield Paper, with whom the Company merged on February 26,
1997. The data should be read in conjunction with the consolidated financial
statements and the related notes, which are included elsewhere in this annual
report.
<TABLE>
<CAPTION>
Years ended March 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000(1) US$'000(1)
------- ------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales(2) 78,387 94,359 307,047 147,244 54,631 7,062
Income (loss) before interest and
income taxes and minority 4,809 6,951 13,443 329 (3,791) (490)
interests
Interest income/(expenses),
net(2) 60 (198) (5,603) (1,810) (525) (68)
Provision for income taxes (960) (1,130) (1,391) (309) (417) (54)
Income (loss) after income
taxes but before minority
interests 3,909 5,623 6,449 (1,790) (4,733) (612)
Net income (loss)(2) 3,909 5,215 5,034 (24) (4,733) (612)
Basic net income (loss) per share
(cents)(5) 42 56 54 (16) (39) (5)
As at March 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998 1998
HK$'000 HK$'000 HK$'000 HK$'000 HK$'000(1) US$'000(1)
------- ------- ------- ------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Fixed assets(3) 12,780 25,467 57,880 123,161 178,434 23,065
Total assets(3) 69,216 91,518 176,577 209,466 211,277 27,311
Long term liabilities(4) -- -- 73,459 120,652 53,532 6,920
</TABLE>
- ----------
(1) The translation from Hong Kong dollars into U.S. dollars for the 1998
data is at US$1.00 equals HK$7.736, the conversion rate prevailing on
March 31, 1998.
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<PAGE> 12
(2) For a discussion of the reasons for the significant changes in certain
selected financial data between fiscal years 1996, 1997 and 1998, see
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$27.3 million in 1998, an increase of
US$234,000 over 1997 which had seen an increase of US$4.2 million over
1996. The 1998 increase of US$234,000 was mainly attributable to an
increase of US$7.1 million in fixed assets, a decrease of US$3.9
million due from fellow subsidiaries, a decrease of US$1.4 million in
accounts receivable and a decrease of US$1.3 million in inventories.
The 1997 increase of US$4.2 million over 1996 was mainly attributable
to US$3.9 million due the Company from fellow subsidiaries and an
increase of US$8.4 million in fixed assets.
(4) Long-term liabilities are composed mainly of US$5.1 million owed to the
Company's parent, Dransfield Holdings Limited and a US$1.8 million loan
from a related company.
(5) Basic net income/loss per share is computed using the weighted average
number of common shares outstanding during the periods. Diluted net
income/loss per share is computed using the weighted average number of
common and potentially dilutive common shares during the periods,
except those that are antidilutive. Please see note 2(k) of the
attached Consolidated Financial Statements for more details.
The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods presented,
expressed in HK$ 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 7.7357 7.7665 7.7300
1996 7.7330 7.7345 7.7440(1) 7.7310(1)
1997 7.7495 7.7431
1998(Sept.3) 7.7495
</TABLE>
- ----------
Source: Federal Reserve 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.
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<PAGE> 13
(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 and
thereafter.
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.
OVERVIEW.
The Company had no business until it merged on February 26, 1997, with
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, 1996, 1997 and 1998.
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, 1998:
<TABLE>
<CAPTION>
Year ended March 31 1996 1997 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 89.6 90.2 91.2
-----------------------
Gross margin 10.4 9.8 8.8
-----------------------
Selling, general and
administrative expenses 7.7 11.0 18.7
Interest expense 1.8 1.3 0.9
Other income and expenses, net (0.7) (2.5) (2.2)
-----------------------
8.8 9.8 17.5
-----------------------
Net income/(loss) 1.6% -0- (8.7%)
-----------------------
</TABLE>
11
<PAGE> 14
SALES.
Sales for 1998 decreased approximately HK$92.6 million (US$11.9
million) or 63% from the prior year as compared with a decrease of HK$159.8
million (US$20.6 million) or 52% in 1997 over 1996. The decreases were due to
the contraction of paper merchanting activities that had been commenced in
November 1994 in an effort to obtain experience and establish business contacts
for a planned expansion into hygienic paper manufacturing. These paper
merchanting activities decreased by HK$164.5 million (US$21.2 million), or 71%,
in 1997 and then decreased HK$27.5 million (US$3.6 million), or 41% in 1998.
Sales of the Tempo brand handkerchief for 1998 decreased approximately HK$65
million (US$8.4 million) to HK$15 million (US$1.9 million), or 81%, over 1997 as
compared with an increase of HK$4.7 million (US$606,000) to HK$80.2 million
(US$10.3 million), or 6%, over 1996. 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$9.6 million (US$1.2 million) in 1998 or
67% from 1997 as compared with a decrease of HK$17.6 million (US$2.3 million) in
1997 or 55% over 1996. As a percentage of sales, however, the 1998 gross margin
decreased to 8.8% of sales from 9.8% of sales in 1997 and 10.4% of sales in
1996. The 1998 decrease from the 1997 level was due largely to a decrease in the
average gross margin of sales of Tempo-brand paper handkerchiefs resulting from
the termination of a distributorship in June 1997 as the margin for paper
handkerchiefs are generally higher than the margin for merchanting activities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses for fiscal 1998 decreased
by HK$6.8 million (US$879,000) or 42% below 1997. In 1997 these expenses
decreased HK$7.6 million (US$975,000) or 32% below 1996. The 1998 and 1997
decreases were both due to a reduction in the paper merchanting business and the
1998 decrease was also attributable to the termination of the Tempo
distributorship.
INTEREST EXPENSE, NET.
The interest expenses of HK$5.6 million (US$736,000) in fiscal 1996,
HK$1.8 million (US$238,000) in fiscal 1997 and HK$525,000 (US$68,000) in fiscal
1998 were attributable mainly to the financing of the Company's paper
merchanting activities. The 68% decrease in 1997 from 1996, and the 71% decrease
in 1998 from 1997 reflected a reduction in bank loans caused by reduced
activities in paper merchanting.
12
<PAGE> 15
NET INCOME.
The Company had a net loss of HK$4.7 million (US$612,000) in 1998
compared with a net loss of HK$24,000 (US$3,000) in 1997 and net income of
HK$5.0 million (US$650,000) in 1996. HK$3.5 million (US$452,000) out of the 1998
net loss was due to
o a loss of HK$832,000 (US$108,000) in the paper merchanting division,
o HK$644,000 (US$83,000) in corporate promotion expenses during the year,
o HK$200,000 (US$26,000) in production of the first annual report after
listing on NASDAQ,
o HK$650,000 (US$84,000) in product development and testing, and
o HK$1.2 million (US$155,000) amortization of employee stock option
expenses.
The 1997 loss also reflects HK$1.8 million (US$234,000) in reorganization
expenses associated with the Company's merger in late fiscal 1997 with
Dransfield Paper 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 is 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 1997
to 1998, 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 fixed assets from HK$123.1 million
(US$15.9 million) in 1997 to HK$178.4 million (US$23.1 million) in 1998 reflect
the acquisition of plant and equipment for Paper Mill Nos. 1 and 2, and the
conversion into common stock of HK$118 million (US$15.3 million) in debt owed to
the Company's parent, Dransfield Holdings Limited. Shareholders' equity
increased to HK$153.6 million (US$19.8 million) in fiscal year 1998 from HK$33.3
million (US$4.3 million) in fiscal 1997.
13
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES.
The Company had positive cash flows from operations of HK$19.2 million
(US$2.5 million) in 1998 and 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. The 1998 positive performance was due to decreases in accounts receivable
of HK$4.1 million (US$528,000), a decrease in inventories of HK$9.9 million
(US$1.3 million) and the net decrease of amounts due from fellow subsidiaries to
HK$16 million (US$2 million). The improvement in 1997 over 1996 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$4.5 million (US$582,000) in 1998, by
HK$5.9 million (US$767,000) in 1997 and by HK$6.0 million (US$772,000) in 1996.
The 1996 shortfall in liquidity was 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$26.7 million (US$3.4 million)
conversion of debt to capital stock. Fiscal 1998 saw a further reduction of
HK$16.7 million (US$2.2 million) in bank loans and overdrafts and a receipt of
HK$5.8 million (US$750,000) on new issue of common 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$86 million (US$11 million) must be made to complete the first two paper
mills, and additional capital expenditures of approximately HK$194 million
(US$25 million), not yet obtained or committed, must be made to complete its
proposed third and fourth paper mills, as follows:
<TABLE>
<CAPTION>
US$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 $ 12,107
New Auxiliary Equipment (China) $ 3,725 Sep 98-Mar 99
New Environmental Control
Equipment (China/USA) 134 Oct 98-Mar 99
Infrastructure (China) 968 1,957 Sep 98-Dec 98
----------------------
Sub-Total $ 13,075 $ 5,816
</TABLE>
14
<PAGE> 17
<TABLE>
<S> <C> <C> <C>
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 $ 7,127
New Auxiliary Equipment (China) $ 3,721 Sep 98-Apr 99
New Environmental Control
Equipment (China/USA) 206 Sep 98-Apr 99
Infrastructure (China) 863 1,315 Sep 98-Nov 98
------- -------
Sub-Total $ 7,990 $ 5,242
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 $23,065 $11,058
</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.
o $6.5 million advance from Dransfield Holdings from September
1997 through March 1998.
The proposed sources of funds for Paper Mill Nos. 3 and 4 are as
follows:
o $25 million by March 2000 from the sale of shares of the
Company in a rights offering with standby underwriters and
profit generated from Mills No.1 and No.2.
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. $4.2 million were converted into common stock of the Company in
September 1997 at $4.25 per share and $4.5 million were converted into common
stock of the Company in March 1998 at $4.50 per 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.
15
<PAGE> 18
THE YEAR 2000 PROBLEM.
The Year 2000 Problem refers to date-related problems that occur in all
systems where two digits are used to represent the year. These systems may not
be able to handle leap years or to roll forward from year 1999 to 2000 with
errors. As a result, all activities which are initiated and operate in
connection with the date may be affected. Management understands that all
systems, including both IT and non-IT systems, as well as items containing
embedded chips, are Year 2000 compliant only if such date-related problems are
eliminated.
The Year 2000 Problem may cause potential errors in accounting and trading
functions, where the impact of date-related problems on the operations of the
Company will be most significant. Management realizes the importance of
resolving the Year 2000 Problem and started taking appropriate action long ago.
For its IT system, the Company completed transfer of the General Ledger from the
previous mainframe system, downsizing it to a personal computer local area
network (LAN) using the "Flexaccount NV2" system, which is Year 2000 compliant.
The Company is now in the process of replacing its trading system with
"Flexaccount Manufacturing Management System," which is also Year 2000
compliant, and expects the installation to be completed by the end of the year.
For its non-IT system, the Company relocated its Hong Kong headquarters in July
1998 and replaced its office telephone system with a new system that is Year
2000 compliant. In furtherance of completing the replacement, substitution and
augmentation of computer-reliant systems and equipment so as to correct,
overcome, repair or otherwise render the Year 2000 Problem harmless, the
Company's parent, Dransfield Holdings Limited, committed to spend an additional
HK$1 million. With implementation of all these new systems by the coming
year-end, Management believes that the Company's potential exposure to the Year
2000 Problem will be minimum. As at March 31, 1998, there existed no significant
authorized or contracted commitments in respect of Year 2000 compliant
modification costs.
The Company will continue to address the Year 2000 Problem by constantly
monitoring, testing and correcting all existing and newly purchased systems and
equipment, and also by monitoring computer-related information exchanges and
other computer-related interactions with entities outside of the Group.
16
<PAGE> 19
OUTLOOK.
The statements contained in this Outlook are based on current plans and
expectations. These statements are forward looking, and actual results may vary
materially from that planned.
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 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 started in November 1994 for the purpose
of establishing business contacts and acquiring skills in buying raw materials,
the quality and mix of which would affect directly the Company's competitiveness
and profitability 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 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. During fiscal
1998, average monthly turnover was further reduced to $427,000 and operating
loss was narrowed down to $108,000 for the year. Current paper merchanting
activities are breaking even. Yet the activities were successful in establishing
credibility and business contacts among suppliers of office waste paper.
Having achieved this goal, during 1998 the Company began working with a
number of local Chinese paper mills, sharing its specialized technical knowledge
of market recycled pulps. Although China has initiated a number of reforestation
programs, the country is unlikely ever to become self-sufficient in wood fiber
and must import it from world markets. The Company believes it may be unique in
China in its ability to help local mills purchase imported market recycled pulp,
made from wood fiber, and combine it with local, non-wood fiber to produce an
improved grade of pulp that is a good-quality and cost-effective substitute for
imported virgin pulp.
17
<PAGE> 20
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 July 1999 July 1999 Operational
Paper Mill No. 2 April 1999 July 1999 April 1999
Phase 2: Planned. Not under construction
Paper Mill No. 3 April 2001 April 2001 April 2001
Paper Mill No. 4 April 2001 April 2001 April 2001
</TABLE>
PAPER MILL NO. 1. The Company invested US$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 1997,
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 in the whole country. 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.
18
<PAGE> 21
Distribution of paper products from the paper conversion plant
commenced in August 1997 under the Company's brand name "D&F." Distribution of
Proctor & Gamble's "Tempo"-brand paper handkerchiefs ceased in June 1997 due to
the conflict of interest which would exist once distribution of D&F products
commenced. There is no 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.
In June 1998, the Company recruited a 20-year veteran of the converting
business to be responsible for marketing jumbo rolls and finished goods to
P.R.C. and overseas markets.
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 July 1999 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.
The Company plans to invest a total of approximately US$13 million for
the de-inking plant and paper making plant. The plant shall be 100% owned by the
Company.
PAPER MILL NO. 2. The Company plans to invest approximately
US$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 US$1.9 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.
19
<PAGE> 22
Currently, negotiations are underway to exclude the power plant in the joint
venture due to excess power supply in Jiangsu Province for the foreseeable
future. This will give the Company more than a 95% interest in the project.
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.
Operations are scheduled to commence at the recycled pulp production
plant by April 1999, at the paper conversion plant by April 1999, and at the
paper making plant by July 1999.
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 first quarter of 2001. Considerable equipment has
already been acquired for the paper making and 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:
20
<PAGE> 23
<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
<CAPTION>
The Company's
Planned
Potential Maximum
Demand Production
Phase IIProvince/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 estimates that its planned production represents only 4
percent of the annual requirements of the targeted markets.
Over recent years the price of virgin pulp has ranged from US$390 to
US$960 a metric ton. The price of office waste paper in the U.S. has ranged from
US$20 to US$250 a metric ton. For instance, prices in September 1996 were US$610
(cost and freight from U.S. West Coast to China) for virgin pulp plus US$12.20
duty, or US$622.20 a metric ton, compared with US$165 (cost, freight and duty)
for office waste paper. Recycling costs in China are estimated to average US$200
a ton and not to exceed US$250 a metric ton. There is little recycled fiber in
China, which fiber sells at prices 5 to 10 percent cheaper than virgin fiber.
The Company expects that the net operating margin of its paper recycling
division will range from 10 to 15 percent.
The Company has purchased equipment and is planning to make, into jumbo
rolls, various grades of hygienic paper from approximately half of its recycled
pulp. Until needed for its own end products of consumer hygienic paper, it plans
to offer for sale to other paper mills in China approximately half of the
production of jumbo rolls of hygienic paper it makes. It expects that the net
operating margin of this division will range from 11 to 16 percent.
With reference to the volatility of the prices of virgin pulp and
office waste paper and the plans of the Company to offer to other China paper
mills, until required for its own needs, approximately half of its
21
<PAGE> 24
production both of recycled fiber and of jumbo rolls of hygienic paper, the
table below illustrates, pro forma, how its planned integrated facilities would
dampen the effect of price volatility with respect to profit margins:
<TABLE>
<CAPTION>
(US$ per Metric Ton)
August 1995 March 1996 March 1997 March 1998
----------- ---------- ---------- ----------
<C> <C> <C> <C> <C>
1. Virgin Pulp Cost $960 $390 $520 $500
2. Secondary Fiber
-Raw Material
(Office Waste) $170-250 $ 20- 70 $ 30-100 $ 30-100
-Freight Cost 80 80 50 35
-Processing Cost
(Average) 200 200 200 200
-------- -------- -------- --------
$450-530 $300-350 $280-350 $265-335
3. Profit Margin
-Recycled Pulp(1) High Low Medium Medium
-Jumbo Roll(1) Medium Low Medium Medium
-Finished Products Low High Medium 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 1998, 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 been
purchased and is expected to be operating in April 1999. 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 are being produced for distribution by
the Company, with the mill capacity for each product initially set as follows:
22
<PAGE> 25
<TABLE>
<CAPTION>
Product Percent
------- -------
<S> <C>
Paper handkerchiefs 9
Tissues 26
Napkins 14
Toilet rolls 51
</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.
<TABLE>
<CAPTION>
Office
Held Term of
Person Office Since Office(1)
------ ------ ----- ---------
<S> <C> <C> <C>
Horace YAO Yee Cheong, 52 Deputy Chairman Apr 1994 Apr 1999
and Chief Executive
Officer
Warren MA Kwok Hung, 41 Treasurer and Apr 1994 Apr 1999
Secretary, Director
Francis NG Ah Ba, 50 Director Jun 1998 Apr 1999
Thomas J. KENAN, 66 Director Mar 1997 Apr 1999
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C> <C> <C>
Jan YANG, Ph.D., 36 Director Apr 1997 Apr 1999
Floyd CHAN Tsoi Yin, 54 Director Jun 1998 Apr 1999
Eric WAI Yip Sing, 34 Group General Counsel Sep 1997 Apr 1999
James MADISON, 48 General Manager May 1996 Apr 1999
of Pulp
and Paper
CHOW Yeung Chee, 57 Plant Manager of Jan 1996 Apr 1999
Guangzhou Dransfield
Paper Ltd.
Manuel ALVAREZ, 62 General Manager Apr 1995 Apr 1999
of paper con-
verting operations
CHEN Shu Hen, 44 General Manager of Apr 1997 Apr 1999
Paper Mill No.1
JIA Yu Qiu, 34 Plant Manager Apr 1997 Apr 1999
Joseph PANKRATZ, 43 Technical Manager Sep 1996 Apr 1999
of Pulp and Paper
Making
John ZHANG Yu De, 34 Acting General Manager Apr 1998 Apr 1999
Paper Mill No. 2
</TABLE>
- ----------
(1) A director is subject to earlier removal, with or without cause, by the
shareholders and with cause by the other directors. Officers are
subject to earlier removal, with or without cause, by the directors.
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.
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
24
<PAGE> 27
Accountants. He spent 17 years in the accounting profession of which 11 years
are with Dransfield Holdings. He holds a Higher Diploma in Accountancy from Hong
Kong Polytechnic University.
FRANCIS NG AH BA. Mr. Ng was a founder of Mearl Paper Industries Sdn.
Bhd., in Malaysia and has more than 20 years of experience in the paper
industry. He holds a diploma in Management Development from the ASEAN Institute
of Management in the Philippines.
NONEXECUTIVE DIRECTORS.
THOMAS J. KENAN. Mr. Kenan has 35 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.
FLOYD CHAN TSOI YIN Mr. Chan is Asia Pacific Coordinating partner of
BDO International, an international accounting and consulting firm. He has more
than 20 years' experience in the accounting profession in the United States and
Hong Kong serving multinational clients investing in Asia and North America. Mr.
Chan is a Fellow of the Hong Kong Society of Accountants and is a certified
C.P.A. in the United States, where he earned a B.S. degree in Accounting from
Southern Illinois University.
SENIOR EXECUTIVES.
ERIC WAI YIP SING Mr. Wai is Group General Counsel and Assistant to the
Chief Executive Officer of the Company. He was the former managing partner of
the Hong Kong office of a U.S. law firm and was in private practice in Hong Kong
and San Francisco for 8 years before joining the Company. Mr. Wai holds a B.A.
from Brown University, an M.S. from Stanford University and a Juris Doctor
degree from Boston College Law School.
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.
25
<PAGE> 28
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.
CHEN SHU HAN Mr. Chen is General Manager of Paper Mill No. 1 (Xinhui,
Guangdong Province). Prior to joining DCPC, he was the General Manager of Xinhui
City Jiangyuan Trading Development Corporation. Mr. Chen graduated from Jiangmen
Wu-Yi University
JIA YU QIU Mr. Jia is a Plant Manager for DCPC. He has worked in the
paper industry in China since completing his studies at Northwest Institute of
Light Industry. Most recently he was the General Manager for Yangzhou Zhonghua
Paper Co. Ltd.
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.
JOHN ZHANG YU DE Mr. Zhang is Assistant to the General Manager and
Project Manager. Prior to joining DCPC, he was an electrical and project
engineer with the China Ministry of Light Industry Installing Engineering
Corporation and oversaw installation of various production equipment at paper
mills in China. He holds a master's degree in Chemical Engineering from Monash
University in Australia.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
The directors and officers of the Company received from it and its
subsidiaries an aggregate of US$606,582.49 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 no outstanding warrants as of August 31,
1998.
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
26
<PAGE> 29
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. During the year, 115,000
share options were cancelled upon the termination of employment of certain
employees.
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, 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
27
<PAGE> 30
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.
ITEM 17. FINANCIAL STATEMENTS.
The financial statements of the Company appear as follows:
<TABLE>
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets as of March 31, 1997 and
March 31, 1998 F-2
Consolidated Statements of Income for the years ended
March 31, 1996, March 31, 1997, and March 31, 1998 F-3
Consolidated Statements of Cash Flows for the years ended
March 31, 1996, March 31, 1997, and March 31, 1998 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended March 31, 1996, March 31, 1997,
and March 31, 1998 F-5
Notes to Consolidated Financial Statements F-6
</TABLE>
28
<PAGE> 31
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.
29
<PAGE> 32
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
/s/ Horace Yao Yee Cheong
Date: September 17 , 1998 By
---------------------------------
Horace Yao Yee Cheong,
Chief Executive Officer
30
<PAGE> 33
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, 1997 and
1998 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, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the 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, 1997 and 1998,
and the consolidated results of their operations and cash flows for each of the
years in the three-year period ended March 31, 1998, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Ernst & Young
Ernst & Young
Hong Kong
28 August 1998
F-1
<PAGE> 34
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1997
AND MARCH 31, 1998
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1998 1998 1997
US$ HK$ HK$
---- ---- ----
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and bank balances 267 2,065 3,254
Accounts receivable, net 6 1,378 10,663 21,255
Inventories, net 7 326 2,521 12,441
Prepaid expenses 121 934 4,359
Income tax recoverable 8 61 --
Due from fellow subsidiaries -- -- 29,902
-------- -------- --------
Total current assets 2,100 16,244 71,211
Fixed assets 8 23,065 178,434 123,161
Loan to a related company 9 1,855 14,350 13,366
Deposit for fixed assets 265 2,049 1,011
Deferred tax asset 5 -- -- 517
Other assets 26 200 200
-------- -------- --------
27,311 211,277 209,466
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank loans and overdrafts, secured 10 -- -- 16,718
Accounts payable 60 465 8,050
Accrued liabilities 158 1,219 7,007
Income tax payable -- -- 719
Due to fellow subsidiaries -- -- 15,851
Due to a minority shareholder 12 317 2,452 2,103
-------- -------- --------
Total current liabilities 535 4,136 50,448
Minority interests -- -- 5,101
Due to holding company 13 5,065 39,182 107,286
Loan from a related company 9 1,855 14,350 13,366
-------- -------- --------
7,455 57,668 176,201
Shareholders' equity:
Common stock, no par value,
40,000,000 shares authorized;
15,585,000 (1997: 9,800,000) issued, and fully paid up 19,853 153,584 3,004
Preferred stock, no par value, 10,000,000 shares authorized;
Convertible preferred stock - Series A;
2,300,000 shares issued and outstanding in 1997 22 -- -- 26,687
Contributed surplus 24 351 2,714 1,530
Retained earnings/(accumulated deficit) (348) (2,689) 2,044
-------- -------- --------
Total shareholders' equity 19,856 153,609 33,265
-------- -------- --------
Total liabilities and shareholders' equity 27,311 211,277 209,466
======== ======== ========
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-2
<PAGE> 35
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED MARCH 31, 1996, MARCH 31, 1997 AND MARCH 31, 1998
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 1998 1998 1997 1996
US$ HK$ HK$ HK$
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales:
Paper handkerchiefs
- third parties -- -- -- 68,011
- fellow subsidiaries 15 1,938 14,992 80,180 7,480
Other paper products to third parties 5,124 39,639 67,064 231,556
-------- -------- -------- --------
7,062 54,631 147,244 307,047
Cost of sales:
Paper handkerchiefs (1,672) (12,935) (68,705) (61,086)
Other paper products (4,766) (36,870) (64,107) (213,917)
-------- -------- -------- --------
(6,438) (49,805) (132,812) (275,003)
Gross profit 624 4,826 14,432 32,044
Commission income -- -- 3,966 5,644
Selling, general and administrative expenses 3
- third parties (946) (7,319) (9,582) (12,938)
- fellow subsidiaries 15 (272) (2,103) (6,626) (10,822)
-------- -------- -------- --------
(1,218) (9,422) (16,208) (23,760)
Interest income 2 12 32 94
Interest expense 10 (70) (537) (1,842) (5,697)
Loss on disposal of subsidiaries 11 (52) (406) -- --
Other income/(expenses), net 2 16 (46) (485)
Compensation from a supplier 19 154 1,195 -- --
Reorganization expenses 20 -- -- (1,815) --
-------- -------- -------- --------
Income/(loss) before income taxes (558) (4,316) (1,481) 7,840
Provision for income taxes: 5
- Current 13 100 (660) (965)
- Deferred (67) (517) 351 (426)
-------- -------- -------- --------
(54) (417) (309) (1,391)
-------- -------- -------- --------
Income/(loss) before minority interests (612) (4,733) (1,790) 6,449
Minority interests -- -- 1,766 (1,415)
-------- -------- -------- --------
Net income/(loss) (612) (4,733) (24) 5,034
======== ======== ======== ========
Basic and diluted net income/(loss) per share
(cents) 2 (5) (39) (16) 54
======== ======== ======== ========
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-3
<PAGE> 36
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1996, MARCH 31, 1997 AND MARCH 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1998 1997 1996
US$ HK$ HK$ HK$
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss) (612) (4,733) (24) 5,034
Adjustments to reconcile income to net
cash provided by operating activities:
Minority interests -- -- (1,766) 1,415
Depreciation 76 590 439 456
Deferred income taxes 67 517 (351) 426
Loss on disposal of subsidiaries 52 406 -- --
Loss/(profit) on disposal of fixed assets -- -- (72) 113
Other -- -- -- 209
Stock option compensation expense 153 1,184 -- --
(Increase)/decrease in current assets:
Accounts receivable 528 4,081 64,225 (41,286)
Inventories 1,273 9,851 9,425 (9,165)
Prepaid expenses 434 3,355 (1,967) (1,406)
Due from fellow subsidiaries 3,865 29,902 (29,902) 5,736
Increase/(decrease) in current liabilities:
Accounts payable (719) (5,566) (11,148) 16,967
Accrued liabilities (523) (4,045) 3,266 583
Income tax payable (57) (444) (762) 704
Due to fellow subsidiaries (2,049) (15,851) (14,076) 14,587
------- ------- ------- -------
Net cash provided by/(used in) operating activities 2,488 19,247 17,287 (5,627)
------- ------- ------- -------
Cash flows from investing activities:
Acquisition of fixed assets (317) (2,452) (5,047) (5,013)
Payment of deposit for purchase of fixed assets (265) (2,049) (1,011) (1,510)
Proceeds from disposal of fixed assets -- -- 111 --
Proceeds from disposal of other assets -- 557
Net cash outflow from disposal of and acquisition
of minority interests in subsidiaries (595) (4,601) -- --
------- ------- ------- -------
Net cash used in investing activities (1,177) (9,102) (5,947) (5,966)
------- ------- ------- -------
Cash flows from financing activities:
Bank loans and overdrafts, secured (2,161) (16,718) (23,812) 25,275
New issue of common stock 750 5,805 3 --
Advances from a minority shareholder 317 2,452 -- 6,000
Advances from holding company -- -- 17,861 19,930
Repayment of loan to a minority shareholder -- -- (2,158) --
Repayment of loan to holding company (371) (2,873) -- (40,320)
Dividend paid to a minority shareholder -- -- (833) --
------- ------- ------- -------
Net cash provided by/(used in) financing activities (1,465) (11,334) (8,939) 10,885
------- ------- ------- -------
Net increase/(decrease) in cash and cash equivalents (154) (1,189) 2,401 (708)
Cash and cash equivalents, at beginning of year 421 3,254 853 1,561
------- ------- ------- -------
Cash and cash equivalents, at end of year 267 2,065 3,254 853
======= ======= ======= =======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-4
<PAGE> 37
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1996, MARCH 31, 1997 AND MARCH 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Retained
earnings/
Common Preferred Contributed (accumulated
stock stock surplus deficit)
HK$ HK$ HK$ HK$
------ --------- ----------- ------------
<S> <C> <C> <C> <C>
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 a minority
shareholder (note 24) -- -- 1,530 --
Net loss -- -- -- (24)
------- ------- ------- -------
Balance at March 31, 1997 3,004 26,687 1,530 2,044
New issue of 2,300,000 shares of common
stock at US$1.5 each on conversion
of preferred stock (note 23) 26,687 (26,687) -- --
New issue of 1,000,000 shares of common
stock at US$5 each on conversion of
amount due to holding company 38,699 -- -- --
New issue of 1,000,000 shares of common
stock at US$4.25 each on conversion
of amount due to holding company 32,893 -- -- --
New issue of 1,335,000 shares of common
stock at US$4.5 each on conversion
of amount due to holding company 46,496 -- -- --
New issue of 150,000 shares of common stock
at US$5 each 5,805 -- -- --
Stock compensation expense (notes 22 and 24) -- -- 1,184 --
Net loss -- -- -- (4,733)
------- ------- ------- -------
Balance at March 31, 1998 153,584 -- 2,714 (2,689)
======= ======= ======= =======
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-5
<PAGE> 38
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> 39
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 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, 1998 which was US$1.00 = HK$7.736. 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, 1998.
F-7
<PAGE> 40
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:
<TABLE>
<S> <C>
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%
</TABLE>
(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.
(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.
F-8
<PAGE> 41
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)
(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.
(j) Employee stock plans
The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its
employee stock options. Under APB 25, the excess of exercise price
of employee stock options over the fair market value of the
underlying stock on the date of grant, is credited to contributed
surplus. For disclosure purposes, pro-forma information in
accordance with Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" has been included in note
22 to the consolidated financial statements.
(k) Basic and diluted net income/loss per share
In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings Per Share". In accordance
with this statement, the Company changed the method previously used
to compute net income/loss per share and restated all prior periods
presented.
Basic net income/loss per share is computed using the
weighted average number of common shares outstanding during the
periods. Diluted net income/loss per share is computed using the
weighted average number of common and potentially dilutive common
shares during the periods, except those that are antidilutive.
The basic net income per share for the year ended March
31, 1996 was 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, 1995.
F-9
<PAGE> 42
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)
(k) Basic and diluted net income/loss per share (continued)
The basic net loss per share for the years ended March
31, 1997 and 1998 were computed by dividing net loss applicable to
common stock, including the cumulative dividends in arrears (note
23), by the weighted average number of 9,606,849 and 13,238,014
shares of common stock, respectively, which were outstanding during
the two years 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 effect of employee stock options, warrants and the
preferred stock outstanding during the three years is anti-dilutive.
(l) Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
issued Statement No.130, "Reporting Comprehensive Income", which
establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial
statements and is effective for fiscal years beginning after
December 15, 1997. Application of this statement only changes the
display and disclosure of previously reported information and will
not impact amounts previously reported for net income or
stockholders equity, nor affect the comparability of previously
issued financial statements. Adoption of this standard is not
expected to have a material impact on the Company's financial
statements or results of operations.
In June 1997, the Financial Accounting Standards Board
issued Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which change the way that
public companies report information in annual financial statements
and also requires those companies to report selected segment
information in interim financial reports to shareholders. The
statement also establishes standards for related disclosures about
operating segments, products and services, geographic areas and
major customers. The statement is effective for fiscal years
beginning after December 15, 1997 and applies to both annual and
interim financial reporting subsequent to this date. This statement
is not expected to have a material impact on the financial condition
or results of operations of the Company.
Additionally, the Financial Accounting Standards Board
Emerging Issues Task Force issued EITF Abstract Issue No. 96-16,
"Investor's Accounting for an Investee When the Investor Has a
Majority of the Voting Interest but the Minority Shareholder or
Shareholders Have Certain Approval or Veto Rights" ("EITF 96-16").
EITF 96-16 indicates how an investor accounts for its interests in
investee in which the investor has a majority of voting interest but
the minority shareholders have certain approval or veto rights. EITF
96-16 is effective for the company for annual and interim financial
reporting with fiscal years ending after December 15, 1998.
Management has not completed its review of EITF 96-16 and therefore,
has not concluded whether the adoption of EITF 96-16 will have a
significant effect on the financial position or results of
operations of the Company.
F-10
<PAGE> 43
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
3. SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Year ended March 31,
1998 1998 1997 1996
US$ HK$ HK$ HK$
---- ---- ---- ----
<S> <C> <C> <C> <C>
Selling, general and administrative expenses:
Depreciation 76 590 94 456
Advertising expenses 4 33 825 599
Exchange loss/(gain), net (9) (72) 187 (680)
==== ==== ==== ====
</TABLE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended March 31,
1998 1998 1997 1996
US$ HK$ HK$ HK$
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest 768 5,939 4,687 6,805
Income taxes 44 344 1,422 149
======= ======= ======= =======
Non cash investing and financing activities:
Loan from a related company
financed by a loan to a
related company (note 10) 127 984 7,136 6,230
Fixed assets paid by
holding company 6,833 52,857 46,999 27,698
Fixed assets paid by certain
fellow subsidiaries -- -- 12,203 --
Issuance of common stock on
conversion of the amount due
to holding company 15,265 118,088 -- --
Issuance of common stock on
conversion of preferred stock 3,450 26,687 -- --
Issuance of preferred stock on
conversion of the amount
due to holding company -- -- 26,687 --
Compensation from a minority
shareholder -- -- 2,747 --
======= ======= ======= =======
</TABLE>
F-11
<PAGE> 44
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
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 which was disposed of during the
year, was incorporated in the Republic of Singapore and was subject
to Singapore tax. Under the Singapore tax law, any income accrued
in, derived from or received in Singapore was subject to Singapore
tax at a rate of 27% in 1997 and before.
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% effective
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, 1998.
Total income tax expense differs from the amount
computed by applying Hong Kong statutory income tax rate of 16.5%
(1997: 16.5% and 1996: 16.5%) to income before taxes as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1998 1998 1997 1996
US$ HK$ HK$ HK$
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computed expected income taxes 92 712 244 (1,294)
Non-deductible losses of subsidiaries (75) (581) (522) (126)
Difference between Hong Kong statutory
rate and Singapore statutory tax rate -- -- (40) (10)
Other 13 100 9 39
Valuation allowance (84) (648) -- --
------ ------ ------ ------
Tax charge for the year (54) (417) (309) (1,391)
====== ====== ====== ======
</TABLE>
Deferred tax asset is comprised of the following:
<TABLE>
<CAPTION>
1998 1998 1997
US$ HK$ HK$
---- ---- ----
<S> <C> <C> <C>
Tax losses carried forward 84 648 517
Valuation allowance (84) (648) --
---- ---- ----
-- -- 517
==== ==== ====
</TABLE>
F-12
<PAGE> 45
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable are comprised of:
<TABLE>
<CAPTION>
March 31,
1998 1998 1997
US$ HK$ HK$
---- ---- ----
<S> <C> <C> <C>
Accounts receivable - trade 1,423 11,013 21,305
Less: Allowance for doubtful debts (45) (350) (50)
------- ------- -------
Accounts receivable, net 1,378 10,663 21,255
======= ======= =======
Movement of allowance for doubtful debts
Balance as at April 1, 6 50 --
Provided during the year 39 300 50
------- ------- -------
Balance as at March 31, 45 350 50
======= ======= =======
</TABLE>
7. INVENTORIES, NET
Inventories are comprised of:
<TABLE>
<CAPTION>
March 31,
1998 1998 1997
US$ HK$ HK$
---- ---- ----
<S> <C> <C> <C>
Raw materials 265 2,053 2,207
Finished goods 203 1,571 11,496
Less: Allowance for obsolescence and
net realizable value (142) (1,103) (1,262)
------- ------- -------
Inventories, net 326 2,521 12,441
======= ======= =======
Movement of allowance for obsolescence
and net realizable value
Balance as at April 1, 163 1,262 702
Provided during the year 101 782 710
Deduction during the year (122) (941) (150)
------- ------- -------
Balance as at March 31, 142 1,103 1,262
======= ======= =======
</TABLE>
F-13
<PAGE> 46
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
8. FIXED ASSETS
<TABLE>
<CAPTION>
March 31,
1998 1998 1997
US$ HK$ HK$
---- ---- ----
<S> <C> <C> <C>
Land and buildings 6,044 46,760 38,304
Leasehold improvement 27 209 278
Machinery and equipment 16,600 128,419 81,803
Motor vehicles 147 1,134 797
Furniture, fixtures and office equipment 500 3,870 3,533
-------- -------- --------
23,318 180,392 124,715
Less: Accumulated depreciation (253) (1,958) (1,554)
-------- -------- --------
23,065 178,434 123,161
======== ======== ========
</TABLE>
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 and land and buildings 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 1997 and
1998 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$174,518 (1997:
HK$119,811).
9. 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.
F-14
<PAGE> 47
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
9. LOANS WITH A RELATED COMPANY (continued)
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 favor of the Company.
As at March 31, 1998, the Company advanced HK$14,350
(US$1,855) to Broadsino for the capital injection in JYDP, which is
classified as a loan to a related company. The same amount of
HK$14,350 (US$1,855) 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-15
<PAGE> 48
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
10. BANK BORROWINGS
The Company and its principal subsidiaries obtained
working capital credit facilities from a bank, 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$2 million (US$258) and letters of credit of HK$20
million (US$2.6 million). As at March 31, 1998, the Shared
Facilities remained unutilized. The Shared Facilities are
collateralized by:
(a) unlimited corporate guarantees given by a fellow
subsidiary of the Company; and
(b) unlimited cross guarantees given by a fellow subsidiary
and certain subsidiaries of the Company.
The weighted average interest rates on bank borrowings
as at the balance sheet date are as follows:
<TABLE>
<CAPTION>
March 31,
1998 1997
<S> <C> <C>
Interest on bank loans and overdrafts N/A 9%
</TABLE>
Interest expense on bank loans, net of the amounts
capitalized, is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
1998 1998 1997 1996
US$ HK$ HK$ HK$
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest incurred 768 5,939 4,687 6,805
Interest capitalized (698) (5,402) (2,845) (1,108)
------ ------ ------ ------
Interest expense 70 537 1,842 5,697
====== ====== ====== ======
</TABLE>
11. 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 Company had 66.7% and 34% equity
interests, respectively.
F-16
<PAGE> 49
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
11. ACQUISITION AND DISPOSAL OF SUBSIDIARIES (continued)
The agreement was declared unconditional on May 9, 1997.
The net amount of consideration payable to the minority shareholder
of HK$3 million (US$388) was settled in cash on June 4, 1997. The
net cash outflow of the above transactions amounted to HK$4,601
(US$595) which consisted of the aforesaid consideration of HK$3
million and cash and bank balances of HK$1,601 (US$207) of the
subsidiaries disposed of.
The loss on disposal of DPSEA and CN amounting to HK$406
(US$52) is reflected in the Company's statements of income for the
year ended March 31, 1998.
12. DUE TO A MINORITY SHAREHOLDER
The balance at March 31, 1998 represents a loan from a
minority shareholder, which is unsecured, interest-free and has no
fixed repayment terms. The balance at March 31, 1997 represented a
loan from another minority shareholder, which was unsecured and
interest-free. The loan was disposed of associated with the disposal
of the corresponding subsidiary (note 11) during the year.
13. DUE TO HOLDING COMPANY
The unsecured long term liability arose when the Group
utilized the banking facilities of the holding company to finance
the Group's capital investment. The interest incurred on the banking
facilities were reimbursed by the Group.
The Group's operations are dependent on the financial
support of its holding company which has agreed that it will not
demand payment of the amount prior to April 1, 1999.
14. COMMITMENTS
As of March 31, 1998, the Group had outstanding capital
commitments of HK$32.8 million (US$4.2 million).
F-17
<PAGE> 50
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
15. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
The major related party transactions are described in
further detail below. Management believes that the methods used in
allocating costs are reasonable.
<TABLE>
<CAPTION>
Year ended March 31,
Nature of transactions Notes 1998 1998 1997 1996
US$ HK$ HK$ HK$
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Sales of products (a) 1,938 14,992 80,180 7,480
====== ======= ======= =======
Expenses:
Electronic data processing and
accounting services charges (b) 82 632 801 2,312
Storage and delivery charges (c) 159 1,232 5,561 7,069
Equipment rental (d) 4 33 55 105
Operating lease rental for land
and building (e) 27 206 209 1,336
------ ------- ------- -------
272 2,103 6,626 10,822
====== ======= ======= =======
</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% in 1996 and 1997). 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.
F-18
<PAGE> 51
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)
(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.
(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-19
<PAGE> 52
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 19 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$44, HK$15 and HK$16 for the years ended March
31, 1996, 1997 and 1998.
19. COMPENSATION FROM A SUPPLIER
The Group received a compensation of HK$1,195 (US$154)
from a supplier during the year ended March 31, 1998 related to
termination of distributorship of certain paper handkerchief
products.
F-20
<PAGE> 53
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
20. REORGANIZATION EXPENSES
The amount represents the costs incurred in connection
with the reverse acquisition transaction.
21. SEGMENT REPORTING AND MAJOR SUPPLIERS
The Group operates in three industry segments, paper
distribution, paper merchanting and paper manufacturing. Operations
in paper distribution include the distribution of paper
handkerchiefs. Operations in paper merchanting include the buying
and selling of paper both on an indent basis and on an agency basis.
Management believes that the operations in paper merchanting
activities are incidental to the core business. The Group is in the
process of setting up a paper manufacturing facility and operations
have not commenced. There is no assurance that the operations, when
commenced, will be successful.
Operating profit is total revenue less operating
expenses, excluding interest expense and general corporate expenses.
Identifiable assets by industry segment include assets directly
identified with those operations. Corporate assets consist primarily
of prepayments and deposits. Information about the Group's
operations in different industry segments were as follows:
<TABLE>
<CAPTION>
1998 1998 1997 1996
US$ HK$ HK$ HK$
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES AND OTHER INCOME
Distribution of paper handkerchiefs
- third parties -- -- -- 68,062
- fellow subsidiaries 1,938 14,992 80,180 7,480
-------- -------- -------- --------
1,938 14,992 80,180 75,542
Paper merchanting 5,124 39,639 67,064 237,243
-------- -------- -------- --------
TOTAL REVENUE 7,062 54,631 147,244 312,785
-------- -------- -------- --------
OPERATING PROFIT/(LOSS)
Distribution of paper handkerchiefs 7 53 5,961 4,296
Paper merchanting (108) (832) (2,926) 9,241
Paper manufacturing (246) (1,905) (591) --
-------- -------- -------- --------
TOTAL OPERATING PROFIT/(LOSS) (347) (2,684) 2,444 13,537
Corporate office expenses (141) (1,095) (268) --
Reorganization expenses -- -- (1,815) --
Interest expense (70) (537) (1,842) (5,697)
-------- -------- -------- --------
INCOME/(LOSS) BEFORE INCOME TAXES (558) (4,316) (1,481) 7,840
======== ======== ======== ========
</TABLE>
F-21
<PAGE> 54
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
21. SEGMENT REPORTING AND MAJOR SUPPLIERS (continued)
<TABLE>
<CAPTION>
1998 1998 1997 1996
US$ HK$ HK$ HK$
---- ---- ---- ----
<S> <C> <C> <C> <C>
IDENTIFIABLE ASSETS
Distribution of paper handkerchiefs 27 208 22,979 20,499
Paper merchanting 1,722 13,326 44,350 90,594
Paper manufacturing 25,521 197,429 141,944 64,308
------- -------- -------- --------
27,270 210,963 209,273 175,401
General corporate assets 41 314 193 1,176
------- -------- -------- --------
TOTAL ASSETS 27,311 211,277 209,466 176,577
======= ======== ======== ========
DEPRECIATION AND AMORTIZATION
Distribution of paper handkerchiefs 2 14 29 143
Paper merchanting 2 17 65 313
Paper manufacturing 72 559 345 -
CAPITAL EXPENDITURES
Distribution of paper handkerchiefs - - - 6
Paper merchanting - - 493 381
Paper manufacturing 7,258 56,146 65,213 32,468
General corporate assets 22 174 53 -
</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, 1998 were
insignificant. There is no single customer who accounted for more
than 10% of net sales for the three years ended March 31, 1998.
In 1996, 1997 and 1998, the Group's top three suppliers
accounted for approximately 57%, 75% and 58% of total purchases,
respectively.
F-22
<PAGE> 55
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
22. COMMON STOCK WARRANTS AND OPTIONS
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. The warrants remained
unexercised and expired on August 23, 1998.
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.
Pursuant to the Plan, the Company granted 625,000 share
options to its employees and directors on April 24, 1997 ("the Grant
Date"). During the year, 115,000 share options were canceled upon
the termination of employment of certain employees. No share options
were exercised during the year. Details of the outstanding options
at March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Number of
options outstanding
Exercise period Exercise price at March 31 1998
<S> <C> <C>
31 October 1998 to 23 April 2001 US$2.8 per share 255,000
31 October 1999 to 23 April 2001 US$2.8 per share 127,500
31 October 2000 to 23 April 2001 US$2.8 per share 127,500
</TABLE>
F-23
<PAGE> 56
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
22. COMMON STOCK WARRANTS AND OPTIONS (continued)
The Company applies Accounting Principles Board Opinion
No. 25, "Accounting for Stock issued to Employees" in accounting for
the Plan. The compensation expense of HK$2,269 (US$293) related to
the share options outstanding at 31 March 1998, which represented
the difference between the exercise price and the fair market value
of the Company's common stock at the Grant Date, which should be
recognized over the vesting period of 4 years from the Grant Date.
Accordingly, a compensation expense of HK$1,184 (US$153) was
recognized for the year.
Pro-forma information regarding net income and earnings
per share is required by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") and
has been determined as if the Company had accounted for its stock
options under the fair value method of that statement. The fair
value for these options was estimated at the Grant Date using a
Black-Scholes option pricing model with the following
weighted-average assumptions for the Grant Date:
<TABLE>
<S> <C>
Risk-free interest rate 7.02%
Dividend yield Nil
Volatility factor of the expected market price
of the Company's common stock 130%
Weighted-average expected life of the options 4 years
</TABLE>
The Black-Scholes option valuation model was developed
for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in these
subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not
provide a reliable single measure of the fair value of its employee
stock options.
For the purposes of pro-forma disclosures, the estimated
fair value of the options is amortized to expense over the options'
vesting period. The Company's pro-forma information for the year
ended March 31, 1998 is as follows:
<TABLE>
<CAPTION>
US$ HK$
<S> <C> <C>
Pro-forma net loss 1,134 8,775
====== ======
Basic and diluted net loss per share (cents) 9 70
====== ======
</TABLE>
F-24
<PAGE> 57
DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except number of shares and per share data)
23. 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.
The 2.3 million shares of the Series A convertible
preferred stock were converted to 2.3 million shares of common stock
on May 30, 1997.
Up to May 30, 1997, the aggregate amount of the
dividends in arrears for the years ended March 31, 1997 and 1998
were HK$1,531 (US$198) and HK$446 (US$58), respectively.
24. CONTRIBUTED SURPLUS
The amount represents a net compensation of HK$1,530
(US$198) from a minority shareholder, which was accounted for as a
capital transaction in 1997, and stock compensation expense of
HK$1,184 (US$153) recognized for the year ended March 31, 1998 (note
22).
F-25
