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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-25963
CHINA GATEWAY HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State of 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) (Zip Code)
Registrant's telephone number, including area code: 011-852-2893-9676
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /X/
Revenues for the fiscal year ended December 31, 1999 were $7,407,367.
The aggregate market value of the common equity held by non-affiliates of the
registrant as of March 31, 2000 was approximately $1,127,396.
The registrant had 4,307,158 shares of common stock outstanding as of
March 31, 2000.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format: Yes No X
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
China Gateway Holdings Inc., formerly Orient Packaging
Holdings Limited (the "Company" or "OPL"), is a manufacturer of paperboard
products used in packaging material for the Chinese market. All of the Company's
manufacturing operations are conducted through Wuhan Dong Feng Paper Company
Limited, the Company's 60%-owned joint venture ("Wuhan Limited" or the "Joint
Venture"). Wuhan Limited has a term of 30 years that expires in 2027. The
Company's manufacturing facilities are located in Wuhan, Hubei Province, which
is in the Yangtze River basin area of the Central part of the People's Republic
of China ("China" or "PRC"). The Wuhan facilities have an annual production
capacity of 35,000 tons of paperboard products.
The Company manufactures bleached (white top) paperboard, a
product used primarily as covering in the manufacture of corrugated packaging
for the food and beverage industry. The Company provides such paperboard
products to customers in China. Major manufacturers of food and beverages in
China, especially foreign brand manufacturers, have increasingly turned to
bleached paperboard covering of corrugated boxes for wholesale distribution of
products. This is in response to the increasing awareness and sophistication of
Chinese consumers.
The Company's objective is to continue to develop as a
supplier of high quality packaging material to foreign brand name consumer
product companies in the Chinese market.
INDUSTRY
According to the industry publication Pulp & Paper
International (July 1999), in 1998, China ranked third, trailing only the United
States and Japan, for the consumption of paper and paperboard products in the
world. The demand for paperboard packaging material is correlated to the rate of
economic growth and consumer spending. The Company believes that China's rapid
growth in recent years and its entry into the World Trade Organization Pact in
November 1999 will increase the Company's market opportunity in China's
fragmented paper industry.
As a result of the Chinese government's earlier attempts at
producing a self-sufficient paper industry based on local enterprise production,
the paper industry in China is highly fragmented into many small capacity paper
mills. This has resulted in large inefficiencies in the industry as well as a
general low level of training and technical expertise. A large number of
`backyard' mills with annual production capacity of less than 5,000 tons per
annum account for a significant proportion of China's total paper production
capacity. Due to the difficulties in regulating environmental pollution from
such a large number of paper mills, and inefficiencies in such an industry
structure, the Chinese government has introduced regulations, effective from
1997, to phase-in a close down of all paper mills with a capacity of less than
10,000 tons per annum. The resulting reorganization of the industry will produce
a consolidation of business among those paper mills currently operating above
this threshold, resulting in significant investment incentives to expand
production capacity at each mill and a trend towards developing higher capacity
mills. With the decreasing number of suppliers in the market, there will be a
window for the Company to expand its market share.
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PRODUCTS
The Company produces mainly uncoated and coated white-lined
chipboard in a range of paperboard weights ranging from 180g/m2 to 400g/m2.
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 Company also produces small quantities of
other types of paperboard products, including whiteback paperboard used for the
packaging of foodstuffs.
Paperboard in China is graded according to Chinese national
technical standards, which are used as an indicator of the quality of the
paperboard but have no formal influence on the sales price achieved, which is
market driven. The white-lined chipboard produced by the Company is primarily
graded as Class C paperboard. Class C paperboard accounts for approximately 80%
of China's total domestic paperboard production.
Class B paperboard, produced by relatively few premium mills, accounts for the
balance of China's domestic production. The highest quality paperboard available
in the China market (Class A paperboard) is imported paperboard, mainly from
South Korea, Taiwan and Japan, which is used almost exclusively by foreign-owned
joint venture operations in some specialized high-quality end-uses.
The Company's product is used in a wide range of packaging for
both domestic and international consumer product manufacturers in China.
Generally, consumer product manufacturers subcontract the conversion and
printing of their packaging to corrugated box manufacturers. These corrugated
box manufacturers in turn assemble and fold containers using white-lined
chipboard supplied by the Company and kraft linerboard imported or manufactured
domestically. Corrugated paper is glued on the inside of the white-lined
chipboard and the kraft linerboard covers onto the corrugated paper and forms a
sandwich structure. Kraft linerboard is a kind of unbleached paperboard, which
maintains a light brown finishing. White-lined chipboard is a bleached
paperboard that has a white finishing like writing paper. The white-lined
chipboard surface of these containers may be printed with the end users' designs
and logos.
The Company's products have been utilized in final packaging
by a number of international beverage manufacturers, including Coca-Cola, Pepsi
Cola and Pabst Blue Ribbon beer for domestic China sales.
The Company's customers, comprised of both paper dealers
and corrugated box manufacturers, are based predominantly in Southern China
and the eastern coastal regions including Shanghai, Fujian and Zhejiang
provinces. The Company also has several customers based in the Sichuan
province in Central China. As of December 31, 1999, the Company had
approximately 20 major customers, of which the largest two accounted for
approximately 15% and 10% of sales, respectively, for the year ended
December 31, 1999.
MARKETING AND SALES
The Company's sales and marketing activities are centered in
Wuhan with additional support from the Company's executive office in Hong Kong.
The Company employs 22 salespersons with key sales regions controlled by a total
of five regional sales managers who operate on a salary and commission basis. In
addition to the Company's sales team in Wuhan, the Company utilizes a network of
five independent sales agents throughout the major markets in China.
The Company markets its white-lined chipboard under the
"Golden Horse" brand name. The brand name has been used by the Wuhan Dong Feng
Paper Mill Company ("Wuhan Company"), the Company's joint venture partner in
Wuhan Limited, for over 40 years.
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MANUFACTURING PROCESS
PRODUCTION
In the production process, the fiber stock for paperboard is
prepared from raw materials by placing wastepaper or pulp sheets into large
digesting tanks where, with the addition of certain chemicals, a fiber slurry is
produced. This slurry is delivered from the tanks by pipelines to the paper
machines where it is laid on to large moving mats which carry the slurry through
various rollers where it is pressed and dried, producing a continuous line of
board that is either wound onto reels or cut up separately into sheets.
The Wuhan facilities have six individual paper machines for
paperboard production and four separate digesting tanks for producing the fiber
slurry to be used in the paperboard production process. The trend in Western
paper mills is towards single large and high capacity paper machines, which are
able to produce significant economies of scale. However the existence of several
small paper machines creates a competitive advantage for a paper mill by
allowing quick and efficient production of paperboard with varying dimensions to
meet customized customer specifications while minimizing the amount of wastage
produced.
RAW MATERIAL SUPPLY
The major component of the Company's manufacturing
expenditures is the cost of raw material for the preparation of the fiber stock,
which generally accounts for between 60% - 75% of the paperboard's sales price.
In addition to being a major cost, the type and amount of fiber used directly
correlates to the quality characteristics of the paperboard. As a result, fiber
supply is a crucial aspect of the Company's manufacturing process.
The Company utilizes four different types of fiber: virgin
bleached kraft softwood pulp (BKSP), straw pulp and two main types of recycled
paper (mixed wastepaper and de-inked newspaper). The BKSP used is imported from
North America and trades at a price determined by international commodity
markets. The price of recycled paper is also determined by the international
commodity markets. The Company imports approximately 30% of its recycled paper
requirements, with the remainder being sourced from the China domestic market.
The Company manufactures its own straw pulp from straw purchased from the region
around Wuhan. However, the Company's use of straw pulp will shortly be
discontinued and replaced with de-inked old newspaper fiber.
The international market for BKSP is cyclical. However, as the
actual proportion of BKSP used in the paperboard production process is less than
10% of the total fiber requirements, the Company's exposure to volatility in
these markets is limited.
More important to the Company's operations is the volatility
of the recycled paper market, which Management believes is generally more stable
than that for virgin pulp products. Most of the internationally traded
wastepaper originates from the United States, so movements in international
prices closely track demand and supply in that market. The Company imports
approximately 35% of its wastepaper requirements, of which two-thirds originate
from Hong Kong and one-third from the United States.
Domestic Chinese wastepaper supply is less volatile than that
of internationally traded wastepaper since it is generally of lower quality than
the international product and often requires further processing before it can be
used. As a result, Chinese wastepaper trades at a significantly lower price than
internationally traded wastepaper. The Company carries out its own wastepaper
collection activities within Wuhan and in addition obtains domestic wastepaper
from wastepaper brokers in Southern China where domestic wastepaper is available
in plentiful supply. The Company carries out barter trade arrangements with
these domestic wastepaper brokers. Specifically, the Company exchanges
paperboard products for wastepaper, which gives it a competitive advantage in
securing a reliable wastepaper supply.
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Other significant inputs in the paperboard production
process include chemicals (for pulping, papermaking, pigmentation and
coating), water, electricity and steam. All chemicals required are sourced
from China domestic manufacturers, which ensures reliable supply and
significant lower cost than that of imported chemicals. The Company's paper
mill is located near the banks of the Yangtze River, and the Company has
constructed its own water treatment facilities at this source to ensure a
cost-effective and reliable water supply. Electricity is purchased from the
Wuhan grid. The large quantities of steam required for the paperboard
production processes are produced on-site at the Company's paper mill by coal
powered boilers.
COMPETITION
The paper industry is highly fragmented in China as a
result of the Chinese government's earlier attempts at producing a
self-sufficient paper industry based on local enterprise production. The
Company believes that as a result of the consolidation of the industry, the
Company is positioned to increase its market share in the industry. In
particular, the Company believes that it has the following competitive
advantages:
PRODUCTION VERSATILITY - The ability to produce paperboard
according to customized customer specification is a unique advantage that the
Company has over other Chinese manufacturers. In larger paper mills in the
West, significant investment in automated sheeting operations and inventory
management is required in order to be able to efficiently meet customer
requirements. Management believes that no paper mill in China has such
systems installed. The Company, however, is able to simulate the process
because the Company has six individual paper machines that provides it
flexibility in scheduling production.
PRODUCT DISTRIBUTION - The Company has established
distribution systems throughout its main customer markets in China. These
include a network of independent agencies in Fuijian and Guangzhou province,
allowing effective servicing of customers in these key markets.
RELIABILITY OF RAW MATERIAL SUPPLY - With fiber being the
most important item in paperboard production, it is essential that reliable
sources of supply exist. The Company has established relationships with
suppliers through its barter trade arrangements with brokers for wastepaper.
ESTABLISHED BRANDS - Wuhan Limited's "Golden Horse" brand
paperboard has been established in the China domestic market for over 40
years. The Company believes that Golden Horse is one of the oldest brands in
the market and is well known for its quality and reliability. Accordingly,
the Company is able to charge a premium for its product as compared to
similarly situated paper mills.
The Company believes that the signing of the World Trade
Organization Pact between the U.S. and China in November 1999 will lead to
the opening of the Chinese market to foreign competitors who will be able to
import paper products into the Chinese market with lower import duties. The
lower price of imported paper products will increase competition in the
Chinese market.
GAMMA LINK ENTERPRISES CORP. ACQUISITION
In October 1999, the Company and Gamma Link Enterprises
Corp., a British Virgin Islands corporation ("Gamma"), entered into a
Purchase Agreement pursuant to which the Company will acquire 100% of the
outstanding capital stock of Gamma in exchange for 3,600,000 shares of the
Company's common stock. The acquisition is scheduled to close during 2000.
Gamma owns a 51% interest in Sino-Panel (Gaoyao) Limited, a
Sino-foreign joint venture company ("Sino-Panel"). The remaining 49% of
Sino-Panel is owned by a party unrelated to the Company. Sino-Panel owns
equipment for a particle panel production line in Gaoyao, China, which
consists of
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reconditioned wood particle grinding equipment, multi-layer press, and other
ancillary equipment and facilities that were manufactured in Finland.
Following closing of the acquisition, Sino-Panel will
construct new production facilities along the West River in the Gaoyao
Economic Development Zone in Guangdong Province, China, for the manufacture
of particleboard panels and doors with high quality overlays. These products
are to be used in the production of door cores, cabinet panels and shelving.
The production facilities will be capable of production, at their full
production level, of 75,000 m3/annum of particleboard or 1,250,000 doors.
Construction is scheduled for completion by December 2000.
The demand for particleboard in China has been growing
rapidly since 1980 when China began its economic reform. The increased demand
for particleboard was primarily driven by the expansion and modernization of
the Chinese furniture industry. The Company believes that the demand for
furniture in China will continue to grow rapidly, with annual growth rates
ranging from 8-10%. The Company believes that Sino-Panel's planned
facilities, using imported equipment, will be capable of manufacturing high
quality particleboard panels that will be superior in quality to currently
available domestic produced particleboard panels.
HISTORY OF THE COMPANY
The Company was incorporated in the State of Delaware on
June 26, 1997 as Orient Packaging Holdings, Ltd. On June 27, 1997 all the
outstanding shares of Orient Investments Limited ("Orient Investments") were
acquired by the Company in exchange for the issuance by the Company of a 100%
interest in the Company to the former shareholders of Orient Investments. On
December 1, 1999, the Company changed its name to China Gateway Holdings Inc.
Orient Investments, a British Virgin Islands corporation
incorporated on January 8, 1997, is a holding company for Orient Packaging
Limited (f/k/a Orient Financial Services Limited) ("Orient Packaging"), a
British Virgin Islands corporation incorporated on May 25, 1993. Orient
Packaging is the owner of a 60% interest in Wuhan Limited; a PRC registered
Sino-foreign equity joint venture company. The remaining 40% interest is
owned by Dong Feng Paper Mill Company, a China state-owned enterprise.
COMPLIANCE WITH ENVIRONMENTAL LAWS
To date, management believes that the Company has complied
with existing environmental regulations in the PRC. Commencing in 1996, the
PRC government adopted plans intended to improve the environment and control
pollution. In order to control acid rain, toxic waste and pollutant
emissions, the PRC targeted certain regions for environmental protection. The
Company's production plant is located in the Yangtze River region and was not
one of the designated control areas. For production plants within the
targeted areas, water treatment plants must be installed in order to comply
with the pollutants emissions standards. The Company has its own water
treatment facilities and a system for recycling the chemicals used in paper
making. Therefore, the Company will not be affected even if the targeted
areas include the Yangtze River region. The annual fees paid to the local
environmental protection authority are as follows:
1997: RMB 397,733 (10 months)
1998: RMB 79,547 (2 months)
1998: RMB 430,991
1999: RMB 374,088
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
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and settlement of disputes is to be governed under Chinese law and disputes
are to be submitted for arbitration to the Foreign Economic and Trade
Arbitration Commission of the China Council for the Promotion of
International Trade. Despite some progress in developing a legal system,
China does not have a comprehensive system of laws. The interpretation of
Chinese laws may be subject to policy changes reflecting domestic political
factors. Enforcement of existing laws, including laws pertaining to Chinese
joint ventures, may be uncertain and sporadic, and implementation may be
inconsistent.
EMPLOYEES
The Company and its subsidiaries have approximately 900
full-time employees. The Company's executive officers are based in the
Company's executive office in Hong Kong. All other employees of the Company
are based in China.
PATENTS AND TRADEMARKS
The Golden Horse band name has been registered as a trade
name in China since 1958 by Wuhan Company. The trade name has been registered
by Wuhan Company since 1958. The trade name is licensed to Wuhan Limited by
Wuhan Company for the term of the Joint Venture.
ITEM 2. DESCRIPTION OF PROPERTIES
HONG KONG. The Company occupies office space in Wanchai,
Hong Kong. The lease expires May 9, 2001.
WUHAN, HUBEI. The Company's joint venture, Wuhan Dong Feng
Paper Company Limited, leases a paper manufacturing plant in Wuhan consisting
of 25,730 square meters. The lease expires concurrent with the term of Wuhan
Limited in 2027.
ITEM 3. LEGAL PROCEEDINGS
There are no pending proceedings against the Company or any of its
properties nor, to the knowledge of the Company, are any legal proceedings
threatened.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year ended December 31, 1999.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company was formed on June 26, 1997. Since October,
1997, the Company's common stock has been listed for trading on the OTC
Electronic Bulletin Board under the symbol "ORPK." The trading market is
limited and sporadic and should not be deemed to constitute an "established
trading market." In connection with the change of the Company's name to China
Gateway, the Company's symbol was changed to "CNGH" on December 13, 1999.
The following table sets forth the range of bid prices of
the Company's common stock as quoted on the OTC Electronic Bulletin Board
during the periods indicated. Such prices reflect prices between
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dealers in securities and do not include any retail markup, markdown or
commission and may not necessarily represent actual transactions. The
information set forth below was provided by NASDAQ Trading & Market Services.
<TABLE>
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HIGH LOW
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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 1.13 .016
March 31, 2000
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On March 31, 2000, the closing bid price for the common
stock as reported by OTC Electronic Bulletin Board was $.016
As of March 31, 2000, the number of security holders of
record of the Company's common stock was 42. As of such date, 4,307,158
shares were outstanding.
DIVIDEND POLICY
The Company has never paid dividends on the common stock
and does not anticipate paying dividends on its common stock in the
foreseeable future. It is the present policy of the Board of Directors to
retain all earnings to provide for the future growth of the Company. Earnings
of the Company, if any, not paid as dividends are expected to be retained to
finance the expansion of the Company's business. The payment of dividends on
its common stock in the future will depend on the results of operations,
financial condition, capital expenditure plans and other cash obligations of
the Company and will be at the sole discretion of the Board of Directors.
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.
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2. On June 27, 1997, the Company issued 285,000 shares of
common stock to 4 unrelated accredited financial consultants of the Company
for services rendered in connection with the reincorporation discussed in
Transaction 1. The shares were issued pursuant to Rule 506 of Regulation D.
3. On June 27, 1997, the Company issued 180,000 shares of
common stock and an option to purchase 150,000 shares of common stock at
$1.66 per share to an unrelated accredited financial consultant of the
Company for services rendered in connection with the reincorporation
discussed in Transaction 1. The common stock were issued pursuant to Rule 504
of Regulation D and the option was issued pursuant to 4(2) of the Securities
Act.
4. From July 1997 through March 1998, the Company issued an
aggregate of 317,700 shares of common stock to 23 accredited investors at
$2.50 per share in a private placement, for an aggregate purchase price of
$794,250. The investors either had pre-existing personal or business
relationships with the Company's officers and/or directors or were introduced
to the Company by financial consultants of the Company who were affiliated
with registered broker-dealers. The offering was done pursuant to Rule 504 of
Regulation D.
5. From January 1998 through May 1998, the Company issued
45,800 shares of common stock to 8 accredited investors at $2.50 per share in
a private placement, for an aggregate purchase price of $114,500. The
investors were introduced to the Company by financial consultants of the
Company who were affiliated with registered broker-dealers. The shares were
issued pursuant to Rule 506 of Regulation D.
6. From January 1998 through April 1998, the Company issued
23,050 shares of common stock to 12 accredited investors for $2.75 per shares
in a private placement, for an aggregate purchase of $63,387.50. 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
the exercise price of $.10 per share, for services rendered in connection
with the private placements described in Transactions 4, 5 and 6. The
warrants were issued pursuant to Rule 504 of Regulation D.
8. In March and April 1998, the warrants issued in
Transaction 7 were exercised for an aggregate of 120,000 shares of common
stock. The shares were issued pursuant to Rule 504 of Regulation D.
9. On April 8, 1998, the option issued in Transaction 3 was
exercised pursuant to the cashless exercise provision as provided in the
Stock Option Agreement for an aggregate of 111,692 shares of common stock.
The shares were issued pursuant to Section 4(2) of the Securities Act.
10. On March 27, 1998, the Company issued 3,000 shares of
common stock and warrants to purchase 125,000 shares of common stock at $.10
per share, which were immediately exercised, to an accredited investor for an
aggregate purchase price of $100,000. The investor had a pre-existing
business relationship with the Company. The 3,000 shares of common stock were
issued pursuant to Rule 504 of Regulation D and the warrants for the 125,0000
shares and the 125,000 shares of common stock, were issued pursuant to Rule
506 of Regulation D.
11. On April 16, 1998, the Company issued warrants to
purchase 3,905 shares of common stock to an accredited investor in
Transaction 4 as compensation for services rendered in connection with
Transaction 4. The warrants were issued pursuant to Rule 504 of Regulation D.
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12. On May 15, 1998, the Company issued 235,316 units, each
unit consisting of one share of common stock and a warrant to purchase one
share of common stock at the exercise price of $2.75 per share at $2.75 per
unit in a private placement to 24 accredited investors for an aggregate
purchase price of $647,119. The investors were introduced to the Company by
financial consultants of the Company who were affiliated with registered
broker-dealers. The units were issued pursuant to Rule 506 of Regulation D.
13. On August 10, 1998, the Company issued 15,000 shares of
common stock to an accredited unrelated financial consultant for financial
services rendered in connection with Transaction 12. The shares were issued
pursuant to Rule 504 of Regulation D.
14. In August and September 1998, the Company issued 10,600
shares of common stock to 3 accredited unrelated financial consultants for
services rendered in connection with Transaction 12. The shares were issued
pursuant to Rule 504 of Regulation D.
15. From September to November 1998, the Company issued
250,000 units, each unit consisting of one share of common stock and a
warrant to purchase one share of common stock at the exercise price of $.10,
at $1.00 per unit to 4 accredited investors, for an aggregate purchase price
of $250,000. The investors were introduced to the Company by financial
consultants of the Company who were affiliated with registered
broker-dealers. The units were issued pursuant to Rule 504 of Regulation D.
16. On November 5, 1998, the Company issued 20,000 units,
each unit consisting of one share of common stock and a warrant to purchase
one share of common stock at the exercise price of $.10, at $1.50 per unit to
1 accredited investor, for an aggregate purchase price of $30,000. The
investor was introduced to the Company by a financial consultant of the
Company who was affiliated with a registered broker-dealer. The units were
issued pursuant to Rule 504 of Regulation D.
17. From September 1998 to January 1999, warrants issued in
Transactions 15 and 16 were exercised for an aggregate of 27,000 shares of
common stock. The shares were issued pursuant to Rule 504 of Regulation D.
18. From October to December 1998, the Company issued
35,000 shares of common stock to 2 accredited unrelated consultants to the
Company for services rendered in connection with Transaction 12. The shares
were issued pursuant to Rule 504 of Regulation D.
19. On December 18, 1998, the Company issued 30,000 shares
to an accredited unrelated advisor for investor relation services. The shares
were issued pursuant to Rule 504 of Regulation D.
20. On December 8, 1998, the Company granted an option to
an employee to purchase 10,000 shares of common stock, at the exercise price
of $.10, as compensation. The option was issued pursuant to Rule 504 of
Regulation D.
21. On December 31, 1998, the option granted in Transaction
20 was exercised for 10,000 shares of common stock. The shares were issued
pursuant to Rule 504 of Regulation D.
22. On March 17, 1999, the Company issued 148,000 shares of
common stock to 2 accredited investors at $.50 per share, for an aggregate
purchase price of $74,000. The investors were introduced to the Company by
financial consultants of the Company who were affiliated with registered
broker-dealers. The shares were issued pursuant to Rule 504 of Regulation D.
23. On April 6, 1999, the Company issued 5,000 shares of
common stock to an accredited unrelated financial consultant for services
rendered in connection with Transactions 22. The shares were issued pursuant
to Rule 504 of Regulation D.
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The Company believes that the transactions described above were exempt from
registration under Section 3(a)(9), 3(b) or 4(2) of the Securities Act because
the Company was not a development stage company, the aggregate amount of the
subject securities was less than $1,000,000 and the subject securities were,
sold to a limited group of persons, each of whom was believed to have been a
sophisticated investor or had a pre-existing business or personal relationship
with the Company or its Management and was purchasing for investment without a
view to further distribution. Restrictive legends were placed, as applicable, on
stock certificates evidencing the securities.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Act of 1995:
This Annual Report on Form 10-KSB 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 requirements, and other statements of expectations, beliefs,
future plans and strategies, anticipated events or trends, and similar
expressions concerning matters that are not historical facts. Although the
Company believes that the assumptions on which the forward-looking statements
are based are reasonable, and the forward-looking statements are within the
definition of the Private Securities Litigation Reform Act of 1995, the
forward-looking statements in this Annual Report on Form 10-KSB are subject to
risks and uncertainties that could cause actual results to differ materially
from those results expressed in or implied by the statements contained herein.
OVERVIEW:
China Gateway Holdings Inc., formerly Orient Packaging Holdings Limited
(the "Company"), was incorporated in the State of Delaware on June 26, 1997.
Effective June 27, 1997, the Company issued 2,310,000 shares of common stock to
the shareholders of Orient Investments Limited, a British Virgin Islands company
incorporated on January 9, 1997 ("OIL"), in exchange for 100% of the capital
stock of OIL. OIL owned a 100% interest in Orient Packaging Limited ("OPL"),
which was incorporated in the British Virgin Islands on May 25, 1993, originally
as Orient Financial Services Limited. OPL owned a 60% interest in Wuhan Dong
Feng Paper Company Limited, a Sino-foreign equity joint venture ("Wuhan Limited"
or the "Joint Venture"), with the remaining 40% owned by Wuhan Dong Feng Paper
Mill Company, a PRC state-owned enterprise ("Wuhan Company").
In accordance with an agreement between OPL and Wuhan Company dated
December 20, 1996 (the "Joint Venture Agreement"), the Joint Venture was
established with a term of 30 years from the date the business license is issued
to engage in the manufacture and sale of cartonboard packaging materials. The
Joint Venture produces primarily coated and uncoated white-lined chipboard,
which are the most common types of cartonboard used in consumer packaging for
beverages, dry foodstuffs, pharmaceutical products and other consumer items. The
Joint Venture's production facilities and operations are located in the city of
Wuhan, Hubei Province, PRC. The Company had no significant operations prior to
the commencement of the Joint Venture's operations effective March 1, 1997.
Through December 31, 1997, OPL had contributed cash of RMB 4,876,893 to
Wuhan Limited, and Wuhan Company had contributed a building and machinery,
accounts receivable and inventory, net of certain liabilities, with a carrying
value of RMB 7,102,039, which approximated fair value at the date of
contribution to Wuhan Limited. During the year ended December 31, 1998, OPL
contributed cash of RMB 5,752,718 to Wuhan Limited. All initial capital
contributions required by the Joint Venture Agreement had been completed as of
December 31, 1998.
11
<PAGE>
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. The funding of this capital
contribution would most likely be accomplished through a sale of the Company's
equity securities. The funds required to be contributed by OPL were intended to
support growth and expansion. In January 2000, a new timetable was agreed upon
whereby OPL will contribute RMB 5,000,000 by June 30, 2000, another RMB
5,000,000 by September 30, 2000, and RMB 10,000,000 by December 31, 2000. No
fixed timetable has been established for the remaining contributions but they
will be based on the proceeds available from capital raising transactions. The
parties have agreed to delay the discussion of a timetable for any contributions
which may be made after December 31, 2000 until an unspecified later date. There
have been no adverse consequences in not contributing the additional RMB
34,362,000 to the joint venture other than the delays in modernization of the
equipment in the plant.
Pursuant to an amendment to the Joint Venture Agreement dated April
19, 1999, certain assets and liabilities related to Wuhan Company aggregating
RMB 26,112,048 were extinguished, consisting of amounts due to Wuhan Company
of RMB 32,122,132, less amounts due from Wuhan Company of RMB 6,010,084, and
were reflected as a contribution to capital to the Joint Venture effective
December 31, 1998. The amounts due to Wuhan Company that were forgiven
reflected unrecoverable charges to the Joint Venture for raw material
inventory, 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
contribution to capital to the Joint Venture.
The Company accounts for its interest in the Joint Venture similar to a
majority-owned subsidiary because of its 60% interest and its contractual
ability to control the Board of Directors, elect the Chairman of the Board of
Directors and appoint the general manager of the Joint Venture. In this
connection, the Joint Venture Agreement provides that the Board of Directors is
the highest authority of the Joint Venture. The Company recognizes that a joint
venture interest in the PRC generally is not consolidated in the financial
statements of the companies that report under the periodic reporting
requirements of the United States Securities and Exchange Commission due to the
rights asserted by the PRC partner under customary joint venture agreements.
However, in view of the above factors specific to the Company, management
believes that it is appropriate to consolidate the Joint Venture's operations in
the Company's consolidated financial statements.
Effective October 4, 1999, the Company entered into an agreement (the
"Purchase Agreement") to acquire 100% of the outstanding capital stock of Gamma
Link Enterprises Corp., a British Virgin Islands company ("Gamma"), in exchange
for 3,600,000 shares of the Company's common stock valued at RMB 44,712,000 (RMB
12.42 per share). Gamma owns a 51% equity interest in Sino-Panel (Gaoyao)
Limited, a Sino-foreign equity joint venture ("Sino-Panel"), with the remaining
49% owned by an unrelated company. Sino-Panel's only assets consists of a
particle panel production line consisting of reconditioned wood particle
grinding equipment, multi-layer presses, and other ancillary equipment and
facilities that were originally manufactured and operated in Finland. Such
equipment has not been employed in revenue-generating operations for the past
several years. The closing of this transaction is subject to the satisfactory
completion of certain conditions which has not yet occurred. Upon the closing,
Sino-Panel expects to begin construction of new production facilities for the
manufacture of particleboard panels and doors with high quality overlays, which
will be used in the production of door cores, cabinet panels and shelving, and
which will be marketed in the PRC and internationally. Construction of the new
manufacturing facilities in Gaoyao City, Guangdong
12
<PAGE>
Province, PRC, is scheduled for completion by December 2000, and operations
are expected to commence during the year ended December 31, 2001.
The acquisition of OIL by the Company was accounted for as a
recapitalization of OIL, as the shareholders of OIL acquired all of the capital
stock of the Company in a reverse acquisition. Accordingly, the assets and
liabilities of OIL have been recorded at historical cost, and the shares of
common stock issued by the Company have been reflected in the consolidated
financial statements giving retroactive effect as if the Company had been the
parent company from inception. The historical consolidated financial statements
for the years ended December 31, 1999 and 1998 consist of the combined financial
statements of the Company and its direct and indirect subsidiaries and joint
venture interests from the dates of their respective formation or acquisition.
The Company's customers are concentrated in the PRC. Sales to such
customers are generally on an open account basis and are denominated in RMB.
Through December 31, 1999, the Company's revenues were generated through its
interest in Wuhan Limited, which supplies paperboard directly or indirectly
to major international consumer brands. Approximately 15% of the Company's
non-related party sales were generated by one customer during the years ended
December 31, 1999 and 1998. One other customer accounted for over 10% of
total sales during the year ended December 31, 1999. During such periods, the
Company also had significant purchases of raw material inventory from the
same customer. As of December 31, 1999 and 1998, approximately 43% and 30%,
respectively, of net trade receivables were due from five customers, of which
one customer accounted for greater than 10% of the net trade receivables
balance.
The consolidated financial statements have been presented in Chinese
Renminbi ("RMB"). Transactions and monetary assets denominated in currencies
other than the RMB are translated into RMB at the respective applicable exchange
rates. Monetary assets and liabilities denominated in other currencies are
translated into RMB at the applicable rate of exchange at the balance sheet
date. The resulting exchange gains or losses are credited or charged to the
consolidated statements of operations. Currency translation adjustments arising
from the use of different exchange rates from period to period are included in
comprehensive income.
CONSOLIDATED RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1999 AND 1998:
Sales. Sales remained relatively constant in 1999 as compared to 1998.
For the year ended December 31, 1999, sales were RMB 61,327,816, consisting of
RMB to 50,217,816 (81.9%) to unrelated parties and RMB 11,100,000 (18.1%) to a
related party. For the year ended December 31, 1998, sales were RMB 60,321,795,
consisting of RMB 55,416,605 (91.9%) to unrelated parties and RMB 4,905,190
(8.1%) to a related party. During the year ended December 31, 1999, the Company
sold 22,129 metric tons of cartonboard at an average selling price of RMB 2,700
per metric ton, as compared to selling 20,942 metric tons of cartonboard at an
average selling price of RMB 2,800 per metric ton for the year ended December
31, 1998.
Gross Profit. For the year ended December 31, 1999, gross profit was
10.4% of sales, as compared to a negative gross profit of (10.3%) of sales
for the year ended December 31, 1998. The Company incurred a negative gross
profit for the year ended December 31, 1998 as a result of its cost of raw
material inventory including certain unrecoverable costs. The Company was
unable to sell its products in 1998 at a price sufficient to recover such
excess inventory costs because of management's concentration at that time on
sales to related parties and on maintaining market share at the expense of
profitability. The purchase liability associated with such excess inventory
costs was forgiven by Wuhan Company effective December 31, 1998, as described
above.
Sales and Marketing Expenses. For the year ended December 31, 1999,
sales and marketing expenses were RMB 1,325,950 or 2.2% of sales, as compared to
sales and marketing expenses of RMB 1,779,781 or
13
<PAGE>
3.0% of sales for the year ended December 31, 1998. Sales and marketing
expenses decreased in 1999 as compared to 1998, both on an absolute basis and
as a percent of sales, as a result of the Company having implemented a
special marketing program at a cost of approximately RMB 426,000 in 1998 to
sell products which management considered to be of reduced quality. This
marketing program was not repeated in 1999.
General and Administrative Expenses. For the year ended December 31,
1999, general and administrative expenses were RMB 13,096,147 or 21.4% of sales,
as compared to general and administrative expenses of RMB 17,189,503 or 28.5% of
sales for the year ended December 31, 1998. General and administrative expenses
decreased in 1999 as compared to 1998 by RMB 4,093,356 or 23.8% primarily as a
result of reduced travel and personnel costs.
Net Loss from Operations. Net loss from operations was RMB 9,559,980
for the year ended December 31, 1999, as compared to a net loss from operations
of RMB 26,673,529 for the year ended December 31, 1998. The net loss from
operations decreased by RMB 17,113,549 in 1999 as a result of the Company
generating a positive gross profit in 1999 as compared to a negative gross
profit in 1998, and a reduction in general and administrative expenses in 1999
as compared to 1998.
Other Income (Expense). The Company recorded commission income of RMB
878,928 during the year ended December 31, 1999. The Company did not have any
commission income during the year ended December 31, 1998. For the year ended
December 31, 1999, interest expense was RMB 772,510, as compared to RMB
3,488,795 for the year ended December 31, 1998. Interest expense decreased in
1999 as compared to 1998 primarily as a result of a reduction in interest
bearing debt to Wuhan Company, which decreased as a result of Wuhan Company
forgiving RMB 16,329,758 and RMB 32,122,132 of such debt, which was recorded
effective December 31, 1999 and 1998, respectively, as described above.
Income Taxes. The Company recognized income tax expense of RMB
1,077,238 for the year ended December 31, 1999 relating to the operations of the
Joint Venture. The Company did not recognize any income tax expense for the year
ended December 31, 1998. The Company is subject to income taxes on an entity
basis on income arising in or derived from the tax jurisdiction in which each
entity is domiciled. The Company's British Virgin Islands subsidiaries are not
liable for income taxes. The Company's PRC Joint Venture is subject to income
taxes at a preferential effective rate of 27%. The Joint Venture is exempt from
income taxes in the PRC for the first two years starting from the first year of
profitable operations, followed by a 50% exemption for the next three years.
Losses incurred by the Joint Venture may be carried forward for five years.
Minority Interest. For the years ended December 31, 1999 and 1998, the
Company recorded a minority interest of RMB 3,770,981 and RMB 9,629,089,
respectively, to reflect the 40% interest of Wuhan Company in the Joint Venture.
Net Loss. Net loss was RMB 6,757,569 for the year ended December 31,
1999, as compared to a net loss of RMB 20,271,018 for the year ended December
31, 1998.
CONSOLIDATED FINANCIAL CONDITION - DECEMBER 31, 1999:
LIQUIDITY AND CAPITAL RESOURCES:
Operating. For the year ended December 31, 1999, the Company's
operations utilized cash resources of RMB 5,131,230, as compared to utilizing
cash resources of RMB 8,783,639 for the year ended December 31, 1998. The
Company had net working capital of RMB 23,081,917 at December 31, 1999, as
compared to RMB 13,500,096 at December 31, 1998, reflecting a current ratio of
1.88:1 at December 31, 1999, as compared to 1.39:1 at December 31, 1998. The
Company's operations utilized a decreased amount of cash resources in 1999 as
compared to 1998 primarily as a result of a reduction in the operating loss. A
major reason for the Company having a significant positive net working capital
position at December 31, 1999 and
14
<PAGE>
1998 was the forgiveness of debt by Wuhan Company effective December 31, 1999
and 1998 of RMB 16,329,758 and RMB 26,112,048, respectively.
Accounts receivable, net of an allowance for doubtful accounts of RMB
155,036 at December 31, 1999 and RMB 1,370,787 at December 31, 1998, decreased
by RMB 5,134,491, to RMB 22,252,822 at December 31, 1999, from RMB 27,387,313 at
December 31, 1998. Bad debt expense was RMB 156,253 and RMB 166,532 for the
years ended December 31, 1999 and 1998, respectively.
Inventories decreased by RMB 2,831,811, to RMB 9,266,568 at December
31, 1999, from RMB 12,098,379 at December 31, 1998.
Investing. During the year ended December 31, 1999, additions to
property, plant and equipment aggregated RMB 109,475. During the year ended
December 31, 1998, additions to property, plant and equipment aggregated RMB
2,350,671.
As of December 31, 1999, the Company had budgeted capital expenditures
of approximately RMB 1,000,000 through December 31, 2000.
Financing. The Company has relied on the credit provided by Wuhan
Company, the 40% interest holder in the Joint Venture, supplemented by the sale
of its securities and short-term bank loans, for the working capital resources
to fund its operations from March 1997 through December 1999. Additional
transactions with respect to the Joint Venture are discussed above at
"Overview".
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, and also issued
393,692 shares of common stock for net proceeds of RMB 28,200 upon the exercise
of outstanding stock options and warrants. During the year ended December 31,
1999, the Company issued 153,000 shares of common stock for net proceeds of RMB
621,691.
The Company had RMB 10,462,659 due from Wuhan Company at December 31,
1999, as compared to RMB 4,730,373 due to Wuhan Company at December 31, 1998,
net of the amounts extinguished effective December 31, 1999 and 1998 of RMB
16,329,758 and RMB 32,122,132, respectively, as described above.
The Company had short-term bank loans of RMB 1,227,057 at December 31,
1998, which were fully repaid during 1999.
During the year ended December 31, 1999, certain shareholders made
advances to the Company totaling RMB 779,322, which are unsecured, non-interest
bearing and payable on demand.
The Company anticipates, based on currently proposed plans and
assumptions relating to its operations, that its projected cash flows from
operations, combined with the credit provided by Wuhan Company, the cash that
the Company expects to generate from the issuance of its securities, and
advances provided by certain shareholders during the year ended December 31,
1999, will be sufficient to support its planned operations during 2000.
Depending upon the rate of growth, the Company may seek additional capital in
the future to support the expansion of operations and acquisitions.
INFLATION AND CURRENCY MATTERS:
15
<PAGE>
In recent years, the Chinese economy has experienced periods of rapid
growth as well as relatively high rates of inflation, which in turn has resulted
in the periodic adoption by the Chinese government of various corrective
measures designed to regulate growth and contain inflation. Since 1993, the
Chinese government has implemented an economic program designed to control
inflation, which has resulted in the tightening of working capital available to
Chinese business enterprises. The recent Asian financial crisis has resulted in
a general reduction in domestic production and sales, and a general tightening
of credit, throughout China. The success of the Company depends in substantial
part on the continued growth and development of the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies may occur periodically and may, in certain instances, materially
affect the Company's results of operations. Both the conversion of Renminbi into
foreign currencies and the remittance of foreign currencies abroad requires the
approval of the government of China. The Renminbi is not freely convertible into
foreign currencies, and the ability to convert the Renminbi is subject to the
availability of foreign currencies. As a result of the Asian financial crisis,
China tightened foreign exchange controls in 1998. Effective December 1, 1998,
all foreign exchange transactions involving the Renminbi must take place through
authorized banks in China at the prevailing exchange rates quoted by the
People's Bank of China. The Company expects that a portion of its revenues will
need to be converted into other currencies to meet foreign currency exchange
obligations, including the payment of any dividends declared.
The continuing Asian financial crisis has had a negative impact on the
Company's operations by reducing the Chinese economy's growth and general level
of activity. During the last two years, the effects of the Asian financial
crisis have negatively impacted the Company. In addition, although the central
government of China has repeatedly indicated that it does not intend to devalue
its currency in the near future, recent announcements by the central government
of China indicate that devaluation is an increasing possibility. Should the
central government of China decide to devalue the Renminbi, the Company does not
believe that such an action would have a detrimental effect on the Company's
operations, since the Company conducts virtually all of its business in China,
and the sale of its products is settled in Renminbi. However, devaluation of the
Renminbi against the United States dollar would adversely affect the Company's
financial performance when measured in United States dollars.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 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.
YEAR 2000 ISSUE:
The Year 2000 Issue results from the fact that certain computer
programs have been written using two digits rather than four digits to define
the applicable year. Computer programs that have sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
16
<PAGE>
As of December 31, 1999, the Company had completed any required
modifications to its software to ensure that its software systems were Year 2000
compliant. The cost of such modifications was not material.
Since the date rollover on January 1, 2000, the Company has not
experienced any material adverse effect from the Year 2000 Issue. While the
primary risk to the Company with respect to the Year 2000 Issue continues to be
the ability of third parties to provide goods and services in a timely and
accurate manner, the Company has not experienced any such disruption to date.
The Company does not expect any remaining risks with respect to the Year 2000
Issue to have a material adverse effect on the Company.
ITEM 7. FINANCIAL STATEMENTS
Filed herewith are the consolidated financial statements for the
years ended December 31, 1999 and 1998.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table and text sets forth the names and ages of
all directors and executive officers of the Company and the key management
personnel as of December 31, 1999. The Board of Directors of the Company is
comprised of only one class. All of the directors will serve until the next
annual meeting of stockholders and until their successors are elected and
qualified, or until their earlier death, retirement, resignation or removal.
Executive officers serve at the discretion of the Board of Directors, and are
appointed to serve until the first Board of Directors meeting following the
annual meeting of stockholders. Also provided is a brief description of the
business experience of each director and executive officer and the key
management personnel during the past five years and an indication of
directorships held by each director in other companies subject to the reporting
requirements under the Federal securities laws.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Danny Wu 39 Chairman of the Board, Chief
Executive Officer and Secretary
Lawrence Hon 51 Director
Vincent Chan 36 Director
Steven Tang 44 Director
Chen Yuen Chen 29 Vice President - Business Department
Oscar Shen 25 Accounting and Finance Manager
</TABLE>
17
<PAGE>
DANNY W. WU was appointed Chairman, CEO and Secretary of the
Company in March 1999. Mr. Wu has over ten years of experience in international
trade, manufacturing management and directed 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 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 international conventions and exhibitions. He joined
Quanta Industries Inc., a Taiwanese conglomerate, in 1989 as the general manager
of Quanta's Hong Kong office overseeing trading, direct investment activities
and setting up joint venture enterprises in China. The joint ventures 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. Hew was responsible for market development of
wood chips and procurement in China and Asia. In 1995, Mr. Wu founded an
investment company, and invested in a number of ventures in China, Hong Kong and
the United States. Mr. Wu joined the Company in 1999. He is a graduate of the
University of Hong Kong with a degree in management studies and economics.
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
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 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 CEO
and President of AgroCan Corporation, a public reporting company specializing in
producing and distributing fertilizers in China. Mr. Hon is a professional
accountant with fellowship in the respective accountants' associations in Hong
Kong and the United Kingdom. He also holds an MBA degree and a professional
qualification in Information Technology.
STEVEN TANG was appointed a director of the Company in March
1999. Mr. Tang is the President of Viasystems Asia Pacific Ltd. based in Hong
Kong. Viasystems Asia Pacific Ltd. is the Asia subsidiary of Viasystsems Group,
Inc., with sales turnover of over US$1.4 billion in the printed circuit board
and electronic assembly business. Mr. Tang has extensive experience operating in
China, Asia and the United States. He was the managing director for Utilux Asia
Ltd. from 1994 to 1999. Previously, he was the general manager for Amphenol East
Asia Ltd. in the electronics and interconnect business. Mr. Tang has a B.Sc.
degree in electrical and electronics engineering from Nottingham University and
an MBA degree from Bradford University in the United Kingdom.
VINCENT C.H.CHAN 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 of experience in direct investments and
mergers and acquisitions in Asia, including China. Mr. Chan received a B.A.
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.
YUAN-CHENG 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
18
<PAGE>
experience in the 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 the Beijing Printing Institute
where he majored in electronic publishing.
OSCAR SHEN was appointed Accounting and Finance Manager of the
Company in March 1999. Mr. Shen joined Ernst and Young in 1997 as an auditor and
participated in the audits of major listed companies in Hong Kong. He joined
Hong Kong Metal Work Co. Ltd. in 1996 and was involved the establishment of a
new computerized accounting system for the accounting and shipping departments.
In 1995, he joined Lippo Asia Investment Management (HK) Limited and was
involved in financial analysis and corporate finance. Mr. Shen received his
education in Hong Kong, Canada and the United States. He is a graduated from the
University of Wisconsin-Madison with an accounting major.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Company's directors and executive officers and persons
who own more than 10% of a registered class of the Company's equity
securities to file various reports with the Securities and Exchange
Commission concerning their holdings of, and transactions in, securities of
the Company. Copies of these filings must be furnished to the Company. During
the fiscal year ended December 31, 1999, the Company did not have any class
of equity securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, and accordingly, was not subject to the
reporting requirements of Section 16 of the Securities Exchange Act of 1934,
as amended.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid during
the fiscal years ended December 31, 1999, 1998 and 1997 to the Company's Chief
Executive Officer. No officer of the Company received annual compensation in
excess of US$100,000 per annum during such years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NAME AND
PRINCIPAL POSITION YEAR SALARY
------------------ ---- ------
<S> <C> <C>
Danny Wu(1), Chairman, Chief Executive Officer
and Secretary 1999 US$nil
Nils A. Ollquist(1), Chairman, President, Chief 1999 US$nil
Executive Officer and Secretary 1998 US$86,710
1997 US$88,258
</TABLE>
(1) Nils A. Ollquist resigned as Chairman, President, Chief Executive Officer
and Secretary and Danny Wu became Chairman, Chief Executive Officer and
Secretary on March 20, 1999.
COMPENSATION AGREEMENTS
There are currently no long-term employment or consulting
agreements between the Company and the executive officers or directors of the
Company.
BOARD OF DIRECTORS
During the year ended December 31, 1999, all corporate actions
were 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, 1999.
STOCK OPTION PLAN
As of December 31, 1999, the Company has not adopted a stock
option plan.
19
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 15,
2000 with respect to the beneficial ownership of the common stock of the Company
by each beneficial owner of more than 5% of the outstanding shares of common
stock of the Company, each director, each executive officer and all executive
officers and directors of the Company as a group, (i) the number of shares of
common stock owned by each such person and group and (ii) the percent of the
Company's common stock so owned.
As used in this section, the term beneficial ownership with respect to
a security is defined by Rule 13d-3 under the Exchange Act as consisting of sole
or shared voting power (including the power to vote or direct the vote) and/or
sole or shared investment power (including the power to dispose of or direct the
disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, subject to community property laws
where applicable. Each person has sole voting and investment power with respect
to the shares of common stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of common stock, except as
otherwise indicated. The address of those persons for which an address is not
otherwise indicated is:
CLI Building, Suite 1003
313 Hennessy Road
Hong Kong
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON PERCENTAGE OUTSTANDING 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%
Steven Tang -- --%
All Directors and Executive Officers as a 1,422,868 33.03%
group (4 person)
5% BENEFICIAL OWNERS
Gateway Worldwide Ltd. 1,250,000 29.02%
Cartier-Fleming International Limited 518,606 12.04%
13C Chinaweal Centre
414-424 Jaffe Road
Wanchai, Hong Kong
</TABLE>
(1) Calculations based upon 4,307,158 shares outstanding on March 15, 2000.
(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.
20
<PAGE>
CHANGES IN CONTROL
The Company is unaware of any contract or other arrangement, the
operation of which may at a subsequent date result in a change in control of the
Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended December 31, 1999, the Company advanced RMB
160,585 and RMB 2,245 to a shareholder and employees, respectively, and at
December 31, 1999, the Company has RMB 427,518 due from the shareholder and
RMB 502,282 due from employees. These advances are unsecured, non-interest
bearing and are due on demand.
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 Company has accounted for the debt extinguishment as
a capital contribution by the Joint Venturer resulting in an increase in
minority interest of RMB 10,444,819 and an increase in capital in excess of
par of RMB 15,667,229. During the year ended December 31, 1999, the Joint
Venturer forgave an additional RMB 16,329,758 of indebtedness, resulting in
an increase in minority interest of RMB 6,531,903 and an increase in capital
in excess of par of RMB 9,797,855.
At December 31, 1999, the Company has RMB 10,462,659 due from the
Joint Venturer, which is unsecured, non-interest bearing and is due on
demand. Interest expense on amounts owed to the Joint Venturer was RMB
686,229, and RMB 3,115,937 for the years ended December 31, 1999 and 1998
respectively, and is included in total debt amounts extinguished by the Joint
Venturer during 1999 and 1998. The weighted average interest rate on the
amount due to the Joint Venturer was 7.78% and 9.54% during the years ended
December 31, 1999 and 1998 respectively.
At December 31, 1999 and 1998, the Company has receivables of RMB
3,959,856 and RMB 1,634,478, respectively, from an affiliate of the Joint
Venturer. During the year ended December 31, 1999 and 1998, the Company
incurred RMB 9,725,528 and RMB 4,551,242 respectively, of manufacturing
costs, included in cost of sales and had net sales of RMB 11,110,000 and RMB
4,905,190 respectively, to this affiliate.
During the year ended December 31,1999, certain shareholders made
advances to the Company totaling RMB 779,322. The advances are unsecured,
noninterest bearing and are payable on demand.
21
<PAGE>
PART IV.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Title
- -------------- -----
<S> <C>
3.1 Certificate of Incorporation as filed with the Delaware
Secretary of State on June 27, 1997 (1)
3.2 Bylaws (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
</TABLE>
(1) Incorporated by reference to the Exhibits to the Registration
Statement on Form 10-SB (file number 000-28819)
(b) Reports on Form 8-K: the Company did not file any Current
Reports on Form 8-K during or related to the three months ended
December 31, 1999.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CHINA GATEWAY HOLDINGS INC.
---------------------------
(Registrant)
Dated: April 13, 2000 By: /s/ DANNY WU
------------------------------------
Danny Wu
Chief Executive Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
By: /s/ DANNY WU Dated: April 13, 2000
-----------------------------------
Danny Wu
Chief Executive Officer, Secretary
and Chairman of the Board
By: /s/ LAWRENCE HON Dated: April 13, 2000
-----------------------------------
Lawrence Hon
Director
By: /s/ VINCENT CHAN Dated: April 13, 2000
-----------------------------------
Vincent Chan
Director
By: /s/ STEVEN TANG Dated: April 13, 2000
-----------------------------------
Steven Tang
Director
By: /s/ CHEN YUEN CHEN Dated: April 13, 2000
-----------------------------------
Chen Yuen Chen
Vice President - Business
Department
By: /s/ OSCAR SHEN Dated: April 13, 2000
-----------------------------------
Oscar Shen
Accounting and Finance Manager
</TABLE>
23
<PAGE>
===============================================================
CHINA GATEWAY HOLDINGS, INC.
===============================================================
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<PAGE>
===============================================================
CHINA GATEWAY HOLDINGS, INC.
===============================================================
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
Independent auditors' report F-2
Consolidated balance sheet F-3
Consolidated statements of operations F-5
Consolidated statements of shareholders' equity
and comprehensive income (loss) F-7
Consolidated statements of cash flows F-8
Notes to consolidated financial statements F-11
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
China Gateway Holdings, Inc.
We have audited the accompanying consolidated balance sheet of China
Gateway Holdings, Inc. and subsidiaries as of December 31, 1999, and the
related consolidated statements of operations, shareholders' equity and
comprehensive income (loss), and cash flows for each of the years in the two
year period ended December 31, 1999. 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. and subsidiaries as of December 31, 1999, and the
results of their operations and their cash flows for each of the years in the
two year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Horwath Gelfond Hochstadt Pangburn, P.C.
HORWATH GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
March 21, 2000
F-2
<PAGE>
============================================================================
CHINA GATEWAY HOLDINGS, INC.
============================================================================
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<CAPTION>
US DOLLARS RMB
<S> <C> <C>
ASSETS
Current assets:
Cash $ 20,328 168,299
Receivables:
Trade, less allowance for
doubtful accounts of
RMB 155,036 (US$18,726) (Note 3) 2,687,772 22,252,822
Affiliates (Note 8) 529,921 4,387,374
Employees (Note 8) 60,667 502,282
Due from Joint Venturer (Note 8) 1,263,713 10,462,659
Other (Note 3) 193,039 1,598,279
Inventories (Note 4) 1,119,245 9,266,568
Prepaid expenses and other 73,277 606,681
---------- ----------
Total current assets 5,947,962 49,244,964
---------- ----------
Property, plant and equipment, net
of accumulated depreciation (Note 5) 716,240 5,929,973
---------- ----------
$ 6,664,202 55,174,937
========== ==========
</TABLE>
(Continued)
F-3
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
US DOLLARS RMB
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,856,515 15,370,649
Accrued expenses 414,437 3,431,249
Accrued income taxes 130,112 1,077,238
Due to related parties (Note 8) 94,129 779,322
Value added tax payable (Note 7) 664,862 5,504,589
---------- ----------
Total liabilities (all current) 3,160,055 26,163,047
---------- ----------
Minority interest 1,456,513 12,058,918
---------- ----------
Commitments and contingencies
(Notes 7, 11, and 12)
Shareholders' equity (Note 9):
Common stock, US $0.0001 par
value, authorized 50,000,000
shares; issued and outstanding;
4,307,158 shares 431 3,568
Capital in excess of par 5,063,867 41,925,275
Deficit (3,091,415) (25,594,753)
General reserve 76,869 636,421
Accumulated comprehensive loss (2,118) (17,539)
---------- ----------
Total shareholders' equity 2,047,634 16,952,972
---------- ----------
$ 6,664,202 55,174,937
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1999 1998
---------- ---------- ----------
US DOLLARS RMB RMB
<S> <C> <C> <C>
Net sales:
Related party (Note 8) $ 1,341,901 11,110,000 4,905,190
Others 6,065,466 50,217,816 55,416,605
---------- ---------- ----------
7,407,367 61,327,816 60,321,795
---------- ---------- ----------
Cost of sales:
Related party (Note 8) 1,174,680 9,725,528 4,551,242
Others 5,464,251 45,240,171 61,972,277
---------- ---------- ----------
6,638,931 54,965,699 66,523,519
---------- ---------- ----------
Gross profit (loss) 768,436 6,362,117 (6,201,724)
---------- ---------- ----------
Operating expenses:
Sales and marketing expenses 160,152 1,325,950 1,779,781
General and administrative expenses 1,581,794 13,096,147 17,189,503
Rent expense, related party
(Note 12) 181,175 1,500,000 1,502,521
---------- ---------- ----------
1,923,121 15,922,097 20,471,805
---------- ----------- ----------
Loss from operations (1,154,685) (9,559,980) (26,673,529)
---------- ----------- ----------
</TABLE>
(Continued)
F-5
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1999 1998
---------- ---------- ----------
US DOLLARS RMB RMB
<S> <C> <C> <C>
Other income (expense):
Interest income $ 4,278 35,423 53,920
Interest expense (Note 8) (93,306) (772,510) (3,488,795)
Commission income 106,160 878,928 -
Other (4,007) (33,173) 208,297
---------- ---------- ----------
13,125 108,668 (3,226,578)
---------- ---------- ----------
Loss before income taxes and
minority interest (1,141,560) (9,451,312) (29,900,107)
Income tax expense (Note 11) (130,112) (1,077,238) -
---------- ---------- ----------
Loss before minority interest (1,271,672) (10,528,550) (29,900,107)
Minority interest 455,471 3,770,981 9,629,089
---------- ---------- ----------
Net loss $ (816,201) (6,757,569) (20,271,018)
========== ========== ==========
Basic and diluted net loss
per common share $ (0.19) (1.59) (5.60)
========== ========== ==========
Weighted average number of
common shares outstanding 4,241,426 4,241,426 3,616,745
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 1999 and 1998
(Expressed in Chinese Renminbi)
<TABLE>
<CAPTION>
FOREIGN
COMMON SHARES CAPITAL RETAILED CURRENCY
------------------ IN EXCESS EARNINGS TRANSLATION GENERAL
SHARES AMOUNT OF PAR (DEFICIT) ADJUSTMENTS RESERVE TOTAL
------ ------ ------ --------- ----------- ------- -----
RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1998 2,987,000 2,475 6,071,555 2,070,255 18,139 - 8,162,424
Issuance of common stock 1,122,158 900 9,158,301 - - - 9,159,201
Common Stock issued for
services 45,000 61 608,776 - - - 608,837
Extinguishment of debt by
Joint Venturer - - 15,667,229 - - - 15,667,229
Comprehensive income (loss):
Net loss for the year ended
December 31,1998 - - - (20,271,018) - - (20,271,018)
Other comprehensive income - - - - 3,966 - 3,966
Comprehensive loss - - - - - - (20,267,052)
---------- ---------- ---------- ---------- ---------- ---------- -----------
Balance at December 31, 1998 4,154,158 3,436 31,505,861 (18,200,763) 22,105 - 13,330,639
Issuance of common stock 153,000 132 621,559 - - - 621,691
Extinguishment of debt by
Joint Venturer - - 9,797,855 - - - 9,797,855
Comprehensive income (loss):
Net loss for the year ended
December 31, 1999 - - - (6,757,569) - - (6,757,569)
Other comprehensive loss - - - - (39,644) - (39,644)
Comprehensive loss - - - - - - (6,797,213)
General reserve - - - (636,421) - 636,421 -
---------- ---------- ---------- ---------- ---------- ---------- -----------
Balance at
December 31, 1999 4,307,158 3,568 41,925,275 (25,594,753) (17,539) 636,421 16,952,972
========== ========== ========== ========== ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1999 1998
---------- ---------- ----------
US DOLLARS RMB RMB
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (816,201) (6,757,569) (20,271,018)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation 90,172 746,564 537,881
Provision for losses on accounts receivable (1,388) (11,496) -
Minority interest (455,471) (3,770,981) (9,629,089)
Compensation expense related to stock issuance - - 608,837
Decrease (increase) in assets
Receivables 488,432 4,043,882 3,392,478
Inventories 342,035 2,831,811 9,565,996
Prepaid expenses and other 68,746 569,171 (623,227)
Increase (decrease) in liabilities
Accounts payable (180,188) (1,491,831) 2,783,813
Accrued expenses (695,541) (5,758,595) 3,805,777
Accrued income taxes 130,112 1,077,238
Due to related parties 94,129 779,322 -
Value added tax payable 315,396 2,611,254 1,044,913
---------- ---------- ----------
Net cash used in operating activities (619,767) (5,131,230) (8,783,639)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (13,223) (109,475) (2,350,671)
---------- ---------- ----------
Net cash used in investing activities (13,223) (109,475) (2,350,671)
---------- ---------- ----------
</TABLE>
(Continued)
F-8
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
1999 1999 1998
---------- ---------- ----------
US DOLLARS RMB RMB
<S> <C> <C> <C>
Cash flows from financing activities:
Decrease in short-term loans $ (148,208) (1,227,057) (1,276,482)
Increase in due to Joint Venturer 446,680 3,698,203 4,242,125
Issuance of common stock 75,090 621,691 9,159,262
---------- ---------- ----------
Net cash provided by financing activities 373,562 3,092,837 12,124,905
---------- ---------- ----------
Effect of exchange rate changes on cash (4,800) (39,644) 3,966
---------- ---------- ----------
(Decrease) increase in cash (264,228) (2,187,512) 994,561
Cash, beginning 284,556 2,355,811 1,361,250
---------- ---------- ----------
Cash, ending $ 20,328 168,299 2,355,811
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 10,421 86,281 367,616
========== ========== ==========
</TABLE>
Supplemental disclosure of noncash investing and financing activity:
Effective December 31, 1999 and 1998, certain assets and liabilities related
to the joint venturer were extinguished as follows (Note 8):
<TABLE>
<CAPTION>
1999 1999 1998
---------- ------------ ------------
US DOLLARS RMB RMB
<S> <C> <C> <C>
Due to joint venturer $1,972,360 16,329,758 32,122,132
Less receivables assumed by joint venturer 6,010,084
---------- ------------ ------------
$1,972,360 16,329,758 26,112,048
========== ============ ============
</TABLE>
(Continued)
F-9
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Effective December 31, 1999, construction-in-process of RMB 2,561,476,
reverted to the joint venturer by a reduction in amounts due to the joint
venturer, pending receipt of OPL's agreed upon additional cash
contributions (Note 1d).
During the year ended December 31, 1999, the Company allocated RMB 636,421
from retained earnings to a general reserve in accordances with PRC Rules
and Regulations (Note 9).
See notes to consolidated financial statements.
F-10
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
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. ("CGH"), and its subsidiaries, Orient
Investments Limited("OIL"), Orient Packaging Limited ("OPL"), and Wuhan
Dong Feng Paper Company Limited ("Wuhan Limited" or the "Joint
Venture"), collectively referred to as the "Company". 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 30-year Joint Venture agreement with Wuhan Dong Feng
Paper Mill Company. Pursuant to the Joint Venture agreement, Wuhan
Limited was formed to engage in the manufacturing and sales of
cartonboard packaging materials, primarily used in consumer product
packaging for items such as beverages, dry foodstuffs, pharmaceutical
products and other consumer items. The Joint Venture commenced
operations 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.
Minority interest represents the Joint Venturer's share of Wuhan
Limited.
F-11
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and basis of consolidated financial statements:
(continued)
The Company accounts for its interest in the Joint Venture similar to a
majority-owned subsidiary because of its 60% interest and its
contractual ability to control the Board of Directors, elect the
Chairman of the Board of Directors and appoint the general manager of
the Joint Venture. In this connection, the Joint Venture Agreement
provides that the Board of Directors is the highest authority of the
Joint Venture. In view of the above factors specific to the Company,
management believes that it is appropriate to consolidate the Joint
Venture's operations in the Company's consolidated financial
statements.
(d) Through December 31, 1997, OPL had contributed cash of RMB 4,876,893 to
Wuhan Limited, and the Joint Venturer had contributed a building and
machinery, accounts receivable and inventory, net of certain
liabilities, with a carrying value of RMB 7,102,039, which approximates
fair value at the date of contribution to Wuhan Limited. During 1998,
OPL contributed cash of RMB 5,752,718 as the remaining portion of its
original capital contribution to the Joint Venture. According to the
Joint Venture agreement, the Joint Venturer's initial forty percent
ownership interest was predicated upon its contributing current assets
equal to current liabilities 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 December 31,1999, the Company had not made any
additional contributions. The parties are negotiating a timetable for
the Company to contribute the additional agreed upon amounts.
(e) The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America ("US GAAP"), and are presented in Chinese Renminbi ("RMB"), the
national currency of the PRC (note 2(e)).
2. Principal accounting policies:
(a) The consolidated financial statements include the accounts of CGH and
its wholly and majority-owned subsidiaries. Material intercompany
accounts have been eliminated in consolidation.
F-12
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(b) Cash and cash equivalents:
For financial reporting purposes, the Company considers all highly
liquid investments purchased with original maturities of three months
or less to be cash equivalents.
(c) Inventories:
Inventories are stated at the lower of cost or market. Cost includes
the cost of raw materials computed using the weighted average method
and for finished goods, direct labor and an appropriate proportion of
production overhead.
(d) Property, plant and equipment:
Property, plant and equipment are stated at cost. Depreciation is
provided by use of the straight-line method over the estimated useful
lives of the related assets, less residual value where appropriate as
follows:
<TABLE>
<S> <C>
Building 20 years
Office equipment 5 years
Machinery 10 years
Leasehold improvements 5 years
</TABLE>
During the year ended December 31, 1999, the Company changed its
estimate of the useful lives of its assets. The change reflects useful
lives consistent with managements estimate of the remaining useful
lives of the assets and with practices in the PRC. The change resulted
in increased depreciation expense and net loss of approximately RMB
190,200 for the year ended December 31, 1999, and an increase in net
loss per share of RMB 0.04.
Repairs and maintenance costs are expensed when incurred.
Construction in progress represents building renovation and machinery
upgrades, which are not depreciated until placed into service.
Management assesses the carrying values of its long-lived assets for
impairment when circumstances warrant such a review. Generally, assets
to be used in operations are considered impaired if the sum of expected
undiscounted future cash flows is less than the assets' carrying
values. If an impairment is indicated, the loss is measured based on
the amounts by which the assets' carrying values exceed their
F-13
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(d) Property, plant and equipment (continued):
fair values. Based on its review, management does not believe any
impairment has occurred as of December 31, 1999.
(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 in other
comprehensive income.
The translation of amounts from RMB into US Dollars for the convenience
of the reader has been made at the rate of exchange quoted by the
People's Bank of China on December 31, 1999 of US$1.00 equal RMB
8.2793, 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 date 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-14
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(g) Earnings per share:
Basic earnings per share amounts are calculated using the weighted
average number of shares of common stock outstanding during the period.
Diluted earnings per share assumes the conversion, exercise or issuance
of all potential common stock instruments such as options, warrants and
convertible securities, unless the effect is to reduce a loss or
increase earnings per share. The basic and diluted weighted average
shares outstanding during the years ended December 31, 1999 and 1998
are 4,241,426 and 3,616,745, respectively. Options and warrants to
purchase common stock were not included in the computation of diluted
EPS for the years ended December 31, 1999 or 1998 because they would
decrease the loss per share.
(h) Fair value of financial instruments:
The fair values of receivables from affiliates and amounts due to the
Joint Venturer and related parties are not practicable to estimate due
to the indefinite payment terms and due to the related party nature of
the underlying transactions. The carrying values of the Company's cash,
other receivables and other liabilities approximate fair values
primarily because of the short maturities of these instruments.
(i) Stock-based compensation:
Statement of Financial Accounting Standards ("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-15
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(j) Comprehensive income:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," on
January 1, 1998. SFAS No. 130 establishes standards for the reporting
and display of comprehensive income, its components and accumulated
balances in a full set of general purpose financial statements. SFAS
No. 130 defines comprehensive income to include all changes in equity
except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items
that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial
statement that is presented with the same prominence as other financial
statements. The Company's only current component of comprehensive
income are foreign currency translation adjustments.
(k) Segment reporting:
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131") 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, manufacturing of cartonboard packaging materials.
(l) Pension and other post retirement benefits:
The Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits" on January 1, 1998. SFAS
No. 132 requires comparative information for earlier years to be
restated. The Company's results of operations and financial position
were not affected by implementation of SFAS No. 132.
(m) Recently issued accounting pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), which is effective for financial statements for all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embeded in other contracts, by
requiring 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
F-16
<PAGE>
===================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(m) Recently issued accounting pronouncements (continued):
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.
(n) 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.
(o) 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.
F-17
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(p) Risk considerations:
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.
(q) Barter Transactions:
In the normal course of operations, the Company exchanges paperboard
products with domestic raw material suppliers in certain circumstances.
These transactions are recorded at fair values when the goods are
received. Amounts included in sales and cost of sales for the years
ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
SALES SALES COST OF SALES COST OF SALES
---------- -------- ------------- -------------
US DOLLARS RMB US DOLLARS RMB
<S> <C> <C> <C> <C>
1999 $234,513 1,941,606 $210,124 1,739,679
1998 $542,550 4,491,934 $444,220 3,677,834
</TABLE>
3. Significant concentrations:
The Company grants credit to its customers, generally without
collateral. The Company's customers are concentrated in the PRC.
Approximately 15% of the Company's non-related party sales were
generated from one customer during the years ended December 31, 1999
and 1998. One other customer accounted for over 10% of total sales for
the year ended December 31, 1999, whereas no other customer accounted
for over 10% of sales in 1998.
Bad debt expense was RMB 156,253 and RMB 166,532 for the years ended
December 31, 1999 and 1998 respectively.
F-18
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Significant concentrations (continued):
At December 31, 1999 and 1998,approximately 43% and 30% respectively of
net trade receivables were due from five customers, of which one
customer accounted for greater than 10% of the net trade receivables
balance. Other receivables at December 31, 1999 and 1998 consist
primarily of RMB 1,094,352 and RMB 2,777,737, respectively, due from
four non-affiliated companies. These receivables represent pending
reimbursements for utility and other services shared by these companies
with the Company and paid by the Company on behalf of these companies.
4. Inventories:
At December 31, 1999 inventories consist of the following:
<TABLE>
<CAPTION>
1999 1999
---- ----
US Dollars RMB
<S> <C> <C>
Raw materials $614,413 5,086,914
Finished goods 504,832 4,179,654
---------- ----------
$1,119,245 9,266,568
========== ==========
5. Property, plant and equipment:
At December 31, 1999 property, plant and equipment consist of the
following:
<CAPTION>
1999 1999
---- ----
US Dollars RMB
<S> <C> <C>
Building $71,732 593,892
Machinery 789,870 6,539,570
Office equipment 39,061 323,404
Leasehold improvements 4,064 33,652
Construction in progress 11,772 97,461
---------- ----------
916,499 7,587,979
Less: Accumulated depreciation (200,259) (1,658,006)
---------- ----------
$716,240 5,929,973
========== ==========
</TABLE>
F-19
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Short-term loans:
During 1999 and 1998, the Company had short-term loans from various
banks in the PRC. The maturities of these short-term borrowings were
generally 90 to 120 days. Interest was based on the banks' prime
lending rates of 5.10% to 7.70% during the year ended December 31,
1998. All borrowings were repaid during 1999.
7. Value added tax:
PRC joint ventures are subject to a value added tax ("VAT"), which is
the principal indirect tax on the sales of tangible goods. The general
VAT rate applicable to the Joint Venture is 17% of net sales.
8. Related party transactions:
During the year ended December 31, 1999, the Company advanced RMB
160,585 and RMB 2,245 to a shareholder and employees, respectively, and
at December 31, 1999, the Company has RMB 427,518 due from the
shareholder and RMB 502,282 due from employees. These advances are
unsecured, non-interest bearing and are due on demand.
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 Company has
accounted for the debt extinguishment as a capital contribution by the
Joint Venturer resulting in an increase in minority interest of RMB
10,444,819 and an increase in capital in excess of par of RMB
15,667,229. During the year ended December 31, 1999, the Joint Venturer
forgave an additional RMB 16,329,758 of indebtedness, resulting in an
increase in minority interest of RMB 6,531,903 and an increase in
capital in excess of par of RMB 9,797,855.
F-20
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. Related party transactions: (continued)
At December 31, 1999, the Company has RMB 10,462,659 due from the Joint
Venturer, which is unsecured, non-interest bearing and is due on
demand. Interest expense on amounts owed to the Joint Venturer was RMB
686,229, and RMB 3,115,937 for the years ended December 31, 1999 and
1998 respectively, and is included in total debt amounts extinguished
by the Joint Venturer during 1999 and 1998. The weighted average
interest rate on the amount due to the Joint Venturer was 7.78% and
9.54% during the years ended December 31, 1999 and 1998 respectively.
At December 31, 1999 and 1998, the Company has receivables of RMB
3,959,856 and RMB 1,634,478, respectively, from an affiliate of the
Joint Venturer. During the year ended December 31, 1999 and 1998, the
Company incurred RMB 9,725,528 and RMB 4,551,242 respectively, of
manufacturing costs, included in cost of sales and had net sales of RMB
11,110,000 and RMB 4,905,190 respectively, to this affiliate.
During the year ended December 31,1999, certain shareholders made
advances to the Company totaling RMB 779,322. The advances are
unsecured, noninterest bearing and are payable on demand.
F-21
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Shareholders' equity:
During the year ended December 31, 1998, CGH issued a total of
1,167,158 shares for net consideration of RMB 9,159,201. A total of
682,866 shares were issued in private placements at prices ranging from
US $.78 per share to US $2.75 per share. In addition, 55,600 shares
were issued in 1998 to investment bankers in connection with 1997 and
1998 private placements, 35,000 shares were issued for investment
services, 10,000 shares were issued to an employee in exercise of an
option issued for services, 272,000 shares were issued as a result of
warrant exercises and 111,692 shares were issued as a result of an
option exercise. The 35,000 shares issued for investment services were
valued at the market value at the date of issue, and resulted in an
expense of US $52,500 (RMB 434,642). The stock issued to an employee
resulted in compensation expense of $21,031 (RMB 174,113) for the
difference between the market value of the stock at the date the option
was granted and the exercise price. The warrants and the option which
were exercised had been issued in connection with the original
formation of CGH or subsequent stock issuance transactions, and
resulted in net proceeds to CGH of US$14,700 (RMB 121,700).
During the year ended December 31, 1999, the Company issued a total of
153,000 shares for net consideration of US $74,985 (RMB 621,691).
In connection with 1997 and 1998 private placements, CGH issued
warrants to purchase 518,905 common shares of CGH 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, CGH issued warrants to purchase 235,316 common
shares of CGH at US$2.75 (RMB 22.77) per share. These warrants expire
in March 2003.
F-22
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Shareholders' equity (continued):
During the year ended December 31, 1999, the Company granted options to
purchase 500,000 shares at an exercise price of US $1.00 (RMB 8.28)
each and expiring on December 31, 1999. The options were not exercised
and were forfeited on December 31, 1999.
At December 31, 1999 warrants to purchase 246,905 common shares of CGH
at an exercise price of US $0.10 (RMB 0.83) per share and warrants to
purchase 235,316 common shares of CGH 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 years ended December, 1999 and 1998:
<TABLE>
<CAPTION>
Options Warrants
--------------------------------------------- -----------------------------------------
Exercise Exercise Exercise Exercise
Shares Price Share Price Shares Price Shares Price
US Dollars US Dollars US D0llars US Dollars
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
December 31, 1997 150,000 $ 1.66 - - 45,000 $ 0.10 - -
Granted - - 10,000 $ 0.10 473,905 0.10 235,316 $ 2.75
Exercised 111,692 1.66 10,000 0.10 272,000 0.10 - -
Forfeited 38,308 1.66 - - - - - -
--------- --------- -------- -------- -------- -------- -------- --------
Outstanding at
December 31, 1998 - - - - 246,905 0.10 235,316 2.75
Granted 500,000 1 - - - - - -
Exercised - - - - - - - -
Forfeited 500,000 1 - - - - - -
--------- --------- -------- -------- -------- -------- -------- --------
Outstanding at
December 31, 1999 - $ - - - $ - 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 among 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.
During the year ended December 31, 1999 RMB 636,421 (15% of the joint
venture's 1997 net income) was allocated to the general reserve.
F-23
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Shareholders' equity: (continued)
Pursuant to the joint venture agreement, the profit and loss allocation
of Wuhan Limited is subject to certain provisions. With the exception
of the first year of operations, allocation to the Joint Venture
parties of annual after-tax profits of the Joint Venture, after the
deduction of contributions to the reserve funds described above, are
made according to the relative investments of the two parties.
10. 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 RMB10,715,919 and
RMB12,280,192 respectively, and to waive interest payable to it by
Wuhan Limited amounting to RMB3,115,937 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.
Under the same agreement, the PRC Joint Venturer further reimbursed
Wuhan Limited certain operating expenses and cost of sales, amounting
to RMB4,650,389 and RMB10,993,140 respectively, and to waive interest
payable to it by Wuhan Limited amounting to RMB686,229 for the year
ended December 31, 1999. Such amounts for PRC reporting purposes,
again, 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, 1999.
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 increases in capital in excess of par and minority
interest in the 60/40 ratio in these consolidated financial statements.
As a result of the above, retained earnings of Wuhan Limited as shown
in its PRC reporting financial statements is different from what is
included in these consolidated financial statements. The reconciliation
of retained earnings between the PRC financial statements and the US
GAAP financial statements is as follows:
F-24
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
10. US GAAP and PRC accounting differences (continued):
<TABLE>
<CAPTION>
Retained
earnings
Retained earnings (deficit) of
as shown in Wuhan Limited
Wuhan Limited's included
PRC in US GAAP
financial financial
statements statements
---------- ----------
RMB RMB
<S> <C> <C>
Balance at December 31, 1997 4,012,237 4,012,237
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
Joint Venturer (26,112,048)
---------- -----------
Balance at December 31, 1998 5,487,264 (20,624,784)
Income for the year ended
December 31, 1999 pursuant to PRC
accounting principles 6,902,305 6,902,305
Reimbursement of expenses, cost of
sales and waiver of interest by
Joint Venturer - (16,329,758)
Transfer to general reserve (636,421) (636,421)
---------- -----------
Balance at December 31, 1999 11,753,148 (30,688,658)
========== ===========
</TABLE>
F-25
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 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 ("BVI") subsidiaries
are not liable for income taxes. PRC entities are generally subject to
income taxes at an effective rate of 33% (30% Chinese national income
tax plus 3% Chinese local income tax). For the light industry or
packaging industry in which Wuhan Limited is engaged, income tax rates
are at a preferential rate of 27% (24% national income tax plus 3%
local income tax). Further, newly-established joint ventures are exempt
from income tax in the first two years starting from the first year of
profitable operations, as well as being allowed a 50% reduction in tax
in the third, fourth and fifth years of profitable operations. Losses
incurred by joint ventures may be carried forward for five years.
Income tax expense is made up of the following current components:
<TABLE>
<CAPTION>
RMB
---------
<S> <C>
US federal -
BVI -
PRC 1,077,238
---------
Total 1,077,238
=========
</TABLE>
The reconciliation between the effective tax rate and the statutory
U.S. federal income tax rate is as follows:
<TABLE>
<CAPTION>
Year ended Year ended
December 31 December 31
1999 1998
------------ ------------
% of pre-tax % of pre-tax
income income
<S> <C> <C>
Computed "expected" tax benefit (34%) (34%)
Permanent differences between US GAAP and PRC
reporting, primarily debt extinguishment 58 30
Operating losses for which a benefit has not
been recognized 4 6
Difference in foreign statutory rates (6) (1)
Foreign income tax exemption (11) (1)
--------- ---------
Actual income tax expense 11% 0%
========= =========
</TABLE>
F-26
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Income tax: (continued)
At December 31, 1999, the Company's deferred tax assets are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999
---------
RMB
U.S. operating loss carryforward 163,105
Deferred tax asset valuation allowance (163,105)
---------
Net deferred tax assets -
=========
</TABLE>
At December 31, 1999 the Company has U.S. operating loss
carryforwards of approximately $131,300. Losses are available for
offset against future U.S. taxable income, if any, through 2019. A
valuation allowance has been provided to reduce the deferred tax
assets to zero as realization of the assets is not assured.
F-27
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Commitments and contingencies:
(a) Land and building lease with Joint Venturer:
In connection with the Joint Venture agreement, Wuhan Limited entered
into a 30-year cancelable lease with the Joint Venturer, which expires
in 2027. Under this agreement, Wuhan Limited is leasing land and
factory buildings from the Joint Venturer. Future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
<S> <C>
RMB
------
2000 1,500,000
2001 1,500,000
2002 1,500,000
2003 1,500,000
2004 1,500,000
Thereafter 33,250,000
----------
40,750,000
==========
</TABLE>
Lease expense for the years ended December 31, 1999 and 1998 was RMB
1,500,000 and RMB 1,502,521 respectively.
(b) Other lease for land and building
In addition to the lease with the Joint Venturer, during 1999 the
Company entered into another lease for office space in Hong Kong which
expires in 2001. Rental expense for 1999 was RMB 104,052 and future
minimum lease payments are as follows:
<TABLE>
<CAPTION>
RMB
------
<S> <C>
2000 249,724
2001 83,241
---------
332,965
=========
</TABLE>
F-28
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS, INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Commitments and contingencies: (continued)
(c) Other commitments: (continued)
Wuhan Limited is subject to certain labor contracts which require it to
fund various Chinese state-sponsored pension and post-employment
benefits. Pursuant to the Joint Venture agreement, Wuhan Limited is to
make monthly contributions equivalent to 29% of the Joint Venture's
annual wages. In addition, Wuhan Limited is to make monthly payments of
approximately RMB 60,435 to the Joint Venturer for medical and
insurance provisions, which are administered by the Joint Venturer.
Beginning in July 1998, the Joint Venture is required to make monthly
payments of approximately RMB 116,730 to the Joint Venturer for medical
and pension allowances for terminated joint venture staff.
F-29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> CHINESE RENMINBI
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> .12079
<CASH> 168,299
<SECURITIES> 0
<RECEIVABLES> 22,407,858
<ALLOWANCES> 155,036
<INVENTORY> 9,266,568
<CURRENT-ASSETS> 49,244,964
<PP&E> 7,587,979
<DEPRECIATION> 1,658,006
<TOTAL-ASSETS> 55,174,937
<CURRENT-LIABILITIES> 26,163,047
<BONDS> 0
0
0
<COMMON> 3,568
<OTHER-SE> 16,949,404
<TOTAL-LIABILITY-AND-EQUITY> 55,174,937
<SALES> 61,327,816
<TOTAL-REVENUES> 61,327,816
<CGS> 54,965,699
<TOTAL-COSTS> 54,965,699
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11,496
<INTEREST-EXPENSE> 772,510
<INCOME-PRETAX> (9,451,312)
<INCOME-TAX> 1,077,238
<INCOME-CONTINUING> (6,757,569)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,757,569)
<EPS-BASIC> (1.59)
<EPS-DILUTED> (1.59)
</TABLE>
