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As filed with the Securities and Exchange Commission on March 14, 2000
Registration No. 0-28819
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 1
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUES UNDER SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
-------------------------
CHINA GATEWAY HOLDINGS INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
CLI BUILDING, SUITE 1003
313 HENNESSY ROAD
HONG KONG
(Address of Principal Executive Offices) (Zip Code)
011-852-2893-9676
(Issuer's Telephone Number)
-------------------
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT: None
SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, Par Value $.0001
(Title of Class)
DOCUMENTS INCORPORATED BY REFERENCE: None
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BUSINESS
OVERVIEW
China Gateway Holdings Inc., formerly Orient Packaging
Holdings Limited (the "Company" or OPL), is a manufacturer of paperboard
products used in packaging material for the Chinese market. All of the
Company's manufacturing operations are conducted through Wuhan Dong Feng
Paper Company Limited, the Company's 60%-owned joint venture ("Wuhan Limited"
or the "Joint Venture"). Wuhan Limited has a term of 30 years that expires in
2027. The Company's manufacturing facilities are located in Wuhan, Hubei
Province, which is in the Yangtze River basin area of Central part of the
People's Republic of China ("China" or "PRC"). The Wuhan facilities have an
annual production capacity of 35,000 tons of paperboard products.
The Company manufactures bleached (white top) paperboard, a
product used primarily as covering in the manufacture of corrugated packaging
for the food and beverage industry. The Company provides such paperboard
products to customers in China. Major manufacturers of food and beverages in
China, especially foreign brand manufacturers, have increasingly turned to
bleached paperboard covering of corrugated boxes for wholesale distribution
of products. This is in response to the increasing awareness and
sophistication of Chinese consumers.
The Company's objective is to continue to develop as a
supplier of high quality packaging material to foreign brand name consumer
product companies in the Chinese market.
The Company is filing this Registration Statement in order
to qualify for trading on the OTC Electronic Bulletion Board. The Company
intends to voluntarily file periodic reports in the event that its obligation
to file such reports is suspended under the Securities Exchange Act of 1934,
as amended.
INDUSTRY
According to the industry publication Pulp & Paper
International (July 1999), in 1998, China ranked third, trailing only the
United States and Japan, for the consumption of paper and paperboard products
in the world. The demand for paperboard packaging material is correlated to
the rate of economic growth and consumer spending. The Company believes that
China's rapid growth in recent years and its entry into the World Trade
Organization Pact in November 1999 will increase the Company's market
opportunity in China's fragmented paper industry.
As a result of the Chinese government's earlier attempts at
producing a self-sufficient paper industry based on local enterprise
production, the paper industry in China is highly fragmented into many small
capacity paper mills. This has resulted in large inefficiencies in the
industry as well as a general low level of training and technical expertise.
A large number of `backyard' mills with annual production capacity of less
than 5,000 tons per annum account for a significant proportion of China's
total paper production capacity. Due to the difficulties in regulating
environmental pollution from such a large number of paper mills, and
inefficiencies in such an industry structure, the Chinese government has
introduced regulations, effective from 1997, to phase-in a close down of all
paper mills with a capacity of less than 10,000 tons per annum. The resulting
reorganization of the industry will produce a consolidation of business among
those paper mills currently operating above this threshold, resulting in
significant investment incentives to expand production capacity at each mill
and a trend towards developing higher capacity mills. With the decreasing
number of suppliers in the market, there will be a window for the Company to
expand its market share.
PRODUCTS
The Company produces mainly uncoated and coated white-lined
chipboard in a range of paperboard weights ranging from 180g/m(2) to 400g/m(2).
Uncoated white-lined chipboard is used in
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consumer corrugated packaging. Coated white-lined chipboard is used for
applications that require higher quality printed surfaces. In addition, the
Company also produces small quantities of other types of paperboard products,
including whiteback paperboard used for the packaging of foodstuffs.
Paperboard in China is graded according to Chinese national
technical standards, which are used as an indicator of the quality of the
paperboard but have no formal influence on the sales price achieved, which is
market driven. The white-lined chipboard produced by the Company is primarily
graded as Class C paperboard. Class C paperboard accounts for approximately
80% of China's total domestic paperboard production. Class B paperboard,
produced by relatively few premium mills, accounts for the balance of China's
domestic production. The highest quality paperboard available in the China
market (Class A paperboard) is imported paperboard, mainly from South Korea,
Taiwan and Japan, which is used almost exclusively by foreign-owned joint
venture operations in some specialized high-quality end-uses.
The Company's product is used in a wide range of packaging
for both domestic and international consumer product manufacturers in China.
Generally, consumer product manufacturers subcontract the conversion and
printing of their packaging to corrugated box manufacturers. These corrugated
box manufacturers in turn assemble and fold containers using white-lined
chipboard supplied by the Company and kraft linerboard imported or
manufactured domestically. Corrugated paper is glued on the inside of the
white-lined chipboard and the kraft linerboard covers onto the corrugated
paper and forms a sandwich structure. Kraft linerboard is a kind of
unbleached paperboard, which maintains a light brown finishing. White-lined
chipboard is a bleached paperboard that has a white finishing like writing
paper. The white-lined chipboard surface of these containers may be printed
with the end users' designs and logos.
The Company's products have been utilized in final
packaging by a number of international beverage manufacturers, including
Coca-Cola, Pepsi Cola and Pabst Blue Ribbon beer for domestic China sales.
The Company's customers, comprised of both paper dealers
and corrugated box manufacturers, are based predominantly in Southern China
and the eastern coastal regions including Shanghai, Fujian and Zhejiang
provinces. The Company also has several customers based in the Sichuan
province in Central China. As of September 1999, the Company had
approximately 20 major customers of which the largest accounted for
approximately 8.8% of sales for the nine-month period ended September 30,
1999.
MARKETING & SALES
The Company's sales and marketing activities are centered
in Wuhan with additional support from the Company's executive office in Hong
Kong. The Company employs 22 salespersons with key sales regions controlled
by a total of five regional sales managers who operate on a salary and
commission basis. In addition to the Company's sales team in Wuhan, the
Company utilizes a network of five independent sales agents throughout the
major markets in China.
The Company markets its white-lined chipboard under the
"Golden Horse" brand name. The brand name has been used by the Wuhan Dong
Feng Paper Mill Company ("Wuhan Company"), the Company's joint venture
partner in Wuhan Limited, for over 40 years.
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MANUFACTURING PROCESS
PRODUCTION
In the production process, the fiber stock for paperboard
is prepared from raw materials by placing wastepaper or pulp sheets into
large digesting tanks where, with the addition of certain chemicals, a fiber
slurry is produced. This slurry is delivered from the tanks by pipelines to
the paper machines where it is laid on to large moving mats which carry the
slurry through various rollers where it is pressed and dried, producing a
continuous line of board that is either wound onto reels or cut up separately
into sheets.
The Wuhan facilities have six individual paper machines for
paperboard production and four separate digesting tanks for producing the
fiber slurry to be used in the paperboard production process. The trend in
Western paper mills is towards single large and high capacity paper machines,
which are able to produce significant economies of scale. However the
existence of several small paper machines creates a competitive advantage for
a paper mill by allowing quick and efficient production of paperboard with
varying dimensions to meet customized customer specifications while
minimizing the amount of wastage produced.
RAW MATERIAL SUPPLY
The major component of the Company's manufacturing
expenditures is the cost of raw material for the preparation of the fiber
stock, which generally accounts for between 60% - 75% of the paperboard's
sales price. In addition to being a major cost, the type and amount of fiber
used directly correlates to the quality characteristics of the paperboard. As
a result, fiber supply is a crucial aspect of the Company's manufacturing
process.
The Company utilizes four different types of fiber: virgin
bleached kraft softwood pulp (BKSP), straw pulp and two main types of
recycled paper (mixed wastepaper and de-inked newspaper). The BKSP used is
imported from North America and trades at a price determined by international
commodity markets. The price of recycled paper is also determined by the
international commodity markets. The Company imports approximately 30% of its
recycled paper requirements, with the remainder being sourced from the China
domestic market. The Company manufactures its own straw pulp from straw
purchased from the region around Wuhan. However, the Company's use of straw
pulp will shortly be discontinued and replaced with de-inked old newspaper
fiber.
The international market for BKSP is cyclical. However, as
the actual proportion of BKSP used in the paperboard production process is
less than 10% of the total fiber requirements, the Company's exposure to
volatility in these markets is limited.
More important to the Company's operations is the
volatility of the recycled paper market, which Management believes is
generally more stable than that for virgin pulp products. Most of the
internationally traded wastepaper originates from the United States, so
movements in international prices closely track demand and supply in that
market. The Company imports approximately 35% of its wastepaper requirements,
of which two-thirds originate from Hong Kong and one-third from the United
States.
Domestic Chinese wastepaper supply is less volatile than
that of internationally traded wastepaper since it is generally of lower
quality than the international product and often requires further processing
before it can be used. As a result, Chinese wastepaper trades at a
significantly lower price than internationally traded wastepaper. The Company
carries out its own wastepaper collection activities
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within Wuhan and in addition obtains domestic wastepaper from wastepaper
brokers in Southern China where domestic wastepaper is available in plentiful
supply. The Company carries out barter trade arrangements with these domestic
wastepaper brokers. Specifically, the Company exchanges paperboard products
for wastepaper, which gives it a competitive advantage in securing a reliable
wastepaper supply.
Other significant inputs in the paperboard production
process include chemicals (for pulping, papermaking, pigmentation and
coating), water, electricity and steam. All chemicals required are sourced
from China domestic manufacturers, which ensures reliable supply and
significant lower cost than that of imported chemicals. The Company's paper
mill is located near the banks of the Yangtze River, and the Company has
constructed its own water treatment facilities at this source to ensure a
cost-effective and reliable water supply. Electricity is purchased from the
Wuhan grid. The large quantities of steam required for the paperboard
production processes are produced on-site at the Company's paper mill by coal
powered boilers.
COMPETITION
The paper industry is highly fragmented in China as a
result of the Chinese government's earlier attempts at producing a
self-sufficient paper industry based on local enterprise production. The
Company believes that as a result of the consolidation of the industry, the
Company is positioned to increase its market share in the industry. In
particular, the Company believes that it has the following competitive
advantages:
PRODUCTION VERSATILITY - The ability to produce paperboard
according to customized customer specification is a unique advantage that the
Company has over other Chinese manufacturers. In larger paper mills in the
West, significant investment in automated sheeting operations and inventory
management is required in order to be able to efficiently meet customer
requirements. Management believes that no paper mill in China has such
systems installed. The Company, however, is able to simulate the process
because the Company has six individual paper machines that provides it
flexibility in scheduling production.
PRODUCT DISTRIBUTION - The Company has established
distribution systems throughout its main customer markets in China. These
include a network of independent agencies in Fuijian and Guangzhou province,
allowing effective servicing of customers in these key markets.
RELIABILITY OF RAW MATERIAL SUPPLY - With fiber being the
most important item in paperboard production, it is essential that reliable
sources of supply exist. The Company has established relationships with
suppliers through its barter trade arrangements with brokers for wastepaper.
ESTABLISHED BRANDS - Wuhan Limited's "Golden Horse" brand
paperboard has been established in the China domestic market for over 40
years. The Company believes that Golden Horse is one of the oldest brands in
the market and is well known for its quality and reliability. Accordingly,
the Company is able to charge a premium for its product as compared to
similarly situated paper mills.
The Company believes that the signing of the World Trade
Organization Pact between the U.S. and China in November 1999 will lead to
the opening of the Chinese market to foreign competitors who will be able to
import paper products into the Chinese market with lower import duties. The
lower price of imported paper products will increase competition in the
Chinese market.
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GAMMA LINK ENTERPRISES CORP. ACQUISITION
In October 1999, the Company and Gamma Link Enterprises Corp.,
a British Virgin Islands corporation ("Gamma"), entered into a Purchase
Agreement pursuant to which the Company will acquire 100% of the outstanding
capital stock of Gamma in exchange for 3,600,000 shares of the Company's common
stock.
Gamma owns a 51% interest in Sino-Panel (Gaoyao) Limited, a
Sino-foreign joint venture company ("Sino-Panel"). The remaining 49% of
Sino-Panel is owned by a party unrelated to the Company. Sino-Panel owns
equipment for a particle panel production line in Gaoyao, China, which consists
of reconditioned wood particle grinding equipment, multi-layer press, and other
ancillary equipment and facilities that were manufactured in Finland.
Following closing of the acquisition, Sino-Panel will
construct new production facilities along the West River in the Gaoyao Economic
Development Zone in Guangdong Province, China, for the manufacture of
particleboard panels and doors with high quality overlays. These products are to
be used in the production of door cores, cabinet panels and shelving. The
production facilities will be capable of production, at their full production
level, of 75,000 m(3)/annum of particleboard or 1,250,000 doors. Construction is
scheduled for completion by December 2000.
The demand for particleboard in China has been growing
rapidly since 1980 when China began its economic reform. The increased demand
for particleboard was primarily driven by the expansion and modernization of
the Chinese furniture industry. The Company believes that the demand for
furniture in China will continue to grow rapidly, with annual growth rates
ranging from 8-10%. The Company believes that Sino-Panel's planned
facilities, using imported equipment, will be capable of manufacturing high
quality particleboard panels that will be superior in quality to currently
available domestic produced particleboard panels.
HISTORY OF THE COMPANY
The Company was incorporated in the State of Delaware on
June 26, 1997 as Orient Packaging Holdings, Ltd. On June 27, 1997 all the
outstanding shares of Orient Investments Limited ("Orient Investments") were
acquired by the Company in exchange for the issuance by the Company of a 100%
interest in the Company to the former shareholders of Orient Investments. On
December 1, 1999, the Company changed its name to China Gateway Holdings Inc.
Orient Investments, a British Virgin Islands corporation
incorporated on January 8, 1997, is a holding company for Orient Packaging
Limited (f/k/a Orient Financial Services Limited) ("Orient Packaging"), a
British Virgin Islands corporation incorporated on May 25, 1993. Orient
Packaging is the owner of a 60% interest in Wuhan Limited; a PRC registered
Sino-foreign equity joint venture company. The remaining 40% interest is
owned by Dong Feng Paper Mill Company, a China state-owned enterprise.
COMPLIANCE WITH ENVIRONMENTAL LAWS
To date, management believes that the Company has complied
with existing enviroment regulations in the PRC. In this connection,
commencing in 1996, the PRC government adopted plans for improving the
environment and controlling pollution. In order to control acid rain, toxic
waste and pollutants emission, the PRC targeted certain regions for
environmental protection. The Company's production plant is located in the
Yangtze River region and was not one of the designated control areas. For
production plants within the targeted areas, water treatment plants must be
installed in order to comply with the pollutants emissions standards. The
Company has its own water treatment facilities and a system for recycling the
chemicals used in paper making. Therefore, the Company will not be affected
even if the targeted areas include the Yangtze River region. The annual fees
paid to the local enviromental protection authority are as follows:
1997: RMB 397,733 (10 months)
1998: RMB 79,547 (2 months)
1988: RMB 430,991
1999: RMB 374,088
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WUHAN LIMITED
The Company presently owns a 60% interest in Wuhan Limited
pursuant to a Joint Venture Agreement dated December 20, 1997 (the "Joint
Venture Agreement"). The validity, interpretation, execution and settlement
of disputes is to be governed under Chinese law and disputes are to be
submitted for arbitration to the Foreign Economic and Trade Arbitration
Commission of the China Council for the Promotion of International Trade.
Despite some progress in developing a legal system, China does not have a
comprehensive system of laws. The interpretation of Chinese laws may be
subject to policy changes reflecting domestic political factors. Enforcement
of existing laws, including laws pertaining to Chinese joint ventures, may be
uncertain and sporadic, and implementation may be inconsistent.
EMPLOYEES
The Company and its subsidiaries have approximately 900
full-time employees. The Company's executive officers are based in the
Company's executive office in Hong Kong. All other employees of the Company
are based in China.
PATENTS AND TRADEMARKS
The Golden Horse band name has been registered as a trade
name in China since 1958 by Wuhan Company. The trade name has been registered
by Wuhan Company since 1958. The trade name is licensed to Wuhan Limited by
Wuhan Company for the term of the Joint Venture.
PROPERTIES
HONG KONG. The Company occupies office space in Wanchai, Hong
Kong. The lease expires May 9, 2001.
WUHAN, HUBEI. The Company's joint venture, Wuhan Dong Feng
Paper Company Limited, leases a paper manufacturing plant in Wuhan,
consisting of 25,730 square meters. The lease expires concurrent with the
term of Wuhan Limited in 2027.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW:
China Gateway Holdings Inc., formerly Orient Packaging
Holdings Limited (the "Company"), was incorporated in the State of Delaware
on June 26, 1997. Effective June 27, 1997, the Company issued 2,310,000
shares of common stock to the shareholders of Orient Investments Limited, a
British Virgin Islands corporation incorporated on January 9, 1997 ("OIL"), in
exchange for 100% of the capital stock of OIL. OIL owned a 100% interest in
Orient Packaging Limited ("OPL"), which was incorporated in the British
Virgin Islands on May 25, 1993, originally as Orient Financial Services
Limited. OPL owned a 60% interest in Wuhan Dong Feng Paper Company Limited, a
Sino-foreign equity joint venture ("Wuhan Limited" or the "Joint Venture"),
with the remaining 40% owned by Wuhan Dong Feng Paper Mill Company, a PRC
state-owned enterprise ("Wuhan Company").
In accordance with an agreement between OPL and Wuhan
Company dated December 20, 1996 (the "Joint Venture Agreement"), the Joint
Venture was established with a term of 30 years from the date the business
license is issued to engage in the manufacture and sale of cartonboard
packaging materials. The Joint Venture produces primarily coated and uncoated
white-lined chipboard, which are the most common types of cartonboard used in
consumer packaging for beverages, dry foodstuffs, pharmaceutical products and
other consumer items. The Joint Venture's production facilities and
operations are located in the city of Wuhan, Hubei Province, PRC. The Company
had no significant operations prior to the commencement of the Joint
Venture's operations effective March 1, 1997.
Through December 31, 1997, OPL had contributed cash of RMB
4,876,893 to Wuhan Limited, and Wuhan Company had contributed a building and
machinery, accounts receivable and inventory, net of certain liabilities,
with a carrying value of RMB 7,102,039, which approximated fair value at the
date of contribution to Wuhan Limited. During the year ended December 31,
1998, OPL contributed cash of RMB 5,752,718 to Wuhan Limited. All initial
capital contributions required by the Joint Venture Agreement had been
completed as of December 31, 1998.
Pursuant to an amendment to the Joint Venture Agreement
dated February 26, 1998, the parties to the Joint Venture Agreement agreed to
expand its registered capital in order to facilitate the expansion of the
Joint Venture by March 31, 1999. OPL agreed to contribute additional cash of
RMB 34,362,000 to the Joint Venture, consisting of RMB 20,000,000 by December
31, 1998 and RMB 14,362,000 by March 31, 1999, and Wuhan Company agreed to
contribute machinery and equipment with
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a total value of RMB 22,908,000. OPL did not fund its required capital
contributions during 1998 and 1999. The funding of this capital contribution
would most likely be accomplished through a sale of the Company's equity
securities. The funds required to be contributed by OPL were intended to
support growth and expansion. In January 2000, a new timetable was agreed
upon whereby OPL will contribute RMB 5,000,000 by June 30, 2000, another RMB
5,000,000 by September 30, 2000 and RMB 10,000,000 December 31, 2000. No
fixed timetable has been established for the remainig contributions but will
be based on the proceeds available from capital raising transactions. The
parties have agreed to delay the discussion of a timetable for any
contributions which may be made after December 31, 2000 until an unspecified
later date. There have been no adverse consequences in not contributing the
additional RMB 34,362,000 to the joint venture other than the delays in
modernization of the equipment in the plant.
Pursuant to an amendment to the Joint Venture Agreement
dated April 19, 1999, certain assets and liabilities related to Wuhan Company
aggregating RMB 26,112,048 were extinguished, consisting of amounts due to
Wuhan Company of RMB 32,122,132, less amounts due from Wuhan Company of RMB
6,010,084, and were reflected as a contribution to capital to the Joint
Venture effective December 31, 1998. The amounts due to Wuhan Company that
were forgiven reflected unrecoverable charges to the Joint Venture for raw
material inventory. Based on the agreement by Wuhan Company to forgive such
amounts, OPL agreed to contribute sufficient capital to the Joint Venture as
may be required to fund its operations at current levels.
The Company accounts for its interest in the Joint Venture
similar to a majority-owned subsidiary because of its 60% interest and its
contractual ability to control the Board of Directors, elect the Chairman of
the Board of Directors and appoint the general manager of the joint venture.
In this connection, the Joint Venture Agreement provides that the Board of
Directors is the highest authority of the Joint Venture. The Company
recognizes that a joint venture interest in the PRC generally is not
consolidated in the financial statements of the companies that report under
the periodic reporting requirements of the United States Securities and
Exchange Commission due to the rights asserted by the PRC partner under
customary joint venture agreements. However, in view of the above factors
specific to the Company, management believes that is appropriate to
consolidate the Joint Venture's operations in the Company's consolidated
financial statements.
Effective October 4, 1999, the Company entered into an
agreement (the "Purchase Agreement") to acquire 100% of the outstanding
capital stock of Gamma Link Enterprises Corp., a British Virgin Islands
company ("Gamma"), in exchange for 3,600,000 shares of the Company's common
stock valued at RMB 44,712,000 (RMB 12.42 per share). Gamma owns a 51% equity
interest in Sino-Panel (Gaoyao) Limited, a Sino-foreign equity joint venture
("Sino-Panel"), with the remaining 49% owned by an unrelated company.
Sino-Panel's only assets consists of a particle panel production line
consisting of reconditioned wood particle grinding equipment, multi-layer
presses, and other ancillary equipment and facilities that were originally
manufactured and operated in Finland. Such equipment has not been employed in
revenue-generating operations for the past several years. Upon the closing,
Sino-Panel expects to begin construction of new production facilities for the
manufacture of particleboard panels and doors with high quality overlays,
which will be used in the production of door cores, cabinet panels and
shelving, and which will be marketed in the PRC and internationally.
Construction of the new manufacturing facilities in Gaoyao City, Guangdong
Province, PRC, is scheduled for completion by December 2000, and operations
are expected to commence during the year ended December 31, 2001.
The acquisition of OIL by the Company was accounted for as
a recapitalization of OIL, as the shareholders of OIL acquired all of the
capital stock of the Company in a reverse acquisition. Accordingly, the
assets and liabilities of OIL have been recorded at historical cost, and the
shares of common stock issued by the Company have been reflected in the
consolidated financial statements giving retroactive effect as if the Company
had been the parent company from inception. The historical consolidated
financial statements for the nine months ended September 30, 1999 and 1998,
the year ended December 31, 1998, and the ten months ended December 31, 1997
consist of the combined financial statements of the Company and its direct
and indirect subsidiaries and joint venture interests from the dates of their
respective formation or acquisition. The financial statements for the two
months ended February 28, 1997 reflect the operations of Wuhan Company, the
predecessor of Wuhan Limited.
The Company's customers are concentrated in the PRC. Sales
to such customers are generally on an open account basis and are denominated
in RMB. Through September 30, 1999, the Company's revenues were generated
through its interest in Wuhan Limited, which supplies paperboard directly or
indirectly to major international consumer brands. Approximately 15%, 19%,
22% and 9% of the Company's sales were generated by one customer during the
year ended December 31, 1998, the ten months ended December 31, 1997, the two
months ended February 28, 1997, and the nine months ended
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September 30, 1999, respectively. During such periods, the Company also had
significant purchases of raw material inventory from the same customer. As of
December 31, 1998 and 1997, and as of September 30, 1999, approximately 30%,
32% and 33%, respectively, of net trade receivables were due from five
customers, of which one customer accounted for greater than 10% of the net
trade receivables balance.
The consolidated financial statements have been presented
in Chinese Renminbi ("RMB"). Transactions and monetary assets denominated in
currencies other than the RMB are translated into RMB at the respective
applicable exchange rates. Monetary assets and liabilities denominated in
other currencies are translated into RMB at the applicable rate of exchange
at the balance sheet date. The resulting exchange gains or losses are
credited or charged to the consolidated statements of operations. Currency
translation adjustments arising from the use of different exchange rates from
period to period are included in comprehensive income.
CONSOLIDATED RESULTS OF OPERATIONS:
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998:
Sales. Sales remained relatively constant in 1999 as
compared to 1998. For the nine months ended September 30, 1999, sales were
RMB 42,659,988, all to unrelated parties, as compared to sales of RMB
43,082,891, consisting of RMB 40,477,695 (94.0%) to unrelated parties and RMB
2,605,196 (6.0%) to a related party, for the nine months ended September 30,
1998. During the nine months ended September 30, 1999, the Company sold
10,665 metric tons of cartonboard at an average selling price of RMB 4,000
per metric ton, as compared to selling 11,337 metric tons of cartonboard at
an average selling price of RMB 3,800 per metric ton for the nine months
ended September 30, 1998.
Gross Profit. For the nine months ended September 30, 1999,
gross profit was 10.4% of sales, as compared to a gross profit of (2.1%) of
sales for the nine months ended September 30, 1998. The Company incurred a
negative gross profit during the nine months ended September 30, 1998 as a
result of its cost of raw material inventory including certain unrecoverable
costs. The Company was unable to sell its products in 1998 at a price
sufficient to recover such excess inventory costs because of management's
concentration at that time on sales to related parties and on maintaining
market share at the expense of profitability. The purchase liability
associated with such excess inventory costs was forgiven by Wuhan Company
effective December 31, 1998, as described above.
Sales and Marketing Expenses. For the nine months ended
September 30, 1999, sales and marketing expenses were RMB 850,756 or 2.0% of
sales, as compared to sales and marketing expenses of RMB 772,222 or 1.8% of
sales for the nine months ended September 30, 1998.
General and Administrative Expenses. For the nine months
ended September 30, 1999, general and administrative expenses were RMB
12,626,134 or 29.6% of sales, as compared to general and administrative
expenses of RMB 10,711,622 or 24.9% of sales for the nine months ended
September 30, 1998. The increase in general and administrative expenses in
1999 as compared to 1998 was primarily a result of increased
personnel-related expenses.
Other Income (Expense). The Company recorded commission
income of RMB 2,785,030 during the nine months ended September 30, 1999. The
Company did not have any commission income during the nine months ended
September 30, 1998. For the nine months ended September 30, 1999, interest
expense was RMB 728,229, as compared to RMB 2,370,274 for the nine months
ended September 30, 1998. Interest expense decreased in 1999 as compared to
1998 primarily as a result of a reduction in interest bearing debt to Wuhan
Company, which decreased as a result of Wuhan
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Company forgiving approximately RMB 32,000,000 of such debt, which was
recorded effective December 31, 1998.
Income Taxes. The Company did not recognize any income tax
expense for the nine months ended September 30, 1999 and 1998. The Company is
subject to income taxes on an entity basis on income arising in or derived
from the tax jurisdiction in which each entity is domiciled. The Company's
British Virgin Islands subsidiaries are not liable for income taxes. The
Company's PRC joint venture is subject to income taxes at an effective rate
of 33%. The joint venture is exempt from income taxes in the PRC for the
first two years starting from the first year of profitable operations,
followed by a 50% exemption for the next three years. Losses incurred by the
joint venture may be carried forward for five years.
Minority Interest. For the nine months ended September 30,
1999 and 1998, the Company recorded a minority interest of RMB 3,483,934 and
RMB 4,967,679, respectively, to reflect the 40% interest of Wuhan Company in
the Joint Venture.
Net Loss. Net loss was RMB 4,605,056 for the nine months
ended September 30, 1999, as compared to a net loss of RMB 10,847,495 for the
nine months ended September 30, 1998.
YEAR ENDED DECEMBER 31, 1998 AND THE TEN MONTHS ENDED DECEMBER 31, 1997:
Sales. Sales for the year ended December 31, 1998 were RMB
60,321,795, consisting of RMB 55,416,605 (91.9%) to unrelated parties and RMB
4,905,190 (8.1%) to a related party. Sales for the ten months ended December
31, 1997 were RMB 93,577,458, consisting of RMB 75,366,279 (80.5%) to
unrelated parties and RMB 18,211,179 (19.5%) to a related party. During the
year ended December 31, 1998, the Company sold 15,847 metric tons of
cartonboard at an average selling price of RMB 3,800 per metric ton. During
the ten months ended December 31, 1997, the Company sold 27,648 metric tons
of cartonboard at an average selling price of RMB 3,380 per metric ton.
The decrease in sales in 1998 as compared to 1997 was a
result of several factors. The Company abandoned its previous policy of
reducing prices to maintain or increase market share. Due to low profit
margins and credit risk, the Company intentionally reduced sales to related
parties in 1998. The Company also reduced its customers from 273 in 1997 to
82 in 1998 by implementing a program in 1998 to focus on its key customers,
particularly multi-national consumer product companies that operate in the
PRC. The Company believes that these customers can generate larger orders
that will allow the Company to operate its manufacturing facilities more
efficiently, which in turn will generate improved profit margins. Although
these factors had the effect of significantly reducing sales in 1998 as
compared to 1997, the Company believes that these policies will ultimately
result in increased sales with improved profit margins and reduced credit
risk.
Gross Profit. Gross profit for the year ended December 31,
1998 was (10.3%) of sales, as compared to a gross profit of 17.6% of sales
for the ten months ended December 31, 1997. The Company incurred a negative
gross profit during the year ended December 31, 1998 as a result of its cost
of raw material inventory including certain unrecoverable costs. The Company
was unable to sell its products in 1998 at a price sufficient to recover such
excess inventory costs because of management's concentration at that time on
sales to related parties and on maintaining market share at the expense of
profitability. The purchase liability associated with such excess inventory
costs was forgiven by Wuhan Company effective December 31, 1998, as described
above.
10
<PAGE>
Sales and Marketing Expenses. Sales and marketing expenses
for the year ended December 31, 1998 were RMB 1,779,781 or 3.0% of sales.
Sales and marketing expenses for the ten months ended December 31, 1997 were
RMB 952,338 or 1.0% of sales. Sales and marketing expenses increased
substantially in 1998 as compared to 1997, both on an absolute basis and as a
percentage of sales, primarily as a result of increased sales commission
rates.
General and Administrative Expenses. General and
administrative expenses for the year ended December 31, 1998 were RMB
17,189,503 or 28.5% of sales. General and administrative expenses for the ten
months ended December 31, 1997 were RMB 8,008,362 or 8.6% of sales. General
and administrative expenses increased substantially in 1998 as compared to
1997, both on an absolute basis and as a percentage of sales, primarily as a
result of increased personnel-related expenses.
Other Income (Expense). For the year ended December 31,
1998, interest expense was RMB 3,488,795. For the ten months ended December
31, 1997, interest expense was RMB 3,567,295.
Income Taxes. The Company did not recognize any income tax
expense for the year ended December 31, 1998 and the ten months ended
December 31, 1997. The Company is subject to income taxes on an entity basis
on income arising in or derived from the tax jurisdiction in which each
entity is domiciled. The Company's British Virgin Islands subsidiaries are
not liable for income taxes. The Company's PRC joint venture is subject to
income taxes at an effective rate of 33%. The joint venture is exempt from
income taxes in the PRC for the first two years starting from the first year
of profitable operations, followed by a 50% exemption for the next three
years. Losses incurred by the joint venture may be carried forward for five
years.
Minority Interest. For the year ended December 31, 1998 and
the ten months ended December 31, 1997, the Company recorded a minority
interest of RMB 9,629,089 and (RMB 1,380,167), respectively, to reflect the
40% interest of Wuhan Company in the Joint Venture. The minority interest
recorded for the year ended December 31, 1998 reflects the increase in equity
in the Joint Venture attributable to the minority interest as the result of
the debt forgiveness by Wuhan Company, as described above.
Net Income (Loss). Net loss was RMB 20,271,018 for the year
ended December 31, 1998. Net income was RMB 2,070,255 for the ten months
ended December 31, 1997.
CONSOLIDATED FINANCIAL CONDITION:
LIQUIDITY AND CAPITAL RESOURCES:
Operating. For the year ended December 31, 1998, the
Company's operations utilized cash resources of RMB 8,783,639. For the ten
months ended December 31, 1997, the Company's operations utilized cash
resources of RMB 8,310,310. The Company had net working capital of RMB
13,500,096 at December 31, 1998, as compared to net working capital of RMB
9,328,880 at December 31, 1997, reflecting a current ratio of 1.39:1 at
December 31, 1998 as compared to 1.17:1 at December 31, 1997. The Company's
operations utilized cash resources during the ten months ended December 31,
1997 primarily to support increased receivables and inventories. The
Company's operations utilized cash resources during the year ended December
31, 1998 as a result of the substantial operating loss. The Company had net
working capital of RMB 13,500,096 at December 31, 1998 as a result of the
extinguishment of certain assets and liabilities to Wuhan Company of RMB
26,112,048 effective December 31, 1998, as described above.
11
<PAGE>
For the nine months ended September 30, 1999, the Company's
operations utilized cash resources of RMB 8,653,732, as compared to utilizing
cash resources of RMB 4,579,540 for the nine months ended September 30, 1998.
The Company had net working capital of RMB 6,719,791 at September 30, 1999,
as compared to net working capital of RMB 13,500,096 at December 31, 1998,
reflecting a current ratio of 1.20:1 at September 30, 1999 as compared to
1.39:1 at December 31, 1998. The Company's operations utilized an increased
amount of cash resources in 1999 as compared to 1998 primarily as a result of
decreases in accounts payable and accrued expenses, offset in part by a
decrease in inventories.
Receivables decreased by RMB 759,109, to RMB 32,014,034 at
September 30, 1999, from RMB 32,773,143 at December 31, 1998. Net of the
amount extinguished effective December 31, 1998 of RMB 6,010,084, receivables
decreased by RMB 3,392,478, to RMB 32,773,143 at December 31, 1998, from RMB
42,175,705 at December 31, 1997. Bad debt expense was RMB 117,163 for the
nine months ended September 30, 1999, RMB 166,532 for the year ended December
31, 1998, and RMB 60,875 for the ten months ended December 31, 1997.
Inventories decreased by RMB 6,682,828, to RMB 5,415,551 at
September 30, 1999, from RMB 12,098,379 at December 31, 1998. Inventories
decreased by RMB 9,565,996, to RMB 12,098,379 at December 31, 1998, from RMB
21,664,375 at December 31, 1997.
Investing. During the year ended December 31, 1998,
additions to property, plant and equipment aggregated RMB 2,350,671. During
the ten months ended December 31, 1997, additions to property, plant and
equipment aggregated RMB 590,906.
During the nine months ended September 30, 1999, the
Company had no additions to property, plant and equipment, but generated RMB
134,474 from the sale of property, plant and equipment. During the nine
months ended September 30, 1998, additions to property, plant and equipment
aggregated RMB 2,302,370.
As of September 30, 1999, the Company had budgeted capital
expenditures of approximately RMB 500,000 through December 31, 1999.
Financing. The Company has relied on the credit provided by
Wuhan Company, the 40% interest holder in the Joint Venture, supplemented by
the sale of its securities and short-term bank loans, for the working capital
resources to fund its operations from March 1997 through September 1999.
In conjunction with the reverse merger transaction on June
27, 1997 pursuant to which 2,310,000 shares of common stock were issued, the
Company received net assets with an historical cost basis of RMB 1,655,780.
During the ten months ended December 31, 1997, the Company sold 212,000
shares of common stock for net proceeds of RMB 4,393,414, and issued an
additional 465,000 shares of common stock to entities arranging such
financing for consideration of RMB 24,836. During the year ended December 31,
1998, the Company issued 773,466 shares of common stock for net proceeds of
RMB 9,131,001. In addition, during the year ended December 31, 1998, stock
options and warrants were exercised, resulting in the issuance of 393,692
shares of common stock for net proceeds of RMB 28,200.
During the nine months ended September 30, 1999, the
Company issued 153,000 shares of common stock for net proceeds of RMB 612,770.
Additional transactions with respect to the Joint Venture
are discussed above at "Overview".
12
<PAGE>
Due to Wuhan Company increased by RMB 1,433,069 during the
ten months ended December 31, 1997 and by RMB 4,242,125 during the year ended
December 31, 1998, net of the amount extinguished effective December 31, 1998
of RMB 32,122,132. During the nine months ended September 30, 1999, due to
Wuhan Company increased by RMB 6,905,996.
The Company had short-term bank loans of RMB 2,503,539 at
December 31, 1997, as compared to RMB 1,227,057 at December 31, 1998 and RMB
1,101,361 at September 30, 1999.
During the nine months ended September 30, 1999, certain
shareholders made advances to the Company totaling RMB 667,023, which are
unsecured, non-interest bearing and payable on demand.
The Company anticipates, based on currently proposed plans
and assumptions relating to its operations, that its projected cash flows
from operations, combined with the credit provided by Wuhan Company, the cash
that the Company expects to generate from the issuance of its securities, and
advances provided by certain shareholders during the year ending December 31,
1999, will be sufficient to support its planned operations for the year 2000.
Depending upon the rate of growth, the Company may seek additional capital in
the future to support the expansion of operations and acquisitions.
INFLATION AND CURRENCY MATTERS:
In recent years, the Chinese economy has experienced
periods of rapid growth as well as relatively high rates of inflation, which
in turn has resulted in the periodic adoption by the Chinese government of
various corrective measures designed to regulate growth and contain
inflation. Since 1993, the Chinese government has implemented an economic
program designed to control inflation, which has resulted in the tightening
of working capital available to Chinese business enterprises. The recent
Asian financial crisis has resulted in a general reduction in domestic
production and sales, and a general tightening of credit, throughout China.
The success of the Company depends in substantial part on the continued
growth and development of the Chinese economy.
Foreign operations are subject to certain risks inherent in
conducting business abroad, including price and currency exchange controls,
and fluctuations in the relative value of currencies. Changes in the relative
value of currencies may occur periodically and may, in certain instances,
materially affect the Company's results of operations. Both the conversion of
Renminbi into foreign currencies and the remittance of foreign currencies
abroad requires the approval of the government of China. The Renminbi is not
freely convertible into foreign currencies, and the ability to convert the
Renminbi is subject to the availability of foreign currencies. As a result of
the Asian financial crisis, China tightened foreign exchange controls in
1998. Effective December 1, 1998, all foreign exchange transactions involving
the Renminbi must take place through authorized banks in China at the
prevailing exchange rates quoted by the People's Bank of China. The Company
expects that a portion of its revenues will need to be converted into other
currencies to meet foreign currency exchange obligations, including the
payment of any dividends declared.
The continuing Asian financial crisis has had a negative
impact on the Company's operations by reducing the Chinese economy's growth
and general level of activity. During the last two years, the effects of the
Asian financial crisis have negatively impacted the Company. In addition,
although the central government of China has repeatedly indicated that it
does not intend to devalue its currency in the near future, recent
announcements by the central government of China indicate that devaluation is
an increasing possibility. Should the central government of China decide to
devalue the Renminbi, the Company does not believe that such an action would
have a detrimental effect on the Company's operations, since the Company
conducts virtually all of its business in China, and the sale of
13
<PAGE>
its products is settled in Renminbi. However, devaluation of the Renminbi
against the United States dollar would adversely affect the Company's
financial performance when measured in United States dollars.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board
issued Statement No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"),
which is effective for financial statements issued for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes standards for the reporting
and display of comprehensive income, its components and accumulated balances
in a full set of general purpose financial statements. SFAS No. 130 defined
comprehensive income to include all changes in equity except those resulting
from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is presented with the same
prominence as other financial statements. The Company's only current
component of comprehensive income is foreign currency translation adjustment.
The Company adopted SFAS No. 130 for its fiscal year beginning January 1,
1998. Adoption of SFAS No. 130 did not have a material effect on the
Company's financial statement presentation and disclosures.
In June 1997, the Financial Accounting Standards Board
issued Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise" and which is
effective for financial statements issued for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
companies report information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements. SFAS No. 131 also establishes
standards for disclosures by public companies regarding information about
their major customers, operating segments, products and services, and the
geographic areas in which they operate. SFAS No. 131 defines operating
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. SFAS No. 131 requires comparative information for earlier years
to be restated. The Company operates in only one segment, the manufacture and
sale of cartonboard packaging materials. The Company adopted SFAS No. 131 for
its fiscal year beginning January 1, 1998. Adoption of SFAS No. 131 did not
have a material effect on the Company's financial statement presentation and
disclosures.
In February 1998, the Financial Accounting Standards Board
issued Statement No. 132, "Employers' Disclosures about Pensions and Other
Post Retirement Benefits" ("SFAS No. 132"), which is effective for financial
statements issued for fiscal years beginning after December 15, 1997. SFAS
No. 132 revises employers' disclosures about pension and other post
retirement benefit plans. SFAS No. 132 requires comparative information for
earlier years to be restated. The Company does not have any pension or other
post retirement benefit plans. The Company adopted SFAS No. 132 for its
fiscal year beginning January 1, 1998. Adoption of SFAS No. 132 did not have
a material effect on the Company's financial statement presentation and
disclosures.
In June 1998, the Financial Accounting Standards Board
issued Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which is effective
14
<PAGE>
for financial statements for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets
or liabilities in the statement of financial position and measure them at
fair value. SFAS No. 133 also addresses the accounting for hedging
activities. The Company will adopt SFAS No. 133 for its fiscal year beginning
January 1, 2001. The Company currently does not have any derivative
instruments nor is it engaged in any hedging activities, thus the Company
does not believe that implementation of SFAS No. 133 will have a material
effect on its financial statement presentation and disclosures.
15
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of December
31, 1999 with respect to the beneficial ownership of the common stock of the
Company by each beneficial owner of more than 5% of the outstanding shares of
common stock of the Company, each director, each executive officer and all
executive officers and directors of the Company as a group, (i) the number of
shares of common stock owned by each such person and group and (ii) the
percent of the Company's common stock so owned.
As used in this section, the term beneficial ownership with respect
to a security is defined by Rule 13d-3 under the Exchange Act as consisting
of sole or shared voting power (including the power to vote or direct the
vote) and/or sole or shared investment power (including the power to dispose
of or direct the disposition of) with respect to the security through any
contract, arrangement, understanding, relationship or otherwise, subject to
community property laws where applicable. Each person has sole voting and
investment power with respect to the shares of common stock, except as
otherwise indicated. Beneficial ownership consists of a direct interest in
the shares of common stock, except as otherwise indicated. The address of
those persons for which an address is not otherwise indicated is:
CLI Building, Suite 1003
313 Hennessy Road
Hong Kong
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER OF SHARES OF PERCENTAGE OUTSTANDING
------------------------ COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
------------------ ---------------------
<S> <C> <C>
Danny Wu 1,250,000(2) 29.02%
Lawrence Hon 1,250,000(2) 29.02%
Vincent Chan 172,868 (3) 4.01%
Steven Tang -- --%
All Directors & Executive Officers as a 1,422,868 33.03%
group (4 person)
5% BENEFICIAL OWNERS
Gateway Worldwide Ltd. 1,250,000 29.02%
Cartier-Fleming International Limited 518,606 12.04%
13C Chinaweal Centre
414-424 Jaffe Road
Wanchai, Hong Kong
</TABLE>
(1) Calculations based upon 4,307,158 shares outstanding on December 31, 1999.
(2) Represents 1,250,000 shares held by Gateway Worldwide Ltd., a British Virgin
Islands corporation owned 50-50 by Messieurs Hon and Wu.
(3) Represents 172,868 shares held by Critical Success Ltd., a British Virgin
Islands corporation, of which Mr. Chan is the sole shareholder.
16
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table and text sets forth the names and ages
of all directors and executive officers of the Company and the key management
personnel as of December 31, 1999. The Board of Directors of the Company is
comprised of only one class. All of the directors will serve until the next
annual meeting of stockholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Executive officers serve at the discretion of the Board of Directors, and are
appointed to serve until the first Board of Directors meeting following the
annual meeting of stockholders. Also provided is a brief description of the
business experience of each director and executive officer and the key
management personnel during the past five years and an indication of
directorships held by each director in other companies subject to the
reporting requirements under the Federal securities laws.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Danny Wu 39 Chairman of the Board, Chief
Executive Officer and Secretary
Lawrence Hon 51 Director
Vincent Chan 36 Director
Steven Tang 44 Director
Chen Yuen Chen 29 Vice President - Business Department
Oscar Shen 25 Accounting and Finance Manager
</TABLE>
BACKGROUND AND EXPERIENCE
DANNY W. WU (39), CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND SECRETARY
Mr Wu was appointed Chairman, CEO and Secretary of the Company in March 1999.
Mr. Wu has over ten years of experience in international trade, manufacturing
management and direct investment in China. He started as a loan officer in
Hang Lung Bank, Hong Kong. He joined the Hong Kong Trade Development Council
(HKTDC) in 1985 and was in charge of promoting HKTDC's services to the local
business community. Subsequently, he was assigned to promote Hong Kong's
export trade and investments and assisted a number of foreign companies to
invest in Hong Kong and China during that period. Mr. Wu was then promoted
to project manager, responsible for organizing and the overall management of
a number of international conventions and exhibitions. He joined Quanta
Industries Inc., a Taiwanese conglomerate, in 1989 as the general manager of
Quanta's Hong Kong office overseeing trading, direct investment activities
and setting up joint venture enterprises in China. The joint ventures were a
catering, cable manufacturing and metal processing. He was also involved in
the general financial management of these ventures. Mr. Wu was a founding
member of Sino-Forest Corporation, a company listed on the Toronto Stock
Exchange, with investments in forestry in China. He was responsible for
market development of wood chips and procurement in China and Asia. In 1995,
Mr. Wu founded an investment company, and invested in a number of ventures in
China, Hong Kong and the United States. Mr. Wu joined the Company in 1999. He
is a graduate of University of Hong Kong with a degree in management studies
and economics.
17
<PAGE>
LAWRENCE HON (51), DIRECTOR
Mr. Hon was appointed a director of the Company in March 1999. He started
his career as a professional accountant. In 1984, Mr. Hon joined Modern
Printing Equipment Ltd. as the Financial Director. Modern Printing was a
subsidiary of KNP BT, a Dutch based multinational group. KNP BT was the
world's eighth largest forestry group specializing in paper, packaging and
printing business. He was promoted to KNP BT's Regional Financial Director
in 1986 and Deputy Managing Director of Asian Operations in 1990, responsible
for Hong Kong, China, Taiwan and Korea. Between 1994 and 1996 Mr. Hon served
as the Senior Vice President of Sino-Forest Corporation, a company listed on
the Toronto Stock Exchange. Mr. Hon was in charge of tree plantation, which
provide wood fiber for paper, packaging and panel-board production.
Mr. Hon is currently the CEO and President of AgroCan Corporation, a public
reported company specialized in producing and distributing of fertilizers in
China. Mr. Hon is a professional accountant with fellowship in the
respective accountants' associations in Hong Kong and the United Kingdom. He
also holds an MBA degree and a professional qualification in Information
Technology.
STEVEN TANG, (44) DIRECTOR
Mr. Tang was appointed a director of the Company in March 1999. Mr. Tang is
the President of Viasystems Asia Pacific Ltd. based in Hong Kong. Viasystems
Asia Pacific Ltd. is the Asia subsidiary of Viasystems Group, Inc., with
sales turnover of over US$1.4 billion in the printed circuit board and
electronic assembly business. Steven has extensive experience operating in
China, Asia and USA. He was the managing director for Utilux Asia Ltd. for
five years since 1994. Previously, he was the general manager for Amphenol
East Asia Ltd. in the electronics and interconnect business. Steven has a
B.Sc. degree in electrical and electronics engineering from Nottingham
University and an MBA degree from Bradford University in the United Kingdom.
VINCENT C.H. CHAN (37), DIRECTOR
Mr. Chan was appointed a director of the Company in March 1999. In 1996, Mr.
Chan joined Suez Asia Inc., an European investment fund for China as an
investment director. Between 1989 and 1996, he served in various capacities
in the financial field, including corporate finance and direct investment
for Standard Chartered Asia Limited and HSBC Private Equity Management
Limited. He has over 11 years experience in direct investments and merger
and acquisition in Asia, including China. In 1986, Mr. Chan was graduated
with a Bachelor of Arts degree in Geography and Economics from the
University of Hong Kong, and a MBA degree from the Manchester Business School
in the United Kingdom in 1998.
YUAN-CHENG CHEN (30), VICE PRESIDENT, BUSINESS DEVELOPMENT
Mr. Chen was appointed Vice President of Business Development for the Company
in March 1999. Mr. Chen is responsible for sales and market development for
the Company's products produced by the Packaging and Wood Divisions. Mr.
Chen has a strong technical background and extensive experience in printing
and packaging industry in China. Since 1993, Mr. Chen worked six years in a
major toy manufacturer in Guangzhou as the Marketing Manager. He managed a
team of 30 sales and marketing personnel. He is a graduate of the Faculty of
Electronics of Beijing Printing Institute, majoring in electronic publishing.
18
<PAGE>
OSCAR SHEN (25), ACCOUNTING AND FINANCE MANAGER
Mr. Shen was appointed Accounting and Finance Manager of the Company in March
1999. Mr. Shen received his education in Hong Kong, Canada and United
States. He is a graduate of University of Wisconsin-Madison, with an
accounting major. In 1995, he joined Lippo Asia Investment Management (HK)
Limited and was involved in financial analysis and corporate finance. He
joined Hong Kong Metal Work Co. Ltd. in 1996, and was involved in
establishing a new computerized accounting system for the accounting and
shipping departments. Mr. Shen joined Ernst and Young in 1997 as an auditor,
and participated in auditing major listed companies in Hong Kong.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during
fiscal year ended December 31, 1998 to the Company's Chief Executive Officer.
No officer of the Company received annual compensation in excess of
US$100,000 per annum.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND
PRINCIPAL POSITION YEAR SALARY
------------------ ---- ------
<S> <C> <C>
Nils A. Ollquist(1), Chairman, President, Chief 1998 US$86,710
Executive Officer and Secretary 1997 US$88,258
</TABLE>
(1) Mr. Ollquist resigned as Chairman, President, Chief Executive Officer and
Secretary and Mr. Danny Wu became Chairman, Chief Executive Officer and
Secretary on March 20, 1999.
COMPENSATION AGREEMENTS
There are currently no long-term employment or consulting
agreements between the Company and the executive officers or directors of the
Company.
BOARD OF DIRECTORS
During the year ended December 31, 1998, 12 meetings of the
Board of Directors were held; certain corporate actions were also conducted
by unanimous written consent of the Board of Directors. Directors receive no
compensation for serving on the Board of Directors, but are reimbursed for
any out-of-pocket expenses incurred in attending board meetings. The Company
had no audit, nominating or compensation committees, or committees performing
similar functions, during the year ended December 31, 1998.
19
<PAGE>
STOCK OPTION PLAN
As of December 31, 1999, the Company has not adopted a
stock option plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At December 31, 1998 and 1997, and at September 30, 1999
(unaudited) the Company has RMB 266,929, RMB 121,352 and RMB110,118,
respectively due from shareholders and RMB 500,037, RMB 818,891 and
RMB451,512, respectively, due from employees of the Company, which represent
unsecured, non-interest bearing advances, due on demand.
During the year ended December 31, 1998, net debt in the
amount of RMB 26,112,048 due to Wuhan Company was extinguished. When the
Joint Venture was formed in 1997, it owed Wuhan Company net current payables
in excess of RMB 33,000,000. In order to assist the economic viability of the
Joint Venture, effective December 31, 1998, Wuhan Company forgave a major
portion of the initial indebtedness. Because the debt forgiveness was made by
a significant equity investor in the Joint Venture, the Company has accounted
for the debt extinguishment as a capital contribution by Wuhan Company
resulting in an increase in minority interest of RMB 10,444,819 and an
increase in capital in excess of par of RMB 15,667,229.
At December 31, 1998 and 1997, and at September 30, 1999
(unaudited), the Company has RMB 4,730,373, RMB 32,610,380 and RMB
11,636,369, respectively, due to Wuhan Company, which is unsecured, bears
interest at the current market rate (9.2% at December 31, 1997 and 5.8% at
September 30, 1999) and is due on demand. Interest expense related to this
obligation was approximately RMB 3,115,937, RMB 3,117,027, and RMB 2,336,952
for the year ended December 31, 1998, the ten months ended December 31, 1997
and the nine months ended September 31, 1999 (unaudited), respectively, and
is included in total debt amounts extinguished during 1998. The weighted
average interest rate on the short-term loans and the amount due to Wuhan
Company was 9.54% at December 31, 1998 and 6.5% at September 30, 1999
(unaudited).
At December 31, 1998 and 1997, and at September 30, 1999
(unaudited), the Company has a receivable of RMB 1,634,478, RMB 1,135,377 and
RMB1,310,213, respectively, due from an affiliate of Wuhan Company. During
the year ended December 31, 1998, the ten months ended December 31, 1997, the
two months ended February 28, 1997 and the nine months ended September 30,
1999 (unaudited), the Company purchased RMB 4,551,242, RMB 15,239,725, RMB
2,790,271 and RMB 0, respectively, of raw material inventory and had net
sales of RMB 4,905,190, RMB 18,211,179, RMB 3,486,087 and RMB 0,
respectively, to this affiliate.
During the nine months ended September 30, 1999, certain
shareholders made advances to the Company totaling RMB 677,023. The advances
are unsecured, noninterest bearing and are payable on demand.
DESCRIPTION OF SECURITIES
GENERAL
The Company is authorized by its Certificate of
Incorporation to issue an aggregate of 50,000,000 shares of common stock, par
value US$0.0001 per share.
20
<PAGE>
The following summary descriptions are qualified in their
entirety by reference to the Company's Certificate of Incorporation, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of
common stock, par value US$0.0001 per share. As of December 31, 1999,
4,307,158 shares of common stock were issued and outstanding. Each
stockholder is entitled to one vote per share of common stock owned by such
stockholder on all matters submitted to a vote of the stockholders.
The common stock is not entitled to preemptive rights and
is not subject to redemption. Holders of common stock are entitled to receive
dividends at such times and in such amounts as the Board of Directors, from
time to time, may determine. Holders of common stock are entitled to receive,
on a pro rata basis, all remaining assets of the Company available for
distribution to the holders of common stock in the event of the liquidation,
dissolution or winding up of the Company.
All outstanding shares of common stock are validly issued,
fully paid and non-assessable.
SECTION 203 OF DELAWARE LAW
Section 203 of the Delaware Law prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to the date of the business combination, the transaction is approved by
the board of directors of the corporation; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock, or (iii) on or after such date, the business combination is
approved by the board of directors and by the affirmative vote of at least
66-2/3% of the outstanding voting stock that is not owned by the interested
stockholder. A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person, who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. Section 203 may have a depressive effect on the
market price of the common stock and/or the Units.
TRANSFER AGENT
The Transfer Agent and Registrar for the common stock is
U.S. Stock Transfer Corporation, Glendale, California.
21
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
The Company was formed on June 26, 1997. Since October,
1997, the Company's common stock has been listed for trading on the OTC
Electronic Bulletin Board under the symbol "ORPK." The trading market is
limited and sporadic and should not be deemed to constitute an "established
trading market." In connection with the change of the Company's name to China
Gateway, the Company's symbol was changed to "CNGH" on December 13, 1999.
The following table sets forth the range of bid prices of
the Company's common stock as quoted on the OTC Electronic Bulletin Board
during the periods indicated. Such prices reflect prices between dealers in
securities and do not include any retail markup, markdown or commission and
may not necessarily represent actual transactions. The information set forth
below was provided by NASDAQ Trading & Market Services.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter $9.99 $2.67
Second Quarter 6.25 4.50
Third Quarter 5.13 0.38
Fourth Quarter 2.88 1.13
FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter 2.00 .59
Second Quarter 3.59 .75
Third Quarter 2.25 .94
Fourth Quarter 2.44 .69
FISCAL YEAR ENDING DECEMBER 31, 2000
Period from January 1, 2000 to
January 6, 2000 .81 .56
</TABLE>
On January 6, 2000, the closing bid price for the common
stock as reported by OTC Electronic Bulletin Board was $.625.
As of December 31, 1999, the number of security holders of
record of the Company's common stock was 44.
DIVIDEND POLICY
The Company has never paid dividends on the common stock
and does not anticipate paying dividends on its common stock in the
foreseeable future. It is the present policy of the Board of Directors to
retain all earnings to provide for the future growth of the Company. Earnings
of the Company, if any, not paid as dividends are expected to be retained to
finance the expansion of the Company's business. The payment of dividends on
its common stock in the future will depend on the
22
<PAGE>
results of operations, financial condition, capital expenditure plans and
other cash obligations of the Company and will be at the sole discretion of
the Board of Directors.
ITEM 2. LEGAL PROCEEDINGS
There are no pending proceedings against the Company or any
of its properties nor, to the knowledge of the Company, are any legal
proceedings threatened.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following is information for all securities that the
Company has sold since inception without registering the securities under the
Securities Act:
1. On June 27, 1997, the Company issued a total of
2,310,000 shares of common stock, consisting of 1,684,856 shares of common
stock to Cartier-Fleming International Limited, 561,619 shares of common
stock to Critical Success Limited, 57,750 to Mr. Xiang Bin and 5,775 shares
to Mr. Lachlan J. Christie, in connection with the acquisition of 100% of the
interest in Orient Investments Limited. The shares were issued in a private
transaction not involving an offering pursuant to Section 4(2) of the
Securities Act. This transaction was characterized as a reincorporation and
had no financial impact on the Company.
2. On June 27, 1997, the Company issued 285,000 shares of
common stock to 4 unrelated accredited financial consultants of the Company
for services rendered in connection with the reincorporation discussed in
Transaction 1. The shares were issued pursuant to Rule 506 of Regulation D.
3. On June 27, 1997, the Company issued 180,000 shares of
common stock and an option to purchase 150,000 shares of common stock at
$1.66 per share to an unrelated accredited financial consultant of the
Company for services rendered in connection with the reincorporation
discussed in Transaction 1. The common stock were issued pursuant to Rule 504
of Regulation D and the option was issued pursuant to 4(2) of the Securities
Act.
4. From July 1997 through March 1998, the Company issued an
aggregate of 317,700 shares of common stock to 23 accredited investors at
$2.50 per share in a private placement, for an aggregate purchase price of
$794,250. The investors either had pre-existing personal or business
relationships with the Company's officers and/or directors or were introduced
to the Company by financial consultants of the Company who were affiliated
with registered broker-dealers. The offering was done pursuant to Rule 504 of
Regulation D.
5. From January 1998 through May 1998, the Company issued
45,800 shares of common stock to 8 accredited investors at $2.50 per share in
a private placement, for an aggregate purchase price of $114,500. The
investors were introduced to the Company by financial consultants of the
Company who were affiliated with registered broker-dealers. The shares were
issued pursuant to Rule 506 of Regulation D.
6. From January 1998 through April 1998, the Company issued
23,050 shares of common stock to 12 accredited investors for $2.75 per shares
in a private placement, for an aggregate purchase of $63,388.00. The
investors were introduced to the Company by financial consultants of the
23
<PAGE>
Company who were affiliated with registered broker-dealers. The shares were
issued pursuant to Rule 504 of Regulation D.
7. On October 31, 1997, March 20, 1998 and April 3, 1998,
the Company issued warrants to an accredited unrelated financial consultant
of the Company to purchase 45,000, 30,000 and 45,000 shares, respectively, at
the exercise price of $.10 per share, for services rendered in connection
with the private placements described in Transactions 4, 5 and 6. The
warrants were issued pursuant to Rule 504 of Regulation D.
8. In March and April 1998, the warrants issued in
Transaction 7 were exercised for an aggregate of 120,000 shares of common
stock. The shares were issued pursuant to Rule 504 of Regulation D.
9. On April 8, 1998, the option issued in Transaction 3 was
exercised pursuant to the cashless exercise provision as provided in the
Stock Option Agreement for an aggregate of 111,692 shares of common stock.
The shares were issued pursuant to Section 4(2) of the Securities Act.
10. On March 27, 1998, the Company issued 3,000 shares of
common stock and warrants to purchase 125,000 shares of common stock at $.10
per share, which were immediately exercised, to an accredited investor for an
aggregate purchase price of $100,000. The investor had a pre-existing
business relationship with the Company. The 3,000 shares of common stock were
issued pursuant to Rule 504 of Regulation D and the warrants for the 125,0000
shares and the 125,000 shares of common stock, were issued pursuant to Rule
506 of Regulation D.
11. On April 16, 1998, the Company issued warrants to
purchase 3,905 shares of common stock to an accredited investor in
Transaction 4 as compensation for services rendered in connection with
Transaction 4. The warrants were issued pursuant to Rule 504 of Regulation D.
12. On May 15, 1998, the Company issued 235,316 units, each
unit consisting of one share of common stock and a warrant to purchase one
share of common stock at the exercise price of $2.75 per share at $2.75 per
unit in a private placement to 24 accredited investors for an aggregate
purchase price of $647,119. The investors were introduced to the Company by
financial consultants of the Company who were affiliated with registered
broker-dealers. The units were issued pursuant to Rule 506 of Regulation D.
13. On August 10, 1998, the Company issued 15,000 shares of
common stock to an accredited unrelated financial consultant for financial
services rendered in connection with Transaction 12. The shares were issued
pursuant to Rule 504 of Regulation D.
14. In August and September 1998, the Company issued 10,600
shares of common stock to 3 accredited unrelated financial consultants for
services rendered in connection with Transaction 12. The shares were issued
pursuant to Rule 504 of Regulation D.
15. From September to November 1998, the Company issued
250,000 units, each unit consisting of one share of common stock and a
warrant to purchase one share of common stock at the exercise price of $.10,
at $1.00 per unit to 4 accredited investors, for an aggregate purchase price
of $250,000. The investors were introduced to the Company by financial
consultants of the Company who were affiliated with registered
broker-dealers. The units were issued pursuant to Rule 504 of Regulation D.
24
<PAGE>
16. On November 5, 1998, the Company issued 20,000 units,
each unit consisting of one share of common stock and a warrant to purchase
one share of common stock at the exercise price of $.10, at $1.50 per unit to
1 accredited investor, for an aggregate purchase price of $30,000. The
investor was introduced to the Company by a financial consultant of the
Company who was affiliated with a registered broker-dealer. The units were
issued pursuant to Rule 504 of Regulation D.
17. From September 1998 to January 1999, warrants issued in
Transactions 15 and 16 were exercised for an aggregate of 27,000 shares of
common stock. The shares were issued pursuant to Rule 504 of Regulation D.
18. From October to December 1998, the Company issued
35,000 shares of common stock to 2 accredited unrelated consultants to the
Company for services rendered in connection with Transaction 12. The shares
were issued pursuant to Rule 504 of Regulation D.
19. On December 18, 1998, the Company issued 30,000 shares
to an accredited unrelated advisor for investor relation services. The shares
were issued pursuant to Rule 504 of Regulation.
20. On December 8, 1998, the Company granted an option to
an employee to purchase 10,000 shares of common stock, at the exercise price
of $.10, as compensation. The option was issued pursuant to Rule 504 of
Regulation D.
21. On December 31, 1998, the option granted in Transaction
20 was exercised for 10,000 shares of common stock. The shares were issued
pursuant to Rule 504 of Regulation D.
22. On March 17, 1999, the Company issued 148,000 shares of
common stock to 2 accredited investors at $.50 per share, for an aggregate
purchase price of $74,000. The investors were introduced to the Company by
financial consultants of the Company who were affiliated with registered
broker-dealers. The shares were issued pursuant to Rule 504 of Regulation D.
23. On April 6, 1999, the Company issued 5,000 shares of
common stock to an accredited unrelated financial consultant for services
rendered in connection with Transaction 22. The shares were issued pursuant
to Rule 504 of Regulation D.
The Company believes that the transactions described above were exempt from
registration under Section 3(a)(9), 3(b) or 4(2) of the Securities Act
because the Company was not a development stage company, the aggregate amount
of the subject securities was less than $1,000,000 and the subject securities
were, sold to a limited group of persons, each of whom was believed to have
been a sophisticated investor or had a pre-existing business or personal
relationship with the Company or its Management and was purchasing for
investment without a view to further distribution. Restrictive legends were
placed, as applicable, on stock certificates evidencing the securities.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation includes
provisions, which limit the liability of its directors. As permitted by
applicable provisions of the Delaware Law, directors will not be liable to
the Company for monetary damages arising from a breach of their fiduciary
duty as directors in certain circumstances. This limitation does not affect
liability for any breach of a director's duty to the Company or its
stockholders (i) with respect to approval by the director of any transaction
from which he or she derives an improper personal benefit, (ii) with respect
to acts or omissions involving an absence of good faith, that the director
believes to be contrary to the best interests of the Company or its
stockholders, that
25
<PAGE>
involve intentional misconduct or a knowing and culpable violation of law,
that constitute an unexcused pattern or inattention that amounts to an
abdication of his or her duty to the Company or its stockholders, or that
show a reckless disregard for duty to the Company or its stockholders in
circumstances in which he or she was, or should have been aware, in the
ordinary course of performing his or her duties, of a risk of serious injury
to the Company or its stockholders, or (iii) based on transactions between
the Company and its directors or another corporation with interrelated
directors or based on improper distributions, loans or guarantees under
applicable sections of Delaware Law. This limitation of directors' liability
also does not affect the availability of equitable remedies, such as
injunctive relief or rescission.
The Company has been advised that it is the position of the
Commission that insofar as the provision in the Company's Certificate of
Incorporation may be invoked for liabilities arising under the Securities
Act, the provision is against public policy as expressed in the Securities
Act and is therefore unenforceable.
26
<PAGE>
================================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998,
TEN MONTHS ENDED DECEMBER 31, 1997,
TWO MONTHS ENDED FEBRUARY 28, 1997 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
<PAGE>
================================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998,
TEN MONTHS ENDED DECEMBER 31, 1997,
TWO MONTHS ENDED FEBRUARY 28, 1997 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Independent auditors' report F-2
Consolidated balance sheets F-3
Consolidated statements of operations F-5
Consolidated statements of shareholders' equity and comprehensive income (loss) F-7
Consolidated statements of cash flows F-8
Notes to consolidated financial statements F-11
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders China Gateway Holdings, Inc. (formerly
Orient Packaging Holdings Limited)
We have audited the accompanying consolidated balance sheets of China Gateway
Holdings, Inc. (formerly Orient Packaging Holdings Limited) and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and comprehensive income (loss), and cash
flows for the year ended December 31, 1998, the ten months ended December 31,
1997, and the two months ended February 28, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of China
Gateway Holdings, Inc. (formerly Orient Packaging Holdings Limited) and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the year ended December 31, 1998, the ten
months ended December 31, 1997, and the two months ended February 28, 1997, in
conformity with generally accepted accounting principles.
HORWATH GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
May 14, 1999
F-2
<PAGE>
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------- ----------------------------
1998 1998 1997 1999 1999
----------- ----------- --------- ---------- -----------
US DOLLARS RMB RMB US DOLLARS RMB
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash $ 284,556 2,355,811 1,361,250 $ 148,415 1,228,712
Receivables:
Trade, less allowance for
doubtful accounts (Note 3)
1999: RMB 1,487,950 (unaudited)
1998: RMB 1,370,787,
1997: RMB 3,221,347 3,308,086 27,387,313 35,431,639 3,333,911 27,601,115
Employees (Note 8) 60,399 500,037 818,891 54,538 451,512
Affiliates (Note 8) 229,669 1,901,407 1,256,729 171,560 1,420,331
Other (Note 3) 360,481 2,984,386 4,668,446 306,934 2,541,076
Inventories (Note 4) 1,461,351 12,098,379 21,664,375 654,139 5,415,551
Prepaid expenses and other 142,030 1,175,852 552,625 154,496 1,279,047
----------- ---------- ---------- ----------- ----------
Total current assets 5,846,572 48,403,185 65,753,955 4,823,993 39,937,344
----------- ---------- ---------- ----------- ----------
Property, plant and equipment, net
of accumulated depreciation
(Note 5) 1,102,627 9,128,539 7,315,749 1,018,458 8,431,712
----------- ---------- ---------- ----------- ----------
$ 6,949,199 57,531,724 73,069,704 $ 5,842,451 48,369,056
=========== ========== ========== =========== ==========
</TABLE>
(Continued)
F-3
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1998 1998 1997 1999 1999
----------- ---------- ---------- ----------- ----------
US DOLLARS RMB RMB US DOLLARS RMB
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term loans (Note 6) $ 148,215 1,227,057 2,503,539 $ 133,032 1,101,361
Accounts payable 2,036,802 16,862,480 14,078,667 1,716,492 14,210,675
Accrued expenses 1,110,032 9,189,844 5,384,067 307,180 2,543,113
Due to Joint Venturer (Note 8) 571,377 4,730,373 32,610,380 1,405,547 11,636,369
Due to related parties (Note 8) 80,569 667,023
Value added tax payable (Note 7) 349,483 2,893,335 1,848,422 369,495 3,059,012
----------- ---------- ---------- ----------- ----------
Total liabilities (all current) 4,215,909 34,903,089 56,425,075 4,012,315 33,217,553
----------- ---------- ---------- ----------- ----------
Minority interest 1,123,096 9,297,996 8,482,205 702,276 5,814,061
----------- ---------- ---------- ----------- ----------
Commitments and contingencies
(Notes 7, 10, and 11)
Shareholders' equity (Note 9):
Common stock, US $0.0001 par
value, authorized 50,000,000
shares; issued and outstanding:
1999: 4,307,158 shares (unaudited)
1998: 4,154,158 shares,
1997: 2,987,000 shares 415 3,436 2,475 431 3,568
Capital in excess of par 3,805,561 31,505,861 6,071,555 3,879,561 32,118,499
Retained (deficit) earnings (2,198,452) (18,200,763) 2,070,255 (2,754,692) (22,805,819)
Other comprehensive income 2,670 22,105 18,139 2,560 21,194
----------- ---------- ---------- ----------- ----------
Total shareholders' equity 1,610,194 13,330,639 8,162,424 1,127,860 9,337,442
----------- ---------- ---------- ----------- ----------
$ 6,949,199 57,531,724 73,069,704 $ 5,842,451 48,369,056
=========== ========== ========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
The consolidated statements of operations for the two months ended February
28, 1997 reflect the operations of the predecessor Company; see Note 1 to the
consolidated financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, Ten months ended Two months ended NINE MONTHS ENDED SEPTEMBER 30,
------------------------- December 31, February 28, ---------------------------------------
1998 1998 1997 1997 1999 1999 1998
----------- ---------- ---------- ---------- ----------- ---------- ----------
US DOLLARS RMB RMB RMB US DOLLARS RMB RMB
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales:
Substantially to a
related party (Note 8) $ 592,493 4,905,190 18,211,179 3,486,087 - - 2,605,196
Others 6,693,716 55,416,605 75,366,279 10,036,618 $ 5,152,857 42,659,988 40,477,695
----------- ---------- ---------- ---------- ----------- ---------- ----------
7,286,209 60,321,795 93,577,458 13,522,705 5,152,857 42,659,988 43,082,891
----------- ---------- ---------- ---------- ----------- ---------- ----------
Cost of sales:
Substantially to a
related party (Note 8) 549,740 4,551,242 15,239,725 2,790,271 - - 3,020,449
Others 7,485,569 61,972,277 61,903,090 10,097,153 4,615,199 38,208,771 40,946,529
----------- ---------- ---------- ---------- ----------- ---------- ----------
8,035,309 66,523,519 77,142,815 12,887,424 4,615,199 38,208,771 43,966,978
----------- ---------- ---------- ---------- ----------- ---------- ----------
Gross (loss) profit (749,100) (6,201,724) 16,434,643 635,281 537,658 4,451,217 (884,087)
----------- ---------- ---------- ---------- ----------- ---------- ----------
Operating expenses:
Sales and marketing
expenses 214,978 1,779,781 952,338 230,650 102,763 850,756 772,222
General and administrative
expenses 2,076,303 17,189,503 8,008,362 1,245,792 1,525,116 12,626,134 10,711,622
Rent expense,
related party (Note 11) 181,488 1,502,521 1,251,770 - 136,118 1,126,891 1,126,825
----------- ---------- ---------- ---------- ----------- ---------- ----------
2,472,769 20,471,805 10,212,470 1,476,442 1,763,997 14,603,781 12,610,669
----------- ---------- ---------- ---------- ----------- ---------- ----------
(Loss) income from
operations (3,221,869) (26,673,529) 6,222,173 (841,161) (1,226,339) (10,152,564) (13,494,756)
----------- ---------- ---------- ---------- ----------- ---------- ----------
</TABLE>
(Continued)
F-5
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
The consolidated statements of operations for the two months ended February
28, 1997 reflect the operations of the predecessor Company, see Note 1 to the
consolidated financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, Ten months ended Two months ended NINE MONTHS ENDED SEPTEMBER 30,
------------------------- December 31, February 28, ------------------------------------
1998 1998 1997 1997 1999 1999 1998
----------- ----------- ---------- ---------- --------- ---------- -----------
US DOLLARS RMB RMB RMB US DOLLARS RMB RMB
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Other income (expense):
Interest income $ 6,513 53,920 746,616 86,730 $ 818 6,773 43,108
Interest expense (Note 8) (421,408) (3,488,795) (3,567,295) (973,706) (87,963) (728,229) (2,370,274)
Commission income - - - - 336,405 2,785,030 -
Other 25,160 208,297 48,928 90,314 - - 6,748
----------- ----------- ---------- ---------- --------- ---------- -----------
(389,735) (3,226,578) (2,771,751) (796,662) 249,260 2,063,574 (2,320,418)
----------- ----------- ---------- ---------- --------- ---------- -----------
(Loss) income before minority
interest (3,611,604) (29,900,107) 3,450,422 (1,637,823) (977,079) (8,088,990) (15,815,174)
Minority interest 1,163,088 9,629,089 (1,380,167) - 420,821 3,483,934 4,967,679
----------- ----------- ---------- ---------- --------- ---------- -----------
Net (loss) income $(2,448,516) (20,271,018) 2,070,255 (1,637,823) $(556,258) (4,605,056) (10,847,495)
=========== =========== ========== ========== ========= ========== ===========
Basic net (loss) earnings
per common share $ (0.67) (5.60) 0.69 $ (0.13) (1.09) (3.04)
=========== =========== ========== ========== ========= ========== ===========
Diluted net (loss) earnings
per common share $ (0.67) (5.60) 0.65 $ (0.13) (1.09) (3.04)
=========== =========== ========== ========== ========= ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS) (NOTE 1)
Year ended December 31, 1998, ten months ended December 31, 1997, two months
ended February 28, 1997, and the nine months ended September 30, 1999
(unaudited)
(Expressed in Chinese Renminbi)
<TABLE>
<CAPTION>
FOREIGN
COMMON SHARES CAPITAL RETAINED CURRENCY
PREDECESSOR -------------------- IN EXCESS EARNINGS TRANSLATION
EQUITY SHARES AMOUNT OF PAR (DEFICIT) ADJUSTMENTS TOTAL
---------- ---------- ------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
THE PREDECESSOR:
Balances at December 31, 1996 7,602,224 - - - - - 7,602,224
Comprehensive income (loss):
Net loss for the two months ended
February 28, 1997 (1,637,823) (1,637,823)
Other comprehensive income 6,665 6,665
Comprehensive loss - - - - - (1,631,158)
---------- ---------- ------ ---------- ----------- ----------- -----------
Balances at February 28, 1997 5,971,066 - - - - - 5,971,066
========== ========== ====== ========== =========== =========== ===========
THE COMPANY:
Issuance of common stock at
inception, March 1, 1997 2,310,000 2,301 1,653,479 - - 1,655,780
Issuance of common stock 677,000 174 4,418,076
4,418,250 Comprehensive income (loss):
Net income for the ten months ended
December 31, 1997 - - - 2,070,255 - 2,070,255
Other comprehensive income 18,139 18,139
Comprehensive income 2,088,394
---------- ---------- ------ ---------- ----------- ----------- -----------
Balances at December 31, 1997 2,987,000 2,475 6,071,555 2,070,255 18,139 8,162,424
Issuance of common stock 1,122,158 900 9,158,301 - - 9,159,201
Common stock issued for services 45,000 61 608,776 608,837
Extinguishment of debt by
Joint Venturer 15,667,229 15,667,229
Comprehensive income (loss):
Net loss for the year ended
December 31, 1998 (20,271,018) (20,271,018)
Other comprehensive income 3,966 3,966
Comprehensive loss - - - - - (20,267,052)
---------- ---------- ------ ---------- ----------- ----------- -----------
Balances at December 31, 1998 4,154,158 3,436 31,505,861 (18,200,763) 22,105 13,330,639
Issuance of common stock (unaudited) 153,000 132 612,638 612,770
Comprehensive income (loss):
Net loss for the nine months ended
September 30, 1999 (unaudited) (4,605,056) (4,605,056)
Other comprehensive income (unaudited) (911) (911)
Comprehensive loss (unaudited) - - - - - (4,605,967)
---------- ---------- ------ ---------- ----------- ----------- -----------
Balances at September 30,
1999 (unaudited) 4,307,158 3,568 32,118,499 (22,805,819) 21,194 9,377,442
========== ========== ====== ========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
The consolidated statements of cash flows for the two months ended February 28,
1997, reflect the operations of the predecessor Company; see Note 1 to the
consolidated financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, Ten months ended Two months ended
----------------------------- December 31, February 28,
1998 1998 1997 1997
---- ---- ---- ----
US DOLLARS RMB RMB RMB
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (2,448,516) (20,271,018) 2,070,255 (1,637,823)
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation 64,970 537,881 377,195 71,033
Gain on sale of property, plant and equipment - - - -
Minority interest (1,163,088) (9,629,089) 1,380,167 -
Compensation expense related to stock issuance 73,541 608,837 - -
Decrease (increase) in assets
Receivables 409,774 3,392,478 (5,919,273) 2,718,998
Inventories 1,155,467 9,565,996 (10,118,538) (2,962,646)
Prepaid expenses and other (75,279) (623,227) 164,536 2,472,758
Increase (decrease) in liabilities
Accounts payable 336,254 2,783,813 4,888,343 (2,268,368)
Accrued expenses 459,696 3,805,777 796,794 (3,374,811)
Amounts due to related parties
Value added tax payable 126,214 1,044,913 (1,949,789) -
-------------- ----------- ------------ ----------
Net cash used in operating activities (1,060,967) (8,783,639) (8,310,310) (4,980,859)
-------------- ----------- ------------ ----------
Cash flows from investing activities:
Capital expenditures (283,935) (2,350,671) (590,906) -
Sale of property, plant and equipment - - - -
-------------- ----------- ------------ ----------
Net cash (used in) provided by investing
activities (283,935) (2,350,671) (590,906) -
-------------- ----------- ------------ ----------
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
1999 1999 1998
---- ---- ----
US DOLLARS RMB RMB
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (556,258) (4,605,056) (10,847,495)
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation 82,106 679,590 403,406
Gain on sale of property, plant and equipment (14,161) (117,238) -
Minority interest (420,821) (3,483,934) (4,967,679)
Compensation expense related to stock issuance - - -
Decrease (increase) in assets
Receivables 91,692 759,109 1,409,946
Inventories 807,212 6,682,828 2,676,908
Prepaid expenses and other (12,465) (103,195) 807,814
Increase (decrease) in liabilities
Accounts payable (320,309) (2,651,805) 4,764,639
Accrued expenses (802,852) (6,646,731) 312,619
Amounts due to related parties 80,569 667,023 -
Value added tax payable 20,012 165,677 860,302
----------- ---------- ----------
Net cash used in operating activities (1,045,275) (8,653,732) (4,579,540)
----------- ---------- ----------
Cash flows from investing activities:
Capital expenditures - - (2,302,370)
Sale of property, plant and equipment 16,243 134,474 -
----------- ---------- ----------
Net cash (used in) provided by investing
activities 16,243 134,474 (2,302,370)
----------- ---------- ----------
</TABLE>
(Continued)
F-8
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
The consolidated statements of cash flows for the two months ended February 28,
1997 reflect the operations of the predecessor Company, see Note 1 to the
consolidated financial statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, Ten months ended Two months ended
-------------------------- December 31, February 28,
1998 1998 1997 1997
US DOLLARS RMB RMB RMB
<S> <C> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in short-term loans $ (154,185) (1,276,482) 2,503,539 (1,466,980)
Increase in due to Joint Venturer 512,402 4,242,125 1,433,069 3,798,210
Issuance of common stock 1,106,338 9,159,262 6,074,030 -
----------- ---------- ---------- -----------
Net cash provided by financing activities 1,464,555 12,124,905 10,010,638 2,331,230
----------- ---------- ---------- -----------
Effect of exchange rate changes on cash 479 3,966 - -
----------- ---------- ---------- -----------
Increase (decrease) in cash 120,132 994,561 1,109,422 (2,649,629)
Cash, beginning 164,424 1,361,250 251,828 2,901,456
----------- ---------- ---------- -----------
Cash, ending $ 284,556 2,355,811 1,361,250 251,827
=========== ========== ========== ===========
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 44,404 367,616 3,119,142 973,706
=========== ========== ========== ===========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
1999 1999 1998
---- ---- ----
US DOLLARS RMB RMB
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in short-term loans $ (15,183) (125,696) (299,572)
Increase in due to Joint Venturer 834,168 6,905,996 429,335
Issuance of common stock 74,016 612,770 7,931,501
---------- ---------- ---------
Net cash provided by financing activities 893,001 7,393,070 8,061,264
---------- ---------- ---------
Effect of exchange rate changes on cash (110) (911) 12,352
---------- ---------- ---------
Increase (decrease) in cash (136,141) (1,127,099) 1,191,706
Cash, beginning 284,556 2,355,811 1,361,250
---------- ---------- ---------
Cash, ending $ 148,415 1,228,712 2,552,956
========== ========== =========
Supplemental disclosures of cash flow
information:
Cash paid for interest $ 87,963 728,229 2,370,274
========== ========== =========
</TABLE>
(Continued)
F-9
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
The consolidated statements of cash flows for the two months ended February 28,
1997 reflect the operations of the predecessor Company, see Note 1 to the
consolidated financial statements.
Supplemental disclosure of noncash investing and financing activities:
Effective December 31, 1998, certain assets and liabilities related to the
Joint Venturer were extinguished as follows:
<TABLE>
<CAPTION>
RMB
-----------
<S> <C>
Receivables (6,010,084)
Due to joint venturer 32,122,132
-----------
26,112,048
==========
</TABLE>
On March 1, 1997, the Joint Venturer contributed the following assets, net of
certain liabilities, in exchange for a 40% equity interest in the Joint
Venture:
<TABLE>
<CAPTION>
RMB
------------
<S> <C>
Cash 251,828
Receivables 36,238,293
Inventories 11,545,837
Prepaid expenses 717,160
Building and equipment 7,102,038
Accounts payable and accrued expenses (13,777,596)
Short-term loans due to Joint Venturer (31,177,311)
Value added tax payable (3,798,210)
------------
Net assets contributed 7,102,039
===========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and basis of consolidated financial statements:
(a) The accompanying consolidated financial statements include the accounts
of China Gateway Holdings, Inc. (formerly Orient Packaging Holdings
Limited), the "Company" and its subsidiaries, Orient Investments Limited
("OIL"), Orient Packaging Limited ("OPL"), and Wuhan Dong Feng Paper
Company Limited ("Wuhan Limited" or the "Joint Venture"), collectively
referred to as the "Group". The Company, OIL and OPL were formed for the
purpose of entering into a Joint Venture agreement with Wuhan Dong Feng
Paper Mill Company (the "Joint Venturer"). All significant intercompany
transactions have been eliminated in consolidation.
(b) The Company was incorporated in Delaware. Effective June 27, 1997, the
Company issued 2,310,000 shares of common stock to the shareholders of
OIL in exchange for their interests in OIL. Prior to the exchange, the
Company had no substantial operations and, under generally accepted
accounting principles, the transaction was accounted for as a
recapitalization, as the shareholders of OIL acquired all of the stock
of the Company. Accordingly, there was no revaluation of assets or
liabilities for financial statement accounting purposes. For financial
reporting purposes, the consolidated financial statements reflect the
above-mentioned reorganization similar to a pooling of interests, with
assets and liabilities recorded at historical cost. The consolidated
financial statements incorporate the results of operations and assets
and liabilities of the Company and its subsidiaries. OIL and OPL are
wholly-owned, British Virgin Islands incorporated companies. On December
20, 1996, OPL entered into a 30-year Joint Venture agreement with Wuhan
Dong Feng Paper Mill Company. Pursuant to the Joint Venture agreement,
Wuhan Limited was formed to engage in the manufacturing and sales of
cartonboard packaging materials, primarily used in consumer product
packaging for items such as beverages, dry foodstuffs, pharmaceutical
products and other consumer items. The Joint Venture commenced
operations in March 1, 1997. The Joint Venture facilities and operations
are located in the city of Wuhan, Hubei Province, People's Republic of
China ("PRC").
(c) Pursuant to terms of the Joint Venture agreement, OPL acquired a 60%
interest in Wuhan Limited and the Joint Venturer acquired 40% in Wuhan
Limited. Profits and losses of Wuhan Limited are shared based on the
respective ownership interests, and the board of directors of Wuhan
Limited consists of ten members, six of which are appointed by OPL.
Minority interest represents the Joint Venturer's share of Wuhan
Limited.
(d) Through December 31, 1997, OPL had contributed cash of RMB 4,876,893 to
Wuhan Limited, and the Joint Venturer had contributed a building and
machinery, accounts receivable and inventory, net of certain
liabilities, with a carrying value of RMB 7,102,039, which approximates
fair value at the date of contribution to Wuhan Limited. During 1998,
OPL contributed cash of RMB 5,752,718 as the remaining portion of its
original capital contribution to the Joint Venture. According to the
Joint Venture agreement, the Joint Venturer's initial forty percent
ownership interest was predicated upon its contributing current assets
and current liabilities of equal amount plus RMB 7,102,039 in property,
plant and equipment. In 1998, the Joint Venture agreement was amended,
and OPL agreed to contribute an additional RMB 34,362,000 and the Joint
Venturer agreed to contribute additional machinery and equipment valued
at RMB 22,908,000. As of September 30,1999 (unaudited), the Company had
contributed none of the additional agreed upon amounts. The parties are
negotiating a timetable for the Company to contribute the additional
agreed upon amounts.
F-11
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and basis of consolidated financial statements (continued):
The statements of operations, equity and cash flows for the two months
ended February 28, 1997 reflect the operations of the predecessor (the
Joint Venturer). The Company had no significant operations prior to the
commencement of the Joint Venture in March 1997.
(e) The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"), and are presented in Chinese Renminbi ("RMB"), the national
currency of the PRC (note 2(e)).
(f) The consolidated balance sheet as of September 30, 1999, the
consolidated statements of operations and cash flows for the nine months
ended September 30, 1999 and 1998, and the consolidated statement of
shareholders' equity and comprehensive income (loss) for the nine months
ended September 30, 1999 have been prepared by the Company without
audit. In the opinion of management, all adjustments (which include
normal recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for all such periods have
been made.
2. Principal accounting policies:
(a) The consolidated financial statements include the accounts of the
Company and its wholly and majority owned subsidiaries. Material
intercompany accounts have been eliminated on consolidation.
(b) Cash and cash equivalents:
For financial reporting purposes, the Company considers all highly
liquid investments purchased with original maturities of three months or
less to be cash equivalents.
(c) Inventories:
Inventories are stated at the lower of cost or market. Cost includes the
cost of raw materials computed using the weighted average method and in
the case of finished goods, direct labor and an appropriate proportion
of production overhead.
(d) Property, plant and equipment:
Property, plant and equipment are stated at cost. Depreciation is
provided by use of the straight-line method over the estimated useful
lives of the related assets as follows:
Building 18 years
Office equipment 18 years
Machinery 16 years
F-12
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies (continued):
(d) Property, plant and equipment (continued):
Repairs and maintenance costs are expensed when incurred.
Construction in progress represents building renovation and machinery
upgrades, which are not depreciated until placed into service.
Management assesses the carrying values of its long-lived assets for
impairment when circumstances warrant such a review. Generally, assets
to be used in operations are considered impaired if the sum of expected
undiscounted future cash flows is less than the assets' carrying values.
If an impairment is indicated, the loss is measured based on the amounts
by which the assets' carrying values exceed their fair values. Based on
its review, management does not believe any impairment has occurred as
of December 31, 1998 (or September 30, 1999, unaudited).
(e) Translation of foreign currencies:
Transactions and monetary assets and liabilities denominated in
currencies other than RMB are translated into RMB at the respective
applicable rates of exchange quoted by the People's Bank of China (the
"Exchange Rate"). Monetary assets and liabilities denominated in other
currencies are translated into RMB at the applicable Exchange Rate at
the respective balance sheet dates. The resulting exchange gains or
losses are credited or charged to the consolidated statements of
operations. Currency translation adjustments arising from the use of
different exchange rates from period to period are included as a
separate component in shareholders' equity, and the amount was not
material for any period presented.
The translation of amounts from RMB into US Dollars for the convenience
of the reader has been made at the rate of exchange quoted by the
People's Bank of China on the respective balance sheet dates of US$1.00
equal RMB 8.28, and accordingly, differs from the underlying foreign
currency amounts. No representation is made that the RMB amounts could
have been, or could be, converted into US Dollars at that rate on the
respective balance sheet dates or at any other date.
(f) Income taxes:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in the consolidated statement of operations
in the period that includes the enactment date.
F-13
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies (continued):
(g) Earnings per share:
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128 during 1997. This statement requires dual presentation of basic
and diluted earnings per share ("EPS") with a reconciliation of the
numerator and denominator of the EPS computations. Basic per share
amounts are based on the weighted average shares of common stock
outstanding. Diluted earnings per share assumes the conversion, exercise
or issuance of all potential common stock instruments such as options,
warrants and convertible securities, unless the effect is to reduce a
loss or increase earnings per share. Accordingly, this presentation has
been adopted for all periods presented. The basic and diluted weighted
average shares outstanding during the year ended December 31, 1998 and
the nine months ended September 30, 1999 and 1998 (unaudited) are
3,616,745, 4,241,426 and 3,568,583, respectively. Options and warrants
to purchase common stock were not included in the computation of diluted
EPS for the year ended December 31, 1998 or the nine months September
30, 1999 and 1998, (unaudited) because they would decrease the loss per
share. The basic and diluted weighted average shares outstanding during
the ten months ended December 31, 1997 are 2,987,000 and 3,182,000,
respectively.
The weighted average outstanding share calculations and the earnings
(loss) per share for each period presented have been calculated assuming
that the shares of stock and warrants issued in connection with the
formation of the Company and the shares of stock issued during the ten
months ended December 31, 1997, had been outstanding at March 1, 1997.
(h) Fair value of financial instruments:
The fair values of receivables from affiliates and amounts due to the
Joint Venturer and related parties are not practicable to estimate
due to the indefinite payment terms and due to the related party
nature of the underlying transactions. The carrying values of the
Company's cash, other receivables and other liabilities approximate
fair values primarily because of the short maturities of these
instruments.
(i) Stock-based compensation:
SFAS No. 123, "Accounting for Stock-Based Compensation" allows
companies to choose whether to account for employee stock-based
compensation on a fair value method, or to account for such
compensation under the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). The Company has chosen to account
for employee stock-based compensation using APB 25.
F-14
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies (continued):
(j) Recently issued accounting pronouncements:
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income," ("SFAS No.
130"), which is effective for financial statements issued for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes
standards for the reporting and display of comprehensive income, its
components and accumulated balances in a full set of general purpose
financial statements. SFAS No. 130 defines comprehensive income to
include all changes in equity except those resulting from investments
by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive
income be reported in a financial statement that is presented with
the same prominence as other financial statements. The Company's only
current component of comprehensive income are foreign currency
translation adjustments. The Company adopted SFAS No. 130 for the
year beginning, January 1, 1998. The financial statements of earlier
periods have been reclassified to reflect the application of SFAS No.
130. Adoption of SFAS No. 130 did not have a material effect on the
Company's financial statement presentation and disclosures.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131"), which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise" and which
is effective for financial statements issued for fiscal years
beginning after December 15, 1997. SFAS No. 131 establishes standards
for the way that public companies report information about operating
segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial
statements. SFAS No. 131 also establishes standards for disclosures
by public companies regarding information about their major
customers, operating segments, products and services, and the
geographic areas in which they operate. SFAS No. 131 defines
operating segments as components of an enterprise about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131
requires comparative information for earlier yers to be restated. The
Company adopted SFAS No. 131 for the year beginning January 1, 1998.
The Company's results of operations and financial position were not
affected by implementation of SFAS No. 131 as it operates in only one
segment, cartonboard packaging materials.
In February 1998, the Financial Accounting Standards Board issued
Statement No. 132, "Employers' Disclosures about Pensions and Other
Post Retirement Benefits" ("SFAS No. 132"), which is effective for
financial statements issued for fiscal years beginning after December
15, 1997. SFAS No. 132 revises employers' disclosures about pension
and other post retirement benefit plans. SFAS No. 132 requires
comparative information for earlier years to be restated. The Company
adopted SFAS No. 132 for the year beginning January 1, 1998. The
Company's results of operations and financial position were not
affected by implementation of SFAS No. 132.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"), which is effective for financial
statements for all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments
embeded in other contracts, by requiring thant an entity recognize
those items as assets or liabilities in the statement of financial
position and measure them at fair value. SFAS No. 133 also addresses
the accounting for certain hedging activities. The Company currently
does not have any derivative instruments nor is it engaged in hedging
activities, thus the Company does not believe implementation of SFAS
No. 133 will have a material impact on its financial statement
presentation or disclosures.
F-15
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies (continued):
(k) Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Management makes these
estimates using the best information available at the time the
estimates are made; however actual results could differ materially
from these estimates.
(l) Risk considerations:
As a majority of the Company's operations are conducted in the PRC,
the Company is subject to special considerations and significant risks
not typically associated with investments in equity securities of
North American and Western European companies. The Company's
operations 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.
The Company expects that substantially all of its revenues will be
denominated in RMB. A portion of such revenues will need to be
converted into other currencies to meet foreign currency obligations
such as payment of any dividends declared. Both the conversion of RMB
into foreign currencies and the remittance of foreign currencies
abroad require PRC government approval. No assurance can be given that
the operating subsidiaries within the Company will continue to be able
to convert sufficient amounts of foreign currencies in the PRC's
foreign exchange markets in the future for payment of dividends.
(m) Barter Transactions:
In the normal course of operations, the Company exchanges paperboard
products with domestic raw material suppliers in certain
circumstances. These transactions are recorded at fair values when the
goods are received. Amounts included in sales and cost of sales for
the ten months ended December 31, 1997, the year ended December 31,
1998 and the nine months ended September 30, 1998 and 1999 (unaudited)
are as follows:
<TABLE>
<CAPTION>
SALES COST OF SALES
--------- -------------
RMB RMB
<S> <C> <C>
December, 1997 5,758,770 4,767,111
December, 1998 4,491,934 3,677,834
September, 1998 3,210,467 2,616,092
September, 1999 1,661,081 1,352,266
</TABLE>
F-16
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Significant concentrations:
The Company grants credit to its customers, generally without collateral.
The Company's customers are concentrated in the PRC. Approximately 15%,
19%, 22% and 9% of the Company's sales were generated from one customer
during the year ended December 31, 1998, the ten months ended December 31,
1997, the two months ended February 28, 1997, and the nine months ended
September 30, 1999 (unaudited), respectively. No other customer accounted
for over 10% of sales in any reporting period.
Bad debt expense was RMB 166,532, RMB 60,875, RMB 0 and RMB 117,163 for
the year ended December 31, 1998, the ten months ended December 31, 1997,
the two months ended February 28, 1997, and the nine months ended
September 30, 1999 (unaudited), respectively.
At December 31, 1998 and 1997, and at September 30, 1999 (unaudited),
approximately 30%, 32% and 33%, respectively, of net trade receivables
were due from five customers, of which one customer accounted for greater
than 10% of the net trade receivables balance. Other receivables at
December 31, 1998 and 1997, and at September 30, 1999 (unaudited),
primarily consist of RMB 2,777,737, RMB 4,388,065 and RMB 2,326,160
respectively, due from four, ten and four non-affiliated companies,
respectively. These receivables represent pending reimbursements for
utility and other services shared by these companies with the Company and
paid by the Company on behalf of these companies.
4. Inventories:
At December 31, 1998 and 1997 and September 30, 1999 (unaudited),
inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ------------------------------
1998 1998 1997 1999 1999
---------- ----------- -------- -------- --------------
US DOLLARS RMB RMB US DOLLARS RMB
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Raw materials $ 885,590 7,331,711 14,212,852 $ 348,329 2,883,781
Finished goods 575,761 4,766,668 7,451,523 305,810 2,531,770
----------- ---------- ---------- ---------- ---------
$ 1,461,351 12,098,379 21,664,375 $ 654,139 5,415,551
=========== ========== ========== ========== =========
</TABLE>
F-17
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Property, plant and equipment:
At December 31, 1998 and 1997 and September 30, 1999 (unaudited),
property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------- ------------------------
1998 1998 1997 1999 1999
---- ---- ---- ---- ----
US DOLLARS RMB RMB US DOLLARS RMB
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Building $ 71,856 594,889 594,731 $ 71,995 596,041
Machinery 791,237 6,550,572 6,548,825 766,620 6,346,765
Office equipment 32,560 269,561 79,295 32,123 265,943
Construction in progress 317,505 2,628,592 470,092 340,338 2,817,629
----------- ---------- --------- ----------- ----------
1,213,158 10,043,614 7,692,943 1,211,076 10,026,378
Less accumulated depreciation 110,531 915,075 377,194 192,618 1,594,666
----------- ---------- --------- ----------- ----------
$ 1,102,627 9,128,539 7,315,749 $ 1,018,458 8,431,712
=========== ========== ========= =========== ==========
</TABLE>
6. Short-term loans:
Short-term loans represent borrowings from various banks in the PRC. The
maturities of these short-term borrowings are generally 90 to 120 days.
Interest rates are based on the banks' prime lending rates of 5.10% to
7.70% at December 31, 1998 and 4.90% to 7.10% at September 30, 1999
(unaudited).
7. Value added tax:
PRC joint ventures are subject to a value added tax ("VAT"), which is the
principal indirect tax on the sales of tangible goods. The general VAT
rate applicable to the Joint Venture is 17% of net sales.
8. Related party transactions:
At December 31, 1998 and 1997, and at September 30, 1999 (unaudited), the
Company has RMB 266,929, RMB 121,352 and RMB 110,118, respectively, due
from shareholders and RMB 500,037, RMB 818,891 and RMB 451,512,
respectively, due from employees of the Company, which represent
unsecured, non-interest bearing advances, due on demand.
During the year ended December 31, 1998, net debt in the amount of RMB
26,112,048 due to the Joint Venturer was extinguished. When the Joint
Venture was formed in 1997, it owed the Joint Venturer net current
payables in excess of RMB 33,000,000. In order to assist the economic
viability of the Joint Venture, effective December 31, 1998, the Joint
Venturer forgave a major portion of the initial indebtedness. Because the
debt forgiveness was made by a significant equity investor in the Joint
Venture, the Company has accounted for the debt extinguishment as a
capital contribution by the Joint Venturer resulting in an increase in
minority interest of RMB 10,444,819 and an increase in capital in excess
of par of RMB 15,667,229.
F-18
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Related party transactions (continued):
At December 31, 1998 and 1997, and at September 30, 1999 (unaudited), the
Company has RMB 4,730,373, RMB 32,610,380 and RMB 11,636,369,
respectively, due to the Joint Venturer, which is unsecured, bears
interest at the current market rate (9.2% at December 31, 1998 and 5.8% at
September 30, 1999) and is due on demand. Interest expense related to this
obligation was approximately RMB 3,115,937, RMB 3,117,027, and RMB
2,336,952 for the year ended December 31, 1998, the ten months ended
December 31, 1997 and the nine months ended September 30, 1999
(unaudited), respectively, and is included in total debt amounts
extinguished during 1998. The weighted average interest rate on the
short-term loans and the amount due to the Joint Venturer was 9.54% at
December 31, 1998 and 6.5% at September 30, 1999 (unaudited).
At December 31, 1998 and 1997, and at September 30, 1999 (unaudited), the
Company has a receivable of RMB 1,634,478, RMB 1,135,377 and RMB
1,310,213, respectively, due from an affiliate of the Joint Venturer.
During the year ended December 31, 1998, the ten months ended December 31,
1997, the two months ended February 28, 1997 and the nine months ended
September 30, 1999 (unaudited), the Company purchased RMB 4,551,242, RMB
15,239,725, RMB 2,790,271 and RMB 0, respectively, of raw material
inventory and had net sales of RMB 4,905,190, RMB 18,211,179, RMB
3,486,087 and RMB 0, respectively, to this affiliate.
During the nine months ended September 30, 1999, certain shareholders made
advances to the Company totaling RMB 667,023. The advances are unsecured,
noninterest bearing and are payable on demand (unaudited).
9. Shareholders' equity:
Effective March 1, 1997, the Company issued 2,310,000 shares of common
stock for RMB 1,655,780, the historical cost basis of the net assets of
OIL on that date. During the year ended December 31, 1997, the Company
issued an additional 677,000 common shares under a private placement for
net consideration of RMB 4,418,250 A total of 212,000 shares of stock were
sold for RMB 4,393,414. Entities arranging the private placement received
285,000 shares for their services, and paid the Company a nominal amount
of RMB 24,836 for an additional 180,000 shares.
During the year ended December 31, 1998, the Company issued a total of
1,167,158 shares for net consideration of RMB 9,159,201. A total of
682,866 shares were issued in private placements at prices ranging from US
$.78 per share to US $2.75 per share. In addition, 55,600 shares were
issued to investment bankers in connection with the 1997 and 1998 private
placements, 35,000 shares were issued for investment services, 10,000
shares were issued to an employee in exercise of an option issued for
services, 272,000 shares were issued as a result of warrant exercises and
111,692 shares were issued as a result of an option exercise. The 35,000
shares issued for investment services were valued at the market value at
the date of issue, and resulted in an expense of US $52,500 (RMB 434,642).
The stock issued to an employee resulted in compensation expense of
$21,031 (RMB 174,113) for the difference between the market value of the
stock at the date the option was granted and the exercise price. The
warrants and the option which were exercised had been issued in connection
with the original formation of the Company or subsequent stock issuance
transactions, and resulted in net proceeds to the Company of US $14,700.
In connection with the 1997 and 1998 private placements, the Company
issued warrants to purchase 518,905 common shares of the Company at an
exercise price of US$0.10 (RMB 0.83) each and an option to purchase
150,000 shares at an exercise price of $1.66 (RMB 13.74). The warrants
expire April 2000 and 272,000 warrants were exercised in 1998. Also,
during the year ended December 31, 1998, the Company issued warrants to
purchase 235,316 common shares of the Company at US$2.75 (RMB 22.77) per
share. These warrants expire in March 2003. The option was exercised in
1998 and 111,692 shares were issued as a result.
F-19
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Shareholders' equity (continued):
At December 31, 1998 and September 30, 1999 (unaudited) warrants to
purchase 246,905 common shares of the Company at an exercise price of US
$0.10 (RMB 0.83) per share and warrants to purchase 235,316 common shares
of the Company at an exercise price of US $2.75 (RMB 22.77) per share
remain outstanding.
The following table summarizes stock option and warrant activity for the
ten months ended December 31, 1997, the year ended December 31, 1998 and
the nine months ended September 30, 1999 (unaudited):
<TABLE>
<CAPTION>
OPTIONS WARRANTS
------------------------------------------------- ------------------------------------------
Exercise Exercise Exercise Exercise
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ -------- ------ --------
US US US US
DOLLARS DOLLARS DOLLARS DOLLARS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
March 1, 1997 - - - - - - - -
Granted 150,000 $ 1.66 45,000 $ 0.10 - -
Exercised - - - - - - - -
Forfeited - - - - - - - -
------- -------- ------ --------- -------- ------ ------- ---------
Outstanding at
December 31, 1997 150,000 1.66 - - 45,000 0.10 - -
Granted 10,000 $ .10 473,905 0.10 235,316 $ 2.75
Exercised 111,692 1.66 10,000 .10 272,000 0.10 - -
Forfeited 38,308 1.66 - - - - - -
------- -------- ------ --------- -------- ------ ------- ---------
Outstanding at
December 31, 1998 - - - - 246,905 0.10 235,316 2.75
Granted (unaudited) - - - - - - - -
Exercised
(unaudited) - - - - - - - -
------- -------- ------ --------- -------- ------ ------- ---------
Outstanding at
September 30, 1999
(unaudited) - $ - - $ - 246,905 $ 0.10 235,316 $ 2.75
======= ======== ====== ========= ======== ====== ======= =========
</TABLE>
PRC rules and regulations governing joint ventures require allocations
of a portion of annual net income, if any, to three reserve funds; a
general reserve fund, an expansion fund and a welfare fund. The amounts
to be reserved are stipulated by PRC laws and regulations. The
allocation between required reserves is at the discretion of the board
of directors. These reserves cannot be used for purposes other than
those for which they are created and are not distributable as cash
dividends.
Pursuant to the joint venture agreement, the profit and loss allocation
of Wuhan Limited is subject to certain provisions. With the exception of
the first year of operations, allocation to the Joint Venture parties of
annual after-tax profits of the Joint Venture, after the deduction of
contributions to the reserve funds described above, shall be decided by
the board of directors according to the relative investments of the two
parties.
F-20
<PAGE>
10. Income tax:
The Group is subject to income taxes on an entity basis on income
arising in or derived from the tax jurisdiction in which each entity is
domiciled. The Company's British Virgin Islands subsidiaries are not
liable for income taxes. The Joint Venture is subject to income taxes at
an effective rate of 33% (30% Chinese national income tax plus 3%
Chinese local income tax). However, newly-established joint ventures are
exempt from income tax in the first two years starting from the first
year of profitable operations, as well as being allowed a 50% reduction
in tax in the third, fourth and fifth years of profitable operations.
Losses incurred by joint ventures may be carried forward for five years.
Deferred tax assets and liabilities are not considered material at
December 31, 1998 and 1997 or at September 30, 1999 (unaudited). The
reconciliation between the effective tax rate and the statutory U.S.
federal income tax rate is as follows:
<TABLE>
<CAPTION>
Ten months Two months Nine months
Year ended ended ended ended
December 31, December 31, February 28, September 30,
1998 1997 1997 1999
----------- ------------ -------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
Statutory U.S. federal tax rate 34% 34% 34% 34%
Difference in foreign statutory rates (1) (1) (1) (1)
Income tax exemption (33) (33) (33) -
Losses carried forward - - - (33)
----------- ------------ -------------- ------------
Effective tax rate -% - % - % -%
=========== ============ ============== ============
</TABLE>
At December 31, 1998 and September 30, 1999 (unaudited), the company's
deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
RMB RMB
------------ --------------
<S> <C> <C>
Foreign operating loss carryforwards 8,201,282 11,078,690
U.S. operating loss carryforward 136,807 135,474
Deferred tax asset valuation allowance (8,338,089) (11,214,164)
------------ --------------
Net deferred tax assets - -
============ ==============
</TABLE>
At December 31, 1998 and September 30, 1999 the Company has foreign operating
loss carryforwards of approximately rmb 24,852,370 and rmb 33,571,788
(unaudited), respectively. Foreign losses are available for offset against
future foreign taxable income, if any, through 2003, and U.S. losses are
available for offset against future U.S. taxable income, if any, through 2018.
A valuation allowance has been provided to reduce the deferred tax assets to
zero as realization of the assets is not assured.
F-21
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS, INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LIMITED)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Commitments and contingencies:
(a) Land and building lease with Joint Venturer:
In connection with the Joint Venture agreement, Wuhan Limited
entered into a 30-year cancelable lease with the Joint Venturer,
which expires in 2027. Under this agreement, Wuhan Limited is
leasing land and factory buildings from the Joint Venturer.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
RMB
-----------
<S> <C>
1999 1,502,521
2000 1,502,521
2001 1,502,521
2002 1,502,521
2003 1,502,521
Thereafter 34,808,445
-----------
42,321,050
==========
</TABLE>
Lease expense for the year ended December 31, 1998, the ten
months ended December 31, 1997, the two months ended February
28, 1997 and the nine months ended September 30, 1999
(unaudited) was RMB 1,502,521, RMB 1,251,770, RMB 0 and RMB
1,126,891, respectively.
(a) Land and building lease with Joint Venturer (continued):
Pursuant to the Joint Venture agreement, the Joint Venturer is
to contribute the factory buildings under the lease by March 31,
1999, and continue leasing the land to Wuhan Limited.
(b) Other commitments:
Wuhan Limited is subject to certain labor contracts which
require it to fund various Chinese state-sponsored pension and
post-employment benefits. Pursuant to the Joint Venture
agreement, Wuhan Limited is to make monthly contributions
equivalent to 29% of the Joint Venture's annual wages. In
addition, Wuhan Limited is to make monthly payments of
approximately RMB 60,435 to the Joint Venturer for medical and
insurance provisions, which are administered by the Joint
Venturer. Beginning in July 1998, the Joint Venture is required
to make monthly payments of approximately RMB 116,730 to the
Joint Venturer for medical and pension allowances for terminated
joint venture staff.
F-22
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Title
- ------- ------
<S> <C>
3.1 Certificate of Incorporation as filed with the Delaware
Secretary of State on June 27, 1997(1)
3.2 By-laws(1)
10.1 Joint Venture with Wuhan Dong Feng Paper Mill Company for
establishment of Wuhan Dong Feng Paper Company Limited(1)
10.2 Tenancy Agreement(1)
10.3 Agreement Associated with Amending the Joint Venture
Agreement and Articles of Association(1)
10.4 Purchase Agreement with Gamma Link Enterprises Corp.(1)
10.5 Amendment to the Joint Venture Agreement(1)
21.1 Subsidiaries of Registrant(1)
27.1 Financial Data Schedule(1)
</TABLE>
(1) Incorporated by reference to the Exhibits to the Registration Statement
on Form 10-SB as filed with the Securities and Exchange Commission.
III-1
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange
Act of 1934, the registrant caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereonto duly
authorized
Date: March 10, 2000
CHINA GATEWAY HOLDINGS INC.
By: /s/ Danny Wu
---------------------------------
Danny Wu
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND SECRETARY
III-2
