UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[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
[ ] 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.
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(Exact name of small business issuer in its charter)
DELAWARE
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
CLI BUILDING, SUITE 1003, 313 HENNESSY ROAD, HONG KONG
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(Address of principal executive offices, including zip code)
Issuer's telephone number, including area code: 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,
$0.001 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
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]
The issuer's revenues for the fiscal year ended December 31, 1999 were RMB -0-.
The aggregate market value of the issuer's common stock held by non-affiliates
of the issuer as of March 31, 2000 was $37,851.
The issuer had 4,307,158 shares of common stock issued and outstanding as of
March 31, 2000.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
Documents incorporated by reference: None.
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
China Gateway Holdings Inc., formerly Orient Packaging Holdings Ltd.
(the "Company"), owns a joint venture interest in a manufacturer of paperboard
products used in packaging material for the Chinese market. The manufacturing
operations are conducted through Wuhan Dong Feng Paper Company Limited, a joint
venture ("Wuhan Limited" or the "Joint Venture"). The Company's 60% interest in
the Joint Venture is accounted for under the equity method of accounting. Wuhan
Limited has a term of 30 years that expires in 2027. The 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 manufacturing facilities have an annual production capacity of
35,000 tons of paperboard products, and produce bleached (white top) paperboard,
a product used primarily as covering in the manufacture of corrugated packaging
for the food and beverage industry in China. In response to the increasing
awareness and sophistication of Chinese customers, major manufacturers of food
and beverages in China, especially foreign brand manufacturers, have
increasingly turned to bleached paperboard covering of corrugated boxes for
wholesale distribution of products.
The Company's objective is to continue to develop the Joint Venture as a
supplier of high quality packaging material to foreign brand name consumer
product companies in the Chinese market.
INDUSTRY
According to the industry publication Pulp & Paper International (July
1999), in 1998, China ranked third, trailing only the United States and Japan,
for the consumption of paper and paperboard products in the world. The demand
for paperboard packaging material is correlated to the rate of economic growth
and consumer spending. The Company believes that China's rapid growth in recent
years and its entry into the World Trade Organization Pact in November 1999 will
increase market opportunities in China's fragmented paper industry.
As a result of the Chinese government's earlier attempts at producing a
self-sufficient paper industry based on local enterprise production, the paper
industry in China is highly fragmented into many small capacity paper mills.
This has resulted in large inefficiencies in the industry as well as a general
low level of training and technical expertise. A large number of `backyard'
mills with annual production capacity of less than 5,000 tons per annum account
for a significant proportion of China's total paper production capacity. Due to
the difficulties in regulating environmental pollution from such a large number
of paper mills, and inefficiencies in such an industry structure, the Chinese
government has introduced regulations, effective from 1997, to phase-in a close
down of all paper mills with a capacity of less than 10,000 tons per annum. The
resulting reorganization of the industry will produce a consolidation of
business among those paper mills currently operating above this threshold,
resulting in significant investment incentives to expand production capacity at
each mill and a trend towards developing higher capacity mills. With the
decreasing number of suppliers in the market, there will be a window for the
Joint Venture to expand its market share.
PRODUCTS
The Joint Venture produces mainly uncoated and coated white-lined
chipboard in a range of paperboard weights ranging from 180g/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 Joint Venture also produces small quantities
of other types of paperboard products, including whiteback paperboard used for
the packaging of foodstuffs.
Paperboard in China is graded according to Chinese national technical
standards, which are used as an indicator of the quality of the paperboard but
have no formal influence on the sales price achieved, which is market driven.
The white-lined chipboard produced by the Joint Venture is primarily graded as
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Class C paperboard. Class C paperboard accounts for approximately 80% of China's
total domestic paperboard production. Class B paperboard, produced by relatively
few premium mills, accounts for the balance of China's domestic production. The
highest quality paperboard available in the China market (Class A paperboard) is
imported paperboard, mainly from South Korea, Taiwan and Japan, which is used
almost exclusively by foreign-owned joint venture operations in some specialized
high-quality end-uses.
The Joint Venture's product is used in a wide range of packaging for both
domestic and international consumer product manufacturers in China. Generally,
consumer product manufacturers subcontract the conversion and printing of their
packaging to corrugated box manufacturers. These corrugated box manufacturers in
turn assemble and fold containers using white-lined chipboard supplied by the
Joint Venture and kraft linerboard imported or manufactured domestically.
Corrugated paper is glued on the inside of the white-lined chipboard and the
kraft linerboard covers onto the corrugated paper and forms a sandwich
structure. Kraft linerboard is a kind of unbleached paperboard, which maintains
a light brown finishing. White-lined chipboard is a bleached paperboard that has
a white finishing like writing paper. The white-lined chipboard surface of these
containers may be printed with the end users' designs and logos.
The Joint Venture's products have been utilized in final packaging by a
number of international beverage manufacturers, including Coca-Cola, Pepsi Cola
and Pabst Blue Ribbon beer for domestic China sales.
The Joint Venture's customers, comprised of both paper dealers and
corrugated box manufacturers, are based predominantly in Southern China and the
eastern coastal regions including Shanghai, Fujian and Zhejiang provinces. The
Joint Venture also has several customers based in the Sichuan province in
Central China. As of December 31, 1999, the Joint Venture 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 Joint Venture's sales and marketing activities are centered in Wuhan
with additional support from the Company's executive office in Hong Kong. The
Joint Venture employs 22 salespersons with key sales regions controlled by a
total of five regional sales managers who operate on a salary and commission
basis. In addition to the Joint Venture's sales team in Wuhan, the Joint Venture
utilizes a network of five independent sales agents throughout the major markets
in China.
The Joint Venture markets its white-lined chipboard under the "Golden
Horse" brand name. The brand name has been used by the Wuhan Dong Feng Paper
Mill Company ("Wuhan Company"), the Company's joint venture partner in Wuhan
Limited, for over 40 years.
MANUFACTURING PROCESS
PRODUCTION
In the production process, the fiber stock for paperboard is prepared
from raw materials by placing wastepaper or pulp sheets into large digesting
tanks where, with the addition of certain chemicals, a fiber slurry is produced.
This slurry is delivered from the tanks by pipelines to the paper machines where
it is laid on to large moving mats which carry the slurry through various
rollers, where it is then pressed and dried, producing a continuous line of
board that is either wound onto reels or cut up separately into sheets.
The Joint Venture's facilities have six individual paper machines for
paperboard production and four separate digesting tanks for producing the fiber
slurry to be used in the paperboard production process. The trend in Western
paper mills is towards single large and high capacity paper machines, which are
able to produce significant economies of scale. However, the existence of
several small paper machines creates a competitive advantage for a paper mill by
allowing quick and efficient production of paperboard with varying dimensions to
meet customized customer specifications while minimizing the amount of wastage
produced.
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RAW MATERIAL SUPPLY
The major component of the Joint Venture's manufacturing expenditures is
the cost of raw material for the preparation of the fiber stock, which generally
accounts for between 60% - 75% of the paperboard's sales price. In addition to
being a major cost, the type and amount of fiber used directly correlates to the
quality characteristics of the paperboard. As a result, fiber supply is a
crucial aspect of the manufacturing process.
Four different types of fiber are used in the manufacturing process:
virgin bleached kraft softwood pulp (BKSP), straw pulp and two main types of
recycled paper (mixed wastepaper and de-inked newspaper). The BKSP used is
imported from North America and trades at a price determined by international
commodity markets. The price of recycled paper is also determined by the
international commodity markets. The Joint Venture imports approximately 30% of
its recycled paper requirements, with the remainder being sourced from the China
domestic market. The Joint Venture manufactures its own straw pulp from straw
purchased from the region around Wuhan. However, the Joint Venture's use of
straw pulp will shortly be discontinued and replaced with de-inked old newspaper
fiber.
The international market for BKSP is cyclical. However, as the actual
proportion of BKSP used in the paperboard production process is less than 10% of
the total fiber requirements, the Joint Venture's exposure to volatility in
these markets is limited.
More important to the Joint Venture's operations is the volatility of the
recycled paper market, which management believes is generally more stable than
that for virgin pulp products. Most of the internationally traded wastepaper
originates from the United States, so movements in international prices closely
track demand and supply in that market. The Joint Venture imports approximately
35% of its wastepaper requirements, of which two-thirds originate from Hong Kong
and one-third from the United States.
Domestic Chinese wastepaper supply is less volatile than that of
internationally traded wastepaper since it is generally of lower quality than
the international product and often requires further processing before it can be
used. As a result, Chinese wastepaper trades at a significantly lower price than
internationally traded wastepaper. The Joint Venture carries out its own
wastepaper collection activities within Wuhan and also obtains domestic
wastepaper from wastepaper brokers in Southern China where domestic wastepaper
is available in plentiful supply. The Joint Venture carries out barter trade
arrangements with these domestic wastepaper brokers. Specifically, the Joint
Venture exchanges paperboard products for wastepaper, which gives it a
competitive advantage in securing a reliable wastepaper supply.
Other significant inputs in the paperboard production process include
chemicals (for pulping, papermaking, pigmentation and coating), water,
electricity and steam. All chemicals required are sourced from China domestic
manufacturers, which ensures reliable supply and significant lower cost than
that of imported chemicals. The Joint Venture's paper mill is located near the
banks of the Yangtze River, and the Joint Venture has constructed its own water
treatment facilities at this source to ensure a cost-effective and reliable
water supply. Electricity is purchased from the Wuhan grid. The large quantities
of steam required for the paperboard production processes are produced on-site
at the Joint Venture's paper mill by coal-powered boilers.
COMPETITION
The paper industry is highly fragmented in China as a result of the
Chinese government's earlier attempts at producing a self-sufficient paper
industry based on local enterprise production. The Company believes that as a
result of the consolidation of the industry, the Joint Venture is positioned to
increase its market share in the industry. In particular, the Company believes
that the Joint Venture has the following competitive advantages:
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PRODUCTION VERSATILITY - The ability to produce paperboard according to
customized customer specification is a unique advantage that the Joint Venture
has over other Chinese manufacturers. In larger paper mills in the West,
significant investment in automated sheeting operations and inventory management
is required in order to be able to efficiently meet customer requirements.
Management believes that no paper mill in China has such systems installed. The
Joint Venture, however, is able to simulate the process because it has six
individual paper machines that provide it flexibility in scheduling production.
PRODUCT DISTRIBUTION - The Joint Venture has established distribution
systems throughout its main customer markets in China. These include a network
of independent agencies in Fujian and Guangzhou province, allowing effective
servicing of customers in these key markets.
RELIABILITY OF RAW MATERIAL SUPPLY - With fiber being the most important
item in paperboard production, it is essential that reliable sources of supply
exist. The Joint Venture has established relationships with suppliers through
its barter trade arrangements with brokers for wastepaper.
ESTABLISHED BRANDS - Wuhan Limited's "Golden Horse" brand paperboard has
been established in the China domestic market for over 40 years. Golden Horse
is one of the oldest brands in the market and is well known for its quality and
reliability. Accordingly, the Joint Venture is able to charge a premium for its
product as compared to similarly situated paper mills.
The Company believes that the signing of the World Trade Organization
Pact between the United States and China in November 1999 will lead to the
opening of the Chinese market to foreign competitors who will be able to import
paper products into the Chinese market with lower import duties. The lower price
of imported paper products will increase competition in the Chinese market.
GAMMA LINK ENTERPRISES CORP. ACQUISITION
Effective October 4, 1999, the Company entered into a Purchase Agreement
to acquire 100% of the outstanding capital stock of Gamma Link Enterprises
Corp., a British Virgin Islands corporation ("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 consisted of a particle panel
production line located in Gaoyao, China, including reconditioned wood particle
grinding equipment, multi-layer presses, and other ancillary equipment and
facilities that were originally manufactured in Finland. Such equipment had not
been employed in revenue-generating operations for the past several years. The
closing of the Purchase Agreement was subject to the satisfactory completion of
certain conditions by Gamma. During May 2000, Gamma notified the Company that
it could not accomplish certain of the conditions required to complete the
proposed transaction, and the Purchase Agreement was thereupon terminated by
mutual agreement.
HISTORY OF THE COMPANY
The Company was incorporated in the State of Delaware on June 26, 1997 as
Orient Packaging Holdings Ltd. On June 27, 1997, all the outstanding shares of
Orient Investments Limited ("Orient Investments") were acquired by the Company
in exchange for the issuance by the Company of a 100% interest in the Company to
the former shareholders of Orient Investments. On December 1, 1999, the Company
changed its name to China Gateway Holdings Inc.
Orient Investments, a British Virgin Islands corporation incorporated on
January 8, 1997, is a holding company for Orient Packaging Limited (f/k/a Orient
Financial Services Limited) ("Orient Packaging"), a British Virgin Islands
corporation incorporated on May 25, 1993. Orient Packaging is the owner of a 60%
interest in Wuhan Limited, a PRC-registered Sino-foreign equity joint venture
company. The remaining 40% interest is owned by Wuhan Dong Feng Paper Mill
Company, a China state-owned enterprise.
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COMPLIANCE WITH ENVIRONMENTAL LAWS
To date, management believes that the Joint Venture 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 Joint
Venture's production plant is located in the Yangtze River region and was not
one of the designated control areas. For production plants within the targeted
areas, water treatment plants must be installed in order to comply with the
pollutant emissions standards. The Joint Venture has its own water treatment
facilities and a system for recycling the chemicals used in paper making.
Therefore, the Joint Venture does not expect to be affected even if the targeted
areas include the Yangtze River region. During 1998 and 1999, the Joint Venture
paid RMB 430,991 and RMB 374,088, respectively, to the local environmental
protection authority.
WUHAN LIMITED
The Company presently owns a 60% interest in Wuhan Limited pursuant to a
Joint Venture Agreement dated December 20, 1997 (the "Joint Venture Agreement").
The validity, interpretation, execution and settlement of disputes are subject
to Chinese law and disputes are required to be submitted for arbitration to the
Foreign Economic and Trade Arbitration Commission of the China Council for the
Promotion of International Trade. Despite some progress in developing a legal
system, China does not have a comprehensive system of laws. The interpretation
of Chinese laws may be subject to policy changes reflecting domestic political
factors. Enforcement of existing laws, including laws pertaining to Chinese
joint ventures, may be uncertain and sporadic, and implementation may be
inconsistent.
EMPLOYEES
The Company, including its subsidiaries, and the Joint Venture have
approximately 900 full-time employees. The Company's executive officers are
based in the Company's executive office in Hong Kong. All other employees are
based in China.
PATENTS AND TRADEMARKS
The Golden Horse brand name has been registered as a trade name in China
since 1958 by Wuhan Company. The trade name is licensed to Wuhan Limited by
Wuhan Company for the term of the Joint Venture.
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 Joint Venture leases a paper manufacturing plant in
Wuhan consisting of 25,730 square meters. The lease expires concurrent with the
term of the Joint Venture in 2027.
ITEM 3. LEGAL PROCEEDINGS
There are no pending or threatened legal proceedings against the Company,
including its subsidiaries, or the Joint Venture.
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.
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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 Bulletin Board
under the symbol "ORPK." The trading market is limited and sporadic and should
not be deemed to constitute an "established trading market". In connection with
the change of the Company's name to China Gateway Holdings Inc., the Company's
symbol was changed to "CNGH" on December 13, 1999.
The following table sets forth the range of bid prices of the Company's
common stock as quoted on the OTC Bulletin Board during the periods indicated.
Such prices reflect prices between dealers in securities and do not include any
retail markup, markdown or commission and may not necessarily represent actual
transactions. The information set forth below was provided by NASDAQ Trading &
Market Services.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter $9.99 $2.67
Second Quarter 6.25 4.50
Third Quarter 5.13 0.38
Fourth Quarter 2.88 1.13
FISCAL YEAR ENDED DECEMBER 31, 1999
First Quarter 2.00 .59
Second Quarter 3.59 .75
Third Quarter 2.25 .94
Fourth Quarter 2.44 .69
FISCAL YEAR ENDING DECEMBER 31, 2000
Period from January 1, 2000 to 1.13 .016
March 31, 2000
</TABLE>
The closing bid price for the common stock as reported by the OTC
Bulletin Board on March 31, 2000 was $.016.
As of March 31, 2000, there were 42 holders of record of the Company's
common stock.
DIVIDEND POLICY
The Company has never paid dividends on the common stock and does not
anticipate paying dividends on its common stock in the foreseeable future. It is
the present policy of the Board of Directors to retain all earnings to provide
for the future growth of the Company. Earnings of the Company, if any, are
expected to be retained to finance the expansion of the Company's business. The
payment of dividends on the Company's common stock in the future will depend on
the results of operations, financial condition, capital expenditure plans and
other cash 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 Ltd.,
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
shares were issued pursuant to Rule 504 of Regulation D and the option was
issued pursuant to 4(2) of the Securities Act.
4. From July 1997 through March 1998, the Company issued an aggregate of
317,700 shares of common stock to 23 accredited investors at $2.50 per share in
a private placement, for an aggregate purchase price of $794,250. The investors
either had pre-existing personal or business relationships with the Company's
officers and/or directors or were introduced to the Company by financial
consultants of the Company who were affiliated with registered broker-dealers.
The 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 an exercise price
of $.10 per share, for services rendered in connection with the private
placements described in Transactions 4, 5 and 6. The warrants were issued
pursuant to Rule 504 of Regulation D.
8. In March 1998 and April 1998, the warrants issued in Transaction 7
were exercised for an aggregate of 120,000 shares of common stock. The shares
were issued pursuant to Rule 504 of Regulation D.
9. On April 8, 1998, the option issued in Transaction 3 was exercised
pursuant to the cashless exercise provision as provided in the Stock Option
Agreement for an aggregate of 111,692 shares of common stock. The shares were
issued pursuant to Section 4(2) of the Securities Act.
10. On March 27, 1998, the Company issued 3,000 shares of common stock and
warrants to purchase 125,000 shares of common stock at $.10 per share, which
were immediately exercised, to an accredited investor for an aggregate purchase
price of $100,000. The investor had a pre-existing business relationship with
the Company. The 3,000 shares of common stock were issued pursuant to Rule 504
of Regulation D and the warrants for the 125,0000 shares and the 125,000 shares
of common stock were issued pursuant to Rule 506 of Regulation D.
11. On April 16, 1998, the Company issued warrants to purchase 3,905
shares of common stock to an accredited investor in Transaction 4 as
compensation for services rendered in connection with Transaction 4. The
warrants were issued pursuant to Rule 504 of Regulation D.
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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 one warrant to purchase one share of
common stock at an exercise price of $2.75 per share, at $2.75 per unit in a
private placement to 24 accredited investors for an aggregate purchase price of
$647,119. The investors were introduced to the Company by financial consultants
of the Company who were affiliated with registered broker-dealers. The units
were issued pursuant to Rule 506 of Regulation D.
13. On August 10, 1998, the Company issued 15,000 shares of common stock
to an accredited unrelated financial consultant for financial services rendered
in connection with Transaction 12. The shares were issued pursuant to Rule 504
of Regulation D.
14. In August 1998 and September 1998, the Company issued 10,600 shares of
common stock to 3 accredited unrelated financial consultants for services
rendered in connection with Transaction 12. The shares were issued pursuant to
Rule 504 of Regulation D.
15. From September 1998 to November 1998, the Company issued 250,000
units, each unit consisting of one share of common stock and one 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 one 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 1998 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 relations 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 Transaction 22. The shares were issued pursuant to Rule 504 of Regulation
D.
The Company believes that the transactions described above were exempt from
registration under Sections 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 the securities for
investment without a view to further distribution. Restrictive legends were
placed, as applicable, on stock certificates evidencing the securities.
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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 Ltd. (the
"Company"), was incorporated in the State of Delaware on June 26, 1997.
Effective June 27, 1997, the Company issued 2,310,000 shares of common stock to
the shareholders of Orient Investments Limited, a British Virgin Islands 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" or the "Joint
Venturer").
In accordance with an agreement between OPL and Wuhan Company dated
December 20, 1996 (the "Joint Venture Agreement"), the Joint Venture was
established with a term of 30 years from the date the business license is issued
to engage in the manufacture and sale of cartonboard packaging materials. The
Joint Venture produces primarily coated and uncoated white-lined chipboard,
which are the most common types of cartonboard used in consumer packaging for
beverages, dry foodstuffs, pharmaceutical products and other consumer items. The
Joint Venture's production facilities and operations are located in the city of
Wuhan, Hubei Province, PRC. The Joint Venture commenced operations effective
March 1, 1997. The Company had no significant operations prior to the
commencement of operations by the Joint Venture. As a result of the Company's
interest in the Joint Venture, the Company operates in one business segment, the
manufacture of cartonboard packaging materials.
Through December 31, 1997, OPL had contributed cash of RMB 4,867,636 to
Wuhan Limited, and Wuhan Company had contributed a building and machinery,
accounts receivable and inventory, net of certain liabilities, with a carrying
value of RMB 7,102,039, which approximated fair value at the date of
contribution to Wuhan Limited. During the year ended December 31, 1998, OPL
contributed cash of RMB 5,752,909 to Wuhan Limited. All initial capital
contributions required by the Joint Venture Agreement had been completed as of
December 31, 1998.
Pursuant to an amendment to the Joint Venture Agreement dated February
26, 1998, the parties to the Joint Venture Agreement agreed to expand its
registered capital in order to facilitate the expansion of the Joint Venture by
March 31, 1999. OPL agreed to contribute additional cash of RMB 34,362,000 to
the Joint Venture, consisting of RMB 20,000,000 by December 31, 1998 and RMB
14,362,000 by March 31, 1999, and Wuhan Company agreed to contribute machinery
and equipment with a total value of RMB 22,908,000. The funds to be contributed
by OPL were intended to support growth and operations. OPL did not fund its
required capital contributions during 1998 and 1999.
In January 2000, a new timetable was agreed upon whereby OPL was to
contribute RMB 5,000,000 by June 30, 2000, another RMB 5,000,000 by September
30, 2000, and RMB 10,000,000 by December 31, 2000. No fixed timetable was
10
<PAGE>
established for the remaining contributions but they were expected to be funded
based on the proceeds available from anticipated capital raising transactions.
The parties agreed to delay the discussion of a timetable for any contributions
that may be made after December 31, 2000 until an unspecified later date.
The Company did not meet its June 30, 2000 funding obligation of RMB
5,000,000 to the Joint Venture, and the Company is currently unable to predict
if it will be able to meet its funding obligations to the Joint Venture. The
Company is engaged in continuing discussions with the Joint Venturer regarding
its funding obligations.
To date, there have been no adverse consequences to not contributing the
additional RMB 34,362,000 to the Joint Venture other than delays incurred to
modernize the equipment in the plant. However, management is currently unable to
predict the results of the ongoing discussions with the Joint Venturer or if
there will be any adverse future consequences relating to the Company's failure
to meet its funding obligations.
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 from the Joint Venture
to Wuhan Company of RMB 32,122,132, less amounts due from Wuhan Company to the
Joint Venture of RMB 6,010,084, and were reflected as a capital contribution by
the Joint Venturer effective December 31, 1998, which resulted in an increase in
the Company's equity investment and capital in excess of par of RMB 15,667,229.
The amounts due to Wuhan Company that were forgiven reflected unrecoverable
charges to the Joint Venture for raw material inventory, as well as general and
administrative expenses, financing expenses and certain other expenses. Based on
the agreement by Wuhan Company to forgive such amounts, OPL agreed to contribute
sufficient capital to the Joint Venture as may be required to fund its
operations at current levels. Effective December 31, 1999, Wuhan Company agreed
to forgive an additional RMB 16,329,758 of amounts due it for raw material
inventory and general and administrative expenses and interest expense, which
were also reflected as a capital contribution by the Joint Venturer, which
resulted in an increase in the Company's equity investment and capital in excess
of par of RMB 9,797,855.
Since inception, the Company has accounted for its 60% interest in the
Joint Venture, which is similar to a majority-owned subsidiary, as a
consolidated subsidiary. During the six months ended June 30, 2000, the Company
determined that the Joint Venturer had retained certain rights under the Joint
Venture Agreement that provided the Joint Venturer with the ability to
participate in management, although such rights have never been asserted by the
Joint Venturer. Under Emerging Issues Task Force Issue No. 96-16, if a minority
joint venture partner has such rights, the majority joint venture partner is
required to account for its interest in the joint venture under the equity
method of accounting. As a result, the Company's financial statements through
December 31, 1999 have been restated to report the Company's investment in the
Joint Venture under the equity method of accounting. The restatement did not
have any effect on net loss, net loss per share or shareholders' equity.
During the six months ended June 30, 2000, the Joint Venture Agreement
was amended to clearly express the intent of the parties that the Company is the
controlling party in the Joint Venture. Since the Joint Venture Agreement was
amended during 2000, the Company is reporting its investment in the Joint
Venture as a consolidated subsidiary commencing January 1, 2000.
The acquisition of OIL by the Company was accounted for as a
recapitalization of OIL, as the shareholders of OIL acquired all of the capital
stock of the Company in a reverse acquisition. Accordingly, the assets and
liabilities of OIL have been recorded at historical cost, and the shares of
common stock issued by the Company have been reflected in the consolidated
financial statements giving retroactive effect as if the Company had been the
parent company from inception. The historical consolidated financial statements
for the years ended December 31, 1999 and 1998 consist of the combined financial
statements of the Company and its direct and indirect subsidiaries from the
dates of their respective formation or acquisition.
11
<PAGE>
The Joint Venture supplies paperboard directly or indirectly to major
international consumer brands. The Joint Venture's customers are concentrated
in the PRC. Sales to such customers are generally on an open account basis and
are denominated in RMB. Approximately 15% of the Joint Venture'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 Joint Venture 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 the
Joint Venture's 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.
Effective October 4, 1999, the Company entered into a Purchase Agreement to
acquire 100% of the outstanding capital stock of Gamma Link Enterprises Corp., a
British Virgin Islands corporation ("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 consisted of a particle panel
production line located in Gaoyao, China, including reconditioned wood particle
grinding equipment, multi-layer presses, and other ancillary equipment and
facilities that were originally manufactured in Finland. Such equipment had not
been employed in revenue-generating operations for the past several years. The
closing of the Purchase Agreement was subject to the satisfactory completion of
certain conditions by Gamma. During May 2000, Gamma notified the Company that
it could not accomplish certain of the conditions required to complete the
proposed transaction, and the Purchase Agreement was thereupon terminated by
mutual agreement.
RESULTS OF OPERATIONS:
YEARS ENDED DECEMBER 31, 1999 AND 1998:
China Gateway Holdings Inc. -
General and Administrative Expenses. For the year ended December 31,
1999, general and administrative expenses were RMB 1,870,699, as compared to
general and administrative expenses of RMB 5,447,516 for the year ended December
31, 1998. General and administrative expenses decreased by RMB 3,576,817 in 1999
as compared to 1998 primarily as a result of reduced travel and personnel costs.
Other Income (Expense). The Company had commission income of RMB 767,689
during the year ended December 31, 1999. The Company did not have any
commission income during the year ended December 31, 1998.
Equity in Net Loss of Joint Venture. As a result of the Company's 60%
equity interest in the Joint Venture, the Company recorded equity in net loss of
joint venture of RMB 5,656,472 for the year ended December 31, 1999, as compared
to RMB 14,780,842 for the year ended December 31, 1998.
Income Taxes. The Company did not recognize any income tax expense for
the year ended December 31, 1999 and 1998. The Company is subject to income
taxes on an entity basis on income arising in or derived from the tax
jurisdiction in which each entity is domiciled. The Company's British Virgin
Islands subsidiaries are not liable for income taxes.
Net Loss. Net loss was RMB 6,757,569 for the year ended December 31,
1999, as compared to a net loss of RMB 20,046,214 for the year ended December
31, 1998.
12
<PAGE>
The Joint Venture -
Sales. Sales remained relatively constant in 1999 as compared to 1998,
increasing by RMB 1,006,000 or 1.7%. For the year ended December 31, 1999,
sales were RMB 61,328,000, consisting of RMB 50,218,000 (82%) to unrelated
parties and RMB 11,110,000 (18%) to a related party. For the year ended
December 31, 1998, sales were RMB 60,322,000, consisting of RMB 55,417,000 (92%)
to unrelated parties and RMB 4,905,000 (8%) to a related party. During the
year ended December 31, 1999, 22,129 metric tons of cartonboard were sold at an
average per ton selling price of RMB 2,771, as compared to 20,942 metric tons of
cartonboard being sold at an average per ton selling price of RMB 2,880 for the
year ended December 31, 1998.
Gross Profit. For the year ended December 31, 1999, gross profit was RMB
6,363 or 10.4% of sales, as compared to a negative gross profit of RMB (6,432)
or (10.7%) of sales for the year ended December 31, 1998. The Joint Venture
incurred a negative gross profit for the year ended December 31, 1998 as a
result of its cost of raw material inventory having included certain
unrecoverable costs. The Joint Venture was unable to sell its products in 1998
at a price sufficient to recover such excess inventory costs because of
management's concentration at that time on sales to related parties and on
maintaining market share at the expense of profitability. The purchase liability
associated with such excess inventory was forgiven by Wuhan Company effective
December 31, 1998, as described above at "Overview".
Operating Expenses. For the year ended December 31, 1999, operating
expenses were RMB 14,051,000 or 22.9% of sales, as compared to operating
expenses of RMB 15,024,000 or 24.9% of sales, a decrease of RMB 973,000 or 6.5%,
primarily as a result of reduced marketing costs.
Loss from Operations. For the year ended December 31, 1999, the loss from
operations was RMB 7,688,000 as compared to a loss from operations of RMB
21,456,000 for the year ended December 31, 1998. The net loss from operations
decreased by RMB 13,768,000 as a result of the Joint Venture generating a
positive gross profit in 1999 as compared to a negative gross profit in 1998.
Other Income (Expenses). For the year ended December 31, 1999, other
income was RMB 113,000, consisting of interest income of RMB 34,000 and
miscellaneous income of RMB 79,000, and other expense consisted of interest
expense of RMB 773,000, of which RMB 686,000 was to Wuhan Company. For the year
ended December 31, 1998, other income was RMB 234,000, consisting of interest
income of RMB 26,000 and miscellaneous income of RMB 208,000, and other expense
consisted of interest expense of RMB 3,413,000, of which RMB 3,116,000 was to
Wuhan Company. 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
26,112,048 of such debt, which was recorded effective December 31, 1999 and
1998, respectively, as described above at "Overview".
Income Taxes. The Joint Venture recorded income tax expense of RMB
1,079,000 for the year ended December 31, 1999. The Joint Venture did not have
any income tax expense for the year ended December 31, 1998.
Net Loss. Net loss was RMB 9,427,000 for the year ended December 31, 1999,
as compared to a net loss of RMB 24,635,000 for the year ended December 31,
1998.
FINANCIAL CONDITION - DECEMBER 31, 1999:
LIQUIDITY AND CAPITAL RESOURCES:
China Gateway Holdings Inc.:
Operating. For the year ended December 31, 1999, the Company's operations
utilized cash resources of RMB 1,025,584, as compared to utilizing cash
resources of RMB 3,437,859 for the year ended December 31, 1998. As of December
31, 1999, the Company had a net working capital deficiency of RMB 1,191,332,
equivalent to a current ratio of .45:1. The Company's operations utilized less
13
<PAGE>
cash resources in 1999 as compared to 1998 primarily as a result of a reduction
in the operating loss. A major reason for the Joint Venture having a
significant positive working capital position at December 31, 1999 and 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.
Investing. During the year ended December 31, 1999, additions to property
and equipment aggregated RMB 99,143. There were no additions to property and
equipment during the year ended December 31, 1998. During the year ended
December 31, 1998, the Company made an additional investment in the Joint
Venture of RMB 5,752,909. Additional transactions with respect to the Joint
Venture are described above at "Overview".
Financing. From March 1997 through December 1999, the Company relied
primarily on the sale of its securities for the working capital resources to
fund its operations and investments in the Joint Venture.
In conjunction with the reverse merger transaction on June 27, 1997,
pursuant to which 2,310,000 shares of common stock were issued, the Company
received net assets with an historical cost basis of RMB 1,655,780. During the
ten months ended December 31, 1997, the Company sold 212,000 shares of common
stock for net proceeds of RMB 4,393,414, and issued an additional 465,000 shares
of common stock to entities arranging such financing for consideration of RMB
24,836. During the year ended December 31, 1998, the Company issued 773,466
shares of common stock for net proceeds of RMB 9,131,001, 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.
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 are payable on demand.
The Joint Venture -
Operating. As of December 31, 1999, the Joint Venture had net working
capital of RMB 24,275,000, equivalent to a current ratio of 2.0:1.
Investing. As of December 31, 1999, the Joint Venture had budgeted capital
expenditures of approximately RMB 1,000,000 through December 31, 2000.
Financing. From March 1997 through December 1999, the Joint Venture has
relied on the credit provided by Wuhan Company, the 40% interest holder in the
Joint Venture, supplemented by investments by the Company and short-term bank
loans, for the working capital resources to fund its operations.
The Joint Venture had short-term bank loans of RMB 1,227,057 at December
31, 1998, which were fully repaid during 1999.
The Joint Venture 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 26,112,048, respectively.
Additional transactions with respect to the Joint Venture are described
above at "Overview".
Both the Company and the Joint Venture have incurred operating losses and
negative cash flows from operations during the past few years that may impair
the Company's ability to obtain additional equity capital. The Company has
relied on the sale of its securities and the credit provided by Wuhan Company to
fund the operations of the Joint Venture since 1997. Based on currently
proposed plans and assumptions relating to the Joint Venture's operations, the
Company believes that the projected cash flows from operations, combined with
the credit provided by Wuhan Company, will provide sufficient liquidity and
capital resources to support the Joint Venture's operations through December 31,
2000.
14
<PAGE>
However, the Company anticipates that it will require additional capital to
meet its funding obligations to the Joint Venture. In addition, to the extent
that the Joint Venture experiences a substantial increase in revenues and/or the
Company acquires other business operations, additional capital may be required.
Should the cash flows generated by operating and financing activities be
insufficient to fund future operations, the ability of both the Company and the
Joint Venture to conduct operations may be impaired.
INFLATION AND CURRENCY MATTERS:
In recent years, the Chinese economy has experienced periods of rapid
growth as well as relatively high rates of inflation, which in turn has resulted
in the periodic adoption by the Chinese government of various corrective
measures designed to regulate growth and contain inflation. Since 1993, the
Chinese government has implemented an economic program designed to control
inflation, which has resulted in the tightening of working capital available to
Chinese business enterprises. The recent Asian financial crisis has resulted in
a general reduction in domestic production and sales, and a general tightening
of credit, throughout China. The success of the Company depends in substantial
part on the continued growth and development of the Chinese economy.
Foreign operations are subject to certain risks inherent in conducting
business abroad, including price and currency exchange controls, and
fluctuations in the relative value of currencies. Changes in the relative value
of currencies may occur periodically and may, in certain instances, materially
affect the Company's results of operations. Both the conversion of Renminbi into
foreign currencies and the remittance of foreign currencies abroad requires the
approval of the government of China. The Renminbi is not freely convertible into
foreign currencies, and the ability to convert the Renminbi is subject to the
availability of foreign currencies. Effective December 1, 1998, all foreign
exchange transactions involving the Renminbi must take place through authorized
banks in China at the prevailing exchange rates quoted by the People's Bank of
China. The Company expects that a portion of its revenues will need to be
converted into other currencies to meet foreign currency exchange obligations,
including the payment of any dividends declared.
Although the central government of China has repeatedly indicated that it
does not intend to devalue its currency in the near future, recent announcements
by the central government of China indicate that devaluation is an increasing
possibility. Should the central government of China decide to devalue the
Renminbi, the Company does not believe that such an action would have a
detrimental effect on the Company's operations, since the Company conducts
virtually all of its business in China, and the sale of its products 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, as amended, is effective for financial statements for all
fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, by requiring that an entity
recognize those items as assets or liabilities in the statement of financial
position and measure them at fair value. SFAS No. 133 also addresses the
accounting for 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
15
<PAGE>
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.
As of December 31, 1999, the Company and the Joint Venture had completed
any required modifications to their software to ensure that their software
systems were Year 2000 compliant. The cost of such modifications was not
material.
Since the date rollover on January 1, 2000, the Company and the Joint
Venture have not experienced any material adverse effect from the Year 2000
Issue. While the primary risk to the Joint Venture 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 Joint Venture 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 Joint Venture.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements for the years ended December 31, 1999
and 1998 are listed at the "Index to Consolidated Financial Statements".
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE>
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 of Directors, Chief
Executive Officer and Secretary
Lawrence Hon 51 Director
Vincent Chan 36 Director
Steven Tang 44 Director (Resigned in May 2000)
Chen Yuen Chen 29 Vice President - Business Department
Oscar Shen 25 Accounting and Finance Manager (Resigned
in August 2000)
</TABLE>
DANNY W. WU was appointed Chairman of the Board of Directors, Chief
Executive Officer and Secretary of the Company in March 1999. Mr. Wu has over
ten years of experience in international trade, manufacturing management and
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 of foreign companies to invest in Hong Kong
and China during that period. Mr. Wu was then promoted to project manager,
responsible for organizing and the overall management of a number of
international conventions and exhibitions. He joined Quanta Industries Inc., a
Taiwanese conglomerate, in 1989 as the general manager of its Hong Kong office
overseeing trading, direct investment activities and setting up joint venture
enterprises in China. The joint ventures related to catering, cable
manufacturing and metal processing. He was also involved in the general
financial management of these ventures. Mr. Wu was a founding member of
Sino-Forest Corporation, a company listed on the Toronto Stock Exchange, with
investments in forestry in China. He was responsible for market development of
wood chips and procurement in China and Asia. In 1995, Mr. Wu founded an
investment company, and invested in a number of ventures in China, Hong Kong and
the United States. He is a graduate of the University of Hong Kong with a degree
in management studies and economics.
LAWRENCE HON was appointed a director of the Company in March 1999. He
started his career as a professional accountant. In 1984, Mr. Hon joined Modern
Printing Equipment Ltd. as the Financial Director. Modern Printing Equipment
Ltd. was a subsidiary of KNP BT, a Dutch-based multinational group. KNP BT was
the world's eighth largest forestry group specializing in paper, packaging and
17
<PAGE>
printing. He was promoted to KNP BT's Regional Financial Director in 1986 and
Deputy Managing Director of Asian Operations in 1990, responsible for Hong Kong,
China, Taiwan and Korea. Between 1994 and 1996, Mr. Hon served as the Senior
Vice President of Sino-Forest Corporation, a company listed on the Toronto Stock
Exchange. Mr. Hon was in charge of tree plantation, which provided wood fiber
for paper, packaging and panel-board production. Mr. Hon is currently the Chief
Executive Officer and President of AgroCan Corporation, a public reporting
company specializing in the production and distribution of fertilizer products
in China. Mr. Hon is a professional accountant with fellowship in the respective
accountants' associations in Hong Kong and the United Kingdom. He also holds an
MBA degree and a professional qualification in Information Technology.
VINCENT 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.
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 Viasystems 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.
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 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
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 in 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 graduate of 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.
18
<PAGE>
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$100,000 per annum during such years.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NAME AND PRINCIPAL POSITION YEAR SALARY
--------------------------- ---- ------
<S> <C> <C>
Danny Wu(1), Chairman, Chief Executive
Officer and Secretary 1999 US$nil
Nils A. Ollquist(1), Chairman, President, 1999 US$nil
Chief Executive Officer and Secretary 1998 US$86,710
1997 US$88,258
<FN>
(1) On March 20, 1999, Nils A. Ollquist resigned as Chairman, President, Chief
Executive Officer and Secretary and Danny Wu became Chairman, Chief Executive
Officer and Secretary.
</TABLE>
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, the number of shares of common stock
owned by each such person and group and the percent of the Company's common
stock so owned.
As used in this section, the term beneficial ownership with respect to a
security is defined by Rule 13d-3 under the Exchange Act as consisting of sole
or shared voting power (including the power to vote or direct the vote) and/or
sole or shared investment power (including the power to dispose of or direct the
disposition of) with respect to the security through any contract, arrangement,
understanding, relationship or otherwise, subject to community property laws
where applicable. Each person has sole voting and investment power with respect
to the shares of common stock, except as otherwise indicated. Beneficial
ownership consists of a direct interest in the shares of common stock, except as
otherwise indicated. The address of those persons for which an address is not
otherwise indicated is CLI Building, Suite 1003, 313 Hennessy Road, Hong Kong.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON PERCENTAGE OUTSTANDING OF COMMON
NAME OF BENEFICIAL OWNER STOCK BENEFICIALLY OWNED COMMON 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 group (4 persons) 1,422,868 33.03%
5% Beneficial Owners
Gateway Worldwide Ltd. 1,250,000 29.02%
Cartier-Fleming International Limited 518,606 12.04%
13C Chinaweal Centre
414-424 Jaffe Road
Wanchai, Hong Kong
<FN>
(1) Calculations based upon 4,307,158 shares issued and outstanding on 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.
</TABLE>
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. These advances are
unsecured, non-interest bearing and are due on demand.
During the year ended December 31, 1999, certain shareholders made
advances to the Company totaling RMB 779,322. The advances are unsecured,
non-interest bearing and are payable 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
Joint Venture accounted for the debt extinguishment as a capital contribution by
the Joint Venturer, which resulted in an increase in the Company's equity
20
<PAGE>
investment and 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, which resulted in an increase in the Company's equity investment
and capital in excess of par of RMB 9,797,855.
At December 31, 1999, the Joint Venture had 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 1999, 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 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 Joint Venture had receivables of RMB
3,959,856 and RMB 1,634,478, respectively, from an affiliate of the Joint
Venturer. During the years ended December 31, 1999 and 1998, the Joint Venture
incurred RMB 9,725,528 and RMB 4,551,242, respectively, of manufacturing costs,
which were included in cost of sales, and had net sales of RMB 11,110,000 and
RMB 4,905,190, respectively, to this affiliate.
21
<PAGE>
PART IV.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number Title
-------------- -----
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 (Electronic filing only)
(1) Filed as an exhibit to the Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission on January 7, 2000,
and incorporated herein by reference.
(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
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CHINA GATEWAY HOLDINGS INC.
---------------------------
(Registrant)
Date: October 12, 2000 By: /s/ DANNY WU
-------------------------------------
Danny Wu
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: October 12, 2000 By: /s/ DANNY WU
-------------------------------------
Danny Wu
Chief Executive Officer, Secretary
and Chairman of the Board of
Directors
Date: October 12, 2000 By: /s/ LAWRENCE HON
-------------------------------------
Lawrence Hon
Director
Date: October 12, 2000 By: /s/ VINCENT CHAN
-------------------------------------
Vincent Chan
Director
Date: October 12, 2000 By: /s/ CHEN YUEN CHEN
-------------------------------------
Chen Yuen Chen
Vice President - Business Department
23
<PAGE>
===============================================================
CHINA GATEWAY HOLDINGS INC.
===============================================================
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
CONTENTS PAGE
Independent auditors' report F-2
Consolidated balance sheet F-3
Consolidated statements of operations F-4
Consolidated statements of shareholders' equity
and comprehensive income (loss) F-5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-8
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.
As discussed in Note 1 to the financial statements, since inception, the
Company has accounted for its 60% interest in Wuhan Dong Feng Paper Company
Limited (a Joint Venture) as a consolidated subsidiary. Because the 40% minority
partner in the Joint Venture retained certain participating rights, the
Company's 1999 and 1998 financial statements have been restated to report its
investment in the Joint Venture using the equity method of accounting. The
restatement did not change net loss, net loss per share or shareholders' equity
from what was previously reported.
/s/ Horwath Gelfond Hochstadt Pangburn, P.C.
HORWATH GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
March 21, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
============================================================================
CHINA GATEWAY HOLDINGS INC.
============================================================================
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS US$ RMB
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,818 48,169
Deposits and other current assets 112,503 931,446
------------ ------------
Total current assets 118,321 979,615
Property and equipment - net 10,728 88,820
Investment in Joint Venture 2,180,798 18,055,484
------------ ------------
Total assets $ 2,309,847 19,123,919
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 109,383 905,615
Other payables and accruals 56,341 466,464
Due to Joint Venturer 2,360 19,546
Due to related parties 94,129 779,322
------------ ------------
Total liabilities 262,213 2,170,947
Shareholders' equity:
Common stock, par value US$0.0001;
Authorized - 50,000,000 shares;
Issued and outstanding - 4,307,158 shares 431 3,568
Capital in excess of par value 5,063,867 41,925,275
Deficit (3,014,546) (24,958,332)
Accumulated other comprehensive loss (2,118) (17,539)
------------ ------------
Total shareholders' equity 2,047,634 16,952,972
------------ ------------
Total liabilities and shareholders' equity $ 2,309,847 19,123,919
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
===========================================================================
CHINA GATEWAY HOLDINGS INC.
===========================================================================
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1999 1998
----------- ----------- ------------
US$ RMB RMB
<S> <C> <C> <C>
----------- ----------- ------------
Net sales - - -
Cost of sales - - -
----------- ----------- ------------
Gross profit - - -
General and administrative expenses $ (225,949) (1,870,699) (5,447,516)
----------- ----------- ------------
Loss from operations (225,949) (1,870,699) (5,447,516)
Other income (expense)
Commission income 92,724 767,689 -
Interest income 231 1,913 27,999
Interest expense - - (76,522)
Other - - 230,667
Equity in loss of Joint Venture (683,207) (5,656,472) (14,780,842)
----------- ----------- ------------
Net loss $ (816,201) (6,757,569) (20,046,214)
=========== =========== ============
Weighted average number of common shares outstanding
4,241,426 4,241,426 3,616,745
=========== =========== ============
Net loss per common share -
Basic and diluted $ (0.19) (1.59) (5.54)
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
===========================================================================
CHINA GATEWAY HOLDINGS INC.
===========================================================================
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 1999 and 1998
(Expressed in Chinese Renminbi)
Foreign
Capital Retained currency
Common Stock in excess earnings translation
Shares Amount of par (deficit) adjustment Total
------------ ------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 2,987,000 2,475 6,071,555 1,845,451 18,139 7,937,620
Issuance of common shares 1,122,158 900 9,158,301 - - 9,159,201
Common stock issued for services 45,000 61 608,776 - - 608,837
Extinguishment of debt by Joint Venturer
- - 15,667,229 - - 15,667,229
Comprehensive income (loss):
Net loss for the year ended December 31, 1998 - - - (20,046,214) - (20,046,214)
Other comprehensive income - - - - 3,966 3,966
Comprehensive loss - - - - - (20,042,248)
------------ ------------ ----------- ------------ ----------- -----------
Balance, December 31, 1998 4,154,158 3,436 31,505,861 (18,200,763) 22,105 13,330,639
Issuance of common shares 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)
------------ ------------ ----------- ------------ ----------- -----------
Balance, December 31, 1999 4,307,158 3,568 41,925,275 (24,958,332) (17,539) 16,952,972
============ ============ =========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
===========================================================================
CHINA GATEWAY HOLDINGS INC.
===========================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
1999 1999 1998
---------- ----------- ------------
US$ RMB RMB
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(816,201) (6,757,569) (20,046,214)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 1,844 15,266 3,700
Equity in loss of Joint Venture 683,207 5,656,472 14,780,842
Compensation expense related to stock issuance - - 608,837
Increase in other receivables, deposits and prepayments
(80,260) (664,518) (145,576)
Due from Joint Venture - - 1,816,589
Increase (decrease) in accounts payable 5 44 (803,881)
Increase (decrease) in other payables and accruals (3,606) (29,828) 303,525
Increase in amounts due to related parties 94,128 779,322 -
Due to Joint Venture (2,993) (24,773) 44,319
---------- ----------- ------------
Net cash used in operating activities (123,876) (1,025,584) (3,437,859)
Cash flows from investing activities:
Capital expenditures (11,975) (99,143) -
Investment in Joint Venture - - (5,752,909)
---------- ----------- ------------
Net cash used in investing activities (11,975) (99,143) (5,752,909)
Cash flows from financing activities
Issuance of common stock 75,090 621,691 9,159,201
---------- ----------- ------------
Net cash provided by financing activities 75,090 621,691 9,159,201
---------- ----------- ------------
Net decrease in cash and cash equivalents (60,761) (503,036) (31,567)
Cash and cash equivalents, beginning 71,368 590,849 618,450
Effect of exchange rate changes on cash (4,789) (39,644) 3,966
---------- ----------- ------------
Cash and cash equivalents, ending $ 5,818 48,169 590,849
========== =========== ============
</TABLE>
(continued)
F-6
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS INC.
===========================================================================
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental disclosure of non-cash investing and financing activity:
Effective December 31, 1999 and 1998, the Company's equity investment increased
as a result of additional capital contributions made by the Joint Venturer of
RMB 16,329,758 (US$ 1,972,360) and RMB 26,112,048 (US$ 3,153,629), respectively
(Note 6).
See notes to consolidated financial statements.
F-7
<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"), and Orient Packaging Limited ("OPL"), collectively referred to
as the "Company". The Company's investment in Wuhan Dong Feng Paper Company
Limited ("Wuhan Limited" or the "Joint Venture") has been accounted for under
the equity method of accounting (Note 5 1(c) and Note 2(c)). 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.
Since inception, the Company has accounted for its 60% interest in the Joint
Venture, which is similar to a majority-owned subsidiary, as a consolidated
subsidiary. During the six months ended June 30, 2000, the Company determined
that the Joint Venturer had retained certain rights under the Joint Venture
Agreement that provided the Joint Venturer with the ability to participate in
management, although such rights have never been asserted by the Joint Venturer.
Under Emerging Issues Task Force Issue No. 96-16, if a minority joint venture
partner has such rights, the majority joint venture partner is required to
account for its interest in the joint venture under the equity method of
accounting.
F-8
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. Organization and basis of consolidated financial statements: (continued)
During the six months ended June 30, 2000, the Joint Venture Agreement was
amended to clearly express the intent of the parties that the Company is the
controlling party in the Joint Venture. As a result, the Company's financial
statements through December 31, 1999 have been restated to report the Company's
investment in the Joint Venture under the equity method of accounting. The
restatement did not have any effect on net loss, net loss per share or
shareholders' equity. However, because the Joint Venture Agreement was amended
during 2000, the Company is reporting its investment in the Joint Venture as a
consolidated subsidiary commencing January 1, 2000.
(d) Through December 31, 1997, OPL had contributed cash of RMB 4,867,636 to
Wuhan Limited, and the Joint Venturer had contributed a building and machinery,
accounts receivable and inventory, net of certain liabilities, with a carrying
value of RMB 7,102,039, which approximates fair value at the date of
contribution to Wuhan Limited. During 1998, OPL contributed cash of RMB
5,752,909 as the remaining portion of its original capital contribution to the
Joint Venture. According to the Joint Venture agreement, the Joint Venturer's
initial 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-owned subsidiaries. Material intercompany accounts have been
eliminated in consolidation. The Company's investment in the Joint Venture is
accounted for using the equity method.
(b) Cash and cash equivalents:
For financial reporting purposes, the Company considers all highly liquid
investments purchased with original maturities of three months or less to be
cash equivalents.
(c) Investment:
The Company accounts for its interest in the Joint Venture under the equity
method of accounting. The Company's 60% interest in the Joint Venture is stated
at cost, adjusted for its equity in earnings or losses of the Joint Venture and
for its share of additional capital contributions made by the joint venturer
(Note 6).
F-9
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(c) Investment (continued):
The following is a summary of condensed financial information of the Joint
Venture:
Condensed Balance Sheet
December 31, 1999
(in thousand RMB)
Current assets due from related parties 14,422
Other current assets 33,845
Property, plant and equipment 5,840
_______
Total assets 54,107
=======
Current liabilities 23,992
Shareholders' equity 30,115
_______
Total liabilities and shareholders' equity 54,107
=======
At December 31, 1999, the Joint Venture had 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 1999, 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 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 Joint Venture had receivables of RMB
3,959,856 and RMB 1,634,478, respectively, from an affiliate of the Joint
Venturer. During the years ended December 31, 1999 and 1998, the Joint Venture
incurred RMB 9,725,528 and RMB 4,551,242, respectively, of manufacturing costs,
which were included in cost of sales, and had net sales of RMB 11,110,000 and
RMB 4,905,190, respectively, to this affiliate.
F-10
<PAGE>
=============================================================================
CHINA GATEWAY HOLDINGS INC.
=============================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(c) Investment (continued):
<TABLE>
<CAPTION>
Condensed Income Statements
(in thousand RMB)
Years ended December 31,
1999 1998
-------- ---------
<S> <C> <C>
Net sales
Related parties 11,110 4,905
Other 50,218 55,417
-------- ---------
61,328 60,322
-------- ---------
Cost of sales
Related parties (9,725) (4,551)
Other (45,240) (62,203)
-------- ---------
(54,965) (66,754)
-------- ---------
Gross profit 6,363 (6,432)
Operating expenses (14,051) (15,024)
-------- ---------
Loss from operations (7,688) (21,456)
Interest expense
Related parties (686) (3,116)
Other (87) (297)
Other income 113 234
-------- ---------
Net loss before taxes (8,348) (24,635)
Income tax expense (1,079) -
-------- ---------
Net loss (9,427) (24,635)
======== =========
</TABLE>
When the Joint Venture was formed in 1997, it owed the Joint Venturer net
current payables in excess of RMB 33,000,000. In order to assist the economic
viability of the Joint Venture, effective December 31, 1998, the Joint Venturer
forgave RMB 26,112,048 of the initial indebtedness. Because the debt forgiveness
was made by a significant equity investor in the Joint Venture, for US GAAP the
Joint Venture accounted for the debt extinguishment as a capital contribution by
the Joint Venturer, which resulted in an increase in the Company's equity
investment and capital in excess of par of RMB 15,667,229. During the year ended
December 31, 1999, the Joint Venturer forgave an additional RMB 16,329,758 of
indebtedness, which resulted in an increase in the Company's equity investment
and capital in excess of par of RMB 9,797,855.
F-11
<PAGE>
===========================================================================
CHINA GATEWAY HOLDINGS INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(d) Property and equipment:
Property and equipment are stated at cost. Depreciation is provided by use of
the straight-line method over the estimated useful lives of the related assets,
less residual value where appropriate as follows:
Furniture and fixtures 5 years
Office equipment 5 years
During the year ended December 31, 1999, the Joint Venture changed its estimate
of the useful lives of its assets. The change reflects useful lives consistent
with management estimates of the remaining useful lives of the assets and with
practices in the PRC. The change resulted in increased depreciation expense for
the Joint Venture and increased the Company's net loss by 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.
Management assesses the carrying values of its long-lived assets for impairment
when circumstances warrant such a review. Generally, assets to be used in
operations are considered impaired if the sum of expected undiscounted future
cash flows is less than the assets' carrying values. If an impairment is
indicated, the loss is measured based on the amounts by which the assets'
carrying values exceed their fair values. Based on its review, management does
not believe any impairment has occurred as of December 31, 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
F-12
<PAGE>
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CHINA GATEWAY HOLDINGS INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(f) Income taxes (continued):
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.
(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. 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 amounts due to the Joint Venture 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 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.
(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 is foreign currency translation adjustments.
F-13
<PAGE>
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CHINA GATEWAY HOLDINGS INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(k) Segment reporting:
The Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" 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
embedded in other contracts, by requiring that an entity recognize those items
as assets or liabilities in the statement of financial position and measure them
at fair value. SFAS No. 133 also addresses the accounting for certain hedging
activities. The Company currently does not have any derivative instruments nor
is it engaged in hedging activities, thus the Company does not believe
implementation of SFAS No. 133 will have a material impact on its financial
statement presentation or disclosures.
(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.
F-14
<PAGE>
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CHINA GATEWAY HOLDINGS INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Principal accounting policies: (continued)
(o) Risk considerations:
As the Company's operations are conducted primarily through its equity investee
in the PRC, the Company is subject to special considerations and significant
risks not typically associated with investments in equity securities of North
American and Western European companies. The Company's operations may be
adversely affected by significant political, economic and social uncertainties
in the PRC. Although the PRC government has been pursuing economic reform
policies for the past several years, no assurance can be given that the PRC
government will continue to pursue such policies or that such policies may not
be significantly altered, especially in the event of a change in leadership,
social or political disruption or unforeseen circumstances affecting the PRC's
political, economic and social life. There is also no guarantee that the PRC
government's pursuit of economic reforms will be consistent or effective.
The Company expects that substantially all of its income will be denominated in
RMB. A portion of such income 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.
3. Property and equipment:
At December 31, 1999 property, plant and equipment consist of the
following:
1999 1999
---- ----
US Dollars RMB
Furniture and fixtures $ 8,109 67,137
Office equipment 6,640 54,972
---------- ----------
14,749 122,109
Less: Accumulated depreciation (4,021) (33,289)
---------- ----------
$ 10,728 88,820
========== ==========
4. 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. These advances,
which are included in deposits and other current assets, are unsecured,
non-interest bearing and are due on demand.
During the year ended December 31,1999, certain shareholders made advances to
the Company totaling RMB 779,322. The advances are unsecured, non-interest
bearing and are payable on demand.
F-15
<PAGE>
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CHINA GATEWAY HOLDINGS INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. 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.
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>
F-16
<PAGE>
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CHINA GATEWAY HOLDINGS INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Shareholders' equity: (continued)
PRC rules and regulations governing joint ventures require allocations of a
portion of annual net income 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.
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.
6. US GAAP and PRC accounting differences:
Pursuant to the terms of an agreement dated April 19, 1999 entered into among
the Joint Venturer, the Company and Wuhan Limited, the Joint Venturer agreed to
reimburse Wuhan Limited for certain operating expenses and cost of sales,
amounting to RMB 10,715,919 and RMB 12,280,192 respectively, and to waive
interest payable to it by Wuhan Limited amounting to RMB 3,115,937 for the year
ended December 31, 1998. For PRC reporting purposes, these amounts were
reflected as a reduction in operating expenses, cost of sales and interest
expense, respectively, in the PRC financial statements of Wuhan Limited for the
year ended December 31, 1998.
Under the same agreement, the Joint Venturer further reimbursed Wuhan Limited
certain operating expenses and cost of sales, amounting to RMB 4,650,389 and RMB
10,993,140 respectively, and to waive interest payable to it by Wuhan Limited
amounting to RMB 686,229 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 an increase in the Company's equity investment and capital in
excess of par for the 60% interest the Company has in the Joint Venture in these
consolidated financial statements. As a result of the above, net income (loss)
of Wuhan Limited as shown in its PRC reporting financial statements is different
from what is included in the equity method of accounting for Wuhan Limited in
these consolidated financial statements. The reconciliation of net income (loss)
between the PRC financial statements and the US GAAP financial statements is as
follows:
F-17
<PAGE>
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CHINA GATEWAY HOLDINGS INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. US GAAP and PRC accounting differences: (continued):
<TABLE>
<CAPTION>
Net income
as shown in Net loss
Wuhan Limited's included
PRC in US GAAP
financial financial
statements statements
-------------- -------------
RMB RMB
<S> <C> <C>
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)
-------------- -------------
1,475,027 (24,637,021)
============== =============
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)
-------------- -------------
6,902,305 (9,427,453)
============== =============
</TABLE>
7. Income tax:
The Company is subject to income taxes on an entity basis on income arising in
or derived from the tax jurisdiction in which each entity is domiciled. The
Company's British Virgin Islands ("BVI") subsidiaries are not liable for income
taxes.
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%)
Operating losses for which a benefit
has not been recognized 34 34
------------ ------------
Actual income tax expense 0% 0%
============ ============
</TABLE>
F-18
<PAGE>
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CHINA GATEWAY HOLDINGS INC.
===========================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income tax (continue):
At December 31, 1999, the Company's deferred tax assets are as follows:
1999
---------
RMB
U.S. operating loss carryforward 369,700
Deferred tax asset valuation allowance (369,700)
---------
Net deferred tax assets -
=========
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.
8. Commitments and contingencies:
Lease for office space
During 1999 the Company entered into a 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:
RMB
-------
2000 249,724
2001 83,241
-------
332,965
=======
F-19
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