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Registration No. 0-28358
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10/A-2
(Amendment No. 2 to Form 10)
General Form For Registration Of Securities
Pursuant to Section 12(b) or (g) of The
Securities Exchange Act of 1934
CHINA CONTAINER HOLDINGS LIMITED
(Exact name of registrant as specified in its charter)
Nevada 11-2243727
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
61, East Garden Road
Yangzhou, Jiangsu
China 225003
(Address of principal
executive offices)
Copies to:
MA TIEYI, SECRETARY & TREASURER JUSTIN K. MACEDONIA
CHINA CONTAINER HOLDINGS LIMITED WINTHROP, STIMSON, PUTNAM & ROBERTS
1250 BROADWAY, 22nd FLOOR ONE BATTERY PARK PLAZA
NEW YORK, NEW YORK 10001 NEW YORK, NEW YORK 10004
(212) 629-7378 (212) 858-1490
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act: Common Stock,
par value $0.001 per share
This form consists of ____ consecutively numbered pages.
An index to the Exhibits to this form appears on Page ____.
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CHINA CONTAINER HOLDINGS LIMITED
FORM 10
ITEM 1. BUSINESS.
GENERAL
China Container Holdings Limited ("Holdings") is a Nevada corporation
which owns 100% of the issued and outstanding common stock of an intermediate
holding company, China Container Holdings Limited ("CCHL-BVI"), a British Virgin
Islands company. CCHL-BVI owns 80% of the registered capital of Yangzhou
Tongyun Container Company Ltd., a Sino-foreign equity joint venture company ("TY
Container"), which manufactures and sells international standard commercial
freight ("ISO") containers. CCHL-BVI also owns 80% of the registered capital of
Yangzhou Tongsheng Container Co. Ltd. ("Tongsheng"), a Sino-foreign equity joint
venture company. The minority shareholdings in Tongsheng are identical to that
of TY Container. Since the completion of its production facilities in May 1996,
Tongsheng also manufactures and sells ISO containers. See "Sino-Foreign Equity
-------------------
Joint Venture Enterprises in General," below, for more detailed information.
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References herein to the "Company" are to Holdings and its direct and
indirect subsidiaries, collectively.
In addition to TY Container and Tongsheng, Holdings indirectly,
through TY Container, has a majority interest in a company which manufactures
ISO integrated refrigerated containers, and minority interests in: four
manufacturers of container components, one manufacturer of container chassis and
specialized semi-trailers, one manufacturer of plastic injection equipment, and
one real estate development company.
The Company maintains its books of account in Renminbi ("RMB"), the
national currency of the PRC. The Company believes that it is easier for
current and potential investors to understand the Company's financial statements
if the United States dollar is used as the Company's currency for financial
statement presentations. Accordingly, the Company's Consolidated Financial
Statements are stated in United States dollars ("US$"). All balance sheet
accounts have been translated from RMB to US$ using the exchange rates in effect
at December 31 of the applicable balance sheet date. All income statement
amounts have been translated using the average exchange rate for the applicable
year. Prior to January 1, 1994, the PRC maintained a dual exchange rate system
which included both an official rate and the rate available at the Foreign
Exchange Adjustment Centers, the so called "Swap Centers." The Swap Center rate
was in large part determined by the supply and demand for foreign currencies in
the PRC. On January 1, 1994, the PRC government abolished the dual rate system
and established a single floating official exchange rate. The conversion rates
used herein for currency translations are those quoted by the Swap Center in
Shanghai prior to January 1, 1994, and by the Bank of China on or after January
1, 1994.
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The following table sets forth the RMB/US$ conversion rates which were
used for currency translations provided herein:
Year RMB Equivalent of US$1
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As at 12/31 Average Rate
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1991 5.90 5.90
1992 7.71 6.66
1993 8.70 8.70
1994 8.45 8.62
1995 8.32 8.35
In May 1995, Holdings (formerly known as Dial-A-Brand, Inc.) acquired
100% of the issued and outstanding common stock of CCHL-BVI in exchange for
approximately 95% of the issued and outstanding common stock of Holdings (the
"Stock Swap"), and then took its present name. Immediately prior to the Stock
Swap, all of the former assets of Holdings, other than Holding's stock books and
other corporate records, were transferred to a separate corporation, which
assumed all of Holdings's then existing liabilities, and was itself acquired by
the former majority shareholder of Holdings. All historical information
relating to the Company disclosed in this Registration Statement is presented as
though the Reorganization and the Stock Swap had already occurred.
As of March 31, 1996, approximately 40% of the shares of Holdings were
owned indirectly by Jiangsu Tongyun Group Company ("TYG") through its wholly
owned subsidiary, Jiangyang Automobile (H.K.) Limited, which owns 50% of
Sinocity Group Limited, which holds approximately 80% of the shares of Holdings.
In addition, TYG indirectly owns approximately 2.85% of the shares of Holdings
through its 95% beneficial interest in Ocean Asia International Ltd. which owns
100% of Tactical Investments Ltd, which holds approximately 3% of the shares of
Holdings. TYG is owned by Yangzhou City, a city located in Jiangsu Province of
the People's Republic of China (the "PRC"). TYG owns equity interests, directly
or indirectly, in 13 enterprises, including TY Container, in Jiangsu Province.
TY Container's main facilities are located in Yangzhou City. See Item 7.
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS," below, which is incorporated
in this Item 1 by reference. The term "Reorganization" is defined in Item 7.
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The following organizational chart shows the ownership of the Company and its
ownership of the various affiliated entities.
[Graphic omitted. Original graphic shows: Yangzhou City owns 100% of TYG; TYG
owns 100% of Jiangyang (H.K.) Auto, 95% of Ocean Asia and 5% of each of TY
Container and Tongsheng; Ocean Asia owns 100% of Tactical Investments Ltd.;
Sinocity Group Ltd. is owned by Jiangyang (H.K.) Auto (50%), Keep Benefit Ltd.
(12.5%), Wide Shine Development Ltd. (12.5%), China Auto (USA) Corp. (6.25%) and
Everbest Auto Ltd. (18.75%); CCHL (Nevada) is owned by Sinocity Group Ltd.
(80.275%), Gordon Capital Ltd. (7.5%), Bonnaire International Ltd. (4.225%),
Tactical Investments Ltd. (3%) and Public Shareholders (5%); CCHL (Nevada) owns
100% of CCHL (BVI), which owns 80% of each of TY Container and Tongsheng; TY
Container owns 25% of Beihai, 51% of Reefer, 35.51% of Tongda, 44% of Tongyang
Machinery and 25% of Universal.]
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As described in greater detail in Item 7., Sinocity is owned by TYG (50%), Keep
Benefit Ltd. (12.5%), Wide Shine Development (12.5%), China Auto (USA) Corp.
(6.25%) and Everbest Auto Ltd. (18.75%). Bonnaire International Ltd., which owns
4.225% of the Company, and Gordon Capital Ltd., which owns 7.5% of the Company,
are unrelated corporations which received their interests in the Company in
connection with the Reorganization and the Stock swap, respectively. Tactical
Investments Ltd., which owns 3% of the Company, is owned by Ocean Asia which is
a 95% subsidiary of TYG. The remaining 5% of the Company's Shares are widely
held.
OPERATING SUBSIDIARIES
DESCRIPTION OF TY CONTAINER
History
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TY Container, currently the Company's primary operating subsidiary,
was established as a Sino-foreign equity joint venture company in the PRC on
March 27, 1989. Pursuant to the joint venture contract and its articles of
association, TY Container has an initial term of 15 years, which may be extended
with the mutual consent of the on-going participants and the approval of
relevant PRC governmental authorities. The joint venture partners contributed
cash totaling US$6,205,500 and land use rights, buildings and machinery valued
at US$904,500, in exchange for their respective interests in the joint venture,
an aggregate of US$7,110,000, the full authorized registered capital.
TY Container commenced operations in August 1990 and is primarily
engaged in the manufacture in the PRC of ISO containers for export and sale
outside the PRC. TY Container is among the first Sino-foreign equity joint
venture enterprises established to manufacture containers in China. The main
production line equipment was imported from South Korea. Additional production
equipment was later installed which increased the capacity of the plant. In
1990, its first year of operations, TY Container produced 424 20-foot, 407 40-
foot, and 237 40-foot high-cube containers for a total production of 1,712
twenty-foot equivalent units ("TEU"). In 1995, TY Container produced a total of
39,792 TEU, making it the second largest Chinese container manufacturer, as
reported by Containerization, an industry journal published in China.
TY CONTAINER HISTORICAL CONTAINER PRODUCTION
1990 1991 1992 1993 1994 1995
----- ------ ------ ------ ------ ------
TEU 1,712 14,749 26,846 31,112 33,745 39,792
Principal Products
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TY Container produces ISO containers for dry freight of the following
dimensions: 20'x 8'x 8'6", 40'x 8'x 8'6", 40'x 8'x 9'6" (High Cube) and 45'x 8'x
9'6". In addition, TY Container manufactures non-standard containers according
to customers' specifications. The containers feature either a corrugated door
or a flat door and are constructed of either structuring steel or Corton steel.
Containers produced by TY Container have been certified by the American Bureau
of Shipping Industrial Verification, Inc. ("ABS") of the United States, Bureau
Veritas Branche Industrie of France, Germanischer Lloyd of Germany, Lloyd's
Register of the United Kingdoms, and ZC of China.
TY Container has received numerous PRC national and provincial
enterprise awards and recognition. In 1995, TY Container was recognized as the
best export sales
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enterprise in Jiangsu Province and one of the ten best Foreign Invested
Enterprises in Jiangsu Province by the Association of Foreign Invested
Enterprises. TY Container received recognition in 1994 from the Development
Research Center of the State Council, placing it third among the largest metal
manufacturers in China. TY Container also was recognized in 1993 as one of the
fifty best industrial enterprises in Jiangsu Province by the Science and
Technology Committee of Jiangsu Province and one of the ten best industrial
engineering enterprises by the Engineering Industry Office of Jiangsu Province.
Sources and Availability of Raw Materials and Components
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The raw materials required for the production of dry commercial
freight containers include steel, plywood, paint, and sealants. In 1995,
approximately 70%, by cost, of TY Container's raw materials and components were
imported and paid for by TY Container in U.S. dollars; of the remaining 30%, all
were purchased in PRC domestic transactions and paid for in RMB. In order to
take advantage of economies of scale, TY Container now purchases all of its raw
materials through its sales and purchasing agent, Jiangsu Tongyun Group Trading
Company ("TYG Trading Co."), a wholly owned subsidiary of TYG (see Item 1.
"General" and Item 7. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
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Historically, TY Container has purchased approximately one-half of its
steel requirements from sources in Japan, and the remaining one-half from
sources in South Korea. The price of all steel imported from Japan into the PRC
is negotiated on a semi-annual basis between the governments of the PRC and
Japan, and the price of steel imported from South Korea generally follows the
negotiated Japanese steel price. However, in 1995, following the earthquake
which struck Kobe and the rebuilding process that began afterwards, Japanese
steel prices increased 14% at the beginning of the year, followed by a 16%
increase during the middle of the year. As a result of the large increase in
steel prices in 1995, TY Container and other container manufacturers with
operations in China are seeking domestic sources of steel which are capable of
meeting their requirements on a long-term basis. In 1995, TY Container
purchased 15,000 metric tons of steel from Baoshan Iron and Steel Corporation
("Baoshan Steel") in Shanghai at an average savings of US$50 per metric ton in
price and US$26 per metric ton in freight charges over what was paid for steel
purchased from Japanese and South Korean sources. TY Container intends to
purchase approximately 60,000 metric tons of steel from Baoshan Steel in 1996.
The average price of steel purchased by TY Container in the first quarter of
1996 was approximately 9% lower for Corton steel and 11% lower for structuring
steel, than that paid in 1995. TY Container generally maintains an inventory of
steel sufficient for three months production.
Paint has been obtained from sources in Denmark and South Korea.
Plywood has been obtained from sources in Indonesia. Weather resistant sealant
has been obtained from Taiwan and domestically, including from Wuxi Tongfa
Economic & Technical Development Company Ltd., a company in which TY Container
holds a 10% equity interest. TY Container also purchases container components
from suppliers in Taiwan and South Korea, as well as domestically. TY Container
purchases some of those components from companies in which it holds a minority
equity interest, including Yangzhou Tongda Forging Ltd., in which it owns a
35.57% interest, as described below in "TY Container Affiliated Companies."
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Purchases from
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affiliated companies are at prices and on other terms and conditions at least as
favorable, and generally significantly more favorable, to TY Container than it
would receive from unaffiliated companies. Plywood and paint are ordered as
needed upon receipt of firm customer orders. TY Container typically maintains a
two month supply of sealant. All other container components are purchased on an
as needed basis, with next day delivery generally available.
TY Container works closely with its suppliers to ensure product
quality and availability and believes it has established a reliable network of
suppliers for its raw materials and components. It is TY Container's intention
to further diversify its sources of raw materials and components, to the extent
consistent with its ability to obtain high quality raw materials and components
at low cost and on a timely basis.
Seasonal Nature of Business
---------------------------
Although the Company considers demand for containers to be seasonal,
as determined in accordance with generally accepted accounting principals in the
United States ("U.S. GAAP"), sales of commercial freight containers are not
highly seasonal, with 25.5%, 28.4%, 20.3% and 25.8% of TY Container's sales in
1995 occurring in the first, second, third and fourth quarters, respectively.
In order to reduce the effects of seasonal fluctuations in demand, and to avoid
lost sales resulting from inadequate inventory (primarily in the second
quarter), a portion of TY Container's annual production (3.3%, 2.5%, 0% and
1.5%, in the first, second, third and fourth quarters, respectively) is based
upon what it refers to as "stock orders" received from its major customers.
Stock orders are not firm orders, but, rather, represent a customer's estimate
of its requirements for the following quarters, and provide for TY Container's
holding the finished containers in inventory for delivery to the customer in
three to six months. Stock orders are not considered "firm orders" until a
formal purchase order is received, typically within five days prior to delivery.
Payment is usually made within 15 days of delivery. TY Container has found
stock orders to be an accurate measure of future demand. TY Container was the
first Chinese container manufacturer to institute this practice in 1992, and
believes it has now been adopted by virtually all of its competitors in the
Yangtze Delta region.
Markets
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TY Container's main facilities are located in Yangzhou City, which is
in the lower reaches of the Yangtze River, in Jiangsu Province, China.
Approximately 85% of TY Container's production is shipped to nearby ports in the
Yangtze River Delta (e.g. Shanghai, Nanjing, Zhenjiang, Nantong, Zhangjiagang,
Jiangyin, Wuhu and Lianyungang) for delivery to customers. The remaining 15% of
TY Container's production is delivered to Hong Kong and ports in Japan and South
Korea. These overseas deliveries are typically sold on a "Free Used" basis
(i.e., free freight, but used once), whereby the customer takes delivery of the
containers in its home markets once-used by an unrelated shipper, but at a
slight discount from the market price. TYG Trading Co. arranges to lease such
containers, for the first use, to a shipping or freight forwarding company for a
nominal amount. The lessee is responsible for any damage incurred during the
shipping, and is obligated to deliver the leased container empty and in good
condition to TY Container's customer at the destination port. This arrangement
benefits all three
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parties: the shipping company, for having access to containers in a normally
container-tight region (primarily in export zones such as Shanghai); the
customers, for paying a slight discount for an almost new container; and TY
Container, for receiving a small leasing fee and, more importantly, not paying
freight charges for shipment of the container.
TY Container does not have long term sales contracts with its
customers. All of its sales are based upon purchase orders, typically received
approximately 6 weeks prior to the desired delivery date (other than purchase
orders for containers manufactured pursuant to "stock orders," which are
typically received approximately five days prior to the desired delivery date.
See "Seasonality of Business," above).
-----------------------
During the past three years, TY Container's consolidated sales by
major customers and by geographic region of destination are as follows:
SALES BY CUSTOMER
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995 1995
US$ US$ US$ % SALES
---- ---- ---- -------
<S> <C> <C> <C> <C>
(amounts in millions)
A P Moller (Maersk Line) 8.5 7.7 2.3 2.6
Interpool Ltd 5.6 12.3 12.4 13.9
Orient Overseas Container Line Ltd. --- --- 19.7 22.1
P & O 2.8 7.3 --- ---
Textainer Capital Corporation 17.7 12.8 14.5 16.2
Transamerica Leasing Inc. 9.9 19.8 17.7 19.8
Triton Container International Ltd. 9.4 12.7 19.5 21.8
Others 7.0 7.2 3.2 3.6
---- ---- ---- -----
60.9 79.8 89.3 100.0
==== ==== ==== =====
</TABLE>
SALES BY REGION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995 1995
US$ US$ US$ % OF SALES
---- ---- ---- ----------
<S> <C> <C> <C> <C>
(amounts in millions)
USA 42.6 57.6 65.9 73.9
Denmark 8.5 7.7 2.3 2.6
United Kingdoms 2.8 7.3 --- ---
Hong Kong 2.7 1.9 20.2 22.6
Others 4.4 5.3 0.8 0.9
---- ---- ---- -----
61.0 79.8 89.2 100.0
==== ==== ==== =====
</TABLE>
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Historically, TY Container has exported virtually all of its
production and almost all of its revenues have been based in U.S. dollars. TY
Container markets its products both directly, through the efforts of its
executives and employees, and indirectly, through independent sales agents. TY
Container currently has a non-exclusive sales representative agreement with
Container Trade and Services, Ltd. ("CTS"). While the agreement does not limit
CTS to a particular geographic area, in practice CTS has originated sales
primarily from customers in North America. In 1995, CTS was responsible for the
sale of approximately 80% of TY Container's total production. In March 1996, TY
Container and CTS executed a new agreement with a term of ten years.
In April 1995, TY Container executed an agreement with TYG Trading
Co., a PRC company indirectly owned by Yangzhou City, under which TYG Trading
Co. agreed to provide certain services for TY Container which TY Container had
previously performed itself. These services include the purchase of raw
materials (see "Sources and Availability of Raw Materials and Components",
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above), the design of containers to be made to customer specifications, and
certain sales support services, such as scheduling deliveries and arranging the
lease of containers to be delivered on a "Free Used" basis. The agreement
provides for the payment by TY Container to TYG Trading Co. of an agency fee in
an amount equal to TYG Trading Co.'s anticipated costs, currently set at one
percent of TY Container's sales. The aggregate amount payable by TY Container
to TYG Trading Co. under the agreement was $8,500 in 1995, and $759,500 for the
six-month period ending June 30, 1996. TY Container believes that its agreement
with TYG Trading Co., which enables it to take advantage of certain economies of
scale, has resulted in significant savings to TY Container.
Despite a significant increase in TY Container's production capacity,
during the past three years demand for certain types of TY Container's
containers has exceeded its capacity. In order to maintain good customer
relations, TY Container has on occasion subcontracted the production of
containers to other, unaffiliated, container manufacturers. The price paid by
TY Container for such containers, while not as low as its own marginal cost of
production, is still below the sales price to its customer. The Company intends
to eliminate the need for such practices by increasing production capacity
through the modernization of existing production lines (see "Modernization
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Plan," below) and the construction of additional production lines (see
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"Description of Yangzhou Tongsheng Container Co. Ltd.," below).
Modernization Plan
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TY Container's management halted production at TY Container's main
facility for a period of approximately two months, commencing in July 1996, and
allocated the production to Tongsheng instead. During this period, TY Container
upgraded and modernized its main assembly line in order to enhance production
throughput and improve product quality. TY Container's management estimates
that the modernization plan cost approximately US$1.2 million in capital
expenditures, all of which was funded from TY Container's internal cash flow. A
portion of the workforce from TY Container was assigned to Tongsheng (see
"Description of Yangzhou Tongsheng Container Co. Ltd.," below) during the
modernization. As a result, TY Container did not have to furlough any of its
workforce and Tongsheng had sufficient experienced workers to assist the company
in the training of new hires.
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Backlog
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As of March 31, 1996, TY Container had backlog orders believed to be
firm of US$14.8 million, as compared to US$12.8 million as of March 31, 1995.
The Company expects all such orders to be filled within the current fiscal year.
Competition
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There are more than forty container manufacturers in China, some of
which are larger and better capitalized than TY Container. However, due to the
relatively high cost of shipping an empty container, TY Container competes
primarily with container manufacturers located in the Yangtze River Delta. To a
lesser extent, TY Container also competes with container manufacturers in the
Pearl River Delta and the northern China ports of Qingdao, Dalian and Tianjin,
to the extent these manufacturers can make use of the "Free Used" method to
transport their containers to Shanghai.
TY Container is the second largest container manufacturer in the
Yangtze River Delta, producing approximately 20% of the total containers
manufactured in that area. The largest container manufacturer in the Yangtze
River Delta is Shanghai Pacific International Container, a joint venture 60%
controlled by Singamas Container Company. TY Container also faces competition
from Associated Industries, Shanghai Jindo Container and Shanghai Hyundai
Container, which commenced operation in June, July and October 1995,
respectively. Management believes, although no assurance can be given, that
when (and if) Tongsheng reaches full production capacity in 1997, the Company
will be the largest manufacturer of containers in the Yangtze River Delta,
capable of producing 80,000 TEU annually. TY Container also faces potential
competition for foreign destinations from container companies around the world
and faces potential competition from new entrants, other than new foreign
invested enterprises in the PRC. In 1995, the PRC government promulgated new
regulations which prohibit any additional foreign investment in the PRC
container industry, whether through Sino-foreign joint ventures, sole foreign
invested enterprises or any other form of foreign investment.
TY Container competes with other container manufacturers on the basis
of price, quality, service and warranty. When necessary, TY Container believes
it is able to compete effectively on the basis of price because of a lower cost
structure resulting from certain economies of scale and its equity interests in
its suppliers of components. However, the high quality of its products has
generally enabled TY Container to sell its containers for prices higher than its
competitors'. TY Container has established a reputation in the industry for a
high level of customer service and has been an industry leader in devising
innovative programs to meet its customers' needs. It was the first Chinese
container manufacturer to offer customers the non-standard 45 foot "High Cube"
container, the first Chinese container manufacturer to accept so called "stock
orders" and has recently introduced a program called "One Second Delivery,"
which meets customers' unexpected container requirements by regularly storing a
number of containers on the customer's property in China, available for
immediate use. TY Container has
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also assisted customers in obtaining financing, from unrelated third parties,
for its container purchases. TY Container's strong relationship with local banks
has given it access to working capital lines of credit which are not available
to many of its competitors. These credit lines provide TY Container with the
financial ability to offer programs such as "stock orders" to its customers. In
addition, the high quality of TY Container's products permit it to provide an
attractive warranty to its customers. Typically, TY Container provides a 12 to
24 months warranty on the container structure, a three to five year warranty on
the paint (which is backed by the paint manufacturer's warranty), and a seven
year warranty on the markings. Normally, warranty claims are settled, without
the acrimony common in the industry, in accordance with a pre-determined payment
schedule which sets forth the amount of claim payment the customer is entitled
to receive from TY Container, based on the type and extent of the defect. Total
warranty claims made against TY Container during the last five years are less
than US$140,000.
Employees
---------
TY Container currently employs approximately 960 people, about 30 of
whom are management personnel, 50 technical and administrative personnel, 30
security and auxiliary personnel and approximately 850 (including 2 shifts)
production workers and supervisors. TY Container typically pays its production
workers a fixed hourly wage plus a monthly bonus which is based on the job
classification and the production level achieved during the period. The average
annual cash compensation of TY Container's production workers in 1995 was
approximately US$1,916, which it believes is approximately two and one half
times the average annual cash compensation of a typical worker in Yangzhou City
(based upon data compiled by the Yangzhou City Bureau of Statistics). In
addition to cash compensation and pursuant to PRC government regulations, TY
Container provides certain pension and medical benefits for all but temporary
employees. TY Container pays an insurance company 23% of the basic salary of
its full time workers, and the insurance company bears the entire cost of the
pension and post-retirement medical benefits. TY Container does not provide
free housing for its employees, as is common for many Chinese companies;
however, for certain highly productive employees with at least three years of
tenure, TY Container provides a one-time home purchase allowance averaging
US$4,800 for staff employees and US$6,000 for managers. The housing allowance
is generally calculated at one-half of the average market price, or two-thirds
of the minimum market price, of a typical one-family apartment. Approximately
215 employees have received the housing allowance through December 31, 1995 and
another 70 employees will be eligible in 1996. All of TY Container's employees
belong to the local trade union. TY Container has not been subject to any
strikes or other labor disturbances, and TY Container's management believes that
its relations with its employees are good. For 1995, TY Container's total labor
cost was less than 6% of its total costs of sales.
TY CONTAINER SUBSIDIARY
-----------------------
YANGZHOU TONGLEE REEFER CONTAINER COMPANY LTD. Yangzhou Tonglee
Reefer Container Company Ltd. ("Reefer") was established as a Sino-foreign
equity joint venture company in the PRC on December 31, 1993, with an initial
term of 20 years, which may be extended with the mutual consent of the
participants and the approval of relevant PRC
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governmental authorities. The joint venture partners contributed cash in the
aggregate of US$8,000,000 in exchange for their respective interests in the
joint venture, the full authorized registered capital. Reefer is located near
the Biangang Port, in the lower portion of the Yangtze River. Reefer operates a
new manufacturing facility which produces international standard integrated
refrigerated containers ("reefers"). These containers are used for the
international transport of temperature sensitive cargo, including agricultural,
biological and medical products, which require a stable cold or warm
environment. Reefer's manufacturing facility, which came on line in May 1995,
was designed to produce 4,000 TEU of reefer containers annually and produced 374
TEU of reefer containers in 1995. The Company expects Reefer to produce at least
4,000 TEU of reefer containers in 1996.
Reefer is China's first reefer manufacturer. Given the present level
of demand, reefer manufacturers, with the greater capital investment and higher
technical skill required in the manufacturing of refrigerated containers,
typically enjoy a higher profit margin than dry container manufacturers. The
Company expects demand for refrigerated containers in China to increase due to
rising exports of fresh and frozen produce and meats as well as silk, which
requires refrigeration during shipping. The total area of the reefer plant site
is over 50,000 square meters, including 13,700 square meters for the main
factory building and 5,500 square meters for supporting facilities. Reefer
currently employs approximately 530 people, 6 of whom are management personnel,
and about 60 technical and administrative personnel, 40 security and auxiliary
personnel and approximately 430 (including 2 shifts) are production workers and
supervisors.
TY Container, which initially held a 50% interest in Reefer, increased
its interest to 51% in January 1996, giving Holdings a 40.8% indirect interest
in the company. TYG holds a 19% interest in the company (see Item 1. "General"
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and Item 7. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"), Liuwei Village
Municipal Authority has a 5% interest, and Singapore Nanlee holds the remaining
25% of the company.
TY CONTAINER AFFILIATED COMPANIES
---------------------------------
The Company reports its share in the earnings and losses of those
companies in which it owns greater than a 20% interest (but less than a 51%
interest) on the equity method of accounting. In 1995, the net losses
attributable to affiliates, was US$1,308,000 (including a loss attributable to
the startup costs of Reefer, in which TY Container had only a 50% interest in
1995, of US$1,062,000), as reported in its Consolidated Statement of Income
under the line item "Share of Net Losses of Associated Companies." TY Container
owns minority interests in affiliated companies as follows:
BEIHAI TONGHAI CONTAINER COMPANY LTD. (25%) Beihai Tonghai Container
Company Ltd. ("Beihai Container") was established as a Sino-foreign equity joint
venture company in the PRC on March 1, 1993. Beihai Container is located in the
vicinity of Beihai City in the southern province of Guangxi, south of the Pearl
River, making it a convenient delivery point to the port of Hong Kong. Beihai
Container operates a new manufacturing facility which was designed to produce
12,000 TEU annually of international standard commercial freight containers
primarily
11
<PAGE>
for export and sale outside the PRC. Beihai Container's manufacturing
facility came on line in May 1995 and produced 6,000 TEU in 1995. Measured by
annual TEU output, Beihai Container is currently the thirteenth largest
manufacturer of containers in China, as reported by Containerization, an
industry journal published in China. Beihai Container intends to expand its
annual capacity to 24,000 TEU by 1997. Ty Container holds a 25% interest in
Beihai Container, giving Holdings a 20% indirect interest in the company. Beihai
Huarui Company, a Chinese company, holds a 45% interest in Beihai Container, and
Ocean Asia International Ltd., a Hong Kong company and 95% owned subsidiary of
TYG ("Ocean Asia"), holds the remaining 30% interest. As a result of startup
costs, Beihai had a loss in 1995, of which the Company's share was US$232,000.
YANGZHOU TONGDA FORGING LTD. (35.57%) Yangzhou Tongda Forging Ltd. ("Tongda")
was established as a Sino-foreign equity joint venture company in the PRC on
June 28, 1993. Tongda produces container door hinges and locking devices to be
used as a complete set. These products meet the inspection standards of ABS,
receiving certification from Houston ABS. Approximately 37% of Tongda's
production is sold to TY Container, which accounts for nearly 100% of TY
Container's requirements for door hinges and locking devices. TY Container
holds a 35.57% interest in Tongda, giving Holdings a 28% indirect interest in
the company. Yangzhou Valve Factory, a PRC government owned company, holds a
39.43% interest in Tongda, and Ocean Asia holds the remaining 25% of the
company. the Company's share of Tongda's 1995 net profits was US$40,000.
YANGZHOU UNIVERSAL COMMERCIAL BUILDING SHAREHOLDINGS CO., LTD. (25%) Yangzhou
Universal Commercial Building Shareholdings Co., Ltd. ("Universal") was
established as a PRC company on May 29, 1993. Universal owns and manages the
largest shopping center in Yangzhou City. In November 1995, TY Container
purchased a 25% interest in Universal from Ocean Asia in exchange for
approximately US$900,000. Ty Container holds a 25% interest in Universal,
giving Holdings a 20% indirect interest in the company. Jiaotong Bank, various
bank branches located in Yangzhou and certain other banking entities hold a
33.3% interest in Universal, approximately 2,000 employees of the shopping
center own a 33.3% interest and a number of unrelated local companies own the
remaining 8.4% of the company. In 1995, Universal had a net profit of
approximately RMB 1,289,000 (US$154,000). The Company's share of such profit
for the month of December was US$6,492.
YANGZHOU TONGYANG MACHINERY CO., LTD. (44%) Yangzhou Tongyang Machinery Co.,
Ltd. ("Tongyang Machinery") was established as a Sino-foreign equity joint
venture company in the PRC on April 8, 1993. Tongyang Machinery manufactures and
sells plastic injection equipment used in the toy industry. On December 1, 1994,
TY Container entered into an agreement with Metchem Company Limited ("Metchem")
providing for the purchase by Metchem of TY Container's 44% interest in Tongyang
machinery for a cash purchase price of US$880,000. The agreement was approved by
the relevant PRC government authorities on January 27, 1995; however, due to a
change in Metchem's investment plans, Metchem has postponed its purchase of TY
Container's interest in Tongyang Machinery. TY Container's
12
<PAGE>
management is currently negotiating with Metchem regarding the consummation of
the sale and hopes to sell its interest in Tongyang Machinery in 1996. TY
Container holds a 44% interest in Tongyang Machinery, giving Holdings a 35.2%
indirect interest in the company. The remaining 56% of Tongyang Machinery is
held by Ocean Asia (25%), TYG (11%), Jiangsu Machinery Import and Export Company
(10%) and Dujiang Village Industry Company (10%). In 1995, Tongyang Machinery
had a net loss of RMB 1,161,000 (US$139,042). The Company's share of such loss
was US$61,198.
DESCRIPTION OF YANGZHOU TONGSHENG CONTAINER CO. LTD.
Tongsheng was established as a Sino-foreign equity joint venture
company in the PRC in December 1995, with an initial term of 15 years, which may
be extended with the mutual consent of the participants and the approval of
relevant PRC governmental authorities. The joint venture partners contributed
an aggregate of US$4,800,000 in cash in exchange for their interests in
Tongsheng, the full authorized registered capital. Tongsheng produces ISO dry
containers. Tongsheng's facilities, which are located adjacent to TY
Container's main production facility, came on line in May 1996. Tongsheng has
been designed for an annual capacity of 40,000 TEU, and is expected to produce
30,000 TEU in 1996. Tongsheng is managed by TY Container's current management
and shares some common facilities, such as a container yard and office space,
with TY Container. A portion of TY Container's workforce was assigned to
Tongsheng during the modernization and upgrade of TY Container's production line
(see "Description of TY Container - Modernization Plan"). The presence of these
------------------
experienced workers enabled Tongsheng to efficiently train new hires. All of
Tongsheng's production will be marketed by TY Container. In June 1996,
Tongsheng executed an agreement with TYG Trading Co. under which TYG Trading Co.
agreed to provide certain support services to Tongsheng in exchange for an
agency fee in an amount equal to TYG Trading Co.'s anticipated costs, currently
set at 1% of Tongsheng's sales. This agreement is virtually identical to the
April 1995 agreement between TY Container and TYG Trading Co. (See "Description
of TY Container - Markets," above.) The ownership of Tongsheng is identical to
-------
that of TY Container, with CCHL-BVI holding an 80% interest in the company
(giving Holdings an 80% indirect interest in the company), Bexi Iron and Steel
Company holding 10%, China Automobile Import and Export holding 5%, and Jiangsu
Tongyun Group Company holding the remaining 5% of the company. The Company's
management considers Tongsheng to be essentially a second production line for TY
Container.
PROPOSED ACQUISITION
TY Container recently received PRC government approval to acquire a
40% interest in Yangzhou Tonghua Semi-Trailer Company Ltd. ("Semi-Trailer") from
TYG in exchange for RMB 19,568,640 (US$2,352,000). Semi-Trailer was established
as a Sino-foreign equity joint venture company on December 14, 1991 and is
located in Yangzhou City. Its principal business is the manufacture and sale of
container chassis and specialized semi-trailers. The Company intends to acquire
its interest in Semi-Trailer by December 1996. Following the acquisition, TY
Container will hold a 40% interest in Semi-Trailer, giving Holdings an 32%
indirect interest in the company. The remaining 60% will be owned by TYG (5%),
China National Foreign Trade Transportation Company (commonly known as
Sinotrans) (15%), Chung
13
<PAGE>
Yin Group Investments Ltd. (15%), KIC International Holdings Corporation
(15%), and China National Foreign Trade Transportation Company, Jiangsu Branch,
(10%). Semi-Trailer had 1995 net profits of RMB 12,620,650 (US$1,511,435), up
11% over 1994. (see Item 7. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS")
SINO-FOREIGN EQUITY JOINT VENTURE ENTERPRISES IN GENERAL
LEGAL FRAMEWORK
Each of TY Container, Tongsheng, and Reefer (the "Operating
Subsidiaries") is organized under PRC law as a Sino-foreign equity joint venture
enterprise, which is a distinct legal entity with limited liability. Such
entities are governed by the law of the PRC on Joint Ventures Using Chinese and
Foreign Investments and implementing regulations related thereto (the "Equity
Joint Venture Law"). The parties to an equity joint venture have rights in the
returns of the joint venture in proportion to the joint venture interests that
they hold. The operations of equity joint ventures are subject to an extensive
body of law governing such matters as formation, registration, capital
contribution, capital distributions, accounting, taxation, foreign exchange,
labor and liquidation.
TAXATION
A Sino-foreign equity joint venture with a term of 10 years or more
and engaged in production is exempt from PRC central government income tax for
the first two years after it attains profitability, and for three years
thereafter it is eligible for a 50% reduction in such income tax. It is further
entitled to a 50% reduction in the PRC central government income tax for each
year in which its export sales exceed 70% of its total sales.
GOVERNANCE, OPERATIONS AND DISSOLUTION
Governance, operations and dissolution of a Sino-foreign equity joint
venture enterprise are governed by the Equity Joint Venture Law and by the
parties' joint venture contract and the joint venture's articles of association.
The Board of Directors of each Operating Subsidiary exercises authority by
majority vote over major corporate decisions, including the appointment of
officers, strategic planning and budgeting, employee compensation and welfare
and distribution of after-tax profits. Pursuant to relevant PRC law, certain
major actions of each Operating Subsidiary require unanimous approval by all of
the directors present at the meeting called to decide upon such actions:
amendments to its contract and articles of association; increases in, or
assignments of, the registered capital of the joint venture; a merger of the
joint venture with another entity; or dissolution of the enterprise. In
addition, PRC government approval is necessary for increases in authorized
registered capital and for certain borrowings.
Each Operating Subsidiary is subject to the Sino-foreign Equity Joint
Venture Enterprise Labor Management Regulations. In compliance with these
regulations, the management of each Operating Subsidiary may hire and discharge
employees and make other determinations with respect to wages, welfare,
insurance and discipline of its employees.
14
<PAGE>
The term of a Sino-foreign equity joint venture enterprise may be
extended with the agreement of all the partners, subject to the approval of the
relevant PRC governmental authorities. Pursuant to the Equity Joint Venture
Law, Sino-foreign equity joint venture enterprises may be terminated prior to
the expiration of their term in certain limited circumstances, including the
inability of the enterprise to conduct its business owing to a breach by one of
its parties or insolvency or force majeure. Upon termination, the board of
directors establishes a liquidating committee to dissolve the enterprise, which
dissolution is subject to PRC government review and approval.
Resort to PRC courts to enforce a joint venture contract or to resolve
disputes between the parties over the terms of the contract is permissible. In
practice, however, disputes between the parties are often resolved by
negotiation. The Company believes that it has good working relationships with
the Chinese joint venture partners to the Operating Subsidiaries and that it
will be able to reach agreement with them on business policies and decisions for
the Operating Subsidiaries.
TAXES APPLICABLE TO HOLDINGS AND CCHL-BVI
Holdings generally will be subject to U.S. federal income tax of 35
percent on distributions from CCHL-BVI that are out of its current or
accumulated earnings and profits, and such distributions will not be eligible
for the dividends-received deduction. Because CCHL-BVI and the Operating
Subsidiaries are "controlled foreign corporations" for U.S. federal income tax
purposes, Holdings may be required to include in gross income (x) those
companies' "Subpart F" income, which includes certain passive income and income
from certain transactions with related persons (whether or not such income is
distributed to Holdings), (y) increases in those companies' earnings invested in
certain U.S. property and (z) certain earnings of those companies invested in
"excess passive assets." Based on the current and expected income, assets and
operations of CCHL-BVI and the Operating Subsidiaries, the Company believes that
it will not have significant U.S. federal income tax consequences under the
"controlled foreign corporation" rules.
So long as (x) Holdings owns ten percent or more of the voting stock
of CCHL-BVI, (y) CCHL-BVI owns ten percent or more of the voting stock of TY
Container and Tongsheng, and (z) the stock ownership percentages described in
(x) and (y) when multiplied together equal or exceed five percent, subject to
certain limitations CCHL-BVI will be deemed to have paid a proportionate amount
of TY Container's or Tongsheng's PRC income taxes when a dividend is distributed
from TY Container or Tongsheng, and Holdings generally will be entitled to claim
a credit for such PRC income taxes when a dividend is distributed from CCHL-BVI
to Holdings.
The Company believes that dividends received by CCHL-BVI from TY
Container or Tongsheng will not be subject to income taxation by the British
Virgin Islands and that CCHL-BVI will not be required to withhold British Virgin
Islands taxes on dividends paid to CCHL.
15
<PAGE>
ENVIRONMENTAL COMPLIANCE
The Operating Subsidiaries are subject to the PRC's national
Environmental Protection Law, which was promulgated on December 26, 1989, as
well as a number of other national and local laws and regulations regulating
air, water and noise pollution and setting pollutant discharge standards.
Violation of such laws and regulations could result in warnings, fines, orders
to cease operations and even criminal penalties, depending on the circumstances
of such violation. The Company believes that all manufacturing and other
operations of the Operating Subsidiaries are in compliance with all applicable
laws relating to air, water and noise pollution.
CERTAIN SELECTED RISK FACTORS
CERTAIN RISKS RELATED TO THE COMPANY
ABILITY TO MANAGE GROWTH
The Company has grown rapidly since its inception and must continue to
expand to achieve its business objectives. To manage its growth effectively,
the Company must continue to develop, install and improve its operating and
information systems and coordinate its efforts with its suppliers. The Company
will also need to continue to expand, train and manage its employee base and its
management personnel will be required to assume even greater levels of
responsibility.
CUSTOMER CONCENTRATION
During 1995, TY Container sold containers to more than 10 customers.
During this period, the top five customers accounted for approximately 93.8% of
net sales. There can be no assurance that the Company's principal customers
will continue to purchase containers from TY Container at current levels, if at
all, and the loss of one or more major customers could have a material adverse
effect on TY Container and the Company.
INTENSE COMPETITION
The Company is subject to intense competition and potential
competition. (see "Competition," above)
--------------------
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the abilities and
participation of its Chairman, President and Chief Executive Officer, Mr. Cheung
Sau Yung. The loss of Mr. Cheung as an officer and director could have a
material adverse effect on the Company's business. On January 1, 1996, Mr.
Cheung signed a five year employment agreement with TY Container. The terms of
this agreement provide for Mr. Cheung to be compensated on
16
<PAGE>
substantially the same basis as he was in 1995. The Company does not carry key
man life insurance for Mr. Cheung and has no plans to do so in the near future.
CONTROL BY MAJORITY SHAREHOLDER
The Company's majority shareholder, Sinocity Group Limited, owns
approximately 80% of the Company's issued and outstanding common stock.
Accordingly, this shareholder may continue to exert significant influence over
the outcome of most corporate actions requiring shareholder approval, including
the declaration of dividends and the election of directors. Jiangyang
Automobile (H.K.) Limited ("JAL"), a wholly owned subsidiary of TYG, is a 50%
shareholder of Sinocity Group Limited and TYG may be deemed to control Sinocity
Group Limited through JAL's 50% ownership interest. The other shareholders of
Sinocity Group Limited are China Everbest Motors Corp. (18.75%), Wide Shine
Development Ltd. (12.5%), Keep Benefit Ltd. (12.5%) and China Auto (USA)
Corporation (6.25%). (See Item 4. "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" and Item 7. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS").
LIMITED DURATION OF OPERATING SUBSIDIARIES
TY Container, Tongsheng and Reefer were established for initial terms
of 15, 15 and 20 years, respectively. Their remaining terms of 9, 14 and 17
years, respectively, may be extended by the mutual consent of the participants
in the respective company, subject to the approval of relevant PRC governmental
authorities. In the event that the term of an Operating Company is not
extended, such venture will be dissolved and liquidated pursuant to provisions
of applicable PRC law and the relevant joint venture contract.
CERTAIN RISKS RELATED TO CHINA
POLITICAL CONSIDERATIONS
The value of Holding's interests in the Operating Subsidiaries may be
adversely affected by significant political, economic and social uncertainties
in the PRC. A change in policies by the PRC government could adversely affect
Holding's interests by, among other things, changes in laws, regulations, or the
interpretation thereof, confiscatory taxation, restrictions on currency
conversion, imports and sources of supplies, or the expropriation of private
enterprises. Although the PRC government has been pursuing economic reform
policies for the past 17 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 conditions.
ECONOMIC CONSIDERATIONS
The economy of the PRC differs significantly from the United States
economy in such respects as structure, level of development, gross national
product, growth rate, capital reinvestment, resource allocation and self-
sufficiency, rate of inflation and balance of payments
17
<PAGE>
position, among others. Only recently has the PRC government encouraged
substantial private economic activity. The PRC economy has experienced
significant growth in the past ten years, but such growth has been uneven among
various sectors of the economy and there can be no guarantee that the
government's pursuit of economic reforms will be consistent or effective. The
increased demand for containers in China since 1990 has in large measure been
driven by the increase in exports of other goods from the PRC and a general
increase in world trade. There is no assurance that exports of goods from the
PRC will continue to increase at their current rate or that such exports will
not decline in the future. Action by the central government of the PRC could
have a significant adverse effect on economic conditions in China and the
economic prospects for the Operating Subsidiaries and the Company. As virtually
all of the sales by the Operating Subsidiaries are to non-PRC entities, the
prospects of the Operating Subsidiaries and the Company may also be materially
affected by developments in the economies of the PRC's principal trading
partners.
PRC LEGAL SYSTEM
Since 1979, many laws and regulations dealing with economic matters in
general and foreign investment in particular have been promulgated in the PRC.
In December 1982, the National People's Congress of China amended the
Constitution of China to authorize foreign investment and to guarantee the
"lawful rights and interests" of foreign investors in the PRC. Despite the
progress in developing its legal system, the PRC does not yet have a
comprehensive system of laws. In addition, enforcement of existing laws may be
uncertain and sporadic, and implementation and interpretation thereof
inconsistent. The PRC judiciary is relatively inexperienced in enforcing the
laws that exist, leading to a higher than usual degree of uncertainty as to the
outcome of any litigation. Even where adequate law exists in the PRC, it may be
difficult to obtain swift and equitable enforcement of such law, or to obtain
enforcement of a judgment by a court of another jurisdiction. The PRC's legal
system is based on written statutes and, therefore, decided legal cases are
without binding legal effect, although they are often followed by judges as
guidance. In particular, PRC laws, regulations and procedures with respect to
complex transactions, such as the Reorganization, the Stock Swap and the
Liquidation (as defined in Item 7. "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS"), are currently being developed, are based in part on unwritten
and informal interpretations of government officials and may be subject to
changes which may have retroactive application. In the future, financings and
other complex transactions might be subject to PRC regulatory approval, which
can include elements that are discretionary with the PRC regulatory agencies.
In addition, the interpretation of PRC laws may be subject to policy changes
reflecting domestic political changes.
As the PRC legal system develops, the promulgation of new laws,
changes to existing laws and the preemption of local regulations by national
laws may adversely affect foreign investors. The trend of legislation over the
past 15 years has, however, significantly enhanced the protection afforded
foreign investment and allowed for more active control by foreign parties of
enterprises in the PRC. There can be no assurance, however, that the current
trend in economic legislation towards promoting market reforms and
experimentation as well as a further "opening to the outside world" will not be
slowed, curtailed or reversed, especially in the event of a change in
leadership, social or political disruption or unforeseen circumstances
18
<PAGE>
affecting the PRC's political, economic or social life. Such a shift could have
a material adverse effect upon the business and prospects of the Operating
Subsidiaries and the Company.
While PRC law expressly protects the status and rights of Sino-foreign
joint venture enterprises, including their right to use land during the term of
their joint venture contracts, the PRC government reserves the right, in extreme
and exceptional circumstances, to terminate the joint venture and provide
compensation therefor. In such an event, a joint venture's right to use land
would terminate and all plant and facilities would revert to the PRC government
in exchange for just compensation.
INFLATION
The PRC experienced a period of relatively high growth and high
inflation during the mid-1980's. The PRC government attempted to contain and
control inflation by applying corrective measures, but the inflationary cycle
was not broken until the imposition of drastic austerity measures commencing in
late 1988. Suppressed demand and tight control over prices and credit led to a
substantially reduced inflation rate in 1990. In 1993, the PRC's overall cost
of living index continued to rise. The overall cost of living index increased
by an estimated 14.5% during 1993 over 1992, and the urban cost of living index
increased by an estimated average of 19.5% for 35 large cities during the same
period. In response to this situation, the PRC government has taken
macroeconomic measures combined with limited administrative measures to control
economic growth and curb inflation. The principal measures taken include
raising interest rates on bank loans and central government securities,
generally restricting access to credit, revoking unauthorized tax exemptions
conferred by local governments, mandating banks to recover certain loans that
were improperly made or left outstanding, increasing efforts to gain control of
investments in capital assets made without proper governmental approval,
reducing government administrative expenses by 20%, temporarily suspending
further price reforms, restricting speculative investments (especially in the
area of real estate) and increasing regulation of imports of certain luxury
goods. During 1994, the overall cost of living index increased by an estimated
average of 21% and the urban cost of living index increased by an estimated
average of 14%. While the official figures for 1995 are not yet available, the
Company believes that such figures will be lower than those for 1994. As of
March 31, 1996, the average interest rate of RMB loans and US$ loans available
to TY Container was 9.18% and 6.4%, respectively. Although approximately 70%,
by cost, of the Operating Subsidiaries' raw materials and components are
imported and paid for in U.S. dollars, high inflation in the PRC could
materially affect the prospects of the Operating Subsidiaries and the Company.
In addition, continued high interest rates could also materially affect the
prospects of the Operating Subsidiaries and the Company. While the Operating
Subsidiaries have not been affected by restrictions on credit, there can be no
assurance that such restrictions would not be imposed on the Operating
Subsidiaries in the future.
19
<PAGE>
ITEM 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
The information set forth below with respect the Company's fiscal
years ended December 31, 1992, 1993, 1994 and 1995 has been selected from the
Consolidated Financial Statements of the Company, which have been audited by
Ernst & Young, independent public accountants, whose report on the Consolidated
Financial Statements of the Company for the three years ended December 31, 1993,
1994 and 1995 appears in Item 13 of this Registration Statement. This
information should be read in conjunction with, and is qualified in its entirety
by reference to, the Consolidated Financial Statements of the Company, including
the notes thereto, included in Item 13 of this Registration Statement. The
information set forth below with respect the Company's fiscal year ended
December 31, 1991 has not been audited but, in the opinion of management,
contain all the adjustments which are of a normal recurring nature, including
those for conforming with U.S. GAAP, necessary for the fair presentation of the
results of operations and cash flows for such period. Because the Stock Swap
has been accounted for as a reverse acquisition, the information set forth below
has been prepared based on the historical financial statements of CCHL-BVI, for
the period prior to the Stock Swap, and on the historical financial statements
of TY Container, for the period prior to the Reorganization, and gives effect to
the Reorganization and the Stock Swap as if they had been completed prior to
January 1, 1991.
20
<PAGE>
<TABLE>
<CAPTION>
(Amounts in Thousands, except per share data)
Year Ended December 31,
1991 1992 1993 1994 1995
(Unaudited) (Audited)
------------ -------------------------------------
INCOME STATEMENT DATA: US$ US$ US$ US$ US $
<S> <C> <C> <C> <C> <C>
Net sales................ 28,284 61,549 60,960 79,771 89,265
Operating income......... 2,082 6,561 5,875 6,116 7,702
Interest expense, net (1,129) (965) (883) (1,625) (2,540)
Foreign exchange gains/ (876) (4,252) (5,079) 412 458
(losses), net
Reorganization expense... - - - - (1,382)
Share of net losses of - - (25) (90) (1,308)
Associated Companies....
Income taxes............. - (160) (657) (742) (992)
Net income before
minority interests...... 2,261 6,235 5,163 5,932 3,808
Minority interests....... (452) (1,247) (1,033) (1,187) (1,038)
-------- ----------- ------- ------- -------
Net income............... 1,809 4,988 4,130 4,745 2,770
======== =========== ======= ======= =======
Net income per share..... 0.07 0.20 0.17 0.19 0.11
======== =========== ======= ======= =======
BALANCE SHEET DATA:
Current assets........... 21,674 21,079 29,415 29,508 51,749
Fixed assets............. 7,272 6,846 6,107 6,374 6,335
Construction in progress. - - - - 5,325
Other assets............. 370 763 4,391 8,006 7,896
-------- ----------- ------- ------- -------
Total assets............. 29,316 28,688 39,913 43,888 71,305
Short-term debt.......... 21,539 16,466 23,305 25,147 48,175
Total liabilities........ 24,321 22,927 32,136 33,128 56,587
Minority interests....... 999 1,152 1,555 2,810 3,060
Total stockholders'
equity.................. 3,996 4,609 6,222 7,950 11,658
-------- ----------- ------- ------- -------
CASH DIVIDENDS DECLARED
PER SHARE............. 0.04 0.11 0.08 0.13 -
======== =========== ======= ======= =======
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
Holdings is a Nevada corporation whose principal activity is the
management of the business of its indirectly held operating subsidiaries, which
manufacture international standard commercial freight containers in the PRC.
21
<PAGE>
The statements in this section under "Results of Operations" and
"Liquidity and Capital Resources" relate to the operations and conditions of
Holdings and its consolidated subsidiaries.
RESULTS OF OPERATIONS
The following table shows selected consolidated income statements data
of Holdings and its subsidiaries for the years ended December 31, 1993, 1994 and
1995. The data should be read in conjunction with the Consolidated Financial
Statements of Holdings and related Notes thereto set forth in Item 13 of this
Registration Statement, and other financial information included elsewhere
herein. The financial statements of Holdings are prepared in conformity with
U.S. GAAP.
<TABLE>
<CAPTION>
Year ended December 31,
1993 1994 1995
<S> <C> <C> <C>
Sales quantity (TEU) 26,002 35,022 38,107
Sales (US$ million) 61.0 79.8 89.3
Gross margin (US$ million) 14.6 11.1 14.0
Gross profit margin 24.0% 13.9% 15.7%
Selling and administrative
expenses (US$ million) (2.8) (3.8) (4.2)
Financial expenses
(US$ million) (6.0) (1.2) (2.1)
Reorganization expenses
(US$ million) 0 0 (1.4)
Share of net losses of
associated companies
(US$ million) 0 0 (1.3)
Net income (US$ million) 4.1 4.8 2.8
</TABLE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994:
1. Sales increased by 11.3% from US$80 million in 1994 to US$89 million
in 1995, and sales quantity increased by 8.8% from 35,022 TEU in 1994 to 38,107
TEU in 1995, as both orders and capacity increased. Capacity increased because
of the following:
(i) At the end of 1994, TY Container acquired new production
equipment and machinery and also upgraded its existing production
lines; and
22
<PAGE>
(ii) Average working hours increased from 48 hours per week at the
beginning of the year to 65 hours per week during the period from
August to October 1995, after which they decreased to 48 hours
through the end of the year.
2. The gross profit margin increase from 13.9% on net sales in 1994
to 15.7% in 1995 primarily because of a decrease in the unit cost of sales due
to the following:
(i) TY Container increased its purchases of Corton steel from
domestic suppliers, which, on average, was approximately 17% less
expensive than the steel from Japan and Korea in 1994;
(ii) the manufacturers of container components in which TY Container
had invested became operational in 1995. Once their quality was
determined to be acceptable, TY Container began to purchase such
components, at prices which were three to ten percent lower than
imported components in 1994;
(iii) paint and plywood suppliers lowered their prices; and
(iv) a computer system was installed to optimize the use of raw
materials, reducing TY Container's unit consumption of steel.
3. Selling and administrative expenses increased by 10.5% from
US$3.8 million in 1994 to US$4.2 million in 1995.
In general, selling and administrative expenses increased as sales
activity increased. For example, sales commissions increased by 8.5%,
coinciding approximately with an 8.4% increase in sales, and more overtime
compensation (at 200% of the base salaries) was paid to administrative staff.
Overtime compensation was partly offset by the savings achieved by reducing the
number of administrative staff.
4. Financial expenses increased by 75% from US$1.2 million in 1994
to US$2.1 million in 1995, which was primarily due to the combined effect of the
following factors on interest expenses:
(a) the increase in the average interest rate of RMB loans and US$
loans from 10.1% and 7.6%, respectively, in 1994 to 13.18% and
8.49%, respectively, in 1995; and
(b) the increase in US$ loan balances by US$22 million in 1995. The
following factors contributed to the significant increase in the
loan balances:
(i) TY Container invested US$ 1.15 million in Beihai Container
and US$ 4 million in Reefer. TY Container invested a
further US$5.17 million in Tongsheng and spent US$638,000
upgrading and modernizing its existing production lines.
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(ii) TY Container's working capital requirements increased as
sales and production increased.
(iii) TY Container's working capital requirements increased as TY
Container began purchasing steel from domestic suppliers,
which required a three month advance deposit to secure the
supply.
5. In 1995, the Company incurred US$1.38 of reorganization expenses
in relation to the Reorganization and Stock Swap.
The reorganization expenses included (i) US$577,000 of audit and
consultancy fees incurred, and (ii) US$805,000 that represented the fair value
of (A) the five percent of CCHL-BVI received by Bonnaire International Limited,
in connection with the Reorganization, and (B) the 12.5% of the issued and
outstanding shares of Holdings's common stock held by Holdings's shareholders
prior to the Stock Swap and certain other parties who received restricted shares
of common stock in exchange for services rendered in connection with the Stock
Swap. This US$805,000 does not represent any actual cash outlays incurred by
Holdings or any other party.
6. In 1995, the Company's share of losses of associated companies
was US$1.32 million.
In 1995, TY Container had the following five associated companies:
Yangzhou Tonglee Reefer Containers Company Ltd. ("Reefer"), Beihai Tonghai
Containers Co. Ltd. ("Beihai Container"), Yangzhou Tongda Forging Co. Ltd.,
Yangzhou Tongyang Machinery Co. Ltd. and Yangzhou Universal Commercial Building
Shareholding Co. Ltd.
Reefer commenced its trial production in May 1995. In exchange for
the assistance of Wide Shine Development Limited ("Wide Shine") in promoting
Reefer's products overseas, Reefer sold 50 refrigerated containers to Wide Shine
at below market prices, resulting in a trading loss to Reefer in 1995. Together
with a write off, in accordance with U.S. GAAP, of pre-operating expenses as
other selling and administrative expenses the Company's share of Reefer's loss
in 1995 was US$1.06 million.
Beihai Container also commenced its production during 1995. The
Company's share of Beihai Container's loss was US$240,000 and mainly consisted
of the write off, in accordance with U.S. GAAP, of pre-operating expenses as
selling and administration expenses.
The profit or loss of the other three associated companies were also
shared by the Company based on the equity holdings therein.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993:
1. Sales increased by 31.1% from US$61 million in 1993 to US$80
million in 1994 and sales quantity increased by 34.7% from 26,002 TEU in 1993 to
35,022 TEU in 1994 as orders and capacity increased. Capacity increased because
TY Container added some
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equipment, eliminated production bottlenecks and strengthened internal
management, which significantly accelerated production.
2. The gross profit margin decreased from 24% on net sales in 1993 to
13.9% in 1994 because of the following:
(i) changes in the customer base required a higher level of
technology and more expensive raw materials; for example, almost
all containers produced in 1994 were made with Corton steel and
pre-painted;
(ii) the continuous increase in the prices of steel imported from
Japan; with prices rising by 3% and 5% in the first and second
half of 1994, respectively;
(iii) the 16% rate of inflation in 1994, which increased TY Container's
costs of sales, particularly its labor costs, which increased by
approximately 20% in 1994; and
(iv) new customer requirements for Corton steel rendered much of the
tariff-free soft steel which TY Container had purchased in
advance obsolete. TY Container exchanged such steel for Corton
steel from other container manufacturers, but at a value below TY
Container's cost, raising its overall production costs in 1994.
3. The following factors contributed to a 35.7% increase in selling
and administrative expenses from US$2.8 million in 1993 to US$3.8 million in
1994:
(i) sales commissions increased by 29.6%, coinciding with a 31.1%
increase in sales;
(ii) administrative expenses increased in line with the 16% inflation
rate in the PRC in 1994; and
(iii) in response to the increased competition in the container
industry, where the number of container factories in the PRC
increased from 24 at the end of 1993 to 36 at the end of 1994,
travel expenses, advertising, exhibitions and other selling
expenses increased significantly.
4. The net financial expenses decreased from US$6.0 million in 1993
to US$1.2 million in 1994. Included in the financial expenses were foreign
exchange losses of US$5.1 million and gains of US$400,000 and US$500,000 for
1994 and 1995, respectively.
TY Container's books of account are maintained in RMB, and the Company's
consolidated financial statements are stated in US$. Currency translations into
US$ are made using the applicable rates of exchange quoted by the Shanghai
Foreign Exchange Adjustment Center prior to January 1, 1994 and by the Bank of
China on or after January 1, 1994. All balance sheet accounts have been
translated from RMB to US$ using the exchange rates in effect
25
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at December 31 of the applicable balance sheet date. All income statement
amounts have been translated using the average exchange rate for the applicable
year.
The following table sets forth the RMB/US$ exchange rates, net sales
in US dollars, total TEU sold and average sales price per TEU in US dollars, for
each of 1993, 1994 and 1995.
1993 1994 1995
RMB equivalent of US$1:
At December 31, 8.70 8.45 8.32
High 10.60 8.70 8.44
Low 7.71 8.45 8.30
Average 8.70 8.62 8.35
Net sales in US$'000 60,960 9,771 89,265
Total TEU sold 26,002 35,022 38,107
Sales in US$ per TEU 2,344 2,278 2,342
During 1993, the exchange rates fluctuated from RMB 7.71 : US$1 to RMB
10.60 : US$1. As TY Container had net foreign currency liabilities in excess of
its domestic currency obligations, reflecting primarily its U.S. dollars bank
loans, the devaluation of RMB led to a significant exchange loss component in
1993.
During 1994, the dual exchange rates were unified. The exchange rate
appreciated from RMB 8.7 : US$1 at January 1, 1994 to RMB 8.45 : US$1 at
December 31, 1994. The appreciation in RMB in 1994 resulted in an exchange gain
of US$400,000 primarily in respect of TY Container's net U.S. dollar
liabilities.
As indicated in the above table, the average sales price per TEU
decreased by 3% in 1994 and increased by 3% in 1995. The sales volume increased
by 35% and 9% in 1994 and 1995, respectively. The effect of exchange rate
fluctuations on the Company's revenues is minimal as the prices of containers
are quoted in US dollars and revenues are reported in US dollars.
While the Company has not employed hedging strategies in the past,
management is currently exploring its options in that regard. The material
unhedged monetary assets and liabilities of the Company at December 31, 1995 are
accounts receivable, accounts payable and bank loans, which amounted to US$7.6
million, US$2.2 million and US$47.0 million, respectively.
Three Months Ended March 31, 1996 Compared With Three Months ended March 31,
1995:
1. Sales increased by 28.7% from US$18.8 million in the three
months ended March 31, 1995 to US$24.2 million in the three months ended March
31, 1996, and sales quantity increased by 20.5% from 6,959 TEU in 1995 to 8,383
TEU in 1996. This was primarily
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due to the consolidation of the results of Reefer (following TY Container's
acquisition of control of Reefer as at January 1, 1996).
2. The gross profit margin decreased from 19.2% on net sales in
the first quarter of 1995 to 18.2% in the first quarter of 1996 primarily
because of [the consolidation of the results of Reefer, which because it was a
new factory was experiencing lower than expected profit margins] offsetting a
decrease in the cost of raw materials of approximately [ ]%, which resulted from
TY Container's increase in its purchases of Corton steel from domestic
suppliers.
3. Selling and administrative expenses increased by 33.3% from
US$900,000 in the first quarter of 1995 to US$1.2 million in the first quarter
of 1996 primarily because of the consolidation of the results of Reefer, which
because it was a new factory was experiencing higher than normal selling and
administrative expenses.
4. Financial expenses decreased by 28.6% from US$700,000 in the
first quarter of 1995 to US$500,000 in the first quarter of 1996, primarily as a
result of a change in policy of TY Container's domestic suppliers of steel which
eliminated the need for TY Container to provide a three month advance deposit on
its steel purchases, reducing working capital requirements and related interest
expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Operating subsidiaries' primary liquidity needs are to finance
accounts receivable, construction in progress, and the expansion of business
operations. Historically, the Operating Subsidiaries have financed their
working capital requirements through a combination of internally generated cash
and short term bank borrowings.
Net cash provided/(used) by operating activities was (US$133,000),
US$7.1 million and (US$6.0 million) in the years 1993, 1994 and 1995,
respectively. Net cash flows from the Company's operating activities are
attributable to the Company's income and changes in its operating assets and
liabilities.
Accounts receivable increased to US$7.6 million as at December 31,
1995. TY Container's customers are mainly reputable international container
leasing companies and shipping lines including Textainer, Interpool and Triton.
For most of its customers, settlement terms of 30 days are allowed. However,
certain major customers have requested and, in negotiated arrangements, been
granted settlement terms as long as 45 days. Because sales to these customers
accounted for a significant percentage of the total sales of TY Container in
1995, the accounts receivable balance as at the 1995 year end increased
significantly. Accounts receivable increased to US$26.6 million as at March 31,
1996 primarily because of (i) the consolidation of the results of Reefer, and
(ii) the delivery of a large order at the end of March, which was subject to
normal payment terms.
Construction in progress increased to US$5.3 million as at December
31, 1995. TY Container purchased from Semi-Trailer a factory building, plant
and machinery and 15 year
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land use rights to a site, in exchange for US$2.8 million. These assets have
been contributed to Tongsheng for the construction of its production line in the
factory building. Tongsheng commenced production in May 1996. It produces the
same type of containers as TY Container and is designed for an annual production
capacity of 40,000 TEU. Tongsheng is expected to produce 30,000 TEU in 1996. In
addition, in 1995 TY Container purchased from Jiangyang Automobile Company 10
year land use rights to a site, and plant and machinery, which are located near
to the site purchased from Semi-Trailer in exchange for US$3.0 million.
Beginning in April 1996, TY Container has used this site as a warehouse.
To finance its working capital, TY Container obtained a US$44 million
and a US$1.2 (denominated in RMB and valued as RMB 10 million) short term bank
loan and overdraft facility which are renewable in 1996. In this facility, the
bank has guaranteed the short term revolving borrowing for a period of five
years expiring in 2000 for an amount not less than US$26 million.
The Company had outstanding bank loans and overdrafts, mainly with the
Bank of China, Yangzhou Branch, amounting to US$48.1 million as at December 31,
1995. As at December 31, 1995, the loans and overdraft facility bore interest
at rates ranging from 8.49% (for US dollar loans) to 13.18% (for RMB loans) per
annum. The bank loans, to the extent of US$26.0 million, are collateralized by
pledge of certain of TY Container's assets and, to the extent of US$19.2
million, guaranteed by TYG.
Bill-and-Hold Transactions
A bill-and-hold transaction is a practice whereby a customer purchases
the goods but the seller retains physical possession until the customer requests
shipment to a designated location and delivery is made thereto.
In 1995, US$8.9 million of TY Container's revenues consisted of bill-
and-hold transactions which have been recognized as sales (1994: Nil). TY
Container's bill-and-hold transactions arise as follows: upon satisfactory
inspection of the containers by quality control inspectors employed by the
customer, the customer then requests that the finished containers be stored at
TY Container's premises. The containers are held pursuant to such requests and
then subsequently delivered to specific locations as instructed by the customer
and transportation expenses incurred by TY Container are recovered from the
customers. TY Container's bill-and-hold transactions are always made upon the
request of the customer.
Normally, TY Container would recognize sales upon delivery of goods to
customers. The Company recognized certain bill-and-hold transactions as sales
in 1995, prior to delivery, because the customers, having inspected and accepted
the quality of the containers, had settled the invoiced amount for such goods
prior to year end, as required under the relevant sales contracts, and under
such contracts the legal title of the goods passed to the customer upon the
earlier of its settlement of the invoiced amount or physical delivery of the
goods. TY Container had transferred the commercial risk regarding those goods,
which were completed and held separately from other goods (identifiable by the
customers' logo and serial numbers), and the goods were delivered to customers
according to a fixed delivery schedule provided by the customers.
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Inflation
Virtually all of TY Container's products are exported and most of its
major components of raw materials are imported. Virtually all of these
transactions are settled in US dollars. Since the prices of such goods are
determined largely by market demand and supply in international trade, the
inflation in the PRC has only a minimal effect on the selling prices; however,
inflation in the PRC has generally resulted in upward pressure on wages and
salary payable to TY Container's employees. Selling prices may be affected by
global inflation and the fluctuation of foreign currencies, particularly US
dollars. The fluctuation of steel prices has the most significant effect on TY
Container's costs of raw materials, as it is the primary raw material used in
the construction of containers.
FASB Statement No. 121
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are the assets' carrying amount.
Statement No. 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company adopted Statement No. 121 in the first
quarter of 1996 and, based on current circumstances, does not believe the effect
of adoption will be material.
Sales by Geographic Region
Approximately 74% of the Company's sales are to customers based in the
United States; up from 70% in 1993 and 72% in 1994. Because only ten major
container shipping and leasing companies control approximately 80% of the
world's container fleet, the Company's sales by geographic region are driven by
the orders of only a few customers. In 1995, the Company received orders from a
new customer, located in Hong Kong, valued at US$19.7; these orders increased
the Company's sales to Hong Kong by 963% over 1994. Sales to the United Kingdom
decreased from US$7.3 in 1994 to US$0 in 1995, because the Company, with orders
exceeding capacity in 1995, refused orders from one of its customers which was
located there, in favor of orders from a larger customer with a longer history
of doing business with the Company. The Company intends to aggressively compete
for orders from all of the major containers shipping and leasing companies,
regardless of where they are based.
Historically, the Company's domestic sales of containers have been
negligible. However, with the PRC Railway Ministry's recent announcement of its
intention to containerize the PRC's railroad system, the Company intends to
compete for orders from PRC governmental agencies in the future. The Company
expects that domestic sales to PRC governmental agencies will constitute a
material portion of its overall sales in the future.
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Modernization Plan
During July and August of 1996, the Company upgraded and modernized TY
Container's main production facilities (see Item 1, "BUSINESS, Description of TY
Container - Modernization Plan", above). TY Container's management estimates
------------------
that the modernization plan cost approximately US$1.2 million in capital
expenditures, all of which was funded from TY Container's internal cash flow.
Management expects the modernization to improve the quality of the containers
and lower production costs by approximately 1.5%, but no assurance can be given
that it will have such an effect, nor can the Company give any assurance that
the modernization will have a material effect on its results of operations and
financial position.
Land Use Rights Certificates
TY Container's existing premises, which were either allocated by the
government to, or purchased by, TY Container during 1989 to 1992, are situated
in Yangzhou, Jiangsu Province. The Provincial Land Administration Bureau of
Jiangsu Province ("the Land Bureau") is in the process of measuring the area of
land used by every factory within Jiangsu Province so as to permit the issuance
of land-use rights certificates. The Company has obtained confirmation from the
Land Bureau that the land use rights in question were granted to TY Container.
The Company believes that the issuance of the land use rights certificates is
only a formality and management does not expect any difficulty in obtaining
certification. The Company has been informed by the Land Bureau that land use
rights certificates are expected to be issued in 1997.
ITEM 3. PROPERTIES.
The Company owns no real property. According to the laws of the PRC,
title to all land is retained by the PRC. Generally, the Company occupies its
facilities through "land use rights" of a specified term of years.
TY Container's main facilities are located in the City of Yangzhou,
Jiangsu Province, and are occupied under land use rights of 15 years, with 9
years remaining. The facilities occupy approximately 65,000 square meters,
consisting of a 13,000 square meter (140,700 square foot) factory building, a
36,000 square meter (390,000 square foot) container yard, a 1,462 square meter
(15,800 square foot) administrative building, and a 14,500 square meter (157,000
square feet) raw material storage and preparation facility. In addition to the
above facilities, TY Container has 50 years land use rights as to 66,000 square
meters (713,000 square feet) of land near the Port of Yangzhou, approximately 15
kilometers (9 miles) from TY Container's main facilities, for container storage.
The off-site container storage yard is adjacent to the main facilities of
Reefer. TY Container's production facilities have an annual capacity of
approximately 40,000 TEU. Those facilities are currently operating at full
capacity.
Reefer's plant site, located near the port of Yangzhou, are occupied
under land use rights of 50 years, with 48 years remaining, and cover over
50,000 square meters (538,200 square feet), including 13,700 square meters
(147,470 square feet) for the main factory building and 5,500 square meters
(59,200 square feet) for supporting facilities. Reefer's production
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facilities have an annual capacity of approximately 4,000 TEU. Those facilities
are currently operating at full capacity.
Tongsheng's plant is located in Yangzhou City, adjacent to TY
Container's main facilities, and are occupied under land use rights of 15 years,
with 14 years remaining. The facilities occupy 12,000 square meters (129,000
square feet) for the main factory building and 44,666 square meters (480,900
square feet) for supporting facilities. Tongsheng's production facilities have
been designed to have an annual capacity of 40,000 TEU and came on line in May
1996.
The Company leases a small amount of office space in New York City for
sales and other administrative purposes. The Company believes that the
foregoing properties are adequate in light of its current expansion plans.
The land use rights covering the majority of the site on which TY
Container's main facility at East Garden Road, Yangzhou City, is situated were
contributed by the Jiangsu Tongyun Group Company (formerly known as Jiangyang
Automobile Company; see Item 7. - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS") in exchange for a portion of its interest in TY Container; the
remainder of such rights were purchased from the same company, which received
its land use rights through allocation by the PRC. TY Container's management is
in negotiation with the Provincial Land Administration Bureau of Jiangsu
Province (the "Land Bureau") for the issue of land use rights certificates for
the above sites to TY Container. The Company believes that upon obtaining
formal land use rights certificates for the above sites, a land use rights
premium may be levied on TY Container by the Land Bureau. While the Company is
unable to quantify the amount of the premium which may be levied on TY Container
in the absence of similar statistics in the area, based upon the current status
of the negotiations, the Company believes that the amount of any such premium
will not be material.
The land use rights for Reefer's facilities were contributed by Liuwei
Village Municipal Authority in exchange for its 15% interest in the company.
Reefer has submitted an application to the provincial authority for a formal
granted land use rights certificate and is currently awaiting approval. The
land use rights for Tongsheng's facilities were purchased from Semi-Trailer and
Jiangyang Automobile Company. The Company has recently submitted applications
for formal land use rights certificates relating to Tongsheng's facilities and
expects to receive such certificates in 1997.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the number and percentage of the shares
of Holdings's common stock owned of record and beneficially by each person
owning more than five percent of such common stock, as reflected in the list of
shareholders provided to Holdings by its transfer agent dated as of April 23,
1996. Holdings's common stock is the only class of equity securities issued by
Holdings. None of Holdings's directors or executive officers, nor any of TY
Container's directors or executive officers, beneficially own any equity
securities in Holdings, or in any of its parents or subsidiaries.
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Name and Address of Number of Shares Percent of
Beneficial Owner Owned Class
- ---------------------- ---------------- ----------
Sinocity Group Limited 20,068,750 80.274%
16th Floor,
1622-36 Swire House
9-25, Chater Road, Central
Hong Kong
Gordon Capital Limited 1,875,000 7.499%
c/o Ruffa & Ruffa
150 East 58th Street
New York, New York 10022
In addition to the foregoing, approximately five percent of the shares
of Holdings's common stock is widely held and the remainder is held by persons
beneficially owning less than five percent of such common stock. The Company is
not aware of any arrangements the operation of which may at a subsequent date
result in a change in control of the Company.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Holdings are identified below.
Each were elected and/or appointed to his or her position(s) as of May 10, 1995.
The directors and executive officers will serve in such capacity until the next
annual stockholders meeting, and until their successors are duly qualified and
elected or appointed.
NAME AGE POSITION
- ---- --- --------
Cheung Sau Yung 51 Chairman of the Board, Director, President
and Chief Executive Officer
Liu Jingxin 56 Director
Sung Hiu Ngan 45 Director
Ma Tieyi 30 Secretary and Treasurer
CHEUNG SAU YUNG, age 51, is the Chairman of the Board of Directors of
Holdings, CCHL-BVI, and TY Container. He is also the President and Chief
Executive Officer of CCHL-BVI and General Manager of TY Container, a position he
has held since 1989. Mr. Cheung is also Chairman of Jiangsu Tongyun Group
Company and acts as Chairman of the following companies in which TY Container
and/or TYG holds an equity interest: Sinocity Group Limited,
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Ocean Asia International LTD., Yangzhou Tonglee Reefer Container Company Ltd.,
and Yangzhou Tonghua Semi-trailer Company Ltd. Mr. Cheung began his career in
1966 with First Auto Transport General Corp., rising to the position of Manager
of their Technology Department. From 1976 through 1984, he worked for China
Foreign Trade Transportation Company where he rose to the position of General
Manager and also became a Director. From 1984 through 1985, Mr. Cheung worked as
a Manager at China National Foreign Trade Transportation Company. From 1985
through 1987 Mr. Cheung served as Deputy Commissioner of the Yangzhou Foreign
Trade and Economic Relations Commission. In 1987, he joined the Jiangsu
Jiangyang Automobile Company, where he held the position of Deputy General
Manager until he joined Ty Container in 1989. Mr. Cheung holds a Bachelor of
Science Degree and has 30 years of experience in the transportation industry.
(see Item 7. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS")
LIU JINGXIN, age 56, is a Director Of Holdings, CCHL-BVI, and TY
Container. Mr. Liu also is a Director and the General Manager, a position he has
held since 1988, of Wide Shine Development Limited, a wholly-owned subsidiary of
China National Foreign Trade Transportation Corporation ("Sinotrans") engaged in
container cargo shipping and container leasing and handling. Prior to joining
Wide Shine, Mr. Liu was with Sinotrans, Beijing Branch, and American Huayun
Company. Mr. Liu has more than 33 years experience in the transportation
industry.
SUNG HIU NGAN, age 45, is a Director Of Holdings AND CCHL-BVI. Ms.
Sung also is the Deputy Chairperson and General Manager of Broadsino Investment
Company Limited, A Hong Kong investment company wholly owned by Jiangsu
International Investment Co. ("Jitic"), a position she has held since 1992. Ms.
Sung also serves as a Director of PSB Investments Limited and PSB Management
Limited, two companies founded by Broadsino and Peregrine Investments Holdings
Limited. Prior to joining Broadsino, Ms. Sung worked in the Investment
Department of Jitic from 1988 to 1992, rising to the position of Department
Manager. Prior to joining Jitic, Ms. Sung held a number of management and
technical positions in the Ministry of Chemical Industry and at China Ocean
Shipping Company. Ms. Sung holds a Bachelor of Science Degree and has more than
25 years experience in the transportation industry and the investment business.
MA TIEYI, age 30, is Secretary and Treasurer of Holdings. He is also
Deputy Director of the Investment & Securities Department at TY Container. Mr.
Ma received his Masters Degree in Electrical Engineering in 1992 and worked as
Deputy Manager in the Import Department of the Yangzhou Foreign Trade Corp., an
import/export company, from 1992 until joining TY Container in 1994.
EXECUTIVE OFFICERS AND KEY MANAGERS OF TY CONTAINER
In addition to Mr. Cheung, whose business experience is described
above, the executive officers and key managers of TY Container are identified
below.
DONG XIAOJUN, age 46, is a Director and a Deputy General Manager of TY
Container. Mr. Dong has been employed by TY Container since 1989, holding
various managerial positions, including Office Manager, Head of Management, Head
of Production, and Head of Trade. Mr.
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Dong began his career with the Jiangsu Jiangyang Automobile Company in 1978 as a
worker, and advanced to the level of Assistant Manager. Mr. Dong holds an
Associate Degree, and has 18 years of experience in the transportation industry.
WANG GONGQING, age 45, is a Deputy General Manager of TY Container.
Mr. Wang began working for TY Container in 1990 as an Office Manager and rose to
the level of Deputy General Manager. Mr. Wang began his career with the Yangzhou
Kaiguan Plant in 1964. He joined the Jiangsu Jiangyang Automobile company in
1967 as a worker and advanced to the position of office manager. mr. wang holds
an associates degree and is an economist by profession. mr. wang has 32 years of
experience in the transportation industry.
AI ZHIYUAN, age 45, is a Deputy General Manager of TY Container.
Mr. Ai has been employed by TY Container since 1990. Mr. Ai began his career
with the Jiangsu Production Construction Military Unit, later moving to a
Special Unit of the People's Liberation Army and achieving the rank of
Lieutenant. Mr. Ai joined the Jiangsu Jiangyang Automobile Company in 1979 and
rose to became the Head of the Party Department. Mr. Ai holds an Associate
Degree and is an economist. Mr. Ai has been associated with the transportation
industry for 17 years.
WU ZHENYU, age 52, is the Chief Economist of TY Container. Mr. Wu began
working for TY Container in 1989 as the Director of Production. He has also held
the position of Assistant Chief Economist. Mr. Wu began his career in 1958 as a
worker and technician for the Jiangsu Jiangyang Automobile Company, where he
rose to the position of Production Manager. Mr. Wu has 38 years of experience in
the transportation industry.
LI HAIXING, age 47, is a Director and Principal engineer of TY
Container. Mr. Li began working for TY Container in 1989 as an Assistant Chief
Engineer, later becoming Director of Quality Control. Mr. Li began his career in
1970 at the Taixing Machinery Repair Plant. He later went on to study machinery
at Tianjin University. After receiving his Associate Degree, Mr. Li joined the
Design Department of Jiangsu Jiangyang Automobile Company and became an
Assistant Manager for the company. Mr. Li has 26 years of experience as an
Engineer in the transportation industry.
TY CONTAINER DIRECTORS
The Board of Directors of TY Container currently consists of 11
members, each of which serves for a term of four years and until their
successors are duly qualified and elected. TY Container's Articles of
Association provide the partners with the right to designate a certain number of
directors, based upon the amount of their interest in the company. Until
recently, it provided as follows: 5-14.9%, one director; 15-24.9%, two
directors; 25-34.9%, three directors; 35-44.9%, four directors; and 45% or more,
five directors. At elections held prior to the Reorganization, this provision
resulted in Jiangyang Automobile (H.K.) Limited and China Everbest Motors
designating four and two directors, respectively, for election to TY Container's
Board, and China Automobile Import and Export Company, Bexi Iron and Steel, Keep
Benefit Limited, Wide Shine Development, China Auto (USA) Corporation and
Jiangsu Tongyun Group Company each designating one director. (China Auto (USA)
Corporation and China Automobile Import and Export Company have each designated
the same individual as director and such
34
<PAGE>
individual has two votes on the Board.) (see Item 7. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS").
Following the completion of the Liquidation, TY Container's Articles
of Association were amended to provide that CCHL-BVI shall have the right to
designate eight directors to the company's board. As a result, at the next
election CCHL-BVI will have the right to designate eight of the 11 directors,
with eight of the 12 votes on the board.
In April 1996, the shareholders of Sinocity executed a shareholders
agreement under which they agreed to use their best efforts to cause Sinocity to
cause Holdings to cause CCHL-BVI to designate four nominees of Jiangyang
Automobile (H.K.) Limited, two nominees of China Everbest Motors, and one
nominee of each of Keep Benefit Limited and Wide Shine Development,
respectively, to TY Container's board of directors.
ITEM 6. EXECUTIVE COMPENSATION
None of the directors and executive officers of Holdings received any
compensation as such for the fiscal year ended in 1995. The following table
sets forth the compensation of the chief executive officer and the four most
highly compensated executive officers of TY Container for the last three fiscal
years.
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<PAGE>
SUMMARY COMPENSATION TABLE
Name and Principal
Position Year Salary Bonus
- ------------------------------ ------ -------- -------
Cheung Sau Yung
CEO 1995 US$5,445 US$448
1994 US$3,634 US$339
1993 US$2,627 US$240
Ai Zhiyuan
Deputy General
Manager 1995 US$4,961 US$409
1994 US$3,246 US$308
1993 US$2,439 US$215
Dong Xiaojun
Deputy General
Manager 1995 US$4,970 US$410
1994 US$3,283 US$308
1993 US$2,439 US$215
Wang Gongqing
Deputy General
Manager 1995 US$4,959 US$410
1994 US$3,326 US$309
1993 US$2,472 US$220
Wu Zhenyu
Chief Economist
1995 US$4,979 US$410
1994 US$3,326 US$309
1993 US$2,471 US$220
The directors of TY Container receive no compensation
for their services as such.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following companies were the joint venture participants of record
on January 1, 1995: Jiangsu Tongyun Group Company (then known as Jiangyang
Automobile Company) (5%), Jiangyang Automobile (H.K.) Limited (40%), Bexi Iron
and Steel Company (20%), China Everbest Motors Company Limited (15%), Wide Shine
Development Limited (10%), China Automobile Import and Export Company (5%), and
China Auto (USA) Corporation (5%). Pursuant to certain agreements dated
November 29, 1994, which were approved by the relevant
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<PAGE>
PRC authorities on March 3, 1995, the following share transfers (the
"Reorganization") were effected: (a)(i) Bexi Iron and Steel Company transferred
half of its 20% interests in TY Container to Keep Benefit Limited; and (ii) each
of Jiangyang Automobile (H.K.), Keep Benefit Limited, China Everbest Motors
Company Limited, Wide Shine Development Limited and China Auto (USA) Corporation
acquired a newly incorporated company (each a "New Company" and, collectively,
the "New Companies") registered in the British Virgin Islands, and each
transferred into its New Company its respective interests in TY Container, in
exchange for 100% of the shares of such New Company; (b) each of the aforenamed
companies then transferred its interests in its New Company into Sinocity Group
Limited, a newly formed British Virgin Islands company ("Sinocity"), in exchange
for shares of Sinocity; (c) Sinocity then transferred its interests in the New
Companies into the newly formed CCHL-BVI in exchange for 95% of the shares of
CCHL-BVI, with the remaining 5% of CCHL-BVI being issued to Bonnaire
International Limited, a British Virgin Islands company wholly-owned by
Broadsino Investment Company Limited ("Broadsino"), in return for services
provided by Broadsino in connection with the Reorganization. The joint venture
participants of record upon the organization of Tongsheng in December 1995 were
Jiangsu Tongyun Group Company (5%), Bexi Iron and Steel Company (10%), China
Automobile Import and Export Company (5%) and the New Companies (80%), exactly
the same ownership structure as TY Container at that time. In April 1996, the
Company began the process of liquidating the New Companies, which resulted in
the distribution of their interests in TY Container and Tongsheng to CCHL-BVI
(the "Liquidation"). Since the completion of the Liquidation, which occurred in
June 1996, CCHL-BVI directly holds 80% of each of TY Container and Tongsheng.
JIANGSU TONGYUN GROUP COMPANY
Jiangsu Tongyun Group Company ("TYG"), a Yangzhou City owned holding
company with equity interests in thirteen enterprises in Jiangsu Province, has a
5% direct interest in TY Container and also owns a 100% interest in Jiangyang
Automobile (H.K.), which had owned 40% of TY Container directly and currently
owns 50% of Sinocity which owns 80.275% of Holdings, which indirectly owns 80%
of TY Container. Jiangsu Tongyun Group Trading Company ("TYG Trading Co.") and
Jiangyang Automobile Company ("JAC") are wholly owned subsidiaries of TYG. In
1995, TYG owned 45% of Yangzhou Tonghua Semi-Trailer Company Ltd. ("Semi-
Trailer"). Mr. Cheung Sau Yung, Chairman of the Board of Directors, President
and Chief Executive Officer of Holdings, Chairman and a director of CCHL-BVI,
and Chairman, a director and General Manager of TY Container, is also Chairman
and a director of Semi-Trailer. Mr. Li Haixing, a director of TY Container, is
also the General Manager of TYG Trading Co.
In 1995, TY Container purchased from Semi-Trailer certain land use
rights, a factory building, plant and machinery, to be used for Tongsheng's
production facilities (see Item 1. - BUSINESS - Subsidiaries - "Description of
Yangzhou Tongsheng Container Co. Ltd."), for an aggregate purchase price of
US$2,816,000.
In 1995, TY Container executed an agreement with TYG Trading Co. (the
"Service Agreement") under which TYG Trading Co. agreed to provide certain
services for TY Container which TY Container had previously performed itself
(see Item 1. - "BUSINESS -
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<PAGE>
Subsidiaries - Description of TY Container Company -Markets"). These services
include the purchase of raw materials, the design of containers to be made to
customer specifications, and certain sales support services, such as scheduling
deliveries and arranging the lease of containers to be delivered on a "Free
Used" basis. In November 1996, TYG Trading Co. agreed to waive the payment by TY
Container Group of any amounts accruing under the agreements for 1996, in
recognition of the difficult competitive situation faced by TY Container Group.
In connection with the Service Agreement, in 1995 TY Container made a US$429,000
loan to TYG Trading Co., which was unsecured and interest free. The proceeds of
this loan were used to expand the operations of TYG Trading Co. in order to
enable it to meet its obligations under the Service Agreement, and for working
capital purposes. The principal balance of such loan as of December 31, 1996 was
US$312,000. The total amount payable by TY Container to TYG Trading Co. under
the Service Agreement in 1995 was US$100,000, all of which was paid.
In 1995, TY Container agreed to purchase certain land use rights,
plant and machinery from JAC for US$3,005,000. A US$1,202,000 deposit was paid
in 1995, with the balance paid at closing in January, 1996.
In 1993 and 1994, TY Container paid to TYG US$133,000 and US$191,000
respectively, as payment for providing meals to TY Container's production
workers. Such services were not provided by TYG in 1995.
In 1994, TY Container loaned US$1,504,000 to TYG on an unsecured and
interest free basis. The loan was repaid in full in 1995.
In 1995, TYG guaranteed TY Container's obligations under its US$18
million working capital loan agreement with the Bank of China.
OCEAN ASIA INTERNATIONAL LTD.
Ocean Asia is a 100% beneficially owned subsidiary of TYG. Mr. Cheung
Sau Yung, Chairman of the Board of Directors, President and Chief Executive
Officer of Holdings, a director of CCHL-BVI, and a director and General Manager
of TY Container, is also Chairman of the Board of Directors of Ocean Asia. In
addition, Mr. Cheung holds 95% of the shares of Ocean Asia in his name for the
benefit of TYG, pursuant to a declaration of trust.
TY Container purchased components used in the manufacture of
containers from Yangzhou Tongda Forging Ltd. ("Tongda") and Wuxi Tongfa Economic
& Technical Development Company Ltd. ("Wuxi") for the three preceding fiscal
years in the amounts set forth below:
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(all amounts in thousands)
Company 1993 1994 1995
- ----------------------- ------ ------ ------
Tongda US$167 US$420 US$670
Wuxi US$0 US$86 US$147
Ocean Asia owns 25% of Tongda and 70% of Wuxi. TY Container owns 35.57% of
Tongda and 10% of Wuxi, and Mr. Cheung is also a director of each of Tongda and
Wuxi.
In 1994, Ocean Asia acted as TY Container's sales agent with respect
to certain customers in Hong Kong. Sales of containers generated by Ocean Asia
resulted in the payment of sales commissions by TY Container amounting to
US$287,689 in 1994. Ocean Asia did not act as TY Container's sales agent in
1995.
In 1993, 1994 and 1995, TY Container made a series of loans to Ocean
Asia. These loans were unsecured and bore interest at a floating market rate.
As at December 31, 1996, the aggregate principal balance of such loans was
$2,489,000.
In 1994, TY Container purchased certain raw materials, including
plywood, paint and steel, from Ocean Asia for an aggregate purchase price of
US$4,700,000. Included in that amount was a deposit of US$2,000,000 for the
purchase of steel. The steel was not delivered on schedule and TY Container
canceled the contract. In 1995, Ocean Asia agreed to repay the deposit in four
equal monthly installments, beginning in February 1996. The deposit has been
repaid in full.
In 1995, TY Container purchased from Ocean Asia a 25% interest in
Yangzhou Universal Commercial Building Shareholdings Co., Ltd. ("Universal") in
exchange for US$900,000 which was offset in full by the satisfaction of an
obligation for Ocean Asia to refund another deposit for the purchase of steel
which arose in November 1995, again because of late delivery. In 1995,
Universal had a net profit of RMB 1,289,000 (US$154,000).
In 1993, TY Container made a US$900,000 loan to Ocean Asia, which was
unsecured and bore interest at floating market rates. The principal balance of
such loan has been repaid in full.
WIDE SHINE DEVELOPMENT LIMITED
Wide Shine Development Limited, a Hong Kong company ("Wide Shine"), is
a wholly-owned subsidiary of China National Foreign Trade Transportation
Corporation which was organized in 1988. Wide Shine is engaged in container
cargo transportation and container leasing and handling, and operates a shipping
agency for container liner services. Prior to the Reorganization, Wide Shine
directly owned 10% of the shares of TY Container. Following the Reorganization,
Wide Shine became a 12.5% shareholder in Sinocity, which currently owns 80.275%
of the shares of Holdings, which indirectly owns 80% of the shares of TY
Container.
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<PAGE>
Mr. Liu, a director of Holdings and of TY Container, is also a director and
General Manager of Wide Shine.
During 1993, 1994 and 1995, Wide Shine purchased containers from TY
Container at market prices and subject to normal trade credit terms. These
purchases amounted to US$2,629,000, US$1,440,000 and US$959,000 in 1993, 1994
and 1995, respectively. In addition, in 1993 Wide Shine purchased certain
containers from TY Container at market prices, payable in 60 equal monthly
installments at an effective annual interest rate of 4.75%. The current
principal balance of such payments is US$856,000.
Wide Shine owns 25% of Yangzhou Tongjiang Container Fittings Company
Ltd. ("Tongjiang"). TY Container also owns 10% of Tongjiang. During 1993, 1994
and 1995, TY Container purchased components used in the manufacture of
containers from Tongjiang at below market prices and subject to normal trade
credit terms. These purchases amounted to US$1,000,000, US$1,300,000 and
US$1,000,000 in 1993, 1994 and 1995, respectively. The favorable prices
received by TY Container are primarily the result of the large volume of such
components purchased from Tongjiang, accounting for approximately 31% of
Tongjiang's production.
In 1993 and 1994, Wide Shine acted as TY Container's sales agent with
respect to certain customers in Hong Kong. Sales of containers generated by
Wide Shine resulted in the payment of sales commissions by TY Container
amounting to US$187,000 and US$281,000 in 1993 and 1994, respectively. Wide
Shine did not act as TY Container's sales agent in 1995.
In 1995, Wide Shine purchased 50 refrigerated containers from Reefer,
in which TY Container had a 50% interest, at below market prices, in exchange
for Wide Shine's promotion of Reefer's products internationally.
OTHER
Ms. Sung Hiu Ngan, a director of Holdings, is also the Chairman and
General Manager of Broadsino Investment Company Limited, a Hong Kong investment
company which performed services for TY Container in 1995 in connection with the
Reorganization.
ITEM 8. LEGAL PROCEEDINGS
Neither Holdings nor any of its subsidiaries, nor any of their
respective property, is subject to any material pending legal proceedings, nor
are any such proceedings known by the Company to be contemplated by any
governmental authority.
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ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
On May 10, 1995, the common stock of Holdings was listed for quotation
on the OTC Bulletin Board of the National Association of Securities Dealers,
Inc. (the "Bulletin Board"). Prior to that date there was no established public
trading market for Holdings's securities or for the securities of any of its
subsidiaries. The following table sets forth the high and low bid for the
common stock of Holdings, as quoted on the Bulletin Board, for each full
quarterly period since May 10, 1995./1/
1995 1996
3rd Q 4th Q 1st Q 2nd Q
----- ----- ----- -----
High 3.625 5.750 4.250 5.000
Low 0.125 2.125 1.750 2.375
As of April 19, 1996, there were approximately 522 holders of
Holdings's common stock, including individual participants in the security
position listing provided by the Depository Trust Company.
The sole funds available to Holdings for the payment of dividends on
its common stock will be the result of dividends, if any, declared and paid on
the common stock of CCHL-BVI, and the sole funds available to CCHL-BVI for the
payment of dividends will be the result of dividends, if any, received from TY
Container or Tongsheng. It is the present policy of Holdings and CCHL-BVI to
declare dividends on their common stock, to the extent funds are legally
available therefor after the payment of any tax or other liabilities. There is
no assurance that this policy will not change. Neither Holdings nor any of its
direct or indirect subsidiaries declared a dividend in 1995. In 1993 and 1994,
TY Container declared dividends of US$3,074,000 and US$3,515,000, respectively,
which were paid to its shareholders in the immediately following fiscal years.
In 1995, it was decided that it was in the Company's best interests to use the
funds which would otherwise have been available for dividends to finance the
Company's expansion. The Company expects TY Container and Tongsheng to declare
annual dividends in future years, to the extent funds are legally available
therefor, and to the extent their respective boards of directors, exercising
their discretion, conclude that it is in the best interests of such companies to
do so. Pursuant to the relevant PRC laws and regulations for Sino-foreign joint
venture companies, the earnings of TY Container and Tongsheng are determined in
accordance with the relevant PRC accounting rules and regulations and are
available for distribution to their shareholders after they (a) satisfy all tax
liabilities, (b) provide for losses in previous years, and (c) make
appropriations to various reserve funds in an amount equal, in the aggregate, to
15% of their respective after-tax profits.
- ---------------
/1/ Such bids represent quotations between dealers, do not include retail mark-
up, mark-down or commission and may not represent actual transactions. The
Company has obtained this information from sources it believes to be
reliable, but no assurance can be given as to its accuracy.
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<PAGE>
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On May 10, 1995, pursuant to a stock purchase agreement and certain
supplemental agreements, Holdings issued 21,875,000 shares of its common stock
to the former shareholders of CCHL-BVI, and their designees, in exchange for
100% of the issued and outstanding shares of CCHL-BVI (the "Stock Swap").
Immediately preceding such issuance, Holdings, relying on the exemption from
registration provided under Rule 504 of Regulation D of the Securities Act of
1933, issued 979,606 shares of its common stock, which were valued at
US$137,145, to 12 entities and individuals in consideration for services
rendered in connection with the Stock Swap. Holdings believes that it was
entitled to the exemption from registration provided under Rule 504 because (A)
it was not (i) subject to the reporting requirements of section 13 or 15(d) of
the Exchange Act, (ii) an investment company, or (iii) a "blank check" company,
(B) the price for the shares issued was less than US$1,000,000, and (C) the
offers and sales of such shares satisfied the applicable terms and conditions of
Rules 501 and 502 of Regulation D.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The securities to be registered are shares of Holdings's common stock,
par value US$0.001 per share (the "Common Stock"). The authorized capital stock
of Holdings consists of 100,000,000 shares of Common Stock and 5,000,000 shares
of preferred stock, par value US$0.01 per share (the "Preferred Stock").
The holders of Common Stock (i) have ratable rights to dividends from
funds legally available therefor, when, as and if declared by the Board of
Directors of Holdings, (ii) are entitled to share ratably in all of the assets
of Holdings available for distribution to holders of Common Stock upon
liquidation, dissolution or winding up of the affairs of Holdings, (iii) do not
have preemptive, subscription or conversion rights and there are no redemption
or sinking fund provisions applicable thereto, and (iv) are entitled to one non-
cumulative vote per share, on all matters which stockholders may vote on at all
meetings of shareholders of Holdings. All shares of Common Stock now
outstanding are fully paid and non-assessable.
There are 25,000,273 shares of Common Stock currently issued and
outstanding. The Preferred Stock may be issued in one or more series at the
discretion of the Board of Directors of Holdings. No shares of Preferred Stock
have been issued by Holdings.
ITEM 12. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Neither the By-Laws nor the Articles of Incorporation of Holdings
provide for indemnification of officers or directors. Section 78.751 of the
Nevada General Corporation Law contains provisions entitling officers and
directors of Holdings to indemnification, under certain circumstances, from
judgements, fines, amounts paid in settlement and reasonable expenses, including
attorney's fees, resulting from an action or proceeding in which they may be
involved
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by reason of being or having been an officer or director of Holdings, provided
said officers or directors acted in good faith.
43
<PAGE>
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The unaudited financial statements for the three months ended March
31, 1996 and 1995 are set forth below. The audited financial statements for the
years ended December 31, 1993, 1994 and 1995 appear on pages F-1 through F-27 of
this Registration Statement. Schedules to financial statements have been
omitted because of the absence of conditions under which they would be required.
The information set forth below has not been audited but, in the
opinion of management, contain all the adjustments which are of a normal
recurring nature, including those for conforming with U.S. GAAP, necessary for
the fair presentation of the results of operations and cash flows for such
period. Because the Stock Swap has been accounted for as a reverse acquisition,
the information set forth below has been prepared based on the historical
financial statements of CCHL-BVI, for the period prior to the Stock Swap, and on
the historical financial statements of TY Container, for the period prior to the
Reorganization, and gives effect to the Reorganization and the Stock Swap as if
they had been completed prior to January 1, 1995. This information should be
read in conjunction with, and is qualified in its entirety by reference to, the
Consolidated Financial Statements of the Company, including the notes thereto,
set forth on pages F-1 through F-27 of this Registration Statement.
44
<PAGE>
FINANCIAL STATEMENTS
CHINA CONTAINER HOLDINGS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(Amounts in thousands, except for per share data)
Three Months ended
March 31
1996 1995
---------- ----------
NET SALES 24,193 18,783
COST OF SALES (19,755) (15,189)
SELLING AND ADMINISTRATIVE EXPENSES (1,221) (888)
---------- ----------
3,217 2,706
FINANCIAL EXPENSES, NET (474) (734)
OTHER INCOME(EXPENSES), NET 16 (58)
---------- ----------
INCOME BEFORE INCOME TAXES 2,759 1,914
INCOME TAXES (246) (230)
---------- ----------
2,513 1,684
SHARE OF NET LOSSES OF ASSOCIATED (58) (33)
COMPANIES
---------- ----------
INCOME BEFORE MINORITY INTERESTS 2,455 1,651
MINORITY INTERESTS (767) (330)
---------- ----------
NET INCOME 1,688 1,321
========== ==========
NET INCOME PER SHARE 0.07 0.05
========== ==========
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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<PAGE>
CHINA CONTAINER HOLDINGS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND MARCH 31, 1996
(Amounts in thousands)
March 31 December 31
Note (unaudited) (audited)
------ --------- ------------
1996 1995
--------- ------------
US$ US$
ASSETS
CURRENT ASSETS
Cash and cash equivalents 2,632 7,431
Accounts receivable 26,602 7,642
Deposits and other receivables 7,870 9,996
Inventories 4 22,017 21,605
Deferred income taxes 84 84
Amount due from associated companies 725 1,234
Amount due from related companies 5,286 3,757
------ ------
TOTAL CURRENT ASSETS 65,216 51,749
INTANGIBLE ASSETS 1,057 499
FIXED ASSETS 14,707 6,335
CONSTRUCTION IN PROGRESS 9,308 5,325
INTERESTS IN ASSOCIATED COMPANIES 6,341 5,826
AMOUNTS DUE FROM RELATED COMPANIES - 670
OTHER ASSETS 301 901
------ ------
TOTAL ASSETS 96,930 71,305
====== ======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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<PAGE>
CHINA CONTAINER HOLDINGS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND MARCH 31, 1996
(Amounts in thousands)
March 31 December 31
Note (unaudited) (audited)
------ --------- ------------
1996 1995
--------- ------------
US$ US$
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Bank loans and overdrafts 67,408 48,175
Accounts payable 5,054 3,705
Accrued liabilities and other payables 2,818 1,803
Income taxes payable 365 274
Deferred income taxes 104 -
Amount due to a related company - 2,630
Amount due to associated companies 3,031 -
------ ------
TOTAL CURRENT LIABILITIES 78,780 56,587
MINORITY INTERESTS 4,723 3,060
------ ------
83,503 59,647
------ ------
SHAREHOLDERS' EQUITY
Paid-up capital shares of 100,000,000 25 25
common
stock of US$0.001 each and 5,000,000
preferred stock of US$0.01 each
authorized; shares 25,000,273
common stock of US$0.001 each
outstanding
Additional paid-in capital 4,683 4,683
Reserves 5,879 5,879
Retained earnings 2,840 1,181
Currency translation adjustments - ( 110)
------ ------
13,427 11,658
TOTAL SHAREHOLDERS' EQUITY ------ ------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY 96,930 71,305
====== ======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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CHINA CONTAINER HOLDINGS LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(Amounts in thousands)
Three months ended
March 31
(unaudited)
--------------------
1996 1995
--------- ---------
US$ US$
Net cash provided by/(used in) (12,151) 5,507
operating activities
CASH FLOWS USED IN INVESTING ACTIVITIES
Increase in intangible assets - -
Increase in fixed assets (1,959) -
Increase in construction in progress (9,822) (207)
Increase in investments in ( 100) (364)
associated companies
Others 600 1,369
------- -------
Net cash used in
investing activities (11,881) (571)
------- -------
CASH FLOWS PROVIDED BY/(USED IN)
FINANCING ACTIVITIES
Repayments of bank loans and overdrafts - ( 5,524)
Proceeds from bank loans and overdrafts 19,233 1,283
------- -------
Net cash provided by/(used in) 19,233 ( 4,241)
financing activities ------- -------
NET INCREASE/(DECREASE) IN CASH AND ( 4,799) 695
CASH EQUIVALENTS
Cash and cash equivalents, at beginning
of period 7,431 1,592
------- -------
Cash and cash equivalents, at end of
period 2,632 2,287
======= =======
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
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CHINA CONTAINER HOLDINGS LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instruction to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
Management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1996. The unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's audited financial statement for
the year ended December 31, 1995.
The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
2. PURCHASE OF YANGZHOU TONGLEE REEFER CONTAINERS COMPANY LIMITED
On January 1, 1996, Holdings' 80% subsidiary, TY Container increased its
shareholding in Reefer from 50% to 51% for US$80. Due to the acquisition
of control by TY Container, the results of Reefer were consolidated into
the Company since January 1, 1996.
No pro forma unaudited results of operations for the three months ended
March 31, 1995, assuming consummation of the purchase as of January 1,
1995, was shown because Reefer had not yet commenced its operation as at
March 31, 1995.
Reefer is a Sino-foreign equity joint venture company governed by the
Income Tax Law of the People's Republic of China concerning Foreign
Investment Enterprises and various local income tax laws (the "Income Tax
Laws").
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In the Yangzhou District, where Reefer is located, the basic rate of income
tax applicable to Reefer exclusive of the local income tax is 24%.
Reefer's local income tax liability of 3% is exempted by the local tax
authorities. Pursuant to the Income Tax Laws, Reefer was further exempted
from income taxes for a period of two years commencing from the first
profitable year and is entitled to a 50% tax exemption for the following
three years.
3. INCOME TAX
A reconciliation of the effective income tax rates (excluding the
reorganization expenses) with the statutory income tax in the PRC is as
follows:
Three months ended
March 31
(unaudited)
1996 1995
Statutory PRC tax rate 24.0% 24.0%
Tax holiday (15.1%) (12.0%)
------ ------
8.9% 12.0%
====== ======
4. INVENTORIES
Inventories comprise:
March 31 December 31
(unaudited) (audited)
--------------- ---------------
1996 1995
US$ US$
Raw materials 16,733 16,828
Finished goods 5,284 4,777
------ ------
22,017 21,605
====== ======
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ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The firm of Ernst & Young has acted as the principal independent
accountant to CCHL-BVI and its subsidiaries, including TY Container, since March
1995. Prior to March 1995, CCHL-BVI did not exist and TY Container engaged only
independent PRC accountants, which it continues to engage to audit its financial
statements for purposes of determining its PRC tax liability, as required by PRC
law. Subsequent to the Stock Swap, Ernst & Young has also acted as the
principal accountant to Holdings. The accountant to Holdings, Deutch Marin &
Company retained to audit the former business of Dial-A-Brand, Inc. (Holdings's
prior name), to the knowledge of Holdings, continues to act as auditors for that
business in the hands of its new owners but has performed no services for
Holdings subsequent to the Stock Swap, and has not been relied upon by Ernst &
Young in its report on the Consolidated Financial Statements of the Company for
the three years ended December 31, 1993, 1994 and 1995 which appears in Item 13
of this Registration Statement.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
a. A list of the financial statements filed herewith is set forth in
the Index to Financial Statements attached hereto and incorporated herein by
reference.
b. The Exhibits filed herewith are identified in the Exhibit Index
attached hereto, which Exhibits are incorporated herein by reference.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
CHINA CONTAINER HOLDINGS LIMITED
By: ________________________________
Ma Tieyi
Secretary and Treasurer
Dated: November 7, 1997
52
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Report of Independent Auditor F-1
Consolidated statements of income for F-2
each of the years ended December 31,
1993, 1994 and 1995
Consolidated statements of changes in F-3
shareholders' equity for each of the
years ended December 31, 1993, 1994
and 1995
Consolidated balance sheets as at F-4
December 31, 1994 and 1995
Consolidated statements of cash flows F-6
for each of the years ended December
31, 1993, 1994 and 1995
Notes to consolidated financial F-8
statements
53
<PAGE>
Consolidated Financial Statements
(Expressed in US$)
CHINA CONTAINER HOLDINGS LIMITED
(Formerly Dial-A-Brand, Inc.)
December 31, 1993, 1994 and 1995
ERNST & YOUNG
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Report of independent auditors........................... F-1
Consolidated statements of income for each of the years
ended December 31, 1993, 1994 and 1995................. F-2
Consolidated statements of changes in shareholders'
equity for each of the years ended December 31,
1993, 1994 and 1995.................................... F-3
Consolidated balance sheets as at December 31, 1994
and 1995............................................... F-4
Consolidated statements of cash flows for each of
the years ended December 31, 1993, 1994 and 1995....... F-6
Notes to consolidated financial statements............... F-8
i
<PAGE>
[ERNST & YOUNG LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
The Shareholders
China Container Holdings Limited
(Formerly Dial-A-Brand, Inc.)
We have audited the accompanying consolidated balance sheets of China Container
Holdings Limited (the "Company") and its subsidiaries (the "Group") as of
December 31, 1994 and 1995 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the years ended
December 31, 1993, 1994 and 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Group as at December 31, 1994 and 1995, and the results of its operations and
its cash flows for each of the years ended December 31, 1993, 1994 and 1995, in
conformity with accounting principles generally accepted in the United States of
America.
Hong Kong
6 February 1996
F-1
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 and 1995
(Amounts in thousands, except for share data)
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------
Notes 1993 1994 1995
US$ US$ US$
<S> <C> <C> <C>
NET SALES 60,960 79,771 89,265
COST OF SALES ( 46,320) ( 68,645) ( 75,243)
SELLING AND ADMINISTRATIVE EXPENSES ( 2,803) ( 3,789) ( 4,238)
-------- -------- --------
11,837 7,337 9,784
FINANCIAL EXPENSES, NET 4 ( 5,962) ( 1,213) ( 2,082)
OTHER INCOME/(EXPENSES), NET 5 ( 30) 640 ( 212)
REORGANIZATION EXPENSES 6 - - ( 1,382)
-------- -------- --------
INCOME BEFORE INCOME TAXES 5,845 6,764 6,108
INCOME TAXES 7 ( 657) ( 742) ( 992)
-------- -------- --------
5,188 6,022 5,116
SHARE OF NET LOSSES OF ASSOCIATED ( 25) ( 90) ( 1,308)
COMPANIES -------- -------- --------
INCOME BEFORE MINORITY INTERESTS 5,163 5,932 3,808
MINORITY INTERESTS ( 1,033) ( 1,187) ( 1,038)
-------- -------- --------
NET INCOME 4,130 4,745 2,770
======== ======== ========
NET INCOME PER SHARE 3(k) 0.17 0.19 0.11
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
(Amounts in thousands, except for share data)
<TABLE>
<CAPTION>
Additional Currency
Paid-up paid-in Retained translation
Capital capital Reserves earnings adjustments
Notes US$ US$ US$ US$ US$
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 25 2,301 487 1,794 -
Net income - - - 4,130 -
Transfer to reserves 23 - - 324 ( 324) -
Capitalization of TYC's retained 15 - 1,581 - ( 1,581) -
earnings as capital
Currency translation adjustments - - - - ( 523)
Dividends (US$0.08 per share) 3(l) - - - ( 1,993) -
------- ----- ----- ------- -----
Balance at December 31, 1993 25 3,882 811 2,026 ( 523)
Net income - - - 4,745 -
Transfer to reserves 23 - - 2,157 ( 2,157) -
Currency translation adjustments - - - - 276
Dividends (US$0.13 per share) 3(l) - - - ( 3,292) -
------- ----- ----- ------- -----
Balance at December 31, 1994 25 3,882 2,968 1,322 ( 247)
Net income - - - 2,770 -
Transfer to reserves 23 - - 2,911 ( 2,911) -
Currency translation adjustments - - - - 137
Reorganization expenses 6 - 801 - - -
------- ----- ----- ------- -----
Balance at December 31, 1995 25 4,683 5,879 1,181 ( 110)
======= ===== ===== ======= =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 1995
(Amounts in thousands, except for share data)
December 31
------------------
Notes 1994 1995
US$ US$
ASSETS
CURRENT ASSETS
Cash and cash equivalents 1,578 7,431
Accounts receivable 1,424 7,642
Deposits and other receivables 2,063 9,996
Inventories 8 20,934 21,605
Deferred income taxes 84 84
Amount due from associated companies 9 299 1,234
Amount due from related companies 9 3,126 3,757
------ ------
TOTAL CURRENT ASSETS 29,508 51,749
INTANGIBLE ASSETS 10 551 499
FIXED ASSETS 11 6,374 6,335
CONSTRUCTION IN PROGRESS 12 - 5,325
INTERESTS IN ASSOCIATED COMPANIES 13 5,887 5,826
AMOUNTS DUE FROM RELATED COMPANIES 9 1,263 670
OTHER 305 901
------ ------
TOTAL ASSETS 43,888 71,305
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 1995
(Amounts in thousands, except for share data)
December 31
------------------------
Notes 1994 1995
US$ US$
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans and overdrafts 14 25,147 48,175
Accounts payable 1,855 3,705
Accrued liabilities and other payables 2,681 1,803
Income taxes payable 624 274
Amount due to an associated company 9 129 -
Amount due to a related company 9 - 2,630
Dividends payable 2,692 -
------ ------
TOTAL CURRENT LIABILITIES 33,128 56,587
MINORITY INTERESTS 2,810 3,060
------ ------
35,938 59,647
------ ------
COMMITMENTS AND CONTINGENCIES 17
SHAREHOLDERS' EQUITY
Share capital - shares of 100,000,000
common stock of
US$0.001 each and 5,000,000
preferred stock of 15 25 25
US$0.01 each authorized; shares
25,000,273
common stock of US$0.001 each
outstanding
Additional paid-in capital 15 3,882 4,683
Reserves 23 2,968 5,879
Retained earnings 23 1,322 1,181
Currency translation adjustments ( 247) ( 110)
------ ------
7,950 11,658
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' 43,888 71,305
EQUITY ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
1993 1994 1995
US$ US$ US$
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 4,130 4,745 2,770
Adjustments to reconcile net income to
net cash
provided by/(used in) operating
activities:
Minority interests 1,033 1,187 1,038
Reorganization expenses - - 801
Amortization 71 71 61
Depreciation 569 714 805
Loss on disposal of fixed assets 8 5 7
Share of net losses of associated 25 90 1,308
companies
Deferred income taxes 105 ( 312) -
Foreign exchange losses/(gain) 3,358 ( 594) ( 486)
Decrease/(increase) in assets:
Accounts receivable ( 325) ( 657) ( 6,172)
Deposits and other receivables 20 645 ( 7,872)
Inventories (10,046) 3,280 ( 343)
Amounts due from associated companies - ( 294) ( 926)
Amounts due from related companies ( 2,644) ( 767) 29
Increase/(decrease) in liabilities:
Accounts payable 2,237 ( 1,530) 1814
Accrued liabilities and other 1,004 132 ( 917)
payables
Income taxes payable 322 287 ( 358)
Amount due to an associated company - 126 ( 130)
Amount due to a related company - - 2,620
------- ------- -------
Net cash provided by/(used in) ( 133) 7,128 ( 5,951)
operating activities ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(Amounts in thousands, except for share data)
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------
1993 1994 1995
US$ US$ US$
<S> <C> <C> <C>
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of fixed assets ( 624) ( 803) ( 711)
Increase in construction in progress - - ( 5,306)
Increase in investments in associated ( 1,020) ( 4,900) ( 1,161)
companies
Proceeds from the sale of fixed assets 8 - 37
Increase in other ( 268) ( 37) ( 589)
Advances to a related company ( 898) 122 -
-------- -------- --------
Net cash used in investing activities ( 2,802) ( 5,618) ( 7,730)
CASH FLOWS PROVIDED BY/(USED IN)
FINANCING ACTIVITIES
Dividends paid ( 2,444) ( 2,474) ( 2,692)
Dividends paid to minority interests ( 611) ( 618) ( 673)
Repayments of bank loans and overdrafts ( 39,288) ( 31,250) ( 14,045)
Proceeds from bank loans and overdrafts 48,001 32,382 36,599
Exchange differences on bank loans ( 3,044) 594 486
denominated in -------- -------- --------
foreign currencies
Net cash provided by/(used in) 2,614 ( 1,366) 19,675
financing activities -------- -------- --------
Exchange differences on cash and cash ( 573) 75 ( 141)
equivalents -------- -------- --------
NET INCREASE/(DECREASE) IN CASH AND ( 894) 219 5,853
CASH EQUIVALENTS
Cash and cash equivalents, at beginning 2,253 1,359 1,578
of year -------- -------- --------
Cash and cash equivalents, at end of 1,359 1,578 7,431
year ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Container Holdings Limited ("China Container") was formerly known as
Dial-A-Brand, Inc. ("DAB") which was incorporated in the State of Nevada,
the United States of America.
China Container Holdings Limited ("CCHL(BVI)") was incorporated in the
British Virgin Islands on November 16, 1994 and became a wholly-owned
subsidiary of China Container on May 10, 1995.
Yangzhou Tongyun Container Company Limited ("TYC") was established as a
Sino-foreign joint venture company in the People's Republic of China (the
"PRC") on March 27, 1989 with a tenure of 15 years. The tenure can be
extended by agreement with the joint venture partners after obtaining the
necessary approval from the relevant government agencies. TYC's principal
activity is the manufacturing of international standard commercial freight
containers in the PRC.
Pursuant to certain restructuring agreements (the "Reorganization"), each
of the 5 of the 8 original shareholders, holding an 80% interest in TYC in
the aggregate (the "Foreign TYC Shareholders"), transferred their interests
in TYC into their respective newly incorporated subsidiaries (the "New
Companies") and transferred into Sinocity Group Limited, a newly
incorporated company ("Sinocity") their respective holdings in the New
Companies in exchange for a pro rata share of the shares of Sinocity.
Sinocity then transferred its interests in the New Companies to the newly
formed CCHL(BVI) in exchange for 95% of the shares of CCHL(BVI). The
remaining 5% interest in CCHL(BVI) was issued to a wholly-owned subsidiary
of Broadsino Investment Company Limited ("Broadsino") in return for
services provided by Broadsino in connection with the Reorganization.
Subsequent to the balance sheet date, management decided to have the New
Companies liquidated and their interests in TYC be distributed to CCHL(BVI)
(the "Proposed Liquidation"). The process of the Proposed Liquidation is
yet to be completed at the date of preparing these financial statements.
As a result of the Reorganization and pending the completion of the
Proposed Liquidation, CCHL(BVI) directly holds 80% of the paid-up capital
of TYC.
Prior to the Reverse Acquisition (defined hereinafter), DAB had 4,474,658
shares of common stock, par value US$0.001 per share, issued and
outstanding. In connection with the Reverse Acquisition and immediately
prior thereto, the following transactions occurred:
F-8
<PAGE>
(i) retirement of 797,500 shares of common stock previously held by DAB
as treasury stock;
(ii) DAB sold the then existing business of DAB including all of its
assets and liabilities as at May 10, 1995, to Dial-A-Brand, Inc, a
newly formed Delaware corporation ("DAB-Delaware"), in exchange for
all of the issued and outstanding shares of common stock of DAB-
Delaware;
(iii) the former majority shareholder of DAB agreed to acquire from DAB
all of the issued and outstanding common stock of DAB-Delaware in
exchange for 1,784,400 shares of DAB's common stock and an indemnity
from such shareholder with respect to any contingent liabilities
relating to the former business of DAB. The 1,784,400 shares of
common stock received were then cancelled by DAB;
(iv) a reverse stock split of 7 to 1 of DAB's then existing issued and
outstanding common stock into 270,667 shares of DAB's common stock
of US$0.001 each, which, because of the practice of rounding up for
each existing stock certificate, resulting in 273 additional shares;
and
(v) the issuance of 979,606 shares of DAB's common stock, par value
US$0.001 per share, to certain parties in return for services
provided in relation to the Reverse Acquisition.
As of May 10, 1995, pursuant to a stock purchase agreement (as amended by a
supplementary agreement, the "Agreement") among Sinocity, Broadsino,
CCHL(BVI) and DAB, DAB acquired the entire issued and outstanding share
capital of CCHL(BVI). In exchange, DAB issued 21,875,000 shares of its
common stock to the former shareholders of CCHL(BVI) (and their designee)
on a pro rata basis, and 1,875,000 shares of its common stock to Gordon
Capital Limited for services rendered in connection with the Reverse
Acquisition, representing a 87.5% and 7.5% holding, respectively, in China
Container's shares of common stock outstanding after the Reverse
Acquisition.
On May 10, 1995, DAB changed its name to China Container Holdings Limited.
The above transactions have been treated as a recapitalization of CCHL(BVI)
with CCHL(BVI) as the acquirer (the "Reverse Acquisition"). Accordingly,
the historical financial statements of China Container for the period prior
to May 10, 1995 are those of CCHL(BVI) or TYC (prior to the Reorganization)
except for paid-in capital which represent that of DAB immediately after
the Reverse Acquisition.
Subsequent to the Reverse Acquisition, China Container's principal activity
is the management of the business of its indirectly held operating
subsidiaries.
F-9
<PAGE>
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
In the opinion of the directors of China Container, the above
Reorganization and Reverse Acquisition constitute a reorganization under
common control and subsequent to which, the ultimate control of TYC remains
substantially the same as before the Reorganization and the Reverse
Acquisition.
Yangzhou Tongsheng Container Company Limited ("Yangzhou Tongsheng") was
established by the New Companies (collectively 80%) and by the existing PRC
holders of TYC (20%) as a Sino-foreign joint venture company in the PRC on
December 21, 1995 with a tenure of 15 years with a total registered capital
US$4,800. The tenure can be extended by agreement with the joint venture
partners after obtaining the necessary approval from the relevant
government agencies. Yangzhou Tongsheng's principal activity is the
manufacturing of international standard commercial freight containers in
the PRC. As at January 31, 1996, the New Companies injected capital of
US$4,800 into Yangzhou Tongsheng in the same proportion, and in exchange
for the same shareholdings, as in TYC.
Yingkou Tongyun Container Company Limited ("Yingkou") was established as a
Sino-foreign joint venture company in the PRC on June 29, 1995 with a
tenure of 50 years with a total registered capital of US$10,000. Yingkou's
principal activity is the manufacturing of international standard
commercial freight containers in the PRC. CCHL(BVI) holds a 80% interest in
Yingkou. The remaining 20% interest of Yingkou is held by China Everbest
Motors Company Limited (10%) and Wide Shine Development Limited (10%). No
capital is yet paid by the shareholders.
2. BASIS OF PRESENTATION
The consolidated financial statements of the Group have been prepared based
on TYC's historical financial statements for the years ended December 31,
1993 and 1994 and to give effect to the Reorganization and the Reverse
Acquisition as set out in note 1 to these consolidated financial statements
as if they have been completed prior to January 1, 1993.
The consolidated financial statements of the Group are prepared in
accordance with accounting principles generally accepted in the United
States of America ("US GAAP"). This basis of accounting differs from that
used in the statutory financial statements of TYC which are prepared in
accordance with the accounting principles and the relevant financial
regulations applicable to Sino-foreign joint venture companies in the PRC.
The principal adjustment made to conform the statutory financial statements
of TYC to US GAAP is the reclassification of the staff bonus and welfare
reserve appropriation from reserves to a charge to income, the timing of
recognizing sales revenue, the restatement of monetary assets and
liabilities denominated in foreign currencies to reflect the exchange rate
quoted by foreign exchange adjustment centers (the "Swap Center
F-10
<PAGE>
Rate") at December 31, 1993 (see note 18) and the restatement of foreign
currency transactions to reflect the Swap Center Rates prevailing at the
date of transactions for the period prior to December 31, 1993.
3. PRINCIPAL ACCOUNTING POLICIES
(a) Cash and cash equivalents
-------------------------
The Group considers cash and cash equivalents to include cash on
hand and deposits with banks with an original maturity of three
months or less.
(b) Inventories
-----------
Inventories are stated at the lower of cost and market value. Cost
is determined on the weighted-average basis and in the case of
finished goods, comprises direct materials, direct labor and an
appropriate proportion of overheads.
(c) Fixed assets and depreciation
-----------------------------
Fixed assets are stated at cost less accumulated depreciation.
Depreciation of fixed assets is calculated on the straight-line
basis to write off the cost less estimated residual value of each asset over its
estimated useful life. The principal annual rates used for this purpose are as
follows:
Buildings 7%
Plant, machinery and equipment 10%
Motor vehicles 20%
Office equipment 20%
No depreciation is provided on construction in progress until the
asset is completed and put into productive use.
(d) Construction in progress
------------------------
Construction in progress represents plant and machinery and other
fixed assets under construction or installation and is stated at
cost. Cost comprises direct costs of construction and installation
as well as interest charges on related borrowed funds.
Capitalization of interest charges ceases when an asset is ready
for its intended use. Construction in progress is transferred to
fixed assets upon commissioning when it is capable of producing
saleable output on a commercial basis.
(e) Intangible assets
-----------------
Intangible assets mainly represent land use rights which are
amortized on the straight-line basis over the remaining tenure of
the joint venture.
(f) Associated companies
--------------------
An associated company is a company, not being a subsidiary, in
which the Group exerts significant influence.
F-11
<PAGE>
The Group's share of the associated companies' post-acquisition
results is included in the consolidated statements of income under
the equity method of accounting. The Group's investments in
associated companies are stated at cost plus the Group's share of
the associated companies' post-acquisition results and capital
transactions.
(g) Revenue recognition
-------------------
Sales represent the invoiced value of goods sold, net of returns.
Revenue is recognized upon delivery to customers or in the case of
bill and hold transactions, revenue is recognized when risks and
legal title of the goods are passed to customers according to the
contract terms.
(h) Foreign currency translation
----------------------------
The Group's financial records are maintained in Renminbi ("RMB"),
the national currency of the PRC, which is the functional currency
of the Group.
Foreign currency transactions are translated into RMB using the
applicable rates of exchange quoted by the Bank of China (the
"Exchange Rates"). Monetary assets and liabilities denominated in
foreign currencies are translated into RMB at the applicable
Exchange Rates at the respective balance sheet dates. The resulting
exchange gains or losses are credited or charged to the Group's
consolidated statements of income.
The market risks associated with changes in exchange rates and the
restrictions over the convertibility of RMB into foreign currencies
are discussed in note 18 to the consolidated financial statements.
These financial statements have been translated into U.S. dollars
in accordance with FASB Statement No. 52, Foreign Currency
Translation. Assets and liabilities have been translated using the
exchange rates in effect at the balance sheet date. Income
statement amounts have been translated using the average exchange
rate for the year. The gains and losses resulting from the changes
in exchange rates from year to year have been reported separately
as a component of shareholders' equity.
(i) Income taxes
------------
A deferred tax liability is recognized for all significant taxable
temporary differences and a deferred tax asset is recognized for
all significant deductible temporary differences carryforwards. A
valuation allowance is recognized if it is more likely than not
that some portion or all of the deferred tax asset will not be
realized.
(j) Retirement benefits
-------------------
Retirement benefits are charged to the statements of income based
on the contributions to an insurance company (see note 19).
F-12
<PAGE>
(k) Net income per share
--------------------
The calculation of net income per share is based on an aggregate of
25,000,273 shares of common stocks outstanding as if the Reverse
Acquisition had been completed as at January 1, 1993 (note 15).
(l) Dividends per share
-------------------
Dividends are the amount paid/payable to the then shareholders of
TYC prior to the Reorganization.
Dividends per share is based on an aggregate of 25,000,273 shares
of common stock outstanding, as if the Reverse Acquisition had been
completed at January 1, 1993 (note 15).
(m) Use of estimates
----------------
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
4. FINANCIAL EXPENSES, NET
Financial expenses, net represent:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------
1993 1994 1995
US$ US$ US$
<S> <C> <C> <C>
Bank loan interest ( 970) ( 1,863) ( 3,173)
Less: Bank loan interest capitalized in - - 258
construction in progress ------- ------- -------
( 970) ( 1,863) ( 2,915)
Interest income 87 238 375
Foreign exchange gains/(losses), net ( 5,079) 412 458
------- ------- -------
( 5,962) ( 1,213) ( 2,082)
======= ======= =======
</TABLE>
F-13
<PAGE>
5. OTHER INCOME/(EXPENSES), NET
Other income/(expenses), net represent:
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------
1993 1994 1995
US$ US$ US$
<S> <C> <C> <C>
Professional fee received in respect of
technical - 589 -
assistance provided to an associated
company
Other ( 30) 51 ( 212)
---- ---- -----
( 30) 640 ( 212)
==== ==== =====
</TABLE>
6. REORGANIZATION EXPENSES
Concurrent with the Reorganization and the Reverse Acquisition set out in
note 1 to the financial statements, reorganization expenses were incurred
which reduced net income by US$1,382. The reorganization expenses included
(i) US$581 of related audit and consultancy fees incurred, and (ii) US$801
which represented the fair value of (a) the 5% of the issued and
outstanding shares of CCHL-BVI received by a wholly-owned subsidiary of
Broadsino in connection with the Reorganization, and (b) the 12.5% of the
issued and outstanding shares of the common stock of China Container held
by the shareholders of DAB prior to the Reverse Acquisition and by certain
other parties who received restricted shares of common stock in exchange
for services rendered in connection with the Reverse Acquisition. The
amount of the expenses in (a) and (b) above were determined based on the
fair value of CCHL-BVI's net assets as determined by an appraisal performed
by an independent PRC appraiser, adjusted for factors affecting the
transferability of the shares.
7. INCOME TAXES
Income taxes represent:
Year ended December 31
--------------------------
1993 1994 1995
US$ US$ US$
Current 552 1,054 992
Deferred 105 ( 312) -
---- ----- ----
657 742 992
==== ===== ====
F-14
<PAGE>
It is management's intention to reinvest all the income attributable to
China Container earned by its operations outside the United States as at
December 31, 1995. Accordingly, no United States corporate income taxes
have been provided in these financial statements.
Under the current British Virgin Islands' law, dividends that the Group
will distribute in future, and capital gains arising from the Group's
investments are not subject to income taxes in the British Virgin Islands.
TYC is a Sino-foreign equity joint venture company governed by the Income
Tax Law of the People's Republic of China concerning Foreign Investment
Enterprises and various local income tax laws (the "Income Tax Laws").
In the Yangzhou District, where TYC is located, the basic rate of income
tax applicable to TYC exclusive of the local income tax is 24%. TYC's local
income tax liability of 3% is exempted by the local tax authorities.
Pursuant to the Income Tax Laws, TYC was further exempted from income taxes
for a period of two years commencing from the first profitable year (1990)
and was entitled to a 50% tax exemption for the following three years.
Thereafter, pursuant to tax concessions under the Income Tax Laws granted
to companies engaged in export sales activities, TYC is further entitled to
a 50% tax exemption for each of the years in which its export sales exceed
70% of its total sales.
Giving effect to the above tax concessions, the actual tax rate for the
three years ended December 31, 1993, 1994 and 1995 was 12%, as TYC was in
its third year of the three-year 50% tax exemption period in 1995.
TYC's associated companies are Sino-foreign equity joint venture companies
and enjoy similar tax exemptions as TYC. No provision for PRC income taxes
has been made for the associated companies as they incurred a loss or were
in their tax holiday period during the relevant years.
The tax benefit to TYC as a result of the tax holiday for the year ended
December 31, 1993, 1994 and 1995 amounted to US$701, US$812 and US$733
(China Container: US$561, US$650 and US$586), respectively. The effective
tax benefit per share for China Container for each of the years ended
December 31, 1993, 1994 and 1995 amounted to US$0.02, US$0.03 and US$0.02,
respectively.
F-15
<PAGE>
A reconciliation of the effective income tax rates (excluding the
reorganization expenses) with the statutory income tax rate in the PRC is
as follows:
Year ended December 31
--------------------------
1993 1994 1995
Statutory tax rate 24.0% 24.0% 24.0%
Tax holiday (12.0%) (12.0%) (12.0%)
Other items ( 0.8%) ( 1.0%) 1.0%
----- ----- -----
11.2% 11.0% 13.0%
===== ===== =====
Deferred income tax relates primarily to temporary differences on
revaluation of foreign currency denominated monetary assets and
liabilities, and the timing of recording income receivable and the accrual
of expenses, in each case between TYC's PRC financial statements for tax
purpose and its US GAAP financial statements.
Undistributed earnings of China Container's foreign subsidiaries amounted
to US$2,563 at December 31, 1995. Because those earnings are considered to
be indefinitely invested, no provision for United States corporate income
taxes on those earnings has been provided. Upon distribution of those
earnings in the form of dividends or otherwise, China Container would be
subject to United States corporate income taxes. Amounts of unrecognized
deferred United States corporate income taxes in respect of those
undistributed earnings as at December 31, 1995 were US$871.
8. INVENTORIES
Inventories comprise:
Year ended December 31
----------------------
1994 1995
US$ US$
Raw materials 11,735 16,828
Finished goods 9,199 4,777
------ ------
20,934 21,605
====== ======
9. RELATED PARTY BALANCES AND TRANSACTIONS
(i) The amounts due from related companies, Jiangsu Tongyun Group Company
(formerly known as Jiangyang Automobile Company, "TYG"), Ocean Asia
International Limited ("Ocean Asia"), Jiangsu Tongyun Trading Company
("Jiangsu Tongyun") and Wide Shine Development Limited ("WSD")
comprise:
F-16
<PAGE>
Year ended December 31
--------------------------
1994 1995
US$ US$
Loan receivable from Ocean Asia 898 2,566
Trade receivable/(payable) to Ocean Asia ( 98) 157
----- -----
800 2,723
Loan receivable from Jiangsu Tongyun - 429
Trade receivable from WSD 2,085 1,275
Loan receivable from TYG 1,504 -
----- -----
4,389 4,427
===== =====
Due within one year 3,126 3,757
Due after more than one year 1,263 670
----- -----
4,389 4,427
===== =====
TYG is a direct 5% owner of TYC and a 50% shareholder of Sinocity, the
majority shareholder of China Container. Jiangsu Tongyun is a wholly-
owned subsidiary of TYG. Ocean Asia is a wholly beneficially owned
subsidiary of TYG in which Mr. Cheung Sau Yung, a director of China
Container, is Chairman of the Board of Directors. In addition, Mr.
Cheung holds 95% of the shares of Ocean Asia in his name for the
benefit of TYG pursuant to a declaration of trust. WSD is a 12.5%
shareholder of Sinocity.
The loan receivable from Ocean Asia is unsecured and bears interest at
market rates (weighted average of 7.1% and 8.49% as at December 31,
1994 and 1995). Interest income on the above loan receivable from
Ocean Asia amounted to US$40, US$74 and US$271 for the years ended
December 31, 1993, 1994 and 1995, respectively.
Apart from an amount of US$992 (1994: US$1,396) receivable from WSD
which is unsecured and bears interest at 4.75% per annum, the trade
receivable from Ocean Asia and WSD and the loans receivable from
Jiangsu Tongyun and TYG are unsecured and interest-free. Interest
income received from WSD amounted to US$34, US$79 and US$82 for the
years ended December 31, 1993, 1994 and 1995, respectively.
(ii) The amount due from a related company, TYG, at December 31, 1994
(1995: Nil) was unsecured and interest-free.
F-17
<PAGE>
(iii) The amounts due from/to associated companies are unsecured and
bear interest at market rates (weighted average of 7.1% and 8.49% as
at December 31, 1994 and 1995 per annum, respectively) and are
repayable on demand.
(iv) TYC sold containers to WSD, which is subject to normal trade credit
terms. Sales of containers to WSD amounted to US$2,629, US$1,439 and
US$959 for each of the years ended December 31, 1993, 1994 and 1995,
respectively.
(v) Pursuant to a sales and purchase agreement dated April 30, 1995, TYC
purchased for a period of 15 years up to 2010 from Yangzhou Tonghua
Semi-Trailer Co Ltd ("Tonghua") a right to use a site, a factory
building and plant and machinery at an aggregate consideration of
US$2,816. Tonghua is owned/controlled by TYG.
(vi) Pursuant to a sales and purchase agreement dated November 25, 1995,
TYC purchased a right to use a site and plant and machinery from TYG
for a period of 10 years up to 2005 at a consideration of US$3,005.
As at December 31, 1995, US$1,203 has been paid as a deposit for the
purchase with the remainder being paid in January, 1996.
(vii) Pursuant to an agreement dated November 10, 1995, Ocean Asia sold
its 25% interest in the capital of Yangzhou Universal Commercial
Building Shareholdings Co Ltd to TYC at a consideration of US$900.
(viii) Other transactions with related companies are summarized as
follows:
Year ended December 31
---------------------
1993 1994 1995
US$ US$ US$
Purchases of raw materials from Yanzhou 167 412 667
Tongda
Purchases of raw materials from Ocean - 4,700 -
Asia
Sales commissions paid to Ocean Asia - 288 -
Sales commissions paid to WSD 187 281 -
Service charge paid to TYG for the
provision of staff messing services ==== ===== ====
133 191 -
==== ===== ====
10. INTANGIBLE ASSETS
Intangible assets mainly comprise TYC's land use rights in the amount of
US$406 and US$376 as at December 31, 1994 and 1995, respectively, which
were obtained during 1989 to 1992 and are in respect of its factory
premises situated in Yangzhou, Jiangsu Province. TYC is required to pay a
premium upon obtaining official certificates for the above land use rights.
Further details are set out in note 17(i) to the audited consolidated
financial statements.
F-18
<PAGE>
11. FIXED ASSETS
Fixed assets comprise:
Year ended December 31
----------------------
1994 1995
US$ US$
Cost:
Buildings 1,811 1,839
Plant, machinery and equipment 5,501 6,194
Motor vehicles 1,050 1,140
Office equipment 235 198
----- -----
8,597 9,371
----- -----
Accumulated depreciation:
Buildings 376 538
Plant, machinery and equipment 1,487 1,942
Motor vehicles 272 456
Office equipment 88 100
----- -----
2,223 3,036
----- -----
Net book value 6,374 6,335
===== =====
12. CONSTRUCTION IN PROGRESS
Year ended December 31
----------------------
1994 1995
US$ US$
Rights to use sites - 3,544
Plant and machinery - 1,375
Interest capitalization - 259
Others - 147
----- -----
- 5,325
===== =====
Rights to use sites represent deposits paid for two land use rights
purchased from Tonghua and TYG, and are in respect of its factory premises
situated in Yangzhou, Jiangsu Province. Further details are set out in note
17(ii) to the audited consolidated financial statements.
F-19
<PAGE>
13. INTERESTS IN ASSOCIATED COMPANIES
Interests in associated companies comprise:
Year ended December 31
--------------------------
1994 1995
US$ US$
Unlisted shares, at cost 6,002 7,249
Share of post-acquisition profits less ( 115) ( 1,423)
losses, net ----- -------
5,887 5,826
===== =======
Particulars of the associated companies, all of which are registered in the
People's Republic of China, are summarized as follows:
<TABLE>
<CAPTION>
Equity holding
held by
the Tenure
Name of Company Registered capital Company years Commencement date
1994 1995
<S> <C> <C> <C> <C> <C>
Yangzhou Tongda Forging Co. Ltd. US$1,050 20% 35.57% 15 March 11, 1993
("Yangzhou Tongda")
Yangzhou Tongyang Machinery Co. Ltd. US$2,000 44% 44% 15 April 8, 1993
Yangzhou Tonglee Reefer US$8,000 50% 50% 20 December 8, 1993
Containers Co. Ltd.
Beihai Tonghai Containers Co. Ltd. US$4,500 20% 25% 15 February 19, 1994
Yangzhou Universal Commercial RMB30,000 - 25% # May 29, 1993
Building Shareholdings Co Ltd
("Yangzhou Universal")
# Yangzhou Universal is a company limited by shares with indefinite tenure.
</TABLE>
Other than Yangzhou Universal, the tenure of each of the other associated
companies can be extended by agreement with the joint venture partners
after obtaining the necessary approval from the relevant government
agencies.
F-20
<PAGE>
On December 1, 1994, TYC entered into an agreement (the "Sale Agreement")
with Metchem Company Limited ("Metchem") providing for the sale of its 44%
interest in Yangzhou Tongyang Machinery Co. Ltd ("Yangzhou Tongyang") to
Metchem for a cash consideration of US$880. Mr. Cheung Sau Yung, a director
of China Container and TYC, is also a director of Metchem. On January 27,
1995, the Sale Agreement was duly approved by the PRC government
authorities. However, due to the change in the investment plans of Metchem,
Metchem decided to delay its investment in Yangzhou Tongyang and the sale
of TYC's interest in Yangzhou Tongyang has, therefore, not yet been
completed. Management is still in the process of negotiating with Metchem
regarding the consummation of the sale.
Subsequent to the balance sheet date, TYC increased its shareholding in
Yangzhou Tonglee Reefer Containers Co. Ltd ("Yangzhou Tonglee") from 50% to
51% for a consideration of US$80.
Yangzhou Tonglee's financial information is summarized as follows:
Year ended December 31
1994 1995
US$ US$
Balance sheet as at December 31:
Current assets 4,516 8,530
Long term assets 5,659 10,496
------ -------
Total assets 10,175 19,026
====== =======
Current liabilities 2,531 12,311
Long term liabilities - 481
Equity 7,644 6,234
------ -------
Total liabilities and equity 10,175 19,026
====== =======
Statement of income for the year ended
December 31:
Net sales 1,098
Cost of sales - ( 2,090)
------ -------
Gross loss - ( 992)
Selling, general administrative - ( 1,136)
and
financial expenses
Other income - 5
------ -------
Net loss for the year - ( 2,123)
====== =======
F-21
<PAGE>
14. BANK LOANS AND OVERDRAFTS
The Company's bank loans and overdrafts comprise:
<TABLE>
<CAPTION>
Weighted
average
interest rates Year ended December 31
----------------------
1994 1995
US$ US$
<S> <C> <C> <C>
Short term bank loans and overdrafts:
Denominated in US$ Floating - 25,147 46,990
(note (i))
Denominated in RMB Floating - - 1,185
(note (ii)) ------ ------
25,147 48,175
====== ======
</TABLE>
Notes:
(i) 8.375% and 8.49% at December 31, 1994 and 1995, respectively.
(ii) 13.18% at December 31, 1995.
A bank has granted to TYC a US$44,000 and a RMB10,000 (US$1,202) short term
bank loan and overdraft facility which are renewable in 1996. In this
facility, the bank has guaranteed the renewal of short term borrowings for
a period of five years expiring in 2000 for an amount not less than
US$26,000. TYC has also negotiated as required with the same bank for
certain short term overdraft facilities to accommodate its additional
financing requirements in excess of the foregoing facilities.
The bank loans to the extent of US$26,000 (1994: US$25,147) are
collateralized by a floating charge over all of TYC's inventories and fixed
assets and to the extent of US$19,202 (1994: Nil) are guaranteed by TYG.
15. SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL
As of May 10, 1995, after giving effect to the Reverse Acquisition set out
in note 1 to the consolidated financial statements, there were an aggregate
of 25,000,273 shares of China Container's common stock, par value US$0.001
per share, issued and outstanding.
These consolidated financial statements were prepared as if China Container
had been in existence throughout the years. Accordingly, paid-up share
capital of 25,000,273 shares
F-22
<PAGE>
of China Container's common stock, par value US$0.001 per share, is
reflected in the consolidated balance sheet as at the respective year ends.
On May 10, 1995, the Board of Directors of China Container approved an
Action by Written Consent to amend the Company's Article of Incorporation
to authorize 5,000,000 shares of preferred stock, of par value US$0.01 per
share. The shares of preferred stock may be issued in one or more series at
the discretion of the Board of Directors. In establishing a series the
Board of Directors shall give to it a distinctive designation so as to
distinguish it from the shares of all others series and classes, shall fix
the number of shares in such series, and the preferences, rights and
restrictions thereof.
Additional paid-in capital represents a transfer of US$1,581 from retained
earnings in the year 1993, and the notional difference between the paid-up
share capital of China Container over 80% of TYC's paid-in capital and
capital reserves, and the nominal value of the Company's shares exchanged
under the Reverse Acquisition and Reorganization set out in note 1 to the
consolidated financial statements.
16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year ended December 31
--------------------------
1993 1994 1995
US$ US$ US$
Cash paid during the year for:
Interest paid 686 2,305 3,076
Income tax 230 767 1,350
==== ===== =====
17. COMMITMENTS AND CONTINGENCIES
As at December 31, 1995, the Group had the following capital commitments
and contingencies:
(i) According to the laws of the PRC, title to all land is retained by the
PRC. TYC's premises, which were either contributed by its joint-
venture parties in exchange for an interest in TYC or purchased by TYC
during the period from 1989 to 1995, are situated in Yangzhou, Jiangsu
Province. Management is in negotiation with the Provincial Land
Administration Bureau of Jiangsu Province (the "Land Bureau") for the
issuance of land use rights certificates for the above sites to TYC.
Management is of the opinion that upon obtaining a formal land use
rights certificate for such sites, a land use rights premium may be
levied on TYC. Management is, however, unable to quantify the amount
of the premium which may be levied on TYC in the absence of similar
statistics in the area.
F-23
<PAGE>
It is the Group's policy to capitalize the aforesaid land use rights
premiums on the balance sheet of the Group as intangible assets and
to amortize them over the terms of the remaining joint venture
tenure of TYC.
(ii) The Group had capital commitments for the acquisition of a right to
use a site, plant and machinery of US$4,544.
(iii) As of December 31, 1995, TYC has given guarantees to the extent of
US$8,281 (1994 : Nil) in favor of banks in connection with specific
bank loans granted to one of its associated companies, Yangzhou
Tonglee Reefer Containers Co. Ltd.
18. FOREIGN CURRENCY EXCHANGE
The Renminbi ("RMB") is not freely convertible into foreign currencies.
Prior to January 1, 1994, all foreign exchange transactions involving RMB
were required to take place either through the Bank of China or other banks
authorized to buy and sell foreign currencies, or at approved Foreign
Exchange Adjustment Centers ("Swap Centers"). The Swap Centers are
institutions which belong to the State Administration of Exchange Control
and its branches. The exchange rates used for transactions through the Bank
of China and other authorized banks ("Official Rates") are set by the State
Administration for Exchange Control whereas the exchange rates available at
a Swap Center ("Swap Center Rates") were determined largely by supply and
demand based on foreign currency and RMB requirements of enterprises
operating in or doing business in the PRC. Foreign currency payments were
subject to the availability of foreign currency which was provided by
export sales or allocated to TYC by the State or was arranged through one
of the Swap Centers with government approval.
On January 1, 1994, the PRC government abolished the dual rate system and
introduced a single rate of exchange as quoted daily by the People's Bank
of China (the "Unified Exchange Rate"). The Unified Exchange Rate is
quoted at levels similar to those quoted by the Swap Centers. However, the
unification of the exchange rates does not imply convertibility of RMB into
United States dollars or other foreign currencies. All foreign exchange
transactions continue to take place either through the Bank of China or
other banks authorized to buy and sell foreign currencies at the exchange
rates quoted by the Bank of China. Approval of foreign currency payments
by the Bank of China or other institutions requires submitting a payment
application form together with suppliers' invoices, shipping documents and
signed contracts.
F-24
<PAGE>
The Official Rates and Swap Center Rates quoted by the Swap Center in
Shanghai as of December 31, 1993 and the Unified Exchange Rate at December
31, 1994 and 1995 were as follows:
Year ended December 31
----------------------
1993 1994 1995
RMB RMB RMB
RMB equivalent of US$1.00:
Official Rates 5.80 N/A N/A
Swap Center Rates 8.70 N/A N/A
Unified Exchange Rate N/A 8.45 8.32
==== ==== ====
19. RETIREMENT PLAN
As stipulated by the regulations of the PRC government, TYC is required to
make an annual contribution equivalent to 23% of the annual base salaries
of its PRC employees to an insurance company, which is responsible for
providing pension benefits to TYC's PRC employees. All staff are entitled
to an annual pension equal to the twelve-month average base salary
immediately prior to their retirement date.
The pension costs charged to the consolidated statements of income amounted
to US$258, US$369 and US$564 for each of the years ended December 31, 1993,
1994 and 1995, respectively.
20. CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject the Group to a
concentration of credit risk principally consist of cash deposits and
accounts receivable.
The group places its cash deposits with various PRC state-owned banks.
Accounts receivable comprise primarily TYC's trade receivables with
customers who are mainly reputable international shipping and leasing
companies. TYC periodically performs credit analysis and monitors the
financial condition of its customers and generally collateral is not
required.
As of December 31, 1995, accounts receivable from customers totalled
US$7,641 (1994: US$1,424), and are generally due within 30 days to 45 days.
No allowance for doubtful account was considered necessary.
F-25
<PAGE>
21. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Group's operating assets and primary source of income and cash flow are
its interests in its subsidiaries in the PRC. The value of the Group's
interests in these subsidiaries 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 17
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 conditions. There is also no guarantee that
the PRC government's pursuit of economic reforms will be consistent or
effective.
Currently, a large proportion of the group's revenue come from the sales of
containers manufactured in the PRC, which is vulnerable to an increase in
the level of competition or a change in the supply and demand relationship
in the container industry in the PRC and internationally.
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Group's cash and cash equivalents approximate
their fair value because of the short maturity of those instruments.
The carrying amounts of bank loans and overdrafts approximate their fair
value based on the borrowing rates currently available for bank loans and
overdrafts with similar terms and average maturity.
23. DISTRIBUTION OF PROFIT
Pursuant to the relevant laws and regulations for Sino-foreign joint
venture companies, earnings of TYC are determined in accordance with the
relevant PRC accounting rules and regulations and are available for
distribution to each of their joint venture partners after TYC (1)
satisfies all tax liabilities; (2) provides for losses in previous years;
and (3) makes appropriations to reserve accounts, in aggregate, at 15% of
profit after taxation. These reserve accounts comprise general reserve,
enterprise expansion reserve and staff bonus and welfare reserve and the
amount of the allocation to the respective reserve accounts is determined
at the sole discretion of the board of directors.
The appropriations to general reserve and enterprise expansion reserve
attributable to China Container totalling US$5,879 are reflected as
reserves in the consolidated balance sheet as at December 31, 1995. Such
amounts are non-distributable except for an amount of US$3,389 included in
the 1995 balance, being voluntarily appropriated into the enterprise
expansion reserve during 1994 and 1995 which is in addition to the
statutorily
F-26
<PAGE>
required appropriation. This amount is distributable upon approval by the
board of directors of TYC.
Staff bonus and welfare benefits are amounts set aside for the provision of
bonus and welfare benefits to the employees of TYC. In accordance with US
GAAP, the amounts designated for payments of staff bonus and welfare
benefits to employees have been charged to income before arriving at net
consolidated income and the remaining balance is reflected as current
liabilities in the consolidated balance sheet.
The retained earnings balances in these financial statements reflect China
Container's share of TYC's retained earnings, including interests in
associated companies, prepared under US GAAP. In addition to the
distributable reserve of US$3,389 as at December 31, 1995, the amount of
distributable retained earnings under the PRC regulations as at December
31, 1994 and 1995 are US$1,263 and US$1,422, respectively.
24. SEGMENT FINANCIAL INFORMATION
The Group is principally engaged in the manufacture and export of
international standard commercial freight containers. An analysis of sales
by geographic region of the destination of sales and by major customers for
the respective years is as follows:
Year ended December 31
----------------------
1993 1994 1995
US$ US$ US$
By geographic region of destination of
sales:
United States of America 42,573 57,597 65,933
Denmark 8,535 7,719 2,339
United Kingdom 2,822 7,310 -
Hong Kong 2,651 1,877 20,178
Others 4,379 5,268 815
------ ------ ------
60,960 79,771 89,265
====== ====== ======
By major customer:
A P Moller 8,535 7,719 2,339
Interpool Limited 5,603 12,255 12,407
Orient Overseas Container Line Ltd - - 19,684
P & O 2,822 7,310 -
Textainer Capital Corporation 17,752 12,832 14,480
Transamerica Leasing Inc 9,857 19,805 17,655
Triton Container International 9,360 12,704 19,463
Limited
Others 7,031 7,146 3,237
------ ------ ------
60,960 79,771 89,265
====== ====== ======
F-27
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
2* Stock Purchase Agreement, dated May 10,
1995, among Dial-A-Brand, Inc., China
Container Holdings Limited and all of
the Shareholders of China Container
Holdings Limited.
3(1) * Articles of Incorporation of
Registrant, filed August 8, 1985.
3(2) * Articles of Amendment to the Articles
of Incorporation of Registrant, filed
April 16, 1986 (changed name to
Dial-A-Brand).
3(3)* Articles of Amendment to the Articles
of Incorporation of Registrant, filed
May 15, 1995 (changed name to China
Container Holdings Limited and
authorized issuance of preferred stock).
3(4)* By-Laws of Registrant.
3(5) +* Joint Venture Contract of Yangzhou
Tongyun Container Company Ltd., as
amended.
3(6) +* Articles of Association of Yangzhou
Tongyun Container Company Ltd., as
amended.
3(7) +* Joint Venture Contract of Yangzhou
Tongsheng Container Co. Ltd., as
amended.
3(8) +* Articles of Association of Yangzhou
Tongsheng Container Co. Ltd., as
amended.
3(9)+* Joint Venture Contract of Yangzhou
Tonglee Reefer Container Company Ltd.
3(10)+* Articles of Association of Yangzhou
Tonglee Reefer Container Company Ltd.
10(1)* Sales Agreement, dated March 27,1996,
between Yangzhou Tongyun Container
Company Ltd. and Container Trade and
Service, Ltd
i
<PAGE>
Exhibit No. Description Page No.
- ----------- ----------- --------
10(2)+* Employment Agreement, dated January 1,
1996, between Yangzhou Tongyun
Container Company Ltd. and Mr. Cheung
Sau Yung.
10(3)+* Service Agreement, dated April 1995,
between Yangzhou Tongyun Container
Company Ltd. and Jiangsu Tongyun Group
Trading Company.
10(4)+* Service Agreement, dated June 1996,
between Yangzhou Tongsheng Container
Co. Ltd. and Jiangsu Tongyun Group
Trading Company.
21* Subsidiaries of Registrant.
- ---------------
* Previously filed.
+ English translation of Chinese language document.
ii
