CHINA GATEWAY HOLDINGS INC
Filing Type: 10SB12G/A
Description: Amended Registration Statement
Filing Date: November 13, 2000
Period End: N/A
Primary Exchange: N/A
Ticker: N/A
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Table of Contents
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10SB12G/A
Table1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Table2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Table3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Table4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Table5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Table6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . 31
Income Statement2 . . . . . . . . . . . . . . . . . . . . . . . . .32
Table9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Income Statement3 . . . . . . . . . . . . . . . . . . . . . . . . .34
Cash Flow Statement. . . . . . . . . . . . . . . . . . . . . . . . 35
Table12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Table13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Table14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Balance Sheet Assets . . . . . . . . . . . . . . . . . . . . . . . 38
Table16. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Table17. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Table18. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Table19. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Table20. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Table21. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
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As filed with the Securities and Exchange Commission on November 13, 2000
Registration No. 0-28819
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
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
Incorporation or Organization) Identification Number)
CLI BUILDING, SUITE 1003, 313 HENNESSY ROAD, HONG KONG
(Address of Principal Executive Offices, including zip code)
Issuer's telephone number, including area code: 852-2893-9676
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, $0.0001 par value
Documents incorporated by reference: None.
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CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995:
This Registration Statement on Form 10-SB contains "forward-looking"
statements within the meaning of the federal securities laws. These
forward-looking statements include, among others, statements concerning the
Company's expectations regarding sales trends, gross and net operating margin
trends, political and economic matters, the availability of equity capital to
fund the Company's capital commitments, and other statements of expectations,
beliefs, future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. The
forward-looking statements in this Registration Statement on Form 10-SB are
subject to risks and uncertainties that could cause actual results to differ
materially from those results expressed or implied by the statements contained
herein.
BUSINESS
OVERVIEW
China Gateway Holdings Inc., formerly Orient Packaging Holdings Ltd. (the
"Company"), owns a joint venture interest in a manufacturer of paperboard
products used in packaging material for the Chinese market. The manufacturing
operations are conducted through Wuhan Dong Feng Paper Company Limited ("Wuhan
Limited" or the "Joint Venture"). The Company's 60%-interest in the Joint
Venture is accounted for under the equity method of accounting. The joint
venture agreement 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 and produce bleached (white top) paperboard,
a product used primarily as covering in the manufacture of corrugated packaging
for the food and beverage industry in China. In response to the increasing
awareness and sophistication of Chinese customers, 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.
The Company's objective is to continue to develop the Joint Venture 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 Bulletin 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 market opportunities 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
Joint Venture to expand its market share.
PRODUCTS
The Joint Venture 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 consumer corrugated packaging. Coated
white-lined chipboard is used for applications that require higher quality
printed surfaces. In addition, the Joint Venture 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 Joint Venture'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
Joint Venture 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 Joint Venture'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 Joint Venture'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
Joint Venture also has several customers based in the Sichuan province in
Central China. As of September 1999, the Joint Venture had approximately 20
major customers, of which the largest accounted for approximately 8.8% of sales
for the nine months ended September 30, 1999.
MARKETING AND SALES
The Joint Venture's sales and marketing activities are centered in Wuhan with
additional support from the Company's executive office in Hong Kong. The Joint
Venture 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 Joint Venture's sales team in Wuhan, the Joint Venture utilizes
a network of five independent sales agents throughout the major markets in
China.
The Joint Venture 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 then pressed and dried, producing a continuous line of board that is
either wound onto reels or cut up separately into sheets.
The Joint Venture's 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 Joint Venture'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 Joint Venture's manufacturing process.
Four different types of fiber are used in the manufacturing process: 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 Joint Venture imports approximately 30% of its recycled
paper requirements, with the remainder being sourced from the China domestic
market. The Joint Venture manufactures its own straw pulp from straw purchased
from the region around Wuhan. However, the Joint Venture'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 Joint Venture's exposure to volatility in
these markets is limited.
More important to the Joint Venture'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 Joint Venture 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 Joint Venture carries out its own
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wastepaper collection activities within Wuhan and also obtains domestic
wastepaper from wastepaper brokers in Southern China where domestic wastepaper
is available in plentiful supply. The Joint Venture carries out barter trade
arrangements with these domestic wastepaper brokers. Specifically, the Joint
Venture 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 significantly lower cost than
that of imported chemicals. The Joint Venture's paper mill is located near the
banks of the Yangtze River, and the Joint Venture 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 Joint Venture'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 Joint Venture is positioned to increase
its market share in the industry. In particular, the Company believes that the
Joint Venture has the following competitive advantages:
PRODUCTION VERSATILITY - The ability to produce paperboard according to
customized customer specification is a unique advantage that the Joint Venture
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
Joint Venture, however, is able to simulate the process because the Joint
Venture has six individual paper machines that provide it flexibility in
scheduling production.
PRODUCT DISTRIBUTION - The Joint Venture has established distribution
systems throughout its main customer markets in China. These include a network
of independent agencies in Fujian 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 Joint Venture 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. Golden Horse is
one of the oldest brands in the market and is well known for its quality and
reliability. Accordingly, the Joint Venture 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 United States 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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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 Wuhan Dong Feng Paper Mill
Company, a China state-owned enterprise.
COMPLIANCE WITH ENVIRONMENTAL LAWS
To date, management believes that the Joint Venture has complied with
existing environmental 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
Joint Venture'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 Joint Venture has its own water
treatment facilities and a system for recycling the chemicals used in paper
making. Therefore, the Joint Venture will not be affected even if the targeted
areas include the Yangtze River region. During the two months ended February 28,
1997, the ten months ended December 31, 1997, and the year ended December 31,
1998, the Joint Venture paid RMB 79,547, RMB 397,733 and RMB 430,991,
respectively, to the local environmental protection agency.
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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 are subject
to Chinese law and disputes are required 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, including its subsidiaries, and the Joint Venture 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 are
based in China.
PATENTS AND TRADEMARKS
The "Golden Horse" brand name has been registered as a trade name in China
since 1958 by Wuhan Company. 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 Joint Venture leases a paper manufacturing plant in
Wuhan, consisting of 25,730 square meters. The lease expires concurrent with the
term of the Joint Venture in 2027.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW:
China Gateway Holdings Inc., formerly Orient Packaging Holdings Ltd. (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" or
the "Joint Venturer").
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 operations by the Joint Venture. As a result of the
Company's interest in the Joint Venture, the Company operates in one business
segment, the manufacture of cartonboard packaging materials.
The Joint Venture supplies paperboard directly or indirectly to major
international consumer brands. The Joint Venture's customers are concentrated in
the PRC. Sales to such customers are generally on an open account basis and are
denominated in RMB.
Through December 31, 1997, OPL had contributed cash of RMB 4,867,636 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 5,752,909 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 a total value of RMB 22,908,000. OPL did not fund its required capital
contributions during 1998 and 1999.
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In January 2000, a new timetable was agreed upon whereby OPL was to
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 was
established for the remaining contributions but they were expected to be funded
based on the proceeds available from anticipated capital raising transactions.
The parties agreed to delay the discussion of a timetable for any contributions
that may be made after December 31, 2000 until an unspecified later date.
The Company did not meet its June 30, 2000 funding obligation of RMB
5,000,000 to the Joint Venture, and the Company is currently unable to predict
if it will be able to meet its funding obligations to the Joint Venture. The
Company is engaged in continuing discussions with the Joint Venturer regarding
its funding obligations.
To date, there have been no adverse consequences to not contributing the
additional RMB 34,362,000 to the Joint Venture other than the delays incurred to
modernize the equipment in the plant. However, management is currently unable to
predict the results of the ongoing discussions with the Joint Venturer or if
there will be any adverse future consequences relating to the Company's failure
to meet its funding obligation.
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, which resulted in an increase in the Company's equity investment and
capital in excess of par of RMB 15,667,229. The amounts due to Wuhan Company
that were forgiven reflected unrecoverable charges to the Joint Venture for raw
material inventory, as well as general and administrative expenses, financing
expenses and certain other expenses. 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. Effective
December 31, 1999, Wuhan Company agreed to forgive an additional RMB 16,329,758
of amounts due it for raw material inventory and general and administrative
expenses and interest expense, which were also reflected as a capital
contribution by the Joint Venturer, which resulted in an increase in the
Company's equity investment and capital in excess of par of RMB 9,797,855.
Since inception, the Company has accounted for its 60% interest in the
Joint Venture, which is similar to a majority-owned subsidiary, as a
consolidated subsidiary. During the six months ended June 30, 2000, the Company
determined that Wuhan Company had retained certain rights under the Joint
Venture Agreement that provided Wuhan Company with the ability to participate in
management, although such rights have never been asserted by Wuhan Company.
Under Emerging Issues Task Force Issue No. 96-16, if a minority joint venture
partner has such rights, the majority joint venture partner is required to
account for its interest in the joint venture under the equity method of
accounting. As a result, the Company's financial statements through December 31,
1999 have been restated to report the Company's investment in the Joint Venture
under the equity method of accounting. The restatement did not have any effect
on net income (loss), net income (loss) per share, or shareholders' equity.
During the six months ended June 30, 2000, the Joint Venture Agreement was
amended to clearly express the intent of the parties that the Company is the
controlling party in the Joint Venture. Since the Joint Venture Agreement was
amended during 2000, the Company is reporting its investment in the Joint
Venture as a consolidated subsidiary commencing January 1, 2000.
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
from the dates of their respective formation or acquisition.
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.
RESULTS OF OPERATIONS:
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998:
China Gateway Holdings Inc. -
General and Administrative Expenses. For the nine months ended September
30, 1999, general and administrative expenses were RMB 1,569,059, as compared to
general and administrative expenses of RMB 3,345,992 for the nine months ended
September 30, 1998. General and administrative expenses decreased by RMB
1,776,933 in 1999 as compared to 1998 primarily a result of reduced travel and
personnel costs.
Other Income (Expense). The Company had commission income of RMB 767,689
during the nine months ended September 30, 1999. The Company did not have any
commission income during the nine months ended September 30, 1998.
Equity in Net Loss of Joint Venture. As a result of the Company's 60%
equity interest in the Joint Venture, the Company recorded equity in net loss of
joint venture of RMB 5,226,004 for the nine months ended September 30, 1999, as
compared to RMB 7,451,020 for the nine months ended September 30, 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.
Net Loss. Net loss was RMB 6,027,366 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.
The Joint Venture -
Sales. Sales remained relatively constant in 1999 as compared to 1998,
decreasing by RMB 423,000 or 1.0%. For the nine months ended September 30, 1999,
sales were RMB 42,660,000, all to unrelated parties. For the nine months ended
September 30, 1998, sales were RMB 43,083,000, consisting of RMB 40,478,000
(94.0%) to unrelated parties and RMB 2,605,000 (6.0%) to related parties. During
the nine months ended September 30, 1999, 10,665 metric tons of cartonboard were
sold at an average per ton selling price of RMB 4,000, as compared to 11,337
metric tons of cartonboard sold at an average per ton selling price of RMB 3,800
during the nine months ended September 30, 1998.
Gross Profit. For the nine months ended September 30, 1999, gross profit
was RMB 4,451,000 or 10.4% of sales, as compared to a negative gross profit of
RMB (884,000) or (2.1%) of sales for the nine months ended September 30, 1998.
The Joint Venture incurred a negative gross profit for the nine months ended
September 30, 1998 as a result of its cost of raw material inventory having
included certain unrecoverable costs. The Joint Venture 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 was forgiven by Wuhan Company
effective December 31, 1998, as described above at "Overview".
Operating Expenses. For the nine months ended September 30, 1999, operating
expenses were RMB 13,035,000 or 30.6% of sales, as compared to operating
expenses of RMB 9,265,000 or 21.5% of sales for the nine months ended September
30, 1998, an increase of RMB 3,770,000 or 40.7%, primarily as a result of
increased personnel related expenses.
Loss from Operations. For the nine months ended September 30, 1999, the
loss from operations was RMB 8,584,000, as compared to a loss from operations of
RMB 10,149,000 for the nine months ended September 30, 1998. The net loss from
operations decreased by RMB 1,565,000 as a result of the Joint Venture
generating a positive gross profit in 1999 as compared to a negative gross
profit in 1998, offset in part by the increase in operating expenses.
Other Income (Expense). For the nine months ended September 30, 1999,
interest expense was RMB 728,000, consisting of RMB 648,000 to related parties
and RMB 80,000 to unrelated parties. For the nine months ended September 30,
1998, interest expense was RMB 2,294,000, consisting of RMB 2,087,000 to related
parties and RMB 207,000 to unrelated parties. Interest expense to related
parties decreased in 1999 as compared to 1998 as a result of the decrease in
amounts due Wuhan Company, which were forgiven by Wuhan Company effective
December 31, 1998, as described above at "Overview". For the nine months ended
September 30, 1999, other income was RMB 602,000, consisting of RMB 595,000 of
commission income and RMB 7,000 of interest income. For the nine months ended
September 30, 1998, other income was RMB 25,000, consisting of RMB 18,000 of
interest income and RMB 7,000 of other income.
Income Taxes. The Joint Venture did not have any income tax expense for the
nine months ended September 30, 1999 and 1998.
Net Loss. Net loss was RMB 8,710,000 for the nine months ended September
30, 1999, as compared to a net loss of RMB 12,418,000 for the nine months ended
September 30, 1998.
10
<PAGE>
YEAR ENDED DECEMBER 31, 1998 AND TEN MONTHS ENDED DECEMBER 31, 1997:
China Gateway Holdings Inc. -
General and Administrative Expenses. For the year ended December 31, 1998,
general and administrative expenses were RMB 5,447,516. For the ten months ended
December 31, 1997 general and administrative expenses were RMB 575,003. General
and administrative expenses increased substantially in 1998 as compared to 1997
primarily as a result of increased personnel-related expenses.
Other Income (Expense). For the year ended December 31, 1998, interest
expense was RMB 76,522. For the ten months ended December 31, 1997, interest
expense was RMB 2,343. For the year ended December 31, 1998, interest income was
RMB 27,999 and other income was RMB 230,667. For the ten months ended December
31, 1997, interest income was RMB 4,303 and other income was RMB 11,326.
Equity in Net Income (Loss) of Joint Venture. As a result of the Company's
60% equity interest in the Joint Venture, the Company recorded equity in net
loss of joint venture of RMB 14,780,842 for the year ended December 31, 1998, as
compared to equity in net income of joint venture of RMB 2,407,168 for the ten
months ended December 31, 1997.
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.
Net Income (Loss). Net loss was RMB 20,046,214 for the year ended December
31, 1998. Net income was RMB 1,845,451 for the ten months ended December 31,
1997.
The Joint Venture -
Sales. Sales decreased significantly in 1998 as compared to 1997, declining
by RMB 33,255,000 or 35.6%. For the year ended December 31, 1998, sales were RMB
60,322,000, consisting of RMB 55,417,000 (91.9%) to unrelated parties and RMB
4,905,000 (8.1%) to related parties. For the ten months ended December 31, 1997,
sales were RMB 93,577,000, consisting of RMB 75,366,000 (80.5%) to unrelated
parties and RMB 18,211,000 (19.5%) to related parties. During the year ended
September 30, 1999, 15,847 metric tons of cartonboard were sold at an average
per ton selling price of RMB 3,800. During the ten months ended December 31,
1997, 27,648 metric tons of cartonboard were sold at an average per ton selling
price of RMB 3,380.
The decrease in sales in 1998 as compared to 1997 was a result of several
factors. The Joint Venture abandoned its previous policy of reducing prices to
maintain or increase market share. Due to low profit margins and credit risk,
the Joint Venture intentionally reduced sales to related parties in 1998. The
Joint Venture 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 Joint
Venture 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. For the year ended December 31, 1998, the Joint Venture had a
negative gross profit of RMB 6,432,000 or 10.7% of sales. For the ten months
ended December 31, 1997, the Joint Venture had a gross profit of RMB 16,423,000
or 17.6% of sales. The Joint Venture incurred a negative gross profit for the
year ended December 31, 1998 as a result of its cost of raw material inventory
having included certain unrecoverable costs. The Joint Venture 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 was forgiven by Wuhan
Company effective December 31, 1998, as described above at "Overview".
Operating Expenses. For the year ended December 31, 1998, operating
expenses were RMB 15,024,000 or 24.9% of sales. For the ten months ended
December 31, 1997, operating expenses were RMB 9,637,000 or 10.3% of sales.
Operating expenses increased significantly in 1998 as compared to 1997 primarily
as a result of increased personnel-related expenses.
Loss from Operations. For the year ended December 31, 1998, the loss from
operations was RMB 21,456,000. For the ten months ended December 31, 1997,
income from operations was RMB 6,786,000. The Joint Venture incurred a net loss
from operations in 1998 as compared to net income from operations in 1997
primarily as a result of the substantial decrease in sales.
Other Income (Expense). For the year ended December 31, 1998, other income
was RMB 234,000, consisting of interest income of RMB 26,000 and other income of
RMB 208,000. For the ten months ended December 31, 1997, other income was RMB
791,000, consisting of interest income of RMB 742,000 and other income of RMB
49,000.
Income Taxes. The Joint Venture did not have any income tax expense for the
year ended December 31, 1998 or the ten months ended December 31, 1997.
Net Income (Loss). Net loss was RMB 24,635,000 for the year ended December
31, 1999, as compared to net income of RMB 4,012,000 for the year ended December
31, 1997.
FINANCIAL CONDITION:
LIQUIDITY AND CAPITAL RESOURCES:
Chine Gateway Holdings Inc. -
Operating. For the year ended December 31, 1998, the Company's operations
utilized cash resources of RMB 3,437,859. For the ten months ended December 31,
1997, the Company's operations utilized cash resources of RMB 594,206. As of
December 31, 1998, the Company had a net working capital deficiency of RMB
588,404, equivalent to a current ratio of 0.59:1. The Company's operations
utilized an increased amount of cash resources in 1998 as compared to 1997 as a
result of an increase operating expenses.
11
<PAGE>
For the nine months ended September 30, 1999, the Company's operations
generated cash resources of RMB 155,309, as compared to utilizing cash resources
of RMB 2,044,250 for the nine months ended September 30, 1998. As of September
30, 1999, the Company had a net working capital deficiency of RMB 864,711,
equivalent to a current ratio of 0.73:1. The Company's operations generated cash
resources in 1999 as compared to utilizing cash resources in 1998 primarily as a
result of a reduction in operating expenses.
Investing. During the year ended December 31, 1998, the Company increased
its investment in Joint Venture by RMB 5,752,909. During the ten months ended
December 31, 1997, the Company increased its investment in Joint Venture by RMB
4,867,636. During the nine months ended September 30, 1999, the Company had no
additions to its investment in Joint Venture.
During the year ended December 31, 1998, the Company had no additions to
property and equipment. During the ten months ended December 3, 1997, the
Company had RMB 11,877 of additions to property and equipment. During the nine
months ended September 30, 1999, the Company had RMB 129,304 of additions to
property and equipment. During the nine months ended September 30, 1998, the
Company had no additions to property and equipment.
Financing. From March 1997 through September 1999, the Company has relied
primarily on the sale of its securities for the working capital resources to
fund its operations and investments in the Joint Venture.
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.
During the nine months ended September 30, 1999, certain shareholders made
advances to the Company totaling 506,451, which are unsecured, non-interest
bearing and are payable on demand.
12
<PAGE>
THE JOINT VENTURE:
Operating. As of December 31, 1998, the Joint Venture had net working
capital of RMB 14,107,000, equivalent to a current ratio of 1.42:1. As of
September 30, 1999, the Joint Venture had net working capital of RMB 6,761,000,
equivalent to a current ratio of 1.22:1.
A primary reason for the Joint Venture having a significant positive
working capital position at December 31, 1998 and September 30, 1999 was the
forgiveness of debt by Wuhan Company effective December 31, 1998 of RMB
26,112,048, respectively.
Investing. As of September 30, 1999 the Joint Venture had budgeted capital
expenditures of approximately RMB 500,000 through December 31, 1999.
Financing. From March 1997 through September 1999, the Joint Venture has
relied on the credit provided by Wuhan Company, the 40% interest holding in the
Joint Venture, supplemented by investments by the Company and short-term bank
loans, for the working capital resources to fund its operations.
The Joint Venture had short-term bank loans of RMB 1,227,057 at December
31, 1998, which were fully repaid during the year ended December 31, 1999.
During the ten months ended December 31, 1997, the Company advanced RMB
1,816,589 to the Joint Venture. This advance was repaid during 1998.
At December 31, 1998 and 1997, and at September 30, 1999, the Joint Venture
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, 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 648,124 for the year ended December 31, 1998, the ten months
ended December 31, 1997 and the nine months ended September 30, 1999,
respectively. The weighted average interest rate on 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.
At December 31, 1998 and 1997, and at September 30, 1999, the Joint Venture
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 and the nine months
ended September 30, 1999, the Joint Venture purchased RMB 4,551,242, RMB
15,239,725 and RMB 0, respectively, of raw material inventory and had net sales
of RMB 4,905,190, RMB 18,211,179, and RMB 0, respectively, to this affiliate.
Additional transactions with respect to the Joint Venture are described
above at "Overview".
Both the Company and the Joint Venture have incurred operating losses and
negative cash flows from operations during the past few years that may impair
the Company's ability to obtain additional equity capital. The Company has
relied on the sale of its securities and the credit provided by Wuhan Company to
fund the operations of the Joint Venture since 1997. Based on currently proposed
plans and assumptions relating to the Joint Venture's operations, combined with
the credit provided by Wuhan Company, the Company believes that the projected
cash flows from operations, combined with the credit provided by Wuhan Company,
will provide sufficient liquidity and capital resources to support the Joint
Venture's operations through December 31, 2000.
However, the Company anticipates that it will require additional capital to
meet its funding obligations to the Joint Venture. In addition, to the extent
that the Joint Venture experiences a substantial increase in revenues and/or the
Company acquires other business operations, additional capital may be required.
Should the cash flows generated by operating and financing activities be
insufficient to fund future operations, the ability of both the Company and the
Joint Venture to conduct operations may be impaired.
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. 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.
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 its products in 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.
13
<PAGE>
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.
14
<PAGE>
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
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, the number of shares of common stock
owned by each such person and group and 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>
PERCENTAGE OF OUTSTANDING
NUMBER OF SHARES OF COMMON SHARES OF COMMON STOCK
NAME OF BENEFICIAL OWNER 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%
Chen Yuen Chen -- --%
All Directors and Executive
Officers as a group (4 persons) 1,422,868 33.03%
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
<FN>
(1) Calculations based upon 4,307,158 shares issued and outstanding on December 31, 1999.
(2) Represents 1,250,000 shares held by Gateway Worldwide Ltd., a British Virgin Islands corporation owned
equally by Lawrence Hon and Danny Wu.
(3) Represents 172,868 shares held by Critical Success Ltd., a British Virgin Islands corporation, of which
Mr. Chan is the sole shareholder.
</TABLE>
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, excluding persons who resigned subsequent to that date. 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.
NAME AGE POSITION
---- --- --------
Danny Wu 39 Chairman of the Board of Directors, Chief
Executive Officer and Secretary
Lawrence Hon 51 Director
Vincent Chan 36 Director
Chen Yuen Chen 29 Vice President - Business Department
BACKGROUND AND EXPERIENCE
Danny W. Wu was appointed Chairman of the Board of Directors, Chief Executive
Officer 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 its Hong Kong office
overseeing trading, direct investment activities and setting up joint venture
enterprises in China. The joint ventures related to 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. He is a graduate of the University of Hong Kong with a degree
in management studies and economics.
17
<PAGE>
Lawrence 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 Equipment Ltd. 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. 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 provided wood fiber for paper, packaging
and panel-board production. Mr. Hon is currently the Chief Executive Officer and
President of AgroCan Corporation, a public reporting company specializing in the
production and distribution of fertilizer products 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.
Vincent Chan was appointed a director of the Company in March 1999. In 1996, Mr.
Chan joined Suez Asia Inc., a 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 acquisitions
in Asia, including China. Mr. Chan received a Bachelor of Arts degree in
Geography and Economics from the University of Hong Kong in 1986, and an MBA
degree from the Manchester Business School in the United Kingdom in 1998.
Chen Yuen 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. From 1993 through 1999, Mr. Chen was the Marketing
Manager for a major toy manufacturer in Guangzhou. He managed a team of 30 sales
and marketing personnel. He is a graduate of the Faculty of Electronics of
Beijing Printing Institute where he majored in electronic publishing.
18
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during the fiscal
years ended December 31, 1998 and 1997 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
NAME AND PRINCIPAL POSITION YEAR SALARY
--------------------------- ---- ------
Nils A. Ollquist(1), Chairman, President, 1998 US$86,710
Chief Executive Officer and Secretary 1997 US$88,258
(1) On March 20, 1999, Nils A. Ollquist resigned as Chairman, President, Chief
Executive Officer and Secretary and Danny Wu became Chairman, Chief Executive
Officer and Secretary.
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, twelve 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 had not adopted a stock option plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1998, the ten months ended December 31,
1997, and the nine months ended September 30, 1999, the Company advanced RMB
579,116, RMB 496,011 and RMB 0, respectively, to affiliated entities controlled
by a shareholder of the Company. At December 31, 1998 and 1997, and at September
30, 1999, the Company has RMB 266,928, RMB 121,352 and RMB 266,928,
respectively, due from these affiliates. These advances are unsecured,
non-interest bearing and are due on demand.
During the ten months ended December 31, 1997, the Company advanced RMB
1,816,589 to the Joint Venture. This advance was repaid during 1998.
During the year ended December 31, 1998, the Joint Venture made advances of
RMB 44,319 to the Company. These advances were repaid during 1999.
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 RMB 26,112,048 of the initial indebtedness. Because the debt forgiveness
was made by a significant equity investor in the Joint Venture, for US GAAP the
Joint Venture accounted for the debt extinguishment as a capital contribution by
the Joint Venturer, which resulted in an increase in the Company's equity
investment and capital in excess of par of RMB 15,667,229.
At December 31, 1998 and 1997, and at September 30, 1999, the Joint Venture
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 648,124 for the year ended December 31, 1998, the ten months
ended December 31, 1997, and the nine months ended September 30, 1999,
respectively. 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.
At December 31, 1998 and 1997, and at September 30, 1999, the Joint Venture
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, and the nine months
ended September 30, 1999, the Joint Venture purchased RMB 4,551,242, RMB
15,239,725, and RMB 0, respectively, of raw material inventory and had net sales
of RMB 4,905,190, RMB 18,211,179, and RMB 0, respectively, to this affiliate.
During the nine months ended September 30, 1999, certain shareholders made
advances to the Company totaling RMB 506,451. The advances are unsecured,
non-interest bearing and are due 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.
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 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 Holdings Ltd., 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 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.
HIGH LOW
---- ---
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
The closing bid price for the common stock as reported by OTC Bulletin
Board on January 6, 2000 was $0.625.
As of December 31, 1999, there were 44 holders of record of the Company's
Common stock.
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. The payment of dividends on the Company's
common stock in the future will depend on the results of operations, financial
condition, capital expenditure plans and other cash commitments of the Company
and will be at the sole discretion of the Board of Directors.
22
<PAGE>
ITEM 2. LEGAL PROCEEDINGS
There are no pending or threatened legal proceedings against the Company,
including its subsidiaries, or the Joint Venture.
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
four 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 shares
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 shares were issued 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.
23
<PAGE>
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. 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.
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 an 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 1998 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 an 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 1998 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 1998 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 an exercise price of $.10, at $1.00 per unit to four
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 an exercise price of $.10, at $1.50 per unit to one 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 1998 to December 1998, the Company issued 35,000 shares of
common stock to two 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 relations 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 an 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
two 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 such securities 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 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
25
<PAGE>
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 Securities and
Exchange 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 LTD.)
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998,
TEN MONTHS ENDED DECEMBER 31, 1997, AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
CONTENTS PAGE
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
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
China Gateway Holdings Inc. (formerly
Orient Packaging Holdings Ltd.)
We have audited the accompanying consolidated balance sheets of China Gateway
Holdings Inc. (formerly Orient Packaging Holdings Ltd.) 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 and the ten months ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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 Ltd.) 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 and the ten months ended December 31,
1997, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, since inception, the Company
has accounted for its 60% interest in Wuhan Dong Feng Paper Company Limited (a
Joint Venture) as a consolidated subsidiary. Because the 40% minority partner in
the Joint Venture retained certain participating rights, the Company's 1999,
1998 and 1997 financial statements have been restated to report its investment
in the Joint Venture using the equity method of accounting. The restatement did
not change net income (loss), net income (loss) per share or shareholders'
equity from what was previously reported.
HORWATH GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
May 14, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
================================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
================================================================================
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997,
and September 30, 1999 (Unaudited)
DECEMBER 31, SEPTEMBER 30,
------------------------------------- -----------------------
1998 1998 1997 1999 1999
----------- ----------- ----------- ----------- ----------
US DOLLARS RMB RMB US DOLLARS RMB
(Restated - (Restated - (Restated - (Unaudited) (Unaudited)
Note 1 ) Note 1) Note 1) (Restated - (Restated -
Note 8) Note 8)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash 71,368 590,849 618,450 148,415 1,228,713
Due from affiliates (Note 4) 32,242 266,928 121,352 32,242 266,928
Due from Joint Venture -- -- 1,816,589 -- --
Prepaid expenses and other -- -- -- 102,869 851,640
----------- ----------- ----------- ----------- ----------
Total current assets 103,610 857,777 2,556,391 283,526 2,347,281
Investment in joint venture 1,680,670 13,914,100 7,274,804 1,049,426 8,688,096
Property equipment, net of
accumulated depreciation
(Note 3) 597 4,943 8,643 11,082 91,747
----------- ----------- ----------- ----------- ----------
1,784,877 14,776,820 9,839,838 1,344,034 11,127,124
----------- ----------- ----------- ----------- ----------
</TABLE>
(Continued)
F-3
<PAGE>
<TABLE>
<CAPTION>
================================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
================================================================================
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997,
and September 30, 1999 (Unaudited)
DECEMBER 31, SEPTEMBER 30,
------------------------------------ --------------------------
1998 1998 1997 1999 1999
------------ ------------ --------- ------------ ------------
US DOLLARS RMB RMB US DOLLARS RMB
(Restated - (Restated - (Restated - (Unaudited) (Unaudited)
Note 1 ) Note 1) Note 1) (Restated - (Restated -
Note 8) Note 8)
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable 109,383 905,571 1,709,452 -- --
Accrued expenses 59,947 496,291 192,766 326,804 2,705,541
Due to Joint Venture 5,353 44,319 -- -- --
Due to affiliates -- -- -- 61,174 506,451
------------ ------------ --------- ------------ ------------
Total liabilities (all current) 174,683 1,446,181 1,902,218 387,978 3,211,992
------------ ------------ --------- ------------ ------------
Commitments and contingencies
(Note 1)
Shareholders' equity (Note 5):
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) 1,845,451 (2,926,496) (24,228,129)
Other comprehensive income 2,670 22,105 18,139 2,560 21,194
------------ ------------ --------- ------------ ------------
Total shareholders' equity 1,610,194 13,330,639 7,937,620 956,056 7,915,132
------------ ------------ --------- ------------ ------------
1,784,877 14,776,820 9,839,838 1,344,034 11,127,124
============ ============ ========= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
================================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1998,
Ten Months Ended December 31, 1997, and
Nine Months Ended September 30, 1999 and 1998 (Unaudited)
YEAR ENDED DECEMBER 31, Ten months ended NINE MONTHS ENDED SEPTEMBER 30,
-------------------------- December 31, ---------------------------------------
1998 1998 1997 1999 1999 1998
------------ ------------ ----------- ------------- ----------- -----------
US DOLLARS RMB RMB US DOLLARS RMB RMB
(Restated - (Restated - (Restated - (Unaudited) (Unaudited) (Unaudited)
Note 1 ) Note 1) Note 1) (Restated - (Restated - (Restated -
Note 8) Note 8) Note 1)
------------ ------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Substantially to a
related party -- -- -- -- -- --
Others -- -- -- -- -- --
------------ ------------ ----------- ------------- ----------- -----------
-- -- -- -- -- --
------------ ------------ ----------- ------------- ----------- -----------
Cost of sales:
Substantially to a
related party -- -- -- -- -- --
Others -- -- -- -- -- --
------------ ------------ ----------- ------------- ----------- -----------
-- -- -- -- -- --
------------ ------------ ----------- ------------- ----------- -----------
Gross (loss) profit -- -- -- -- -- --
------------ ------------ ----------- ------------- ----------- -----------
Operating expenses:
Sales and marketing
expenses -- -- -- -- -- --
General and administrative
expenses 658,000 5,447,516 575,003 189,525 1,569,059 3,345,992
------------ ------------ ----------- ------------- ----------- -----------
658,000 5,447,516 575,003 189,525 1,569,059 3,345,992
------------ ------------ ----------- ------------- ----------- -----------
(Loss) income from
operations (658,000) (5,447,516) (575,003) (189,525) (1,569,059) (3,345,992)
------------ ------------ ----------- ------------- ----------- -----------
(Continued)
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
================================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
================================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 1998,
Ten Months Ended December 31, 1997, and
Nine Months Ended September 30, 1999 and 1998 (Unaudited)
YEAR ENDED DECEMBER 31, Ten months ended NINE MONTHS ENDED SEPTEMBER 30,
-------------------------- December 31, -------------------------------------
1998 1998 1997 1999 1999 1998
------------ ------------ ------------- ------------ ----------- ------------
US DOLLARS RMB RMB US DOLLARS RMB RMB
(Restated - (Restated - (Restated - (Unaudited) (Unaudited) (Unaudited)
Note 1 ) Note 1) Note 1) (Restated - (Restated - (Restated -
Note 8) Note 8) Note 1)
<S> <C> <C> <C> <C> <C> <C>
Other income (expense):
Interest income 3,382 27,999 4,303 1 8 26,022
Interest expense (9,243) (76,522) (2,343) -- -- (76,505)
Commission income -- -- -- 92,724 767,689 --
Other 27,862 230,667 11,326 -- -- --
------------- ------------ ------------- ------------ ----------- ------------
22,001 182,144 13,286 92,725 767,697 (50,483)
------------- ------------ ------------- ------------ ----------- ------------
(Loss) income before earnings
of joint venture (635,999) (5,265,372) (561,717) (96,800) (801,362) (3,396,475)
Equity in earnings of
joint venture (1,785,363) (14,780,842) 2,407,168 (631,244) (5,226,004) (7,451,020)
------------- ------------ ------------- ------------ ----------- ------------
Net (loss) income (2,421,362) (20,046,214) 1,845,451 (728,044) (6,027,366) (10,847,495)
============= ============ ============= ============ =========== ============
Basic net (loss) earnings
per common share (0.67) (5.54) 0.62 (0.17) (1.42) (3.04)
============= ============ ============= ============ =========== ============
Diluted net (loss) earnings
per common share (0.67) (5.54) 0.58 (0.17) (1.42) (3.04)
============= ============ ============= ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
================================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
================================================================================
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, 1998,
Ten Months Ended December 31, 1997, and
Nine Months Ended September 30, 1999 (Unaudited)
(Expressed in Chinese Renminbi)
(Restated -- Notes 1 and 8)
FOREIGN
COMMON SHARES CAPITAL RETAINED CURRENCY
-------------------------- IN EXCESS EARNINGS TRANSLATION
SHARES AMOUNT OF PAR (DEFICIT) ADJUSTMENTS TOTAL
------------ ------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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 -- -- -- 1,845,451 -- 1,845,451
Other comprehensive income -- -- -- -- 18,139 18,139
Comprehensive income -- -- -- -- -- 1,863,590
------------ ------------ ------------ ------------- ------------ ------------
Balances at December 31, 1997 2,987,000 2,475 6,071,555 1,845,451 18,139 7,937,620
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 -- -- -- (20,046,214) -- (20,046,214)
Other comprehensive income -- -- -- -- 3,966 3,966
Comprehensive loss -- -- -- -- -- (20,042,248)
------------ ------------ ------------ ------------- ------------ ------------
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) -- -- -- (6,027,366) -- (6,027,366)
Other comprehensive income (unaudited) -- -- -- -- (911) (911)
Comprehensive loss (unaudited) -- -- -- -- -- (6,028,277)
------------ ------------ ------------ ------------- ------------ ------------
Balances at September 30,
1999 (unaudited) 4,307,158 3,568 32,118,499 (24,228,129) 21,194 7,915,132
============ ============ ============ ============= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
================================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1998,
Ten Months Ended December 31, 1997, and
Nine Months Ended September 30, 1999 and 1998 (Unaudited)
YEAR ENDED DECEMBER 31, Ten months ended
------------------------ December 31,
1998 1998 1997
----------- ------------ ------------
US DOLLARS RMB RMB
(Restated - (Restated - (Restated -
Note 1 ) Note 1) Note 1)
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income (2,421,362) (20,046,214) 1,845,451
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation 447 3,700 3,234
Equity (earnings) losses in joint venture 1,785,363 14,780,842 (2,407,168)
Compensation expense related to stock issuance 73,541 608,837 --
Decrease (increase) in assets
Due from affiliates (17,584) (145,576) (121,352)
Due from Joint Venture 219,424 1,816,589 (1,816,589)
Increase (decrease) in liabilities
Accounts payable (97,100) (803,881) 1,709,452
Accrued expenses 36,663 303,525 192,766
Amount due to Joint Venture 5,353 44,319 --
----------- ------------ ------------
Net cash used in operating activities (415,255) (3,437,859) (594,206)
----------- ------------ ------------
Cash flows from investing activities:
Investment in joint venture (694,888) (5,752,909) (4,867,636)
Capital expenditures -- -- (11,877)
----------- ------------ ------------
Net cash used in investing activities (694,888) (5,752,909) (4,879,513)
----------- ------------ ------------
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1999 1999 1998
----------- ------------ ------------
US DOLLARS RMB RMB
(Unaudited) (Unaudited) (Unaudited)
(Restated - (Restated - (Restated -
Note 8) Note 8) Note 1)
----------- ------------ ------------
Cash flows from operating activities:
Net loss (728,044) (6,027,366) (10,847,495)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 5,134 42,500 2,775
Equity (earnings) losses in joint venture 631,244 5,226,004 7,451,020
Increase (increase) in assets
Due from affiliates -- -- (178,319)
Prepaid expenses and other (102,869) (851,640) --
Due from Joint Venture -- -- 1,816,589
Increase (decrease) in liabilities
Accounts payable (109,383) (905,571) (390,276)
Accrued expenses 266,857 2,209,250 (170,471)
Amounts due to Joint Venture (5,353) (44,319) 271,927
Amounts due to affiliates 61,174 506,451 --
----------- ------------ ------------
Net cash provided by (used in) operating activities 18,760 155,309 (2,044,250)
----------- ------------ ------------
Cash flows from investing activities:
Investment in joint venture -- -- (5,752,909)
Capital expenditures (15,619) (129,304) --
----------- ------------ ------------
Net cash used in investing activities (15,619) (129,304) (5,752,909)
----------- ------------ ------------
</TABLE>
(Continued)
F-8
<PAGE>
<TABLE>
<CAPTION>
================================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended December 31, 1998,
Ten Months Ended December 31, 1997, and
Nine Months Ended September 30, 1999 and 1998 (Unaudited)
YEAR ENDED DECEMBER 31, Ten months ended
------------------------ December 31,
1998 1998 1997
----------- ------------ ------------
US DOLLARS RMB RMB
(Restated - (Restated - (Restated -
Note 1 ) Note 1) Note 1)
<S> <C> <C> <C>
Cash flows from financing activities:
Issuance of common stock 1,106,330 9,159,201 6,074,030
----------- ------------ ------------
Net cash provided by financing activities 1,106,330 9,159,201 6,074,030
----------- ------------ ------------
Effect of exchange rate changes on cash 479 3,966 18,139
----------- ------------ ------------
Increase (decrease) in cash (3,334) (27,601) 618,450
Cash, beginning 74,702 618,450 --
----------- ------------ ------------
Cash, ending 71,368 590,849 618,450
=========== ============ ============
Supplemental disclosures of cash flow
information:
Cash paid for interest 9,243 76,522 2,343
=========== ============ ============
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1999 1999 1998
----------- ------------ ------------
US DOLLARS RMB RMB
(Unaudited) (Unaudited) (Unaudited)
(Restated - (Restated - (Restated -
Note 8) Note 8) Note 1)
----------- ------------ ------------
Cash flows from financing activities:
Issuance of common stock 74,016 612,770 7,931,501
----------- ------------ ------------
Net cash provided by financing activities 74,016 612,770 7,931,501
----------- ------------ ------------
Effect of exchange rate changes on cash (110) (911) 12,352
----------- ------------ ------------
Increase in cash 77,047 637,864 146,694
Cash, beginning 71,368 590,849 618,450
----------- ------------ ------------
Cash, ending 148,415 1,228,713 765,144
=========== ============ ============
Supplemental disclosures of cash flow
information:
Cash paid for interest -- -- 76,505
=========== ============ ============
</TABLE>
(Continued)
F-9
<PAGE>
================================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
================================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended December 31, 1998,
Ten Months Ended December 31, 1997, and
Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Supplemental disclosure of non-cash investing and financing activities:
Effective December 31, 1998, the Company's equity investment increased as a
result of additional capital contributions of RMB 26,112,048 (US$ 3,153,629)
made by the Joint Venturer.
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:
RMB
------------
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
============
See notes to consolidated financial statements.
F-10
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
===============================================================================
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 Ltd.) and
its subsidiaries, Orient Investments Limited ("OIL") and Orient Packaging
Limited ("OPL"), collectively referred to as the "Company". The Company's
investment in Wuhan Dong Feng Paper Company Limited ("Wuhan Limited" or the
"Joint Venture") has been accounted for under the equity method of
accounting. CGH, 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) CGH was incorporated in Delaware. Effective June 27, 1997, CGH issued
2,310,000 shares of common stock to the shareholders of OIL in exchange for
their interests in OIL. Prior to the exchange, CGH 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 CGH. 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 CGH and its subsidiaries. OIL and OPL are wholly-owned,
British Virgin Islands incorporated companies. On December 20, 1996, OPL
entered into a Joint Venture Agreement with Wuhan Dong Feng Paper Mill
Company with a term of 30 years. 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
on 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 a 40% interest.
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.
Since inception, the Company has accounted for its 60% interest in the
Joint Venture, which is similar to a majority-owned subsidiary, as a
consolidated subsidiary. During the six months ended June 30, 2000, the
Company determined that the Joint Venturer had retained certain rights
under the Joint Venture Agreement that provided the Joint Venturer with the
ability to participate in management, although such rights have never been
asserted by the Joint Venturer. Under Emerging Issues Task Force Issue No.
96-16, if a minority joint venture partner has such rights, the majority
joint venture partner is required to account for its interest in the joint
venture under the equity method of accounting.
During the six months ended June 30, 2000, the Joint Venture Agreement was
amended to clearly express the intent of the parties that the Company is
the controlling party in the Joint Venture. As a result, the Company's
financial statements through September 30, 1999 have been restated to
report the Company's investment in the Joint Venture under the equity
method of accounting. The restatement did not have any effect on net income
(loss), net income (loss) per share, or shareholders' equity. However,
because the Joint Venture Agreement was amended during 2000, the Company is
reporting its investment in the Joint Venture as a consolidated subsidiary
commencing January 1, 2000.
Additionally, the Company has determined that net income for the ten months
ended December 31, 1997 and net loss for the year ended December 31, 1998
were overstated by RMB 224,804 due to an error in the calculation of
minority interest, when the Company was accounting for its 60% interest in
the Joint Venture as a consolidated subsidiary. Accordingly, the financial
statements have been restated to correct this error, resulting in a
decrease in net income of RMB 224,804 and basic and diluted net income per
share of RMB 0.07 for the ten months ended December 31, 1997, and a
decrease in net loss of RMB 224,804 and basic and diluted net loss per
share of RMB 0.06 for the year ended December 31, 1998.
(d) Through December 31, 1997, OPL had contributed cash of RMB 4,867,636 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 5,752,909 as the remaining portion of its original capital
contribution to the Joint Venture. According to the Joint Venture
agreement, the Joint Venturer's initial 40% 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 not made any additional
contributions. 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 LTD.)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and basis of consolidated financial statements (continued):
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 ("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-owned subsidiaries. Material intercompany accounts have been
eliminated on consolidation. The Company's investment in the Joint Venture
is accounted for under the equity method.
(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) Investment:
The Company accounts for its interest in the Joint Venture under the equity
method. The Company's 60% interest in the Joint Venture is stated at cost,
adjusted for its equity in earnings or losses of the Joint Venture and for
its share of additional capital contributions made by the Joint Venturer
(Note 6).
The following is a summary of condensed financial information of the Joint
Venture:
<TABLE>
<CAPTION>
Condensed Balance Sheet
(In thousand RMB)
Year ended Ten months ended Nine months
December 31, December 31, ended September
1998 1997 30, 1999
--------------- ---------------- ---------------
(unaudited)
<S> <C> <C> <C>
Current assets due from related parties 1,634 1,135 1,310
Current assets 45,978 63,879 36,183
Property, plant and equipment 9,123 7,307 8,340
--------------- ---------------- ---------------
Total assets 56,735 72,321 45,833
=============== ================ ===============
Due to related parties 4,730 32,610 11,636
Other current liabilities 28,775 23,714 19,096
Shareholders' equity 23,230 15,997 15,101
--------------- ---------------- ---------------
Total liabilities and shareholders' equity 56,735 72,321 45,833
=============== ================ ===============
</TABLE>
<TABLE>
<CAPTION>
Condensed Income Statement
(In thousand RMB)
Year ended Ten months ended Two months ended Nine months Nine months
December 31, December 31, February 28, ended September ended September
1998 1997 1997 30, 1999 30, 1998
------------ ---------------- ---------------- --------------- ----------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales
Related parties 4,905 18,211 3,486 -- 2,605
Other 55,417 75,366 10,037 42,660 40,478
------------ ---------------- ---------------- --------------- ----------------
60,322 93,577 13,523 42,660 43,083
------------ ---------------- ---------------- --------------- ----------------
Cost of sales
Related parties 4,551 15,240 2,790 -- 3,020
Other 62,203 61,914 10,097 38,209 40,947
------------ ---------------- ---------------- --------------- ----------------
66,754 77,154 12,887 38,209 43,967
------------ ---------------- ---------------- --------------- ----------------
Gross profit (6,432) 16,423 636 4,451 (884)
Operating expenses 15,024 9,637 1,477 13,035 9,265
------------ ---------------- ---------------- --------------- ----------------
Income (loss) from
operations (21,456) 6,786 (841) (8,584) (10,149)
Interest expense
Related parties (3,116) (3,117) (974) (648) (2,087)
Other (297) (448) -- (80) (207)
Other income
(expense) 234 791 177 602 25
------------ ---------------- ---------------- --------------- ----------------
Net income (loss) (24,635) 4,012 (1,638) (8,710) (12,418)
============ ================ ================ =============== ================
</TABLE>
At December 31, 1998 and 1997, and at September 30, 1999 (unaudited), the
Joint Venture 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 648,124 for the
year ended December 31, 1998, the ten months ended December 31, 1997 and
the nine months ended September 30, 1999 (unaudited), respectively. The
weighted average interest rate on 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
Joint Venture 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 Joint Venture 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.
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 RMB 26,112,048 of the initial indebtedness. Because
the debt forgiveness was made by a significant equity investor in the Joint
Venture, for US GAAP the Joint Venture accounted for the debt
extinguishment as a capital contribution by the Joint Venturer, which
resulted in an increase in the Company's equity investment and capital in
excess of par of RMB 15,667,229.
(d) Property and equipment:
Property 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:
Office equipment 18 years
Machinery 16 years
F-12
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies (continued):
(d) Property and equipment (continued):
Repairs and maintenance costs are expensed when incurred.
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. The
amount was not material for any period presented.
The translation of amounts from RMB into United States 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
equals 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 LTD.)
===============================================================================
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 number of 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 anti-dilutive (i.e., 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 were anti-dilutive. 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 amounts due to and from affiliates and the Joint
Venturer 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 LTD.)
===============================================================================
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 is 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 years 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, as amended, 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 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 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 LTD.)
===============================================================================
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.
F-16
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Property 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
(Restated - (Restated - (Restated - (Unaudited) (Unaudited)
Note 1 ) Note 1) Note 1) (Restated - (Restated -
Note 8) Note 8)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Furniture and fixtures $ - - - $ 8,109 67,137
Office equipment 1,435 11,877 11,877 8,945 74,044
----------- ----------- ----------- ----------- -----------
1,435 11,877 11,877 17,054 141,181
----------- ----------- ----------- ----------- -----------
Less accumulated depreciation (838) (6,934) (3,234) (5,972) (49,434)
$ 597 4,943 8,643 11,082 91,747
=========== =========== =========== =========== ===========
</TABLE>
4. Related party transactions:
During the year ended December 31, 1998, the ten months ended December 31,
1997 and the nine months ended September 30, 1999 (unaudited), the Company
advanced RMB 579,116, RMB 496,011 and RMB 0, respectively, to affiliated
entities controlled by a shareholder of the Company. At December 31, 1998,
December 31, 1997 and September 30, 1999, RMB 266,928, RMB 121,352 and RMB
266,928, respectively, are due from these affiliates. These advances are
unsecured, non-interest bearing and are due on demand.
During the year ended December 31, 1998, the Joint Venture made advances of
RMB 44,319 to the Company. These advances were repaid during 1999.
During the ten months ended December 31, 1997, the Company advanced RMB
1,816,589 to the Joint Venture to fund inventory purchases, which was
repaid during 1998.
F-17
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Related party transactions (continued):
During the nine months ended September 30, 1999, certain shareholders made
advances to the Company totaling RMB 506,451 (unaudited). The advances are
unsecured, non-interest bearing and are payable on demand.
5. 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 ten months ended December 31, 1997, the Company
sold 212,000 shares of common stock for net proceeds of RMB 4,393,414.
Entities arranging such financing received 285,000 shares for their
services and paid the Company 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 $0.78
per share to US$ 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 upon 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 RMB 434,642. The stock issued to an
employee resulted in compensation expense of 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 RMB 121,700.
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 US$ 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 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-18
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. 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
the Joint Venture 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-19
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. US GAAP and PRC accounting differences:
Pursuant to the terms of an agreement dated April 19, 1999 entered into
among the Joint Venturer, the Company and Wuhan Limited, the Joint Venturer
agreed to reimburse Wuhan Limited for certain operating expenses and cost
of sales, amounting to RMB 10,715,919 and RMB 12,280,192, respectively, and
to waive interest payable to it by Wuhan Limited amounting to RMB 3,115,937
for the year ended December 31, 1998. For PRC reporting purposes, these
amounts were reflected as a reduction in operating expenses, cost of sales
and interest expense, respectively, in the PRC financial statements of
Wuhan Limited for the year ended December 31, 1998.
In accordance with US GAAP, these transactions must be accounted for as
additional capital contributions made by the Joint Venturer, and have been
reflected as an increase in the Company's equity investment and capital in
excess of par for the 60% interest the Company has in the Joint Venture in
these consolidated financial statements. As a result of the above, net
income (loss) of Wuhan Limited as shown in its PRC reporting financial
statements is different from what is included in the equity method of
accounting for Wuhan Limited in these consolidated financial statements.
The reconciliation of net income (loss) between the PRC financial
statements and the US GAAP financial statements is as follows:
Net income
as shown in Net loss
Wuhan Limited's included
PRC in US GAAP
financial financial
statements statements
---------- ------------
RMB RMB
Income for the year ended
December 31, 1998 pursuant to PRC
accounting principles 1,475,027 1,475,027
Reimbursement of expenses, cost of
sales and waiver of interest by the
Joint Venturer - (26,112,048)
---------- ------------
1,475,027 (24,637,021)
========== ============
F-20
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income tax:
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 reconciliation between the effective tax rate and the statutory United
States federal income tax rate is as follows:
Ten months Nine months
Year ended ended ended
December 31, December 31, September 30,
1998 1997 1999
------------ ------------- -------------
(Restated - (Restated - (Unaudited)
Note 1 ) Note 1) (Restated -
Note 8)
Computed expected tax benefit (34%) (34%) (34%)
Operating losses for which a
benefit has not been recognized 34 34 34
------------ ------------- -------------
Effective tax rate 0% 0% 0%
============ ============= =============
At December 31, 1998 and September 30, 1999 (unaudited), the Company's
deferred tax assets are as follows:
December 31, September 30,
1998 1999
RMB RMB
(Restated - (Restated -
Note 1 ) Note 8)
------------ --------------
United States operating loss carryforward 310,098 307,074
Deferred tax asset valuation allowance (310,098) (307,074)
------------ --------------
Net deferred tax assets - -
============ ==============
At December 31, 1998 and September 30, 1999, the Company has United States
operating loss carryforwards of approximately RMB 912,053 and RMB 903,159
(unaudited), respectively. Losses are available for offset against future
United States 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 LTD.)
===============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Restatement of Commission Income:
The previously issued financial statements for the nine months ended
September 30, 1999 (unaudited) included commission income of RMB 1,422,310
that was incorrectly recorded as earned due to a misinterpretation of the
commission agreement. These financial statements have been restated to
reflect the correction of this error as follows:
Restatement
of Previously
Reported
Amounts Under
As Previously Equity Method
Reported of Accounting As Restated
------------- -------------- -----------
RMB RMB RMB
Total liabilities 33,217,553 1,789,682 3,211,992
Shareholders' equity 9,337,442 9,337,442 7,915,132
Net loss 4,605,056 4,605,056 6,027,366
Net loss per share 1.09 1.09 1.42
<PAGE>
===============================================================================
CHINA GATEWAY HOLDINGS INC.
(FORMERLY ORIENT PACKAGING HOLDINGS LTD.)
===============================================================================
PART III
ITEM 1. INDEX TO EXHIBITS
Exhibit
Number Title
------ -----
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 (Electronic filing only)
(1) Filed as an exhibit to the Registration Statement on Form 10-SB filed with
the Securities and Exchange Commission on January 7, 2000, and incorporated
herein by reference.
III-1
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this Amendment No. 2 to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
CHINA GATEWAY HOLDINGS INC.
---------------------------
(Registrant)
Date: November 8, 2000 By: /s/ Danny Wu
---------------------------------
Danny Wu
Chairman, Chief Executive Officer
and Secretary
III-2
<PAGE>
