<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, 2000
Commission file number 000-21919
DF CHINA TECHNOLOGY INC.
(PREVIOUSLY 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 - 18,165,007 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>
<CAPTION>
<S> <C> <C>
Item 1. Description of Business 2
Item 2. Description of Property 8
Item 3. Legal Proceedings 9
Item 4. Control of Registrant 9
Item 5. Nature of Trading Market 10
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders 10
Item 7. Taxation 13
Item 8. Selected Financial Data 13
Item 9. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 15
Item 9A. Quantitative and Qualitative Disclosures About
Market Risk 30
Item 10. Directors and Officers of the Company 31
Item 11. Compensation of Directors and Officers 34
Item 12. Options to Purchase Securities from the Company 34
Item 13. Interest of Management in Certain Transactions 35
Item 14. Description of Securities to Be Registered 36
Item 15. Defaults Upon Senior Securities 36
Item 16. Changes in Securities and Changes in Security for
Registered Securities 36
Item 17. Financial Statements 37
Item 18. Financial Statements 38
Exhibit List 38
SIGNATURE 39
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
DF China Technology Inc. (Nasdaq: DFCT), formerly Dransfield China Paper
Corporation, is a 78.4%-owned subsidiary of Dransfield Holdings Limited
("Dransfield Holdings"), a Cayman Islands company that was founded by Sir
Kenneth Fung, CBE, JP, in the 1940s to market and distribute consumer products
in Hong Kong. Dransfield Holdings has three business divisions:
o a paper business conducted by us, which bought and sold a Proctor & Gamble
"Tempo" brand-name paper handkerchief, which we distributed to retailers
until June 1997, and which business division is expanding its operations to
include paper manufacturing and distribution of our own brand-name paper
products;
o 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
o a logistics and services division that provides warehousing, deliveries,
repair, exhibition and buying-program services to affiliated and
non-affiliated companies in Hong Kong and China. The services division now
includes a small consumer electronics department that distributes household
appliances under the brand names of "Turbo" and "DF".
Our parent, Dransfield Holdings, has been listed on the Hong Kong Stock
Exchange since April 1993.
Through distribution of DFCT shares by Dransfield Holdings to its
shareholders on June 30, 2000, Dransfield Holdings reduced its shareholdings to
approximately a 32.2% level with the result that the public float of DFCT is
increased to approximately 9,180,120 shares (or 50%).
Until February 26, 1997, our business was conducted by Dransfield Paper
Holdings Limited ("Dransfield Paper"), which merged with us on that date.
The purpose of the merger was to transfer Dransfield Holdings' equity in
its paper business division from the Hong Kong Stock Exchange to the Nasdaq
Stock Market in the U.S. The paper business dates back to 1975, when A.
Dransfield & Co. Ltd., a wholly-owned subsidiary of Dransfield Holdings, secured
the exclusive distribution rights for Tempo paper handkerchiefs in Hong Kong and
Macau. In 1994 Dransfield Paper, before its merger with us, succeeded to this
business from its sister company and continued to develop a substantial
distribution network for Tempo handkerchiefs, principally through supermarkets,
drug stores and newspaper stands.
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Our ability to achieve consistent market share of more than 40% of the
paper handkerchief market in Hong Kong through our sales of Tempo handkerchiefs
provided the incentive to manufacture and distribute our own DF branded paper
products, distribution of which commenced in August 1997. In June 1997, we
ceased distributing Proctor & Gamble's Tempo product.
In November 1994, our company undertook to establish business contacts and
to gain experience in buying waste paper, which it did both on an indent, or
pre-sold, basis and on an agency basis, all in support of its plan to become an
integrated manufacturer and distributor of hygienic paper products for
consumers. This paper merchanting operation was conducted by a subsidiary
company named C.S. Paper Holdings (International) Limited, which comprised 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 agency
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, our company began production of our own DF brand-name paper
products at a paper converting facility we established at Conghua, in the city
of Guangzhou, Guangdong Province, Southern China. This was a major step in our
evolution into a vertically-integrated hygienic paper producer and distributor
serving some of China's most densely populated and fastest growing areas, as
well as in Hong Kong.
To date, the converting facility has not been able to locate a sufficient
domestic source of consistent quality jumbo rolls that meet the quality and cost
criteria for our intended market segments. Quality imports are available, but
high price and import duties pose major hurdles to market penetration.
Until we obtain the needed funding to complete either paper mill No.1 or
mill No. 2, our converting facility will always be short of affordable raw
materials and, as a result, our market penetration will be delayed. As we
continue aggressively to seek funds to complete the mills, we have made
arrangements to meet part of our production requirements, thereby alleviating
this problem in the short term.
1. We have signed a seven-year agreement with Jiangmen Sugar Cane Chemical
Factory (Group) Corporation Limited to operate its small paper mill in
Jiangmen, Guangdong Province. The mill has annual capacity of up to 5,500
metric tons of tissue paper and 33,000 metric tons of deinked pulp.
However, the recent price increase in virgin pulp, which this paper mill
uses as its primary raw
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material, has prevented the mill from producing paper at a cost that will
allow us to make a reasonable return. We are therefore limiting our use of
the Jiangmen mill at this time.
2. We have signed up two small paper mills in the county of Conghua, Guangzhou
City, to contract manufacture jumbo rolls to our specifications. We have
begun taking delivery of approximately 75-100 metric tons per month, which
represent the excess capacity of these two paper mills. In order to assure
quality, our process engineers are stationed at these paper mills to
supervise the production of our paper.
3. We have identified two small paper mills in Guangxi Province that together
have excess capacity of approximately 150 metric tons per month. Again, we
will be supervising the production of our contracted volume in order to
assure consistent quality.
4. Guangdong Dransfield Paper Ltd. has signed a five-year lease with a small
paper mill in Xinhui, also in Guangdong Province. The mill will manufacture
medium-quality paper under our direct management, operating as a branch
factory of our own paper mill under construction in Xinhui. We began test
production in this mill in early September, 2000.
5. We will continue to supplement domestically sourced jumbo rolls with
imported paper in order to serve export markets. In the final quarter of
fiscal 2000, we began marketing our products overseas and are beginning to
meet with encouraging success in Macau, Hong Kong and Taiwan.
THE PAPER INDUSTRY IN CHINA
China currently has more than 700 business enterprises producing tissue
paper, most of which are small mills with a daily output of 1 to 5 metric tons.
Most are equipped with cylinder and fourdrinier paper machines with paper widths
of 1,092mm to 1,760mm and speeds of 60m to 120m per minute only. Raw materials
are mostly mixed waste paper pulp, white paper trimmings, rice and wheat straw
pulp, bagasse pulp, tail pulp of paper mills, waste cotton pulp and others which
have just been simply bleached. Only a few paper machines imported from
overseas, together with a few Chinese-made cylinder and fourdrinier machines use
imported wood pulp as raw material to produce higher grade tissue paper.
The following table is an estimate of raw material utilization in tissue
paper plants.
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TABLE 1
<TABLE>
<CAPTION>
ESTIMATED
RAW MATERIALS QUALITY USAGE RATE (%)
<S> <C> <C>
100% imported wood pulp or Best 10
Chinese-made cotton pulp
30% imported wood pulp, Good 20
70% wood pulp and waste paper
or quality bleached bagasse pulp
White paper shorts and bleached Average 20
rice and wheat straw pulp
Mixed waste paper, ordinary straw Bad 50
pulp and tail pulp of paper mills
</TABLE>
In 1997, an estimated 31 million metric tons of paper and paper board were
produced in China. Approximately 2.1 million metric tons of hygienic paper were
produced by tissue paper mills.
Although annual consumption of hygienic paper in China is only a fraction
of that in the West, tissue paper consumption grew at an annual compound rate of
15.7%, from 680,000 metric tons in 1990 to 2.1 million metric tons in 1997.
Annual per capita consumption increased from 0.6kg to 1.7kg, which is still less
than 10% of the United States, where annual per capita consumption exceeds 19kg.
While China still lags developed countries in the consumption of hygienic
paper products, the volume and variety of paper products consumed is growing
each year. Tissue paper products currently available in China include folded
handkerchiefs, facials, napkins, bathroom tissues, kitchen and other paper
towels, and moist tissues. Western packaged facials, handkerchiefs, napkins and
bathroom tissues are now sold in supermarkets of major cities.
From 1988 to 1992, toilet paper accounted for more than 95% of all tissue
paper sold in China. With the subsequent increase in consumer income, toilet
paper accounted for 88% and tissues 12%, according to a 1995 industry survey. In
1997, the estimated proportion of toilet paper fell to approximately 75%, while
tissues rose to 25%, of which 15% was napkins and 10% facials.
We believe that most mills producing hygienic paper in China are
under-financed, poorly managed and producing low-grade products, covering
approximately 65% of the mass market.
The two mills we are building target medium- and premium-quality paper
product markets. Depending on the grade of raw materials used, our products can
also compete in the top end of the mass market.
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Currently, the top end of the tissue paper market comprises 15% of total market
share.
THE COMPETITION
Our competitors in China are:
o Scott Shanghai (now owned by Kimberly Clark). Estimated output: 14,000
metric tons per annum.
o Taiwan Long Chen (now owned by Procter & Gamble) located in Suzhou, Jiangsu
Province. Estimated output: approximately 14,000 metric tons per annum.
o Taiwan Yuen Foong Yu located in Kunshan, Jiangsu Province. Estimated
output: approximately 15,000 metric tons per annum.
o Guangdong Vinda Paper Co. Ltd., the largest and most influential local
paper mill, located in Xinhui, Guangdong Province. Estimated expanded
capacity: approximately 30,000 metric tons per annum.
o Asia Pulp & Paper Co. Ltd. has a factory in Jiangsu Province that produces
jumbo rolls and a converting facility in Guangdong Province. Estimated
maximum capacity of the paper making facility: 120,000 metric tons per
annum. (The factory is currently producing approximately 96,000 tons per
annum of which approximately 50% is sold as jumbo rolls to converters.)
o Fujian Hengan Holding Co. Ltd. in Changde, Hunan Province, now produces
tissue paper to meet its requirements for production of diapers as well as
paper. Estimated capacity: approximately 30,000 metric tons per annum.
Given the above-described capacities together with our estimated production
capacity, we believe the need for top quality products for both domestic and
on-premise (tourist) consumption will be temporarily met until the next round of
economic growth in China.
DF CHINA TECHNOLOGY POSITIONING
Despite recent double-digit growth in China and projected annual growth of
around 7%, we assume that the majority of consumers in China will not afford
themselves the luxury of premium-priced hygienic paper products for several
years to come. Accordingly, we plan to position ourselves in the mass market as
well as in the medium- to premium-priced market. Our rationale is to penetrate
the mass market with the aim of cultivating consumer purchasing habits,
appreciation of our quality, and recognition of our brand name over the years.
We intend to have raw materials for the mass-market products
contract-manufactured by smaller paper mills and to produce raw materials for
higher-end products at our own mills as they are commissioned.
In addition to the vast market in China, we are beginning to target
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nearby Asian export markets, namely Macau, Taiwan and Hong Kong. We have begun
to produce away-from-home products including hand roll towels (HRT), jumbo roll
tissues (JRT) and "N" multi-fold towels. Our aim is to export sufficient
quantity to match our U.S. dollar expenditures for imported waste paper, mainly
from the U.S. Export sales help to control currency risk by currency matching
expenses and revenues. Export of Chinese-manufactured goods coupled with the
purchase of raw materials from overseas is also consistent with the national
policy of the People's Republic of China, which encourages two-way trade.
RESEARCH AND DEVELOPMENT. We have not incurred any significant expenses on
research and development activities.
ENVIRONMENTAL CONTROLS. We anticipate that the Chinese government will increase
its requirements for environmental controls. With this in mind, we are
installing and employing environmental control standards that meet U.S.
standards, which are higher than those currently required by the PRC.
The environmental controls we are installing at Paper Mill No. 2 have been
approved by the provincial authorities and the central government. The paper
mills will use an enzymatic deinking agent instead of the traditional chemical
agent. This biological process will reduce the use of chemicals by approximately
90%. The effluent output is mostly clay, which can be used as a construction
material, and the effluent water will be treated in lagoons. 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 entire deinking process has been designed by in-house U.S. and European
experts assisted by an independent consultant. Our waste treatment process and
plants have been designed by specialists in the U.S., but are being built in
China.
Similar environmental controls are proposed for Paper Mill No. 1 and have
been approved by the local environmental protection agency. We expect them to be
approved by the provincial authorities and the central government.
Because our environmental procedures will have received local authority
approval prior to installation of the equipment, we do not anticipate incurring
any significant environmental clean-up expenses other than those that are part
of our regular operating costs.
NUMBER OF EMPLOYEES. On March 31, 2000 we employed 156 persons. Once the
operations in Conghua and the small paper mill we just leased in Xinhui go 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. Most of our sales for the last three fiscal years were in Hong
Kong. Less than 10% of our sales during the year ended March 31, 2000, were
attributable to exports to China.
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PATENTS, COPYRIGHTS AND INTELLECTUAL PROPERTY.
We hold no patents, copyrights or intellectual property other than
trademarks established for our new paper products for the consumer market. We
are not aware of any patents, trademarks, licenses, franchises and concessions
that would affect our business and production described herein.
ITEM 2. DESCRIPTION OF PROPERTY.
CONGHUA - PAPER MILL NO. 1.
We have the land use rights to 16,011 square meters in a development zone
in Conghua, Guangzhou, PRC, on which we have constructed a paper converting
plant and warehouse, a conference center, and a 52-room guest house. The
recycled pulp production and paper making facilities are planned for a tract of
approximately 35,000 square meters in Xinhui, near Guangzhou, near other
manufacturers of tissue and industrial-grade paper, on a major river with ready
access to road and river transportation facilities and with an abundant supply
of electricity.
JIANGYIN - PAPER MILL NO. 2.
Paper Mill No. 2 is owned by a Sino-foreign equity joint venture of our
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% owned by Jiangsu Huaxi Holdings Corporation and 60% owned
by Dransfield Broadsino Paper Holdings Limited ("Dransfield Broadsino Paper"), a
company 80% owned by us and 20% owned by Broadsino. We have 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.
Our joint venture partner, Jiangsu Huaxi Holdings Corporation, has a
50-year land use agreement with the local authority in Jiangyin, Jiangsu
Province, for a 65,000-square-meter tract on which Paper Mill No. 2 is being
constructed. Jiangsu Huaxi, a PRC government corporation, originally agreed to
provide this parcel of land as part of its capital contribution. The project
site is adjacent to a Yangtze River tributary, which will supply water to the
paper mill. The tract is also accessible by a major highway, near other
manufacturers of industrial grade papers, and adequate to meet medium-term
expansion needs.
Originally, the joint venture was established in order to ensure an
adequate supply of electricity to the mill. Our Chinese partners were to
contribute a 12,000-kilowatt-hour, coal-fired, power plant as their 40% interest
in the joint venture. This power plant currently supplies electricity to other
plants nearby and was to supply the required electricity and steam to the paper
mill. However, there now being an adequate supply of electricity in the area in
which the factory is
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situated, we believe we are in a position to develop and operate the factory on
the strengths of our own management.
In an effort to generate funds from sources other than the public market,
we came to an agreement in July 1999 with Jiangsu Huaxi to exchange shares of
our common stock in partial payment for land in Jiangyin, the site of Paper Mill
No. 2. Under the agreement, we expect to convert our Sino-foreign equity joint
venture into a foreign company, wholly owned by Dransfield Broadsino Paper
Holdings Ltd., which is 80% held by us. Since the conversion to a wholly-owned
foreign company in the third quarter 1999 we are now able to focus on our
investment.
In July 1999 our converting facility at Paper Mill No. 2 in Huaxi was
commissioned and test production begun.
OFFICE FACILITIES.
We rent office facilities in Hong Kong from another subsidiary corporation
of our parent, Dransfield Holdings, and share these facilities with other
Dransfield subsidiary.
ITEM 3. LEGAL PROCEEDINGS.
Neither our company nor any of its properties 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.
At the balance sheet date, we were a 78.4%-owned subsidiary of Dransfield
Holdings, a Cayman Islands company listed on the Hong Kong Stock Exchange.
Through distribution of DFCT shares by Dransfield Holdings to its
shareholders on June 30, 2000, Dransfield Holdings reduced its shareholdings to
approximately a 32.2% level.
The following table sets forth, as of August 31, 2000, information with
respect to any person known to us to be the beneficial owner of more than ten
percent of our Common Stock and the total amount of our 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 5,909,000(1) 32.2%
Grandom Asia Trading Limited 2,226,156 12.1%
Grandom Inc. 1,004,439 5.5%
</TABLE>
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<TABLE>
<S> <C> <C>
Officers and Directors as a
Group(8 persons) 9,176,098 50.0%
</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 our
Common Stock.
INSIDE THE UNITED STATES
Our Common Stock is listed for trading on the Nasdaq SmallCap Market under
the symbol "DFCT".
Our 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>
(Closing Price)
Calendar Quarters High Low
<S> <C> <C>
1997, 2nd Quarter $5.250 $2.500
1997, 3rd Quarter $4.875 $3.250
1997, 4th Quarter $4.875 $4.313
1998, 1st Quarter $4.000 $2.750
1998, 2nd Quarter $2.875 $1.625
1998, 3rd Quarter $2.375 $0.750
1998, 4th Quarter $2.125 $0.313
1999, 1st Quarter $2.250 $1.250
1999, 2nd Quarter $1.250 $0.781
1999, 3rd Quarter $1.125 $0.797
1999, 4th Quarter $12.000 $0.438
2000, 1st Quarter $7.563 $2.625
2000, 2nd Quarter $4.375 $1.438
</TABLE>
Of the 18,165,007 outstanding shares of Common Stock, 3,563,307 shares are
held in the United States by approximately 1,200 record holders and 14,601,700
shares are held in Hong Kong by approximately 520 shareholders, one of whom,
Dransfield Holdings Limited, a Cayman corporation, owns 5,909,000 shares.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
The business of our company is conducted in and from Hong Kong and the
People's Republic of China ("the PRC") in Hong Kong dollars and the
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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 the average noon exchange rate between
Renminbi and U.S. dollars for the periods indicated and is expressed in RMB per
U.S. Dollar:
<TABLE>
<CAPTION>
PERIOD AVERAGE NOON BUYING RATE(1)(2)
------ ------------------------
<S> <C>
1989 3.8149
1990 4.8175
1991 5.3431
1992 5.5309
1993 5.7769
1994 8.6402
1995 8.3700
1996 8.3389
1997 8.3193
1998 8.3008
</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. Figures after 1998 are no longer available.
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.
(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.
The Hong Kong dollar is freely convertible into the U.S. dollar.
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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, HSBC, Standard Chartered Bank and the
Bank of China. Under the agreement, 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 = HK$7.80. When
the banknotes are withdrawn from circulation, the banknote issuing banks
surrender the certificates of indebtedness to the Hong Kong Government Exchange
Fund and are paid the equivalent of U.S. dollars at the fixed rate. Exchange
rates between the Hong Kong dollar and other currencies are influenced by the
linked rate between the U.S. dollar and the Hong Kong dollar.
The market exchange rate of the Hong Kong dollar against the U.S. dollar
continues to be determined by the forces of supply and demand in the foreign
exchange market. However, against the background of the fixed rate system which
applies to the issue of Hong Kong currency in the form of banknotes, as
described above, the market exchange rate has not deviated significantly from
the level of HK$7.80 to US$1.00. See "Selected Financial Data" below. 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 (the "SAR")on July 1, 1997, 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$1.00, if at all.
Our company is organized under the laws of the British Virgin Islands ("the
BVI"). The relevant BVI law imposes no limitations on the rights of nonresidents
or foreign owners to hold or vote securities of the company, nor are there any
charters or other constituent documents of the company - that would impose
similar limitations.
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ITEM 7. TAXATION.
There are no British Virgin Islands ("BVI") governmental laws, decrees or
regulations affecting the remittance of dividends or other payments to
nonresident holders of our company's securities. U.S. holders of our securities
are subject to no taxes or withholding provisions under existing BVI laws and
regulations. By reason of the fact that we conduct no business operations within
the BVI, there are no applicable reciprocal tax treaties between the BVI and the
U.S. that would affect the preceding statement that there are no BVI taxes,
including withholding provisions, to which U.S. security holders are subject
under existing laws and regulations of the BVI.
ITEM 8. SELECTED FINANCIAL DATA.
The following selected financial data for the five years ended March 31,
2000, are derived from the audited consolidated financial statements of our
company and of Dransfield Paper, with whom we merged on February 26, 1997. The
data should be read in conjunction with the consolidated financial statements
and the related notes, which are included elsewhere in this annual report.
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------------------------------------------------
1996 1997 1998 1999 2000 2000
HK$'000 HK$'000 HK$'000 HK$'000 HK$ "000(1) US$'000(1)
-------- -------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales(2) 307,047 147,244 54,631 4,812 1,502 193
Income (loss) before interest and
income taxes and minority 13,443 329 (3,791) (8,843) (7,009) (900)
interests
Interest income/(expenses),
net(2) (5,603) (1,810) (525) (254) 41 5
Provision for income taxes (1,391) (309) (417) 9 -- --
Income (loss) after income
taxes but before minority
interests 6,449 (1,790) (4,733) (9,088) (6,968) (895)
Net income (loss)(2) 5,034 (24) (4,733) (9,088) (6,968) (895)
Basic net income (loss) per share
(cents) 54 (16) (39) (58) (43) (6)
</TABLE>
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<TABLE>
<CAPTION>
As at March 31,
---------------------------------------------------------------------
1996 1997 1998 1999 2000 2000
HK$'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) 57,880 123,161 178,434 186,642 200,909 25,791
Total assets(3) 176,577 209,466 211,277 208,338 224,983 28,881
Long term liabilities(4) 73,459 120,652 53,532 58,359 14,350 1,842
</TABLE>
----------
(1) The translation from Hong Kong dollars into U.S. dollars for the 2000 data
is at US$1.00 equals HK$7.79, the conversion rate prevailing on March 31,
2000.
(2) For a discussion of the reasons for the significant changes in certain
selected financial data between fiscal years 1998, 1999 and 2000, 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$28.8 million in 2000,an increase of US$2.1
million over 1999, which had seen a decrease of US$435,000 over 1998. The
2000 increase of US$2.1 million was mainly attributable to an increase of
US$1.8 million in fixed assets, an increase of US$94,000 in inventories and
an increase of US$161,000 in deposit for fixed assets. The 1999 decrease of
US$435,000 was mainly attributable to an increase of US$1 million in fixed
assets, a decrease of US$1.3 million in accounts receivables and a decrease
of US$143,000 in inventories.
(4) Long-term liability of US$1.8 million in 2000 is a loan from a related
company. Long-term liabilities in 1999 were composed mainly of US$5.7
million owed to the company's parent, Dransfield Holdings Limited and a
US$1.8 million loan from a related company.
The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods presented,
expressed in HK$ per US$:
14
<PAGE> 16
<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 7.7345 7.7345 7.7440(1) 7.7310(1)
1997 7.7495 7.7431
1998 7.7476 7.7467
1999,Sep 17 7.7663
</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.
(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.
We had no business until we merged on February 26, 1997, with Dransfield
Paper. The financial statements included herein (see "Financial Statements") and
the references below to our business operations refer also to Dransfield Paper's
financial statements and business operations before the merger, to which we
succeeded upon our merger with Dransfield Paper. Certain vertical integration
activities (see "Outlook" below) are reflected in the statements of operation
and cash flows for the fiscal years ended March 31, 1998, 1999 and 2000.
15
<PAGE> 17
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, 2000:
<TABLE>
<CAPTION>
Year ended March 31 1998 1999 2000
------------------- -------- -------- --------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 91.2 90.9 104.7
-------- -------- --------
Gross margin 8.8 9.1 (4.7)
-------- -------- --------
Selling, general and
administrative expenses 18.7 192.8 536.5
Interest expense 1.0 5.3 (2.7)
-------- -------- --------
Other income and expenses, net (2.2) -0- (74.6)
17.5 198.1 459.2
-------- -------- --------
Net loss (8.7)% (189.0)% (463.9)%
-------- -------- --------
</TABLE>
SALES.
Sales for fiscal year 2000 decreased approximately HK$3.3 million
(US$423,000) or 69% from the prior year as compared with a decrease of
approximately HK$49.8 million (US$6.4 million) or 91% in 1999 over 1998. The
decreases were due to further 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 HK$34.8 million
(US$4.5 million), or 87.9%, in 1999 and then decreased HK$4.2 million
(US$539,000), or 88% in 2000. There were no sales of the Tempo brand
handkerchief for 1999, which represented a decrease of HK$15 million (US$1.9
million) or 100%, over 1998 as compared with a decrease of HK$65 million (US$8.4
million), or 81%, over 1998. Sales of our own manufactured hygienic paper
products in fiscal 2000 were approximately HK$905,000 (US$116,000).
Total sales for the first two months of fiscal 2001 is approximately HK$1.1
million (US$141,000).
GROSS MARGIN.
In fiscal 2000 we incurred a gross loss of HK$70,000 (US$9,000) as compared
with a gross margin of HK$436,000 (US$56,000) in 1999. Gross margin decreased by
HK$4.4 million (US$568,000) in 1999 or 91% from 1998. The gross loss in 2000 was
due to high manufacturing costs resulting from start-up production. The 1999
gross margin increased to 9.1% of sales from 8.8% of sales in 1998. The 1999
increase from the 1998 level was due to the sales of our paper merchanting
division being achieved at higher margin.
16
<PAGE> 18
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
Selling, general and administrative expenses for fiscal 2000 decreased by
HK$1.2 million (US$154,000) or 13% below 1999. In 1999 these expenses decreased
by HK$143,000 (US$21,000) or 1.5% below 1998. The 2000 decreases were due to a
further reduction in the paper merchanting business.
INTEREST EXPENSE, NET.
The interest income of HK$41,000 (US$5,000) in 2000 was interest earned
from time deposit of capital fund raised through new issue of common stock. The
net interest expenses of HK$254,000 (US$33,000) in 1999 and HK$525,000
(US$68,000) in 1998 were attributable mainly to the financing of the Company's
paper merchanting activities. Currently the company has no interest bearing
liabilities.
NET INCOME.
We had a net loss of HK$6.9 million (US$895,000)in 2000 compared with a net
loss of 9 million (US$1.2 million) in 1999 and a net loss of HK$4.7 million
(US$612,000) in 1998. HK$5.2 million (US$667,000) of the 2000 net loss were due
to
o a loss of HK$827,000 (US$106,000) in the paper merchanting division,
o HK$873,000 (US$112,000) in corporate expenses,
Items not affecting cash flow:
o HK$2.3 million (US$295,000) in amortization and depreciation of land and
building, factory and machinery of our Conghua converting plant during the
year,
o HK$616,000 (US$79,000) increase in provision for inventories, and
o HK$624,000 (US$80,000) amortization of employee stock option expenses.
The 1999 net loss was mainly due to
o a loss of HK$3.9 million (US$510,000) in the paper merchanting division,
o HK$630,000 (US$81,000) in corporate expenses,
Items not affecting cash flow:
o HK$2.8 million (US$359,000) in amortization and depreciation of land and
building, factory and machinery of our Conghua converting plant during the
year, and
o HK$939,000 (US$121,000) amortization of employee stock option expenses.
17
<PAGE> 19
The 1998 loss was mainly due to a loss of HK$832,000 (US$108,000) in the paper
merchanting division, the cost of HK$644,000 (US$83,000) in corporate promotion
expenses, the cost of HK$200,000 (US$26,000) in production of the first annual
report after listing on NASDAQ, the cost of HK$650,000 (US$84,000) in product
development and testing, and the cost of HK$1.2 million (US$155,000)
amortization of employee stock option expenses.
BALANCE SHEET ITEMS.
Significant changes in several balance sheet items occurred from 1999 to
2000, in particular accounts receivable, inventories, fixed assets, and
shareholders' equity. These changes reflect -
o the reduction of the company's operations of the high-volume, large-
inventory, and low-gross-margin paper merchanting activities,
o the increase in fixed assets from HK$186.6 million (US$24.1 million) in
1999 to HK$200.9 million (US$25.8 million) in 2000, reflecting the
construction works carried out for Paper Mill Nos. 1 and 2,
o the issuance of 1,674,787 shares of common stock in exchange for the
cancellation of HK$46.4 million (US$6 million) in amounts owed to our
parent company, Dransfield Holdings,
o the issuance of 438,138 shares of common stock for HK$7.8 million (US$1
million) in cash,
o the issuance of 218,232 shares of common stock in exchange for services
rendered and the acquisition of construction works in Mill Nos. 1 and 2
amounting to HK$11.8 million (US$1.5 million), and
o the issuance of 248,850 shares of common stock to employees on the exercise
of stock options.
18
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES.
We had negative cash flows from operations of HK$2.7 million (US$351,000)
in 2000 and had positive cash flows from operations of HK$6.4 million
(US$831,000) in 1999 and HK$19.2 million (US$2.5 million) in 1998. The 2000
negative performance was due to an increase in inventories of HK$0.7 million
(US$94,000) and a decrease in accounts payable of HK$506,000 (US$65,000). The
1999 towards fiscal year end positive performance was due to a decrease in
accounts receivable of HK$10.2 million (US$1.3 million) and a decrease in
inventories of HK$1.1 million (US$143,000). The 1998 positive performance was
due to a decrease 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). Our
additions of fixed assets for our planned paper business expansion reduced our
cash flow by HK$6.8 million (US$873,000) in 2000, HK$3.1 million (US$405,000) in
1999 and HK$4.5 million (US$582,000) in 1998.
Fiscal 1998 saw a 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) from new
issues of common stock. Fiscal 1999 saw a repayment of HK$4.1 million
(US$533,000) of loans made to us by our parent company. Fiscal 2000 saw a
receipt of HK$13.1 million (US$1.7 million) from new issues of common stock, a
repayment of HK$2.4 million (US$311,000) of a loan from a minority shareholder
and a repayment of HK$0.7 million (US$87,000) of loans made to us by our parent
company. 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 our proposed third and fourth paper mills, as follows:
19
<PAGE> 21
<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 $ 13,789
New Auxiliary Equipment (China) $ 3,800 Apr 00-Jul 01
New Environmental Control
Equipment (China/USA) 158 Apr 00-Jul 01
Infrastructure (China) 1,211 1,966 Apr 00-Jul 01
---------- ---------
Sub-Total $ 15,000 $ 5,924
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 $ 8,211
New Auxiliary Equipment (China) $ 3,750 Apr 00-Apr 01
New Environmental Control
Equipment (China/USA) 206 Apr 00-Apr 01
Infrastructure (China) 1,452 1,320 Apr 00-Apr 01
---------- ---------
Sub-Total $ 9,663 $ 5,276
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 $ 26,663 $ 11,200
</TABLE>
The source of funds for these capital expenditures for Paper Mill Nos. 1
and 2 was as follows:
o $10 million advance from parent, Dransfield Holdings in November 1996
and April 1997,
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,
o $1.0 million advance from Dransfield Holdings from April 1998 through
March 1999,
20
<PAGE> 22
o $1.5 million by the issuance of common stock to contractors from April
1999 through March 2000, and
o $1.2 million advance from Dransfield Holdings from April 1999 through
March 2000.
The proposed sources of funds for Paper Mill Nos. 3 and 4 are as follows:
o $25 million by March 2003 from the sale of shares of the company in a
rights offering with standby underwriters, and
o profits 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, $4.5 million were converted into common stock
of the company in March 1998 at $4.50 per share, $147,000 were converted into
common stock of the company in November 1999 at $7 per share and $5.8 million
were converted into common stock of the company in February 2000 at $3.51 per
share. The proposed source of funds for Plant Nos. 3 and 4 would involve the
issuance of equity securities and, accordingly, represent potential dilution to
our shareholders.
THE YEAR 2000 PROBLEM.
Our company, our parent company, and its other affiliates have fully
recognized the importance of the Year 2000 problem, which arises from computer
hardware and software systems using two digits to represent the year. The
problem may cause uncertainty, unreliability or disruption to the operations of
a company during several key dates. We understand the term "Year 2000 Compliant"
to mean the elimination of these problems.
Beginning in 1997, our parent company formed a working committee to
evaluate its exposure and the exposure of its subsidiaries, including us, to the
Year 2000 problem and then to develop and implement ways to reduce exposure to
the problem. This working committee tested and evaluated our electronic and
mechanical systems. It identified our parent company's three main areas of
possible significant exposure to the Year 2000 problem to lie in its telephone
system, its trading and accounting software and its computer hardware, all of
which we share.
The working committee then developed a schedule - for the period July 1998
through October 1999 - for the upgrading or replacement of all the identified
systems. It also developed procedures and plans for the continuous monitoring,
testing and evaluation (and where needed, upgrading or replacement) of
electronic and mechanical systems with
21
<PAGE> 23
regard to exposure to the Year 2000 problem.
We believe that this project is completed. Besides installing and
activating a new telephone system and accounting and trading software, our
parent company is replacing our computer hardware. Our parent company has
completed the installation of its new Year 2000 compliant local area network
(LAN) servers at its head office and at its Victorison Tradeport in Shenzhen,
China. In addition, all mission-critical computer workstations in our parent
company's head office and in the Victorison Tradeport have been upgraded with
Year 2000 compliant workstations and productivity software. Other workstations
that are not mission-critical are being upgraded. Certain operational software
which is not mission-critical is also being replaced with Year 2000 compliant
software written, implemented and tested on an in-house basis. Delivery,
implementation and testing of this software are in the final stage of
completion.
22
<PAGE> 24
TABLE SHOWING DF CHINA TECHNOLOGY INC.'S SUBSIDIARIES
1. DF CHINA TECHNOLOGY INC. (new name effective 3-28-00. Previous name:
Dransfield China Paper Corporation. Incorporated in British Virgin Islands)
1.1. DF CHINA TECHNOLOGY INC. owns 100% of DRANSFIELD CHINA PAPER
CORPORATION (Cayman Islands corporation).
Paper mills in China:
Enzymatic deinking of waste paper
Paper making into jumbo rolls
Converts jumbo rolls into paper products
1.2. DF CHINA TECHNOLOGY INC. owns 80% of DRANSFIELD CYBER INC. (Cayman
Islands corporation).
1.2.1. DRANSFIELD CYBER INC. owns 85% of DFtradelink.com INC. (Cayman
Islands corporation) (1)
Distribution (Logistics)
E-Commerce B to B
Domain expertise (in house):
Paper
Consumer electronics
Apparel
Toiletries
Food and beverages
1.2.2. DRANSFIELD CYBER INC. owns 55% of E-NET BOX INC. (Cayman Islands
corporation) (1)
Set-Top-Box technology
Ad-based E-Commerce B to C
1.2.3. DRANSFIELD CYBER INC. has agreed to purchase, subject to due
diligence, a 28.9% interest in VISIONSOFT INC. (Cayman Islands
corporation)
1.2.3.1. VISIONSOFT INC. owns 90% of TIANJIN 3D IMAGE TECHNIQUE CO. LTD.
(People's Republic of China corporation)
Manufacturing and marketing of products using 3-D technology
Note:
(1) Participation in these ventures is to accelerate market penetration, at the
least cost, with adequate resources to fulfil orders.
OUTLOOK.
The statements contained in this Outlook are based on current expectations.
These statements are forward looking, and actual results may vary materially.
We are building a vertically-integrated, multi-product, consumer hygienic
paper manufacturing and distribution business. Planning for the development of
this business began in 1993. We made business contacts in the buying and selling
of unfinished paper and established business alliances for two plants in China.
Material capital expenditures were both committed and made, and the first two
paper converting plants are now operational.
During 1998 we began working with a number of local Chinese paper mills,
sharing our 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. We believe we are unique in China in our 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.
Our vertical integration plans embrace the following activities, one of
which is operational. All others are still in the development stage:
o Recycled pulp production. We will process waste paper into recycled
pulp. Until we need all the recycled pulp for our own further
processing, we will offer approximately half of what we produce for
sale to other paper mills in China and will use the balance in our own
paper making operation.
o Paper making. We will employ our paper making machines to process
recycled pulp into jumbo rolls. Until we need all the jumbo rolls for
our own further processing, we will offer approximately half of what
we produce for sale to other companies in China with paper converting
plants and will use the balance in our own paper converting plants.
o Paper converting. We are now converting jumbo rolls of paper into
finished paper products, such as bathroom tissue, facial tissue,
napkins and handkerchiefs, which are packaged and distributed to
customers.
23
<PAGE> 25
We estimate the net operating margins in these divisions will be as follows:
<TABLE>
<CAPTION>
Division Net Operating Margin
----------------------- --------------------
<S> <C>
Recycle pulp production 10 to 15%
Paper making 10 to 16%
Paper converting 11 to 21%
</TABLE>
TIMING OF THE EXPANSION. Phase I of our business expansion is the
completion of Paper Mills Nos. 1 and 2. Phase II of our long-term growth plan
involves constructing two more paper mills, one in the Tianjin region in
northern China and another in the Sichuan Province in western China. We will
only begin Phase II when Phase I begins to achieve our targeted financial
results and after we have demonstrated that we can apply the knowledge and
experience gained in building Paper Mill Nos. 1 and 2 to construct the third and
fourth mills with maximum speed and efficiency. The projected dates for the
completion and commencement of operations of each of the four 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 April 2001 September 2001 Operational
Paper Mill No. 2 February 2000 July 2001 Operational
Phase 2: Planned. Not under construction
Paper Mill No. 3 March 2003 March 2003 March 2003
Paper Mill No. 4 March 2004 March 2004 March 2004
</TABLE>
PAPER MILL NO. 1. Our company invested US$6 million in establishing a paper
conversion plant, a conference center, and a research and development center in
Conghua county in the city of Guangzhou, Guangdong Province in southern China.
The paper conversion plant tested production and came on stream in August 1997
and now converts jumbo rolls of paper into toilet tissue, paper handkerchiefs,
napkins and facial tissue. Its maximum capacity is approximately 1,200 metric
tons per month. The plant will also serve as a training and research and
development center to develop our paper business throughout China. 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 our
expansion. He has completed his mission and retired, but remains as a consultant
to the company.
Distribution of paper products from the paper converting plant commenced in
August 1997 under our own brand name, DF. These products are being marketed
primarily in Hong Kong and Southern China. In June 1998, we recruited a 20-year
veteran of the converting business to be responsible
24
<PAGE> 26
for marketing jumbo rolls, finished goods and our newly introduced
away-from-home products to overseas markets.
A used deinking plant for recycled pulp production was purchased in
Belgium, dismantled, shipped to China in May 1996, and is planned to begin
operations within eight months of receipt of required funding of about US$5
million. This plant has output capacity of approximately 90 metric tons per 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 eight miles of the
mill and represents current annual customer demand exceeding 800,000 metric
tons.
We will invest a total of approximately US$11.1 million for the deinking
and paper-making plants, both of which will be 100% owned by us.
To develop a reliable interim supply of quality tissue paper for our
converting facility, we have signed a number of contracts, described in Item 1,
with small local mills in Guangdong Province, which will supply our converting
facility with medium- and low-grade tissue paper. In all cases, we will be
providing the technical expertise and supervision to ensure the quality and
consistency of the tissue paper.
Once funding is obtained to complete our own mill, we expect to adhere to
the following timetable: Completion of infrastructure, four months; completion
of deinking facility within a further four months; and completion of paper mill
with in four months after that.
PAPER MILL NO. 2. We expect to invest a total of approximately US$13
million for a 60% controlling voting interest and a 48% equity interest in a
paper mill, called Paper Mill No. 2, 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 of our company, Jiangsu Huaxi
Holdings Corporation and Broadsino Investment Company Ltd., as described under
Item 2.
Originally, the Chinese partners were to contribute a 12,000-kilowatt-hour,
coal-fired, power plant for their 40% interest in the joint venture. However,
there is now an adequate supply of electricity in the area where the factory is
situated, and negotiations to exclude the power plant in the joint venture were
completed in July 1999. We believe we are in a position to develop and operate
the factory on the strength of our own management.
A further agreement was reached with our joint venture partner under which
the equity joint venture will be converted into a foreign company wholly owned
by Dransfield Broadsino Paper Holdings Ltd. We will shortly commence discussion
with Broadsino Investment Company Limited with a view to acquiring the 20%
equity held by Broadsino in Dransfield Broadsino Paper Holdings Ltd. Upon
successful negotiation and completion, we will be the sole owners of Paper Mill
No. 2. Conversion to a wholly-owned foreign company with the sole operation
being the
25
<PAGE> 27
manufacture of paper products will enable us to focus on our investment.
The converting facility at Paper Mill No. 2 in Huaxi, Jiangsu Province, was
commissioned in July 1999 and is now in test production. Pending completion of
our own recycled pulp production and paper making plant, we will be obtaining an
interim supply of medium- and low-grade tissue paper for our converting facility
from a number of small local mills with which we have contracted to manage
production, as described under Item 1.
Once our deinking and paper mill plants are completed, we will purchase
unsorted office waste directly from U.S. suppliers such as Weyerhaeuser,
Smurfit, Allan & Co., etc. We will also make use of other grades of waste paper
to reduce our cost of production.
A used 120-metric-tons-per-day deinking plant for recycled pulp production
has been purchased from Georgia Pacific Company in the U.S., and a used
28-metric-tons-per-day paper making plant has been purchased from VPK in
Belgium. The machines arrived in China in May and July 1996.
At first, we estimate we will use less than half of the
120-metric-tons-per-day recycled pulp production in Paper Mill No. 2's own
tissue paper plant. Until we need it for our own end products, we will offer for
sale more than half of the production to other paper mills in Jiangsu and
Zhejiang Provinces, which have an annual demand of 1,400,000 metric tons.
We expect to complete infrastructure construction in May 2000, with
completion of the de-inking facility to follow four months later, and completion
of the paper mill three months after that.
PAPER MILLS NO. 3 AND 4. Eventually we plan to assemble and operate two
additional integrated paper mills -- that is, plants for recycled pulp
production, paper making, and paper conversion -- one in northern China in the
Tianjin area, and the other in western China in Sichuan Province. These two
paper mills will be installed after the first two mills, now under construction,
are operational. Subject to funding and satisfactory operation of Mills No. 1
and 2, our plans envision the commencement of full operations at Paper Mills No.
3 and 4 by the last quarter of fiscal 2004. Considerable equipment has already
been acquired for the paper making and conversion plants for Paper Mills No. 3
and No. 4.
As stated earlier, our plans include recycling waste paper into pulp, which
is against the trend in China of importing virgin fiber. The following table
shows the present annual demand for recycled pulp and jumbo rolls, in the areas
to be served by our four planned paper mills, and the expected annual production
of the mills:
26
<PAGE> 28
<TABLE>
<CAPTION>
The Company's
Planned
Maximum
Potential Production
Demand (Recycled Pulp)
Phase I Province/City (Metric Tons) (Metric Tons)
-------- ------------- ------------- -------------
<S> <C> <C> <C>
No. 1 Guangdong Province 861,022 100,000*
No. 2 Jiangsu Province 767,050 72,000
No. 2 Zhejiang Province 679,100
No. 2 Shanghai Municipality 234,547
---------- ----------
Total 2,541,719 172,000
</TABLE>
<TABLE>
<CAPTION>
The Company's
Planned
Maximum
Potential Production
Demand (Recycled Pulp)
Phase II Province/City (Metric Tons) (Metric Tons)
-------- ------------- ------------- -------------
<S> <C> <C> <C>
No. 3 Tianjin Municipality 221,400 60,000
No. 3 Beijing Municipality 101,000
No. 3 Heibei Province 128,000
No. 4 Sichuan Province 238,750 60,000
---------- ----------
Total 689,150 120,000
</TABLE>
* includes 40,000 metric tons from Jiangmen Paper Mill
Our planned production represents only 4% 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 example, prices in April 1999 were US$510 (cost and
freight from U.S. West Coast to China) for virgin pulp plus 1% duty, compared
with US$110 (cost, freight and duty) for office waste paper. Recycling costs in
China are estimated to average US$200 per metric ton and not to exceed US$250
per ton. There is little market recycled fiber in China, and what there is sells
at prices 5 to 10% lower than virgin fiber prices.
With reference to the volatility of the prices of virgin pulp and office
waste paper, the table below suggests, pro forma, how our planned integrated
facilities would dampen the effects of price volatility with respect to profit
margins:
27
<PAGE> 29
<TABLE>
<CAPTION>
(US$ per Metric Ton)
March
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1. Virgin Pulp Cost $ 390 $ 520 $ 500 $ 510 $ 640
2. Secondary Fiber
-Raw Material
(Office Waste) $ 20-70 $30-100 $ 30-100 $ 30-100 $ 50-150
-Freight Cost 80 50 35 35 25
-Processing Cost
(Average) 200 200 200 200 200
-------- -------- -------- -------- --------
$300-350 $280-350 $265-335 $265-335 $275-375
3. Profit Margin
-Recycled Pulp(1) Low Medium Medium Medium Medium
-Jumbo Roll(1) Low Medium Medium Medium Medium
-Finished Products High Medium Medium Medium Medium
</TABLE>
----------
(1) Until needed for our 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 2000, the price of virgin pulp experienced the
most volatility in the last 30 years.
MARKETING AND DISTRIBUTION.
Our personal hygienic paper products are marketed by franchised
distribution agents primarily in Hong Kong and Southern China, and via the
company's business-to-business e-commerce platform joint venture to retailers in
China. In June 1998, we recruited a 20-year veteran of the converting business
to be responsible for marketing jumbo rolls, finished goods and our newly
introduced away-from-home products to overseas markets, including Macau and
Taiwan.
E-COMMERCE PLATFORM.
By establishing a business-to-business (B2B) e-commerce platform in
2000, we took an important step in our effort to increase penetration of the
domestic market in China and bring cost-efficient delivery to our customers.
Called DF Tradelink.com, Inc., the platform is a 50-50 joint venture with DFCT
major shareholder, Dransfield Holdings Limited. The goal of DF Tradelink.com,
Inc., is to become a dominant B2B marketplace for Chinese businesses dealing
with one another in China as well as with foreign buyers and sellers. The
initial customer target will be China's grass roots retailers for whom a B2B
platform can expand product offerings and deliver cost savings. A soft launch of
DF Tradelink.com is expected before year-end 2001.
28
<PAGE> 30
In a related undertaking, DFCT is also participating in a joint
venture to create E-Net Box Inc., a company that will provide set-top boxes to
access the new B2B platform. A set-top box connects users with service providers
via a box placed on top of a television set; messages appear on a television
screen. E-Net Box has a number of innovative features and costs much less than a
PC. A five-year plan calls for placing more than one million set-top boxes in
retail outlets across China.
We recognize that initial volume in B2B e-commerce will be small. To
protect shareholders' interests, we have chosen an approach that is unique to
China, one that we expect will hasten the profitability of the venture. We will
use e-commerce in support of our conventional trading, not to replace it.
Instead of relying on transaction fees, we expect to generate income by charging
a fee for use of our set-top boxes and for technical information provided by us.
OUR PRESENT POSTURE.
Our paper converting facility in Plant No. 1 is in operation and is making
our own DF-branded products. We are producing five products for distribution.
The mill output for each product is initially set as follows:
<TABLE>
<CAPTION>
Product Approximate Percentage
------- ----------------------
<S> <C>
Paper handkerchiefs 9%
Tissues 26%
Napkins 14%
Toilet rolls 40%
Away-from-home products 10%
</TABLE>
We anticipate that our gross margins on sales will be greater than the
margins we received distributing Proctor & Gamble's manufactured Tempo-brand
paper handkerchief. Further, we will be distributing five products, not one. The
equipment for Plant No. 2's paper converting facility was commissioned in July
1999 and is now in test production.
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.
29
<PAGE> 31
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The only market risk to which we are exposed is foreign currency risk. We
trade in Renminbi, U.S. dollars and Hong Kong dollars. Both Renminbi and Hong
Kong dollars are effectively pegged to the U.S. dollar at, respectively,
approximately 8.32 and HK$7.8 to US$1. The table and narrative below describe
how we intend to manage the foreign currency risk.
Chinese paper mills that import a substantial portion of raw materials,
notably wood fiber, are subject to foreign exchange risk in the event of a
decline in the Renminbi versus the U.S. dollar. Because wood fiber is traded on
the world market in U.S. dollars, a weakening of the local currency would raise
costs, which would normally be passed on to customers. We will set prices in
U.S. dollar equivalents for our market-recycled pulp, thereby protecting our
revenues against exchange rate fluctuations. Export sales will further help
manage foreign currency risk by matching expense and revenue currencies. To that
end, our experienced marketing staff will focus on extending our sales efforts
in neighboring Southeast Asian countries.
On the cost side, only about one-third of our costs to manufacture
market-recycled pulp are paid in U.S. dollars and are therefore subject to
exchange rate fluctuations. Our unique technical ability to combine imported
waste-paper fiber with local non-wood fiber to manufacture import-substitute,
market recycled pulp significantly decreases our dependence on imported raw
materials. Accordingly, the proportion of our costs subject to U.S. dollar
foreign exchange risk is substantially less than that of most mills that use
100% imported raw materials (see table below).
There is no ready market in the PRC for our company to enter into forward
exchange rate swaps or other instruments designed to mitigate its exposure to
foreign currency risks. However, by establishing prices in U.S. dollar
equivalents, by building export sales, and by reducing the amount of raw
material costs we pay in U.S. dollars relative to our competitors, we will be
protecting ourselves against foreign currency risk, thereby improving our
competitiveness and margins.
TABLE SHOWING IMPACT OF CLOSE TO 50% DEVALUATION OF THE RENMINBI
<TABLE>
<CAPTION>
Exchange BEFORE DEVALUATION AFTER DEVALUATION COST DIFFERENCE
Rate US$1 = RMB 8.32 RMB 12.00 PER METRIC TON
--------------------------- ------------------------------ ---------------
Our Mill Other Mills Our Mill Other Mills
-------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Imported cost
per metric
ton, say US$ 150 US$ 400 US$ 150 US$ 400
Renminbi
Equivalent RMB1,248 RMB3,328 RMB1,800 RMB4,800
Our cost
advantage over
competitors RMB2,080 RMB3,000 RMB 920
US$ difference using the devalued exchange rate US$ 76
</TABLE>
30
<PAGE> 32
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, 54 Deputy Chairman Apr 1994 Apr 2001
and Chief Executive
Officer
Warren MA Kwok Hung, 43 Treasurer and Apr 1994 Apr 2001
Secretary, Director
Andy PANG Kwong Wah, 55 Director-Converting Jan 2000 Apr 2001
Operation
Francis NG Ah Ba, 52 Director Jun 1998 Apr 2001
Kenneth MAK Kar Shun, 43 Director Apr 2000 Apr 2001
Thomas J. KENAN, 68 Director Mar 1997 Apr 2001
Kurt W. Krause, 55 Director Apr 1997 Apr 2001
Professor Li Chang, 42 Director Aug 2000 Apr 2001
James MADISON, 50 General Manager May 1996 May 2000
of Pulp
and Paper; now a
Consultant
CHOW Yeung Chee, 59 Plant Manager of Jan 1996 Apr 2001
Guangzhou Dransfield
Paper Ltd.
</TABLE>
31
<PAGE> 33
<TABLE>
<S> <C> <C> <C>
Manuel ALVAREZ, 64 General Manager Apr 1995 Dec 1999
of paper converting
operations; now a
Consultant
CHEN Shu Hen, 46 General Manager of Apr 1997 Apr 2001
Paper Mill No.1
JIA Yu Qiu, 36 Plant Manager Apr 1997 Apr 2001
Mou Wai Kim, 43 General Manager of Mar 2000 Apr 2001
Marketing & Sales
-Domestic Market
Dela LI Siu Yin, 38 Finance Manager Sep 2000 Apr 2001
Frank GUO, 26 Marketing Manager of Sep 2000 Apr 2001
E-Net Box Inc.
</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 Accountants.
He spent 18 years in the accounting profession of which 12 years are with
Dransfield Holdings. He holds a Higher Diploma in Accountancy from Hong Kong
Polytechnic University.
ANDY PANG KWONG WAH. Mr. Pang is Chief Operating Officer of our paper
operation. He has extensive experience in finance and administration, business
and general management. Prior to joining Dransfield, he was Assistant Managing
Director of Yee Tung Garment Co. Ltd. He holds a master's of business of
administration degree from the University of Southern California, U.S.A.
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
32
<PAGE> 34
ASEAN Institute of Management in the Philippines.
KENNETH MAK KAR SHUN. Mr. Mak is Director of Research & Development of
E-Net Box Inc. He has over 20 years of experience in engineering and research
and development in Europe, Middle East and Asia. He holds a B.Sc. degree in
Electrical Engineering from University of Alberta, Canada.
NONEXECUTIVE DIRECTORS.
THOMAS J. KENAN. Mr. Kenan has 36 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.
KURT W. KRAUSE Mr. Krause is a founder and the president of Beverage
Marketing Company, Inc., a US-based company specializing in the food and
beverage industry. He has more than 30 years of experience in the industry,
having been national sales manager of Pabst Brewing Company and a consultant to
leading German breweries and American and Canadian spring water companies. He
holds a BA degree from the University of Nebraska.
PROFESSOR LI CHANG. Professor Li is a founder and the CEO of Tianjin 3D Lab
and Tianjin 3D Image Technique Co., Ltd. He has been involved in research and
development of 3D imaging technology for over 18 years. He holds 52 patents and
has received numerous international awards for his inventions. He is the
Director of Ph.D. Post Graduate Studies at the Civil Aviation University of
China, Vice Chairman of National Inventors Association and National Specialist
of Engineering and Technology. In 1998, he received an Inventor's Gold Medal
from the Chief Executive of Hong Kong Special Administrative Region.
SENIOR EXECUTIVES.
JAMES MADISON. Mr. Madison has more than 25 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. Mr. Madison completed his initial
contract as general manager of pulp and paper with DFCT and continues as a
consultant to the company.
CHOW YEUNG CHEE. Mr. Chow has more than 32 years experience chemical
engineering and managing manufacturing plants. He has a bachelor of science
degree in chemistry.
MANUEL ALVAREZ. Mr. Alvarez has more than 30 years experience in the paper
converting business in the U.S. Prior to joining the Group, he was the Vice
President of Production of a major paper company in the U.S. He joined DFCT to
develop capable production team to spearhead our expansion.
33
<PAGE> 35
He has completed his mission and retired, but remains as a consultant to the
company.
CHEN SHU HAN Mr. Chen is General Manager of Paper Mill No. 1 (Xinhui,
Guangdong Province). Prior to joining our company, 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 DFCT. 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.
MOU WAI KIM Mr. Mou was a founder of Wei Bao, a paper mill in Xinhui. He
has engaged in the paper trading business for 20 years and has extensive
experience in doing business in the PRC, including Chuhai, Xinhui and Wunan.
DELA LI SIU YIN Ms. Li has over 15 years of practical experience in the
accounting profession, with more than 7 years of exposure with various listed
companies in Hong Kong. She is a fellow member of the Association of Chartered
Certified Accountants and an Associate of Hong Kong Society of Accountants.
FRANK GUO Mr. Guo graduated from Commerce University of China in 1995.
Before joining the company, Mr. Guo spent 5 years in charge of the regional
business of an electronic consumer company.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
The directors and officers of our company received from it and its
subsidiaries an aggregate of US$454,825 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. Our company
has no pension, retirement or similar benefits for directors and officers
pursuant to a plan contributed to by our company.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY.
WARRANTS. Our company has no outstanding warrants as of May 31, 2000.
STOCK OPTION PLAN. Our 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 our company. The options are for four-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 our company's Common Stock during the five trading days prior
to the grant of the option or, if the
34
<PAGE> 36
Common Stock is not trading, not less than the net book value per share of our
company's Common Stock as reflected in our 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.
Changes in the stock options granted under the Plan during the year are as
follows:
<TABLE>
<CAPTION>
Exercise Price
Number of Options $2.8 $3.67 $4.05 Total
----------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance outstanding at
Mar 31, 1999 510,000 -- -- 510,000
Options granted on
Jan 3, 2000 -- -- 465,000 465,000
Options granted on
Mar 4, 2000 -- 188,000 -- 188,000
Options cancelled during year
Upon termination of employment (31,000) -- -- (31,000)
Options exercised during year (248,850) -- -- (248,850)
-------- -------- -------- --------
Balance outstanding at
Mar 31, 2000 230,150 188,000 465,000 883,150
======== ======== ======== ========
</TABLE>
Subsequent to the balance sheet date, 30,000 stock options were granted on May
17, 2000 at an exercise price of $4.375. As of May 30, 2000, 666,600 options are
held by directors and officers of the company.
On June 20, 2000, the Board of Directors invited the grantees of share options
issued between January and May 2000 to surrender their share options by June 30,
2000. The Board authorized the Company Secretary to exchange the shares
surrendered by the same number of shares by granting a new share option at
US$1.75 per share, being the market closing price of the Company's shares on
June 19, 2000.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
Since the inception of the company's predecessor, Dransfield Paper, in
March 1994, and since the merger on February 26, 1997, between Dransfield
35
<PAGE> 37
Paper and the company, the company has had transactions with fellow subsidiary
companies (that is, companies that 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 earlier-distributed 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 DF-branded paper products, distribution of
which products commenced in August 1997. Such arrangement ceased during the year
ended March 31, 1999.
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.
36
<PAGE> 38
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, 1999 and
March 31, 2000 F-2
Consolidated Statements of Operations for the years ended
March 31, 1998, March 31, 1999, and March 31, 2000 F-3
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, March 31, 1999, and March 31, 2000 F-4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended March 31, 1998, March 31, 1999,
and March 31, 2000 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
37
<PAGE> 39
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
DF China Technology Inc.
(Formerly Dransfield China Paper Corporation)
(Incorporated in the British Virgin Islands with limited liability)
We have audited the accompanying consolidated balance sheets of DF
China Technology Inc. and subsidiaries (hereinafter aggregately referred as the
"Group") as of March 31, 1999 and 2000 and the related statements of operations,
cash flows and changes in shareholders' equity for each of the years in the
three-year period ended March 31, 2000. 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 the
Group at March 31, 1999 and 2000, and the consolidated results of its operations
and its cash flows for each of the years in the three-year period ended March
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Ernst & Young
Ernst & Young
Hong Kong
August 1, 2000
F-1
<PAGE> 40
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 and 2000
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 2000 2000 1999
US$ HK$ HK$
---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and bank balances 220 1,710 1,203
Accounts receivable, net 6 5 41 430
Inventories, net 7 275 2,147 1,415
Prepayments and other receivables 146 1,137 863
Income tax recoverable 12 92 92
---------- ---------- ----------
Total current assets 658 5,127 4,003
Fixed assets 8 25,791 200,909 186,642
Loan to a related company 9 1,842 14,350 14,350
Deposit for fixed assets 564 4,397 3,143
Other assets 26 200 200
---------- ---------- ----------
28,881 224,983 208,338
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 8 65 571
Accrued liabilities 497 3,870 1,527
Due to a former minority shareholder 12 -- -- 2,421
---------- ---------- ----------
Total current liabilities 505 3,935 4,519
Due to holding company 13 -- -- 44,009
Loan from a related company 9 1,842 14,350 14,350
---------- ---------- ----------
2,347 18,285 62,878
Shareholders' equity:
Common stock, no par value,
40,000,000 shares authorized;
18,165,007 issued, (1999: 15,585,000) 28,883 225,001 153,584
Unpaid subscription receivable (492) (3,835) --
---------- ---------- ----------
28,391 221,166 153,584
Contributed surplus 23 549 4,277 3,653
Accumulated deficit (2,406) (18,745) (11,777)
---------- ---------- ----------
Total shareholders' equity 26,534 206,698 145,460
---------- ---------- ----------
Total liabilities and shareholders' equity 28,881 224,983 208,338
========== ========== ==========
</TABLE>
The accompanying notes form an integral part of
these consolidated financial statements.
F-2
<PAGE> 41
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 1998, MARCH 31, 1999 AND MARCH 31, 2000
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Notes 2000 2000 1999 1998
US$ HK$ HK$ HK$
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales:
Distribution of hygienic paper products
-fellow subsidiaries 15 -- -- -- 14,992
Paper merchanting
-third parties 77 597 4,812 39,639
Paper manufacturing
-third parties 48 373 -- --
-fellow subsidiaries 15 68 532 -- --
---------- ---------- ---------- ----------
193 1,502 4,812 54,631
Cost of sales:
Hygienic paper products (127) (989) -- (12,935)
Other paper products (75) (583) (4,376) (36,870)
---------- ---------- ---------- ----------
(202) (1,572) (4,376) (49,805)
Gross profit/(loss) (9) (70) 436 4,826
Consulting services income 132 1,026 -- --
Selling, general and administrative expenses 3
- third parties (866) (6,744) (7,222) (7,319)
- fellow subsidiaries 15 (169) (1,315) (2,057) (2,103)
---------- ---------- ---------- ----------
(1,035) (8,059) (9,279) (9,422)
Interest income 5 41 -- 12
Interest expense 10 -- -- (254) (537)
Loss on disposal of subsidiaries 11 -- -- -- (406)
Other income, net 12 94 -- 16
Compensation from a supplier 19 -- -- -- 1,195
---------- ---------- ---------- ----------
Loss before income taxes (895) (6,968) (9,097) (4,316)
Provision for income taxes: 5
- Current -- -- 9 100
- Deferred -- -- -- (517)
---------- ---------- ---------- ----------
-- -- 9 (417)
---------- ---------- ---------- ----------
Net loss (895) (6,968) (9,088) (4,733)
========== ========== ========== ==========
Basic and diluted net loss per share (cents) 2 (6) (43) (58) (39)
========== ========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-3
<PAGE> 42
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 1998, MARCH 31, 1999 AND MARCH 31, 2000
(Amounts in thousands)
<TABLE>
<CAPTION>
2000 2000 1999 1998
US$ HK$ HK$ HK$
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss (895) (6,968) (9,088) (4,733)
Adjustments to reconcile income to net
cash provided by operating activities:
Depreciation 301 2,346 2,800 590
Deferred income taxes -- -- -- 517
Loss on disposal of subsidiaries -- -- -- 406
Gain on disposal of fixed assets (9) (68) -- --
Stock option compensation expense 80 624 939 1,184
(Increase)/decrease in current assets:
Accounts receivable 50 389 10,233 4,081
Inventories (94) (732) 1,106 9,851
Prepayments and other receivables (35) (274) 71 3,355
Income tax recoverable -- -- (31) --
Due from fellow subsidiaries -- -- -- 29,902
Increase/(decrease) in current liabilities:
Accounts payable (65) (506) 106 (5,566)
Accrued liabilities 316 2,459 308 (4,045)
Income tax payable -- -- -- (444)
Due to fellow subsidiaries -- -- -- (15,851)
---------- ---------- ---------- ----------
Net cash provided/(used) by operating activities (351) (2,730) 6,444 19,247
---------- ---------- ---------- ----------
Cash flows from investing activities:
Acquisition of fixed assets (309) (2,408) -- (2,452)
Payment of deposit for purchase of fixed assets (564) (4,397) (3,143) (2,049)
Proceeds from disposal of fixed assets 9 68 -- --
Net cash outflow from disposal of and acquisition
of minority interests in subsidiaries -- -- -- (4,601)
---------- ---------- ---------- ----------
Net cash used in investing activities (864) (6,737) (3,143) (9,102)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Bank loans and overdrafts, secured -- -- -- (16,718)
New issue of common stock 984 7,666 -- 5,805
Issue of common stock on exercise of stock options 694 5,410 -- --
Advances from a former minority shareholder -- -- -- 2,452
Repayment of loan to a former minority shareholder (311) (2,421) (31) --
Repayment of loan to holding company (87) (681) (4,132) (2,873)
---------- ---------- ---------- ----------
Net cash provided/(used) in financing activities 1,280 9,974 (4,163) (11,334)
---------- ---------- ---------- ----------
Net increase/(decrease) in cash and cash equivalents 65 507 (862) (1,189)
Cash and cash equivalents, at beginning of year 155 1,203 2,065 3,254
---------- ---------- ---------- ----------
Cash and cash equivalents, at end of year 220 1,710 1,203 2,065
========== ========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-4
<PAGE> 43
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, MARCH 31, 1999 AND MARCH 31, 2000
(Amounts in thousands, except number of shares and per share data)
<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, 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 22) 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$5 each 5,805 -- -- --
Stock compensation expense (notes 21 and 23) -- -- 1,184 --
Net loss -- -- -- (4,733)
---------- ---------- ---------- ----------
Balance at March 31, 1998 153,584 -- 2,714 (2,689)
Stock compensation expense (notes 21 and 23) -- -- 939 --
Net loss - -- -- (9,088)
---------- ---------- ---------- ----------
Balance at March 31, 1999 153,584 -- 3,653 (11,777)
</TABLE>
F-5
<PAGE> 44
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998, MARCH 31, 1999 AND MARCH 31, 2000
(Amounts in thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Retained
earnings/
Common Preferred Contributed (accumulated
stock stock surplus deficit)
HK$ HK$ HK$ HK$
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
New issue of 3,000 shares of common stock
at US$5 each on conversion of accrued 116 -- -- --
liabilities
New issue of 21,087 shares of common
stock at US$7 each on conversion
of amount due to holding company 1,144 -- -- --
New issue of 429,515 shares of common stock
at US$2.3 each to a former minority 7,666 -- -- --
shareholder
New issue of 8,623 shares of common stock
at US$2.3 each for construction costs incurred 154 -- -- --
New issue of 96,912 shares of common stock
at US$7 each for construction costs incurred 5,276 -- -- --
New issue of 103,022 shares of common stock
at US$7 each on conversion of holding
company's accounts payable 5,721 -- -- --
New issue of 248,850 shares of common stock
at US$2.8 each on exercise of stock options 5,410 -- -- --
New issue of 15,298 shares of common stock
at US$5.5 each for construction costs
incurred 655 -- -- --
New issue of 1,653,700 shares of common
stock at US$3.51 each on conversion
of amount due to holding company 45,275 -- -- --
Stock compensation expense -- -- 624 --
Net loss -- -- -- (6,968)
---------- ---------- ---------- ----------
Balance at March 31, 2000 225,001 -- 4,277 (18,745)
========== ========== ========== ==========
</TABLE>
The accompanying notes form an integral part of these
consolidated financial statements.
F-6
<PAGE> 45
DF CHINA TECHNOLOGY INC. 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
(a) Organization
DF China Technology Inc., formerly known as Dransfield China
Paper Corporation, (the "Company") was incorporated in the British
Virgin Islands on June 24, 1996. The Company is a 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.
The Company and its subsidiaries (hereinafter aggregately
referred as the "Group") is principally engaged in three industry
segments of paper distribution, paper merchanting and paper
manufacturing. Paper distribution and merchanting are being operated in
Hong Kong, Macau and the People Republic of China ("PRC"). The
manufacturing of hygienic paper is being operated in the PRC.
Intercompany balances and transactions have been eliminated on
consolidation.
On March 28, 2000, the Company changed its name to DF China
Technology Inc. and on May 11, 2000, the symbol for stock trading in
the NASDAQ Stock Market was changed to DFCT.
(b) Basis of presentation
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$") using rates prevailing on
March 31, 2000 which was US$1.00 = HK$7.79. 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, 2000.
F-7
<PAGE> 46
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
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
Machinery and equipment 5%
Motor vehicles 20 - 25%
Furniture, fixtures and office equipment 20%
</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.
F-8
<PAGE> 47
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) Foreign currency translation
Foreign currency transactions are translated into Hong Kong
dollars at the applicable 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 applicable rates of exchange ruling at that date.
Exchange differences are accounted for in the statements of operations.
(f) Operating leases
Leases where substantially all the rewards and risks of
ownership of assets remain with the leasing company are accounted for
as operating leases. Rentals applicable to such operating leases are
charged to income on the straight-line basis over the lease terms.
(g) Revenue recognition
Revenue from sales of goods are recognized on delivery to
customers. Consulting services income is recognized as the services are
provided.
(h) Advertising expenses
Advertising expenses, net of cooperative advertising
reimbursements, are charged to the statements of operations 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 expensed and 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 21 to the consolidated
financial statements.
F-9
<PAGE> 48
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(k) Basic and diluted net income/loss per share
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 loss per share for the year ended March 31, 1998
was computed by dividing net loss applicable to common stock, including
the cumulative dividends in arrears (note 22), by the weighted average
number of 13,328,014 shares of common stock, which was outstanding
during the year on the assumption that the 9.3 million shares of common
stock issued to DHL upon the effectiveness of the merger had existed at
April 1, 1997. The basic net loss per share for the years ended March
31, 1999 and 2000 were computed by dividing net loss applicable to
common stock by the weighted average number of 15,585,000 and
16,073,338 shares of common stock, respectively.
(l) Cash and cash equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
3. SUPPLEMENTARY INCOME STATEMENT INFORMATION
<TABLE>
<CAPTION>
Year ended March 31,
2000 2000 1999 1998
US$ HK$ HK$ HK$
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Selling, general and administrative expenses:
Depreciation 301 1,848 2,800 590
Advertising expenses 3 25 -- 33
Exchange gain, net (2) (18) (53) (72)
======== ======== ======== ========
</TABLE>
F-10
<PAGE> 49
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended March 31,
2000 2000 1999 1998
US$ HK$ HK$ HK$
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest 339 2,642 2,741 5,939
Income taxes -- -- 22 344
======== ======== ======== ========
Non cash investing and financing activities:
Loan from a related company
financed by a loan to a
related company (note 9) -- -- -- 984
Fixed assets contributed by holding company 639 4,977 8,959 52,857
Issuance of common stock for
construction costs incurred 781 6,085 -- --
Issuance of common stock on
conversion of accrued liabilities 15 116 -- --
Issuance of common stock on
conversion of holding company's
accounts payable 734 5,721 -- --
Issuance of common stock on
conversion of amount due
to holding company 5,959 46,419 -- 118,088
Issuance of common stock on
conversion of preferred stock -- -- -- 26,687
======== ======== ======== ========
</TABLE>
5. INCOME TAXES
The Company was incorporated in the British Virgin Islands
and, under current law of the British Virgin Islands, is not subject to
tax on income or on capital gains.
Grandom Dransfield (International) and Company Limited ("GDI")
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.
F-11
<PAGE> 50
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
5. INCOME TAXES (continued)
Guangzhou Dransfield Paper Limited, a co-operative joint
venture formed in the PRC in which the Company has a 100% interest, and
Jiangsu Dransfield Paper Co. Ltd. ("JSDP"), formerly known as Jiang
Ying Dransfield Paper Co., Ltd., an equity joint venture formed in the
PRC in which the Company has an 80% (1999 : 48% and 1998 : 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, 2000.
Total income tax expense differs from the amount computed by
applying Hong Kong statutory income tax rate of 16% (1999: 16% and
1998: 16.5%) to income before taxes as follows:
<TABLE>
<CAPTION>
Year ended March 31,
2000 2000 1999 1998
US$ HK$ HK$ HK$
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Computed expected income taxes 143 1,115 1,455 712
Non-deductible losses of subsidiaries (120) (933) (811) (581)
Other -- -- 9 100
Valuation allowance (23) (182) (644) (648)
-------- -------- -------- --------
Tax credit/(charge) for the year -- -- 9 (417)
======== ======== ======== ========
</TABLE>
Deferred tax asset is comprised of the following:
<TABLE>
<CAPTION>
2000 2000 1999
US$ HK$ HK$
-------- -------- --------
<S> <C> <C> <C>
Tax losses carried forward 189 1,474 1,292
Valuation allowance (189) (1,474) (1,292)
-------- -------- --------
-- -- --
======== ======== ========
</TABLE>
Due to its history of losses, the Company does not believe
that sufficient objective, positive evidence currently exists to
conclude that recoverability of its net deferred tax assets is more
likely than not. Consequently, the Company has provided a valuation
allowance covering 100% of its net deferred tax assets.
As at March 31, 2000, the Company has Hong Kong net operating
loss carry forward of approximately HK$9,212 (US$1,183). Currently, the
net operating loss can be carried forward indefinitely.
F-12
<PAGE> 51
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable are comprised of:
<TABLE>
<CAPTION>
March 31,
2000 2000 1999
US$ HK$ HK$
-------- -------- --------
<S> <C> <C> <C>
Accounts receivable - trade 5 41 1,600
Less: Allowance for doubtful debts -- -- (1,170)
-------- -------- --------
Accounts receivable, net 5 41 430
======== ======== ========
Movement of allowance for doubtful debts:
Balance as at April 1, 150 1,170 350
Provided/(Written back) during the year (2) (20) 820
Written off during the year (148) (1,150) --
-------- -------- --------
Balance as at March 31, -- -- 1,170
======== ======== ========
</TABLE>
7. INVENTORIES, NET
Inventories are comprised of:
<TABLE>
<CAPTION>
March 31,
2000 2000 1999
US$ HK$ HK$
-------- -------- --------
<S> <C> <C> <C>
Raw materials 188 1,470 814
Work in progress 11 83 --
Finished goods 220 1,715 1,106
Less: Allowance for obsolescence and
net realizable value (144) (1,121) (505)
-------- -------- --------
Inventories, net 275 2,147 1,415
======== ======== ========
Movement of allowance for obsolescence
and net realizable value
Balance as at April 1, 65 505 1,103
Provided during the year 90 699 --
Deduction during the year (11) (83) (598)
-------- -------- --------
Balance as at March 31, 144 1,121 505
======== ======== ========
</TABLE>
F-13
<PAGE> 52
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
8. FIXED ASSETS
<TABLE>
<CAPTION>
March 31,
2000 2000 1999
US$ HK$ HK$
-------- -------- --------
<S> <C> <C> <C>
Land and buildings 7,391 57,569 48,331
Leasehold improvements 29 224 224
Machinery and equipment 18,623 145,071 137,748
Motor vehicles 105 822 1,134
Furniture, fixtures and office equipment 515 4,015 3,963
-------- -------- --------
26,663 207,701 191,400
Less: Accumulated depreciation (872) (6,792) (4,758)
-------- -------- --------
25,791 200,909 186,642
======== ======== ========
</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.
No depreciation was provided on the land and buildings and
machinery and equipment which were under construction at March 31,
2000. The carrying value of the assets which are under construction at
the balance sheet date amounted to HK$156.46 (1999: HK$138.89).
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,
JSDP, which was 60% owned by DBPHL and was principally engaged in paper
manufacturing. DBPHL has committed to contribute an amount of US$9,260
(approximately HK$72,000) to JSDP, to be financed by a shareholders'
loan. During the year, JSDP became a wholly-owned subsidiary of DBPHL
as a result of changes in the agreement with the PRC joint venture
partner and the registration status of JSDP was changed from a
Sino-foreign equity joint venture company to a wholly-owned foreign
enterprise on 14 October 1999. Further details are set out in note 11.
F-14
<PAGE> 53
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
9. LOANS WITH A RELATED COMPANY (continued)
In prior years, 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$9,260 million (approximately
HK$72,000) (the "Shareholders' Loan") to DBPHL. Pursuant to another
agreement, the Company agreed to make a loan of US$1,852 (approximately
HK$14,000) 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 JSDP 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, 2000, the Company advanced HK$14,350
(US$1,842) to Broadsino for the capital injection in JSDP, which is
classified as a loan to a related company. The same amount of HK$14,350
(US$1,842) is recorded in the consolidated financial statements as long
term loan payable to Broadsino by DBPHL. The loan to and loan from a
related company have no fixed repayment terms.
10. BANK BORROWINGS
The Group has utilized the banking facilities of the holding
company to finance the Group's capital investment. The interest
incurred on the banking facilities were reimbursed by the Group based
on the actual interest charged by the banks.
Interest expense on the above-mentioned bank borrowings, net
of the amounts capitalized, is as follows:
<TABLE>
<CAPTION>
Year ended March 31,
2000 2000 1999 1998
US$ HK$ HK$ HK$
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest incurred 339 2,642 2,741 5,939
Interest capitalized (339) (2,642) (2,487) (5,402)
-------- -------- -------- --------
Interest expense -- -- 254 537
======== ======== ======== ========
</TABLE>
As at the balance sheet date, the interest rates on the above-mentioned
bank borrowings ranged from 9% to 10.25% per annum (March 31, 1999:
5.75% to 10.25% per annum).
F-15
<PAGE> 54
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
11. ACQUISITION AND DISPOSAL OF SUBSIDIARIES
(a) 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.
The agreement was declared unconditional on May 9, 1997. The
net amount of consideration payable to the minority shareholder of
HK$3,000 (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$3,000 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) was reflected in the Company's statements of operations for the
year ended March 31, 1998.
(b) On 20 July 1999, DBPHL entered into an agreement with Jiangsu Huaxi
Holdings Corporation ("Jiangsu Huaxi"), the PRC joint venture partner
of JSDP.
It was agreed that Jiangsu Huaxi gave up the rights to invest
40% equity interest in JSDP as originally stated in the joint venture
agreement entered into between DBPHL and Jiangsu Huaxi. Accordingly,
JSDP became a wholly-owned subsidiary of DBPHL and the registration
status of JSDP was changed from a Sino-foreign equity joint venture
company to a wholly-owned foreign enterprise on 14 October 1999.
12. DUE TO A FORMER MINORITY SHAREHOLDER
The balance at March 31, 1999 represented a loan from a former
minority shareholder, which was unsecured, interest-free and had no
fixed repayment terms. During the year, the balance was fully repaid.
13. DUE TO HOLDING COMPANY
As mentioned in note 10, 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.
During the year, the Company issued shares of common stock to
DHL and fully settled the amount due to holding company at a range of
US$3.5 per share to US$7.0 per share, which represented fair market
value at the date of transactions.
F-16
<PAGE> 55
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
14. COMMITMENTS
As of March 31, 2000, the Group had outstanding capital
commitments of HK$37,000 (US$5,000).
15. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
The major related party transactions are described in further
detail below. Management believes that the methods used in allocating
costs are reasonable.
<TABLE>
<CAPTION>
Year ended March 31,
Nature of transactions Notes 2000 2000 1999 1998
US$ HK$ HK$ HK$
------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Sales of products (a) 68 532 -- 14,992
====== ====== ====== ======
Expenses:
Electronic data processing, accounting
services and personnel and
administrative charges (b) -- -- 1,447 632
Storage and delivery charges (c) 56 436 541 1,232
Equipment rental (d) -- -- -- 33
Operating lease rental for land
and buildings (e) -- -- 69 206
------ ------ ------ ------
56 436 2,057 2,103
====== ====== ====== ======
</TABLE>
(a) Sales of products
Prior to April 1, 1998, the Group sold products to Victorison
Marketing Limited and Dransfield Pacific Limited, fellow subsidiaries
of the Company at cost plus 3%. The Group also sold products to
Dransfield Trading Limited ("DTL") at cost plus 18% for the years ended
March 31, 1998 and 2000. Under this arrangement, DTL is responsible for
the marketing and distribution of the Group's hygienic paper 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.
F-17
<PAGE> 56
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
15. RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)
(b) Electronic data processing, accounting services and personnel
and administrative charges
In prior years, 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 was 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. Since services were terminated in April
1999, no such fee was charged in the current year.
(c) Storage and delivery charges
Prior to April 1, 1999, Victorison Logistics Limited, a fellow
subsidiary of the Company, provided storage and delivery services to
the Group. Commencing April 1, 1999, such services are provided to the
Group by Dransfield Services Limited and Dransfield Food and Beverage
Limited, fellow subsidiaries of the Company. The services are charged
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 was 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 was paid to Well Assessed
Limited ("WAL"), 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. Commencing August 1, 1998, WAL ceased the
operating leases with the Group.
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 was not determinable.
The carrying amount reported in the balance sheet for accounts
receivable and accounts payable approximate their fair value.
F-18
<PAGE> 57
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
17. CONCENTRATION OF RISK
Concentration of credit risk:
The Group's principal activities are manufacturing and
distribution of paper products. 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.
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 several 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 the 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 statement of operations 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, are HK$16 and HK$5,
respectively, for the years ended March 31, 1998 and 1999. No pension
scheme expense, net of forfeited contributions, is incurred for the
year ended March 31, 2000.
19. COMPENSATION FROM A SUPPLIER
The Group received a compensation of HK$1,195 (US$154) from a
supplier during the year ended March 31, 1998 related to termination of
distributorship of certain hygienic paper products.
F-19
<PAGE> 58
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
20. SEGMENT REPORTING, MAJOR CUSTOMERS AND SUPPLIERS
The Group evaluates performance and allocates resources based
on profit or loss from operations. The accounting polices of the
reportable segments are the same as those described in the summary of
significant accounting policies.
The Group's reportable segments are business units that offer
different products. The reportable segments are each managed separately
because they manufacture and/or distribute distinct products with
different production processes.
The Group operates in three industry segments, paper
distribution, paper merchanting and paper manufacturing. Operations in
paper distribution include the distribution of hygienic paper products.
Operations in paper merchanting include the buying and selling of paper
both on an indent basis. As at March 31, 2000, the Group has three
paper mills in the PRC. Except for the converting paper mill in
Conghua, the other two paper mills are still under construction and
operations have not commenced. There is no assurance that the
operations, when commenced, will be successful. Prior to April 1, 1999,
there was no turnover and operating results contributed from the
segment of paper manufacturing because the paper mills were either
under trial-run or under construction.
<TABLE>
<CAPTION>
2000 2000 1999 1998
US$ HK$ HK$ HK$
------ ------ ------ ------
<S> <C> <C> <C> <C>
REVENUE
Distribution of hygienic paper products
- fellow subsidiaries -- -- -- 14,992
Paper merchanting
- third parties 77 597 4,812 39,639
Paper manufacturing
- third parties 48 373 -- --
- fellow subsidiaries 68 532 -- --
------ ------ ------ ------
Total consolidated revenues 193 1,502 4,812 54,631
====== ====== ====== ======
DEPRECIATION AND AMORTIZATION
EXPENSE
Distribution of hygienic paper products -- -- -- 14
Paper merchanting 1 10 17 17
Paper manufacturing 300 2,336 2,783 559
------ ------ ------ ------
Total consolidated depreciation and
amortization expense 301 2,346 2,800 590
====== ====== ====== ======
</TABLE>
F-20
<PAGE> 59
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
20. SEGMENT REPORTING, MAJOR CUSTOMERS AND SUPPLIERS (continued)
<TABLE>
<CAPTION>
2000 2000 1999 1998
US$ HK$ HK$ HK$
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PROVISION FOR INCOME TAXES
Distribution of hygienic paper products -- -- -- 30
Paper merchanting -- -- 9 (447)
-------- -------- -------- --------
Total consolidated provision for income taxes -- -- 9 (417)
======== ======== ======== ========
SEGMENT LOSS
Distribution of hygienic paper products -- -- -- 53
Paper merchanting (106) (827) (3,957) (832)
Paper manufacturing (709) (5,517) (3,947) (1,905)
-------- -------- -------- --------
Total segment loss (815) (6,344) (7,904) (2,684)
RECONCILING ITEMS
Corporate expenses (80) (624) (939) (1,095)
Interest expense -- -- (254) (537)
-------- -------- -------- --------
Total consolidated loss before income taxes (895) (6,968) (9,097) (4,316)
======== ======== ======== ========
SEGMENT ASSETS
Distribution of hygienic paper products 37 292 211 208
Paper merchanting 3 20 351 13,326
Paper manufacturing 28,676 223,385 207,560 197,429
-------- -------- -------- --------
Total segment assets 28,716 223,697 208,122 210,963
RECONCILING ITEM
Corporate assets 165 1,286 216 314
Amount due from holding company 492 3,835 -- --
-------- -------- -------- --------
Total consolidated assets 29,373 228,818 208,338 211,277
======== ======== ======== ========
EXPENDITURE FOR ADDITIONS TO
LONG-LIVED ASSETS
Distribution of hygienic paper products -- -- -- --
Paper merchanting -- -- -- --
Paper manufacturing 2,133 16,613 11,008 56,320
-------- -------- -------- --------
Total expenditure for additions to long-lived assets 2,133 16,613 11,008 56,320
======== ======== ======== ========
</TABLE>
F-21
<PAGE> 60
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
20. SEGMENT REPORTING AND MAJOR SUPPLIERS (continued)
There is no inter-segment sales for the three years ended
March 31, 2000.
The principal assets of the Group are located in the PRC. The
assets located elsewhere are insignificant.
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, 2000 were insignificant.
MAJOR CUSTOMERS AND SUPPLIERS
There is no single customer who accounted for more than 10% of
net sales for the year ended March 31, 1998. In 1999 and 2000, the
Group's top three customers, excluding fellow subsidiaries, accounted
for approximately 26% and 39% of total sales, respectively.
In 1998, 1999 and 2000, the Group's top three suppliers
accounted for approximately 58%, 42% and 38% of total purchases,
respectively.
21. COMMON STOCK OPTIONS
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 are
subject to earlier expiration on April 2, 2003 which is the last
validity date of the Plan. All the options granted may not be exercised
during the first year of the grant. The exercise price for each option
shall be set by the directors but may not be less than 80 percent of
the average of closing prices 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 the 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.
F-22
<PAGE> 61
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
21. COMMON STOCK OPTIONS (continued)
The status of the Company's stock options is summarized below as of March
31:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise
options price
<S> <C> <C>
Outstanding at March 31, 1997 -- --
Granted 625,000 US$2.80
Cancelled (115,000) US$2.80
--------
Outstanding at March 31, 1998 and 1999 510,000 US$2.80
Granted 653,000 US$3.94
Exercised (248,850) US$2.80
Cancelled (31,000) US$2.80
--------
Outstanding at March 31, 2000 883,150 US$3.64
======== =======
Options exercisable at:
March 31, 1998 -- --
March 31, 1999 255,000 US$2.80
March 31, 2000 112,650 US$2.80
======== =======
</TABLE>
A summary of information about the Company's stock options outstanding at
March 31, 2000 is as follows:
<TABLE>
<CAPTION>
No. of options Weighted average
Range of exercise Outstanding at remaining Weighted average
price March 31, 2000 contractual life exercise price
<S> <C> <C> <C>
US$2.80-4.05 883,150 2.5 years US$3.64
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" in accounting for the Plan. The
compensation expense related to the stock options outstanding at March 31,
1999 and 2000, which represented the difference between the exercise price
and the fair market value of the Company's common stock at the date of
grant, should be recognized over the vesting period from the respective
dates of grant. Accordingly, a compensation expense of HK$1,184 (US$153),
HK$939 (US$121) and HK$624 (US$80) was recognized for the years ended March
31, 1998, 1999 and 2000, respectively.
F-23
<PAGE> 62
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
21. COMMON STOCK OPTIONS (continued)
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 weighted-average fair value of
options granted during 1998 and 2000 estimated on the date of grant using a
Black-Scholes option pricing model was US$2.86 and US$3.94, respectively.
The fair value for these options was estimated at the respective dates of
grant using the following weighted-average assumptions for the respective
dates of grant:
<TABLE>
<CAPTION>
Options granted Options granted Options granted
on April 24, 1997 on January 3, 2000 on March 4, 2000
<S> <C> <C> <C>
Risk-free interest rate 7.02% 6.41% 6.42%
Dividend yield Nil Nil Nil
Volatility factor of the expected
market price of the Company's
common stock 130% 45% 65%
Weighted-average expected life
of the options 4 years 3 years 3 years
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in these subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not provide a reliable single measure of the fair value
of its employee stock options.
For the purposes of pro-forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro-forma information for the years ended March 31, 1998, 1999
and 2000 is as follows:
<TABLE>
<CAPTION>
2000 2000 1999 1998
US$ HK$ HK$ HK$
----- ----- ------ -----
<S> <C> <C> <C> <C>
Pro-forma net loss 1,063 8,284 12,301 8,775
----- ----- ------ -----
Basic and diluted net loss per share (cents) 7 52 79 70
----- ----- ------ -----
</TABLE>
F-24
<PAGE> 63
DF CHINA TECHNOLOGY INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, unless otherwise stated and
except number of shares and per share data)
22. PREFERRED STOCK
The holders of the Series A convertible preferred stock were 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 year ended March 31, 1998 were HK$446 (US$58).
23. 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
1998, and stock compensation expense of HK$1,184 (US$153), HK$939 (US$121)
and HK$624 (US$80) recognized for the years ended March 31, 1998, 1999 and
2000 (note 21).
24. SUBSEQUENT EVENT (unaudited)
(a) Subsequent to the balance sheet date, 3,000 stock options were
cancelled upon the resignation of an employee. On May 29, 2000, 30,000
stock options were granted by the Company to certain directors and
employees of the Company. On June 20, 2000, the board of directors invited
the grantees of share options issued between January to May 2000 to
surrender their share options by June 30, 2000 in exchange for the same
number of share options at an exercise price of US$1.75 per share, being
the market closing price of the Company's shares on June 19, 2000. All
share options were surrendered and exchanged for new share options on June
30, 2000.
(b) Subsequent to the balance sheet date, 191,211 shares were issued to
third parties at fair market value.
(c) Subsequent to the balance sheet date, on June 30, 2000, DHL distributed
8,325,700 shares of the Company to its shareholders as dividend in specie
and ceased to be the Company's holding company from that date onwards.
F-25
<PAGE> 64
ITEM 18. FINANCIAL STATEMENTS.
We have elected to provide the financial statements and relevant
information specified in Item 17 in lieu of those specified in Item 18.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
FINANCIAL STATEMENTS. See Item 17 for a list of all financial statements filed
as part of this annual report.
EXHIBITS. The following exhibits are filed as a part of this annual report:
Exhibit No.
1 Copies of all amendments or modifications, not previously
filed, to all exhibits previously filed.
None
2 Agreement dated August 8, 2000 between DF China Technology
Inc., jointly and severely with Dransfield Cyber Inc. (Party
A) and Tianjin 3D Lab., jointly and severely with Tianjin 3D
Image Technique Co. Ltd., headed by Professor Li Chang (Party
B) relating to acquisition of 26% in Party B.
2.1 Marketing Agreement dated August 8, 2000 between DF China
Technology Inc., jointly and severely with Dransfield Cyber
Inc. (Party A) and Tianjin 3D Lab., jointly and severely with
Tianjin 3D Image Technique Co. Ltd., headed by Professor Li
Chang (Party B) relating to worldwide marketing for Party B's
technology products.
3 List of all parents or subsidiaries of the registrant.*
* Previously filed as Exhibit 1 to the Registrant's Form 20-F
for the Fiscal Year ended March 31, 1999 (SEC File No.
000-21919); incorporated herein.
38
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DRANSFIELD CHINA PAPER CORPORATION
Date: September 12, 2000
By /s/ Horace Yao Yee Cheong
-------------------------
Horace Yao Yee Cheong,
Chief Executive Officer
39
<PAGE> 66
DF CHINA TECHNOLOGY INC.
(Previously Dransfield China Paper Corporation)
Commission File No. 000-21919
EXHIBITS TO FORM 20-F
ANNUAL REPORT FYE MARCH 31, 2000
1 Copies of all amendments or modifications, not previously filed, to all
exhibits previously filed. None
2 Agreement dated August 8, 2000 between DF China Technology Inc.,
jointly and severely with Dransfield Cyber Inc. (Party A) and Tianjin
3D Lab., jointly and severely with Tianjin 3D Image Technique Co. Ltd.,
headed by Professor Li Chang (Party B) relating to acquisition of 26%
in Party B.
2.1 Marketing Agreement dated August 8, 2000 between DF China Technology
Inc., jointly and severely with Dransfield Cyber Inc. (Party A) and
Tianjin 3D Lab., jointly and severely with Tianjin 3D Image Technique
Co. Ltd., headed by Professor Li Chang (Party B) relating to worldwide
marketing for Party B's technology products.
3 List of all parents or subsidiaries of the registrant.*
* Previously filed as Exhibit 1 to the Registrant's Form 20-F for the
Fiscal Year ended March 31, 1999 (SEC File No. 000-21919); incorporated
herein.
