<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITY
EXCHANGE ACT OF 1934
For the transition period from ------------------ to ------------------
Commission file number 00028358
--------
CHINA CONTAINER HOLDINGS LIMITED
(Exact Name of Registrant as Specified in Its Charter)
Nevada 11-2243727
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
61, East Garden Road, Yangzhou, Jiangsu, China 225003
(Address of principal executive offices)
Registrant's Telephone Number, Including area code, (011) 86-514-7222871
Securities registered pursuant to Section 12 (b) of the Act:
None.
Securities registered pursuant to Section 12 (g) of the Act:
Common stock, $0.001 Par Value
Indicate by check mark whether the registrant: (1) has filed all
reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days Yes No X .
------- --------
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of
the registrant, based upon the closing sale price of common stock on March 9,
1999, as quoted on the OTC Bulletin Board of the National Association of
Securities Dealers, Inc., was approximately $98,630.
As of March 9, 1999, there were 25,000,273 shares of the registrant's
common stock outstanding.
2
<PAGE>
ITEM 1. BUSINESS
All statements contained herein, as well as statements made in press releases
and oral statements that may be made by China Container Holdings Limited
("Holdings") or by officers, directors or employees of Holdings acting on its
behalf, that are not statements of historical fact constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that could cause the actual results of Holdings
to be materially different from historical results or from any future results
expressed or implied by such forward-looking statements. Among the factors that
could cause actual results to differ materially are the following: the
unavailability of sufficient capital on satisfactory terms to finance Holdings's
business plan; increased competition from other ISO and reefer containers
manufacturers; the introduction of new technologies and competitors into the ISO
and reefer containers manufacturer business; the outcome of any litigation in
which Holdings may be involved; general business and economic conditions; and
other risk factors described from time to time in Holdings's reports filed with
the Securities and Exchange Commission ("SEC"). In addition to statements that
explicitly describe such risks and uncertainties, readers are urged to consider
statements that include the terms "believes," "belief," "expects," "plans,"
"anticipates," "intends" or the like to be uncertain and forward-looking. All
cautionary statements made herein should be read as being applicable to all
forward-looking statements wherever they appear. In this connection, investors
should consider the risks described herein.
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
both Yangzhou Tongsheng Container Co. Ltd. ("Tongsheng") and Yingkou Tongyun
Container Company Limited ("Yingkou"). Both Tongsheng and Yingkou are a
Sino-foreign equity joint venture companies. TY Container owns 51% of the
registered capital of Yangshou Tonglee Reefer Containers Company Limited
("Tonglee"), a Sino-foreign equity joint venture company, that manufactures and
sells integrated standard refrigerated containers ("reefer containers"). See
"Sino-Foreign Equity Joint Venture Enterprises in General," below, for more
detailed information.
References herein to the "Company" are to Holdings and its direct and
indirect subsidiaries, collectively.
In addition to TY Container, Tonglee and Tongsheng, Holdings
indirectly, through TY Container, has 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.
3
<PAGE>
Historically, the Company has maintained its books of account in
Renminbi ("RMB"), the national currency of the People's Republic of China (the
"PRC"). The Company believed that it would be easier for current and potential
investors to understand the Company's financial statements if the United States
dollar was used as the Company's currency for financial statement presentations,
despite the Company's use of RMB as its functional currency. Accordingly, the
Company's Consolidated Financial Statements were stated in United States dollars
("US$") through the translation of all balance sheet data from RMB to US$ using
the exchange rates in effect at December 31 of the applicable balance sheet
date. All income statement amounts were translated using the average exchange
rate for the applicable year. Prior to January 1, 1994, the PRC maintained a
dual exchange rate system that 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
People's Bank of China on or after January 1, 1994.
The following table sets forth the RMB/US$ conversion rates which were
used for currency translations provided herein:
Year RMB Equivalent of US$1
- ---- --------------------------
As at 12/31 Average Rate
----------- ------------
1993 8.70 8.70
1994 8.45 8.62
1995 8.32 8.35
1996 8.30 8.31
1997 8.30 8.30
In 1998, the Company began the process of restating its prior financial
statements for the fiscal years 1993 through 1996 to reflect the use of the US$
as the Company's functional currency. Additionally, the Company has begun to
restate its books of account using the US$ as its functional currency.
As of December 31, 1997, 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 PRC. TYG owns equity interests, directly or indirectly, in 13 enterprises,
including TY Container, all of which are located in Jiangsu Province, except for
Jiangyong Auto, Ltd., which is located in Hong Kong. TY Container's main
facilities are located in Yangzhou City. See Item 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS," below, which is incorporated in this Item 1 by reference.
4
<PAGE>
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 TY Container and Yingkou; TY
Container owns 25% of Beihai, 51% of Tonglee, 35.51% of Tongda, 44% of Tongyang
Machinery and 25% of Universal.]
OPERATING SUBSIDIARIES
DESCRIPTION OF TY CONTAINER, TONGSHENG AND TONGLEE
TY Container was established as a Sino-foreign equity joint venture company in
the PRC on March 27, 1989. Tonglee and Tongsheng were established as
Sino-foreign equity joint venture companies in the PRC on December 31, 1993 and
in December 1995, respectively. TY Container, like Tongsheng, produces ISO dry
containers and Tonglee produces reefer containers. Tonglee's facilities are
located adjacent to TY Container's main production facility. Tonglee and
Tongsheng are both managed by TY Container's current management and share some
common facilities, such as a container yard and office space, with TY Container.
All of Tongsheng's and Tonglee's production are marketed by TY Container. TY
Container holds a 51% interest in Tonglee. The remaining 49% interest is held by
Jiangsu Tongyun Group Company (19%), Singapore Namlee Steel (Private) Limited
(25%) and Jiang Lin Wei Agricultural Industrial Commercial Company (5%). 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% 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 (with a 40,000 twenty-foot equivalent unit ("TEU") annual
capacity) for TY Container. (TY Container, Tongsheng and Tonglee collectively,
are hereinafter sometimes referred to as "TY Container Group") TY Container
Group is primarily engaged in the manufacture in the PRC of ISO dry containers
and reefer containers for export and sale outside the PRC. In 1997, TY Container
Group produced a total of 52,597 TEU.
<TABLE>
<CAPTION>
TY CONTAINER GROUP HISTORICAL CONTAINER PRODUCTION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ----
TEU 1,712 14,749 26,846 31,112 33,745 34,307 32,446 52,597
</TABLE>
TY CONTAINER
- ------------
Principal Products
------------------
TY Container Group 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).
In addition, TY Container Group 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
5
<PAGE>
steel or Corton steel. Containers produced by TY Container Group 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 Kingdom, and ZC
of China. TY Container Group's manufacturing facilities have qualified for
ISO-9002 certification.
Sources and Availability of Raw Materials and Components
--------------------------------------------------------
The raw materials required for the production of dry commercial freight
containers include steel, plywood, paint, and sealants. In 1997, approximately
40%, by cost, of TY Container Group's raw materials and components were
imported and paid for by TY Container Group in U.S. dollars; the remaining 60%
were purchased in PRC domestic transactions, with 35% paid for in U.S. Dollars
and the remainder paid for in RMB. In order to take advantage of economies of
scale, TY Container Group 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 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS").
In 1997, TY Container Group purchased steel from South Korea, Japan and
domestically (within the PRC). TY Container Group generally maintains an
inventory of steel sufficient for four months production. Paint was obtained
from sources in South Korea and domestically. Plywood was obtained from sources
in Indonesia. Weather resistant sealant was obtained domestically, including
from Wuxi Tongfa Economic & Technical Development Company Ltd., a company in
which TY Container Group holds a 10% equity interest. TY Container Group also
purchased container components from suppliers in South Korea as well as
domestically. TY Container Group purchased some of those components from
companies in which TY Container Group 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." Purchases from
affiliated companies are at prices and on other terms and conditions at least as
favorable, and generally significantly more favorable, to TY Container Group
than it would receive from unaffiliated companies. Sealant is ordered as needed
upon receipt of firm customer orders. TY Container Group typically maintains a
two-month supply of plywood and paint. All other container components are
purchased on an as needed basis, with next day delivery generally available.
TY Container Group 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
Group'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
---------------------------
Demand for commercial freight containers is seasonal, with 21.3%,
30.4%, 23.7% and 24.6% of TY Container Group's sales in 1997 occurring in the
first, second, third and fourth quarters, respectively. In past years, in order
to reduce the effects of seasonal fluctuations in demand and to avoid lost sales
resulting from inadequate inventory, a portion of TY Container Group's annual
production was 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
6
<PAGE>
for the following quarters, and provide for TY Container Group'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 ten days prior to delivery. Payment is
usually made within 30 days of delivery. While TY Container Group has found
stock orders to be an accurate measure of future demand, TY Container Group did
not accept stock orders during 1997.
Markets
-------
TY Container Group's main facilities are located in Yangzhou City,
which is in the lower reaches of the Yangtze River, in Jiangsu Province, China.
In 1997, approximately 60% of TY Container Group's production was shipped to
nearby ports in the Yangtze River Delta (e.g. Shanghai, Nanjing, Zhenjiang,
Ningbo, Zhangjiagang, Yangzhou and Lianyungang) for delivery to customers;
approximately 20% of TY Container Group's production was delivered to nearby
railway stations for delivery to the PRC Railway Ministry; 11% of TY Container
Group's production was delivered to other ports in China (other than Hong Kong);
1% of TY Container Group's production was delivered to Taiwan; and 8% of TY
Container's production was delivered to Hong Kong. The Hong Kong deliveries were
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.
In 1997, TY Container Group did not have any long term sales contracts
with its customers. All of its sales were based upon purchase orders, typically
received approximately 6 to 8 weeks prior to the desired delivery date.
TY Container Group markets its products both directly, through the
efforts of its executives and employees, and indirectly, through independent
sales agents. TY Container Group currently has nonexclusive sales representative
agreements with Container Trade and Services, Ltd. ("CTS"). While the agreements
do not limit CTS to a particular geographic area, in practice CTS has originated
sales primarily from customers in North America. In 1997, CTS was responsible
for the sale of approximately 25% of TY Container Group's total production.
Pursuant to certain agreements with TY Container Group, TYG Trading Co.
provides certain support services to TY Container Group, including the purchase
of raw materials (see "Sources and Availability of Raw Materials and
Components", 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 agreements provide for the payment by TY Container Group 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 Group's sales. In 1997, TY
Container Group paid TY Trading Co. sales commissions equal to US$200,000. TY
Container Group believes that its agreements with TYG Trading Co., which enable
it to take advantage of certain economies of scale, have resulted in significant
savings to TY Container Group.
7
<PAGE>
Competition
-----------
There are more than forty container manufacturers in China, some of
which are larger and better capitalized than TY Container Group. However, due to
the relatively high cost of shipping an empty container, TY Container Group
competes primarily with container manufacturers located in the Yangtze River
Delta. To a lesser extent, TY Container Group 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 Group 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 that 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, however,
enforcement of these regulations has not been uniform throughout the PRC.
TY Container Group competes with other container manufacturers on the
basis of price, quality, service and warranty. When necessary, TY Container
Group 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 enabled TY Container Group to sell its containers at the
prevailing market price. TY Container and Tongsheng are two of only six
Chinese container manufacturers to qualify for ISO-9002 certification. TY
Container Group 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 in 1996
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
Group has also assisted customers in obtaining financing, from unrelated third
parties, for their container purchases. TY Container Group'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 Group with the financial ability to offer programs such as "stock
orders" to its customers. In addition, the high quality of TY Container Group's
products permits it to provide an attractive warranty to its customers.
Typically, TY Container Group provides a 12 to 24 month 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 Group, based on the type and extent of the defect.
Backlog
-------
TY Container had no backlog orders believed to be firm as of either
December 31, 1997 or December 31, 1998.
8
<PAGE>
Employees
---------
As of December 31, 1997, TY Container employed approximately 1,396
people, 87 of whom were management personnel, 95 were technical personnel, 7
were administrative personnel, 73 were security and auxiliary personnel and
approximately 1,134 (including two shifts) production workers and supervisors.
The number of management, technical and administrative personnel in 1997
represent significant increases over 1996, this is in large part due to
increased operations at Tongsheng, as well as a Company-wide restructuring of
management and operations.
TONGLEE
- -------
Tonglee was established as a Sino-foreign equity joint venture company
in the PRC on December 31, 1993. Tonglee is located near the Biangang Port, in
the lower portion of the Yangtze River. Tonglee operates a manufacturing
facility that 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. Tonglee's
manufacturing facility, which came on line in May 1995, was designed to produce
4,000 TEU of reefer containers annually and produced 2,368 TEU of reefer
containers in 1997. TY Container holds a 51% interest in Tonglee, giving
Holdings a 40.8% indirect interest in the company. TYG holds a 19% interest in
the company (see Item 1. "General," and Item 13. "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS"), Liuwei Village Municipal Authority has a 5% interest,
and Singapore Nanlee holds the remaining 25% of the company.
Principal Products
------------------
Tonglee produces ISO refrigerated containers of the following
dimensions: 20'x 8'x 8'6", 40'x 8'x 8'6" and 40'x 8'x 9'6" (High Cube). The
containers feature either a riveted alloy side rail structure or a welded steel
side rail structure. Containers produced by Tonglee 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. Tonglee's
manufacturing facilities have qualified for ISO-9002 certification.
Sources and Availability of Raw Materials and Components
--------------------------------------------------------
The raw materials required for the production of reefers include steel
plate, aluminum plate, aluminum frame, foam insulation and refrigeration units.
In 1997, approximately 85%, by cost, of Tonglee's raw materials and components
were imported and paid for by Tonglee in U.S. dollars; of the remaining 15%, all
were purchased in PRC domestic transactions and paid for in RMB. In 1997,
Tonglee purchased steel plate from Japan and domestically. Aluminum plate and
frame were purchased from domestic sources. Foam insulation was obtained from
sources in Germany and Britain, and refrigeration units were obtained from the
United States and Japan. Components were obtained domestically, including from
Yangzhou Tongda Forging Ltd., in which TY Container owns a 35.57% interest, as
described below in "TY Container Affiliated Companies." Tonglee generally
maintains an inventory of steel and aluminum plate and
9
<PAGE>
aluminum frame sufficient to manufacture approximately 400 units. Refrigeration
units are ordered as needed upon receipt of firm customer orders. Foam
insulation and all other container components are purchased on an as needed
basis, with next day delivery generally available.
Tonglee 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 Tonglee'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
---------------------------
Demand for reefers is seasonal in nature and fluctuated in 1997, with
25%, 38%, 8% and 29% of Tonglee's sales occurring in the first, second, third
and fourth quarters.
Markets
-------
Tonglee's main facilities are located near the Biangang Port, in the
lower portion of the Yangtze River, in Jiangsu Province, China. In 1997, all of
Tonglee's production was shipped to nearby ports in the Yangtze River Delta
(e.g., Shanghai and Ningbo) for delivery to customers.
In 1997, Tonglee marketed its products primarily through TYG Trading
Co. There has been no formal agreement between Tonglee and TYG Trading Co. and
TYG Trading Co. has received no compensation for its services. Holdings
management believes that TYG Trading Co. will be compensated for future services
once Tonglee becomes profitable. Tonglee does not have long term sales contracts
with its customers. All of its sales are based upon purchase orders, typically
received at least 90 days prior to the desired delivery date.
Competition
-----------
Tonglee competes primarily with the four other reefer manufacturers
located in China, all of which are larger and better capitalized than Tonglee.
Tonglee competes with other container manufacturers primarily on the basis of
quality.
Modernization
-------------
Tonglee continued its modernization program by adding a new welding
line in 1997. The new welding line, which is still under construction, will
provide Tonglee with the capability to mass-produce stainless steel welded
reefers. Tonglee's management estimates that the new welding line will cost
approximately US$1 million and has been funded from the proceeds of a loan from
the Bank of China.
Backlog
-------
Tonglee had no backlog orders believed to be firm as of either December
31, 1997 or December 31, 1998.
10
<PAGE>
Employees
---------
As of December 31, 1997, Tonglee employed approximately 402 people,
67 of whom were management personnel, 58 were technical and administrative
personnel, 54 were security and auxiliary personnel and approximately 223
(including two shifts) were production workers and supervisors. The number of
management personnel employed in 1997 represents a significant increase over
1996, this is the result of Tonglee's compliance with domestic regulations which
set minimum levels of management personnel.
COMPANY SALES
During the past three years, the Company's consolidated sales by
geographic region of destination and by major customers are as follows:
Year ended December 31
---------------------------------------
1995 1996 1997
US$'000 US$'000 US$'000
By geographic region of destination of sales:
United States of America 62,998 28,814 38,458
Denmark 2,339 -- --
Hong Kong 14,125 50,848 46,641
People's Republic of China -- 14,512 24,586
Germany -- -- 12,576
Others 815 3,271 1,244
-------- -------- -------
80,277 97,445 123,505
======== ======== =======
By major customer:
A.P. Moller 2,339 -- --
Capital Leasing GMBH -- -- 12,158
China Railway Container
Transportation Center -- 14,512 20,114
Gateway Container International
Limited -- -- 13,047
Interpool Limited 12,407 2,147 2,827
Orient Overseas Container Line
Ltd. 13,632 19,999 38,824
South China WI Limited -- -- 3,329
Textainer Capital Corporation 14,380 8,310 4,472
Transamerica Leasing Inc. 16,924 5,667 10,632
Triton Container International
Limited 18,123 9,768 7,480
Wide Shine Development Limited 959 28,899 4,817
Others 1,513 8,143 5,805
-------- ------- -------
80,277 97,445 123,505
======== ======= =======
11
<PAGE>
TY CONTAINER AFFILIATED COMPANIES
----------------------------------
The Company reports its share in the earnings and losses of investments
in which it does not control but exerts significant influence, generally
investments in which it owns a greater than 20% interest (but not more than 50%)
on the equity method of accounting. In 1997, the net losses attributable to
affiliates was US$610,000, 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 manufacturing facility which was designed to produce 12,000
TEU annually of international standard commercial freight containers primarily
for export and sale outside the PRC. Beihai Container's manufacturing facility
came on line in May 1995 and produced approximately 8,000 TEU in 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.
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. In 1997, approximately 66% of
Tongda's production was sold to TY Container Group and 3% of its production was
sold to Tonglee, which accounted for nearly 78% of TY Container Group's and 100%
of Tonglee's requirements, respectively, 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.
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
second largest shopping center in Yangzhou City. 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.
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. TY Container holds a
44% interest in Tongyang Machinery, giving Holdings a 35.2% indirect interest in
the company. The remaining
12
<PAGE>
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%).
SINO-FOREIGN EQUITY JOINT VENTURE ENTERPRISES IN GENERAL
LEGAL FRAMEWORK
Each of TY Container, Tongsheng, Yingkou, and Tonglee (the "PRC
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 (e.g.,
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.
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
13
<PAGE>
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 PRC Subsidiaries and that it will be
able to reach agreement with them on business policies and decisions for the PRC
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 PRC 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) and (y) increases in those companies' earnings invested
in certain U.S. property. Based on the current and expected income, assets and
operations of CCHL-BVI and the PRC 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, Yingkou and Tongsheng, and (z) the stock ownership percentage
described in (x), when multiplied with the stock ownership percentage described
in (y) with respect to either TY Container, Yingkou or Tongsheng, equals or
exceeds 5 percent, subject to certain limitations, CCHL-BVI will be deemed to
have paid a proportionate amount of the PRC income taxes of TY Container,
Yingkou or Tongsheng, as the case may be, when a dividend is distributed from TY
Container, Yingkou 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, Yingkou 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.
ENVIRONMENTAL COMPLIANCE
The PRC 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
14
<PAGE>
Company believes that all manufacturing and other operations of the PRC
Subsidiaries are in compliance with all applicable laws relating to air, water
and noise pollution.
ITEM 2. 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. After the
expiration of a land use right, the Company may apply to the granting government
entity for a renewal or extension thereof.
The Company's main facilities are located in the City of Yangzhou,
Jiangsu Province, and are occupied under land use rights of 15 years, with six
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
Tonglee. TY Container's production facilities have an annual capacity of
approximately 40,000 TEU.
Tongsheng's plant is located in Yangzhou City, adjacent to TY
Container's main facilities, and is occupied under land use rights of 15 years,
with 11 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.
Tonglee's facilities, located near the port of Yangzhou, are occupied
under land use rights of 15 years, with 11 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. Tonglee's production facilities
have an annual capacity of approximately 10,000 TEU. Those facilities are
currently operating at approximately 55% of capacity.
The Company occupied a small amount of office space in New York City
for administrative purposes until October 1998, when the Company closed the New
York office.
The land use rights covering the majority of the site on which TYC'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 13 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS") in
exchange for a portion of its interest in TYC; the remainder of such rights were
purchased from the same company, which received its land use rights through
allocation by the PRC. TYC'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 TYC.
The land use rights for Tonglee's facilities were contributed by Liuwei
Village Municipal Authority in exchange for its 15% interest in the company, and
Tonglee' management is in negotiation with the Land Bureau for the issue of the
land use certificates for the above sites for Tonglee. The land use
rights for TYC's facilities were purchased from Semi-Trailer and Jiangyang
Automobile Company. The Company submitted applications for formal land use
15
<PAGE>
rights certificates relating to Tongsheng's facilities in 1996 and received such
certificates in 1997.
ITEM 3. LEGAL PROCEEDINGS
Waldman, et al. v. Cheung Sau Yung, et al., Index No. 603544/97, Sup. Ct.,
- -----------------------------------------
N.Y. Co.
On or about August 6, 1997, plaintiffs Barbara Waldman and Rachelle
Preiserowicz, derivatively on behalf of Holdings and individually and on behalf
of shareholders similarly situated, served a complaint on Holdings (as a nominal
defendant) and its Secretary and Treasurer Ma Tieyi as an individual defendant.
In October 1997, the plaintiffs attempted to serve a complaint on each of Cheung
Sau Yung (the President, Chief Executive Officer, Chairman of the Board, and a
director of Holdings); and Liu Jingxin and Sung Hiu Ngan (both directors of
Holdings). An additional defendant in the suit (which has not been served) is
Sinocity Group Limited ("Sinocity"), Holdings' majority shareholder.
The suit is pending in the Supreme Court of the State of New York,
County of New York, and the complaint, as amended, contains six causes of
action. The first cause of action (which purports to be a derivative suit) seeks
an injunction against the director defendants to require filings of certain
reports on Forms 10Q and 10K with the Securities and Exchange Commission. Such
filings were made on or around November 7, 1998. The second cause of action
(which also purports to be a derivative suit) seeks in excess of $500,000 in
damages from the individual defendants for breach of fiduciary duty for failure
to file such reports. The third cause of action seeks in excess of $1 million in
damages from defendants Cheung Sau Yung and Sinocity for breaches of fiduciary
duty against Holdings' minority shareholders for failure to file such reports.
The fourth cause of action seeks in excess of $1 million in damages from the
individual defendants and Holdings for aiding and abetting Sinocity's alleged
breaches of fiduciary duty against Holdings' minority shareholders for failure
to file such reports. The fifth cause of action seeks in excess of $1 million in
damages from the individual defendants for breaches of fiduciary duties against
Holdings' minority shareholders for failure to file such reports. The sixth
cause of action seeks an injunction requiring all defendants to cause Holdings
to hold an annual shareholder meeting and conduct an election for Holdings'
board of directors. Among other things, plaintiffs have also demanded punitive
damages in the amount of $1 million and that the director defendants establish a
special audit committee to ensure Holdings compliance with United States
securities laws.
Holdings moved to dismiss the plaintiffs' fourth and sixth causes of
action, the only claims that are pled directly against the company, for failure
to state a claim. Defendant Ma Tieyi moved to dismiss the plaintiffs' first,
second, fourth, fifth and sixth causes of action, the only claims pled directly
against him, for mootness and failure to state a claim. The director defendants
moved to dismiss the complaint for, among other things, mootness, failure to
state a claim, lack of personal jurisdiction, and improper service of process.
In response to all of these motions, the plaintiffs cross-moved for
jurisdictional discovery, an extension of time to serve defendant Sinocity, and
an award of reasonable attorneys' fees and expenses. On July 15, 1998, Justice
Gammerman granted in part and denied in part each of the motions. Plaintiff has
moved to reargue the motions before Justice Gammerman and filed a notice of
appeal.
16
<PAGE>
Hollander v. Cheung Sau Yung, et al., 98 Civ. 1529 (Martin, D.J.), S.D.N.Y.
- -----------------------------------
On or around March 11, 1998, plaintiff Lawrence Hollander, on behalf of
himself and all others similarly situated (and represented by the same law firm
prosecuting the Waldman action), served a complaint on Holdings and Ma Tieyi.
Cheung Sau Yung, Liu Jingxin, Sung Hiu Ngan, and Sinocity are also defendants in
the action.
The suit is pending in the United States District Court for the
Southern District of New York, and the complaint alleges four causes of action.
The first count seeks an indeterminate amount of damages from the individual
defendants and Holdings for violations of Section 10(b) of the Securities and
Exchange Act (the "Act") and Rule 10(b)(5) promulgated thereunder, attributable
to Holdings' alleged misleading statements and failure to disclose adverse
financial information about the company in a press release. The second count
seeks an indeterminate amount of damages from the individual defendants and
Sinocity, seeking to hold them liable as controlling persons of Holdings (which
allegedly violated Section 10(b) of the Act and Rule 10(b)(5) promulgated
thereunder) under Section 20(a) of the Act. The third count seeks an
indeterminate amount of damages from the individual defendants and Holdings,
seeking to hold them liable for common law fraud attributable to alleged
misleading statements and failure to disclose adverse financial information
about the company in a press release. The fourth count seeks an indeterminate
amount of damages from the individual defendants and Holdings, seeking to hold
them liable for negligent misrepresentation attributable to alleged misleading
statements and failure to disclose adverse financial information about the
company in a press release. Defendants Holdings and Tieyi have answered the
complaint.
On April 7, 1998, plaintiff moved, among other things, to be appointed
lead plaintiff and for his counsel to be appointed lead counsel in this putative
class action.
Plaintiffs and defendants have reached an agreement in principal to
settle both of the above-described actions for the total cost of no more than
$450,000 and the settlement of each action was to be contingent on the
settlement of the other action. Defendants have advised plaintiffs' counsel that
certain financial statements would be restated and have provided counsel with
the draft restatements. Additional settlement negotiations are ongoing to
incorporate and account for these new developments. If agreement is reached, it
is anticipated that the settlements will be submitted to the respective courts
in which the actions are pending by the end of March. It is impossible, at this
time, to predict with certainty whether final settlements will be reached and
whether the settlements will be approved without objection or whether additional
changes to the settlements will be required.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR 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 1997
------------ --------------------------- ----------------------------
3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q 1st Q 2nd Q 3rd Q 4th Q
----- ----- ----- ----- ----- ------ ----- ----- ----- ------
High 3.625 5.750 4.250 5.000 2.875 2.875 2.75 1.875 .8125 .25
Low 0.125 2.125 1.750 2.375 2.438 2.625 1.125 0.8125 .15625 .09375
As of March 9, 1999, there were approximately 450 record holders of
Holdings' common stock.
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, Yingkou or Tonglee. 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, 1996 or 1997. In
1995, it was decided that it was in the Company's best interests to use the
funds that would otherwise have been available for dividends to finance the
Company's expansion. In 1996 and 1997, there were no funds legally available for
dividends. The Company expects TY Container, Tongsheng, Yingkou and Tonglee 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, Tongsheng,
Yingkou and Tonglee 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)
- -------------------
[1] Such bids represent quotations between dealers, do not include retail
markup, markdown or commission and may not represent actual transactions.
The Compay has obtained this information from sources it believes to be
reliable, but no assurance can be given as to its accuracy.
18
<PAGE>
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.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below with respect the Company's fiscal years
ended December 31, 1993, 1994, 1995, 1996 and 1997 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, 1995,
1996 and 1997 appears in Item 8 of this Annual Report. 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 8 of this Annual Report. 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' then existing liabilities, and was itself acquired by the former
majority shareholder of Holdings. 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 (as defined in Item 13), and gives
effect to the Reorganization and the Stock Swap as if they had been completed
prior to January 1, 1992.
19
<PAGE>
<TABLE>
<CAPTION>
(Amounts in Thousands, except per share data)
Year Ended December 31,
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
Income Statement Data: US$ US$ US$ US$ US$
Net sales...................... 60,960 79,771 80,277 97,445 123,505
Operating income/(loss)........ (5,193) 5,528 (6,293) (3,856) (20,078)
Interest expense, net.......... (883) (1,625) (2,540) (3,528) (4,897)
Foreign exchange gains/
(losses), net............... (5,491) 101 657 (110) 122
Reorganization expense......... - - (1,382) - -
Share of net losses of
Associated Companies........ (25) (90) (1,341) (816) (610)
Income taxes................... (657) (742) (831) (426) (15)
------ ------ ------ ------ ------
Net income (loss) before
minority interests.......... 4,481 5,336 2,527 (5,084) (20,586)
Minority interests............. (1,001) (1,013) (755) 1,945 3,509
------ ------ ------ ------ -------
Net income (loss).............. 3,480 4,323 1,772 (3,139) (17,077)
====== ====== ====== ====== =======
Net income (loss) per share.... 0.17 0.21 0.08 (0.13) (0.68)
====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------
Balance Sheet Data: 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C>
Current assets.............. 29,415 29,312 59,186 72,134 72,637
Fixed assets................ 8,541 8,375 8,003 24,561 23,587
Construction in progress.... - - 5,325 747 2,967
Other assets................ 4,598 7,998 7,937 20,589 35,224
-------- ------- ------- -------- --------
Total assets................ 42,554 45,685 80,451 118,031 134,415
Short-term debt............. 23,305 25,147 48,175 80,758 99,674
Total liabilities........... 32,136 33,128 65,200 104,785 141,755
Minority interests.......... 2,084 3,169 3,167 4,296 787
Total stockholders' equity.. 8,335 9,388 12,084 8,950 (8,127)
Cash dividends declared 0.08 0.16 -- -- --
per share................... ======= ====== ====== ======== ========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
20
<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, 1995, 1996 and
1997. The data should be read in conjunction with the Consolidated Financial
Statements of Holdings and related Notes thereto set forth in Item 8 of this
Form 10-K, and other financial information included elsewhere herein. The
financial statements of Holdings are prepared in conformity with U.S. GAAP.
Year ended December 31,
1995 1996 1997
Sales quantity (TEU) 34,307 32,446 52,597
Sales (US$ million) 80.3 97.5 123.5
Gross margin (US$ million) 12.1 6.7 1.3
Gross profit margin 15.1% 6.8% 1.1%
Selling and administrative
expenses (US$ million) (4.0) (6.6) (6.9)
Financial expenses, net
(US$ million) (1.9) (3.7) (4.8)
Reorganization expenses
(US$ million) (1.4) --- ---
Share of net losses of
associated companies
(US$ million) (1.3) (0.8) (0.6)
Net income/(loss) (US$ million) 1.8 (3.1) (17.1)
In 1997 the Company experienced an overall decrease in the average unit
price of its products of 21.8%. This decrease was due to the intense competition
in the PRC.
The significant decrease in the Company's gross margin in 1997 was
primarily due to:
(a) a significant downturn in the container manufacturing
industry in general and specifically for dry box containers;
(b) a decrease in the average unit sales price of the dry box
containers produced by TY Container by 18% in 1997, which was
due to intense competition in the PRC; and
(c) a decrease in the average unit sales price of reefers produced
by Tonglee by 5% in 1997, which was due to intense competition
in the PRC.
21
<PAGE>
1st Qtr 1997 2nd Qtr 1997 3rd Qtr 1997 4th Qtr 1997
Quantity 11,263 14,876 14,016 12,442
(TEU)
Sales 30,509 38,394 26,609 27,993
(US$'000)
Gross Margin 7.3% 11.3% -3.6% -15.4%
The Company's results of operations for the first and second quarters
are essentially consistent with its performance in the first two quarters of
1996. The primary reasons for the decrease in the gross profit margin from 11.3%
in the second quarter to a negative 3.6% in the third quarter are (i) the
average sales price per TEU dropped while the cost of raw materials and
components remained essentially unchanged, and (ii) the 5.8% decrease in sales
quantity caused by the general downturn in the container industry. The primary
reason for the fourth quarter's gross profit margin of negative 15.4% despite
the 18.5% increase in the average sales price is the continuing decline of the
number of TEU's sold and the increase in the cost of raw materials and
components for TEU's sold. The increase in the cost of raw materials used in the
fourth quarter was due to the diverse specifications made by customers for TEU's
sold.
22
<PAGE>
Year Ended December 31, 1997 Compared to year Ended December 31, 1996
1. Sales increased by 26.7% from US$97.5 million in 1996 to
US$123.5 in 1997, and sales quantity increased by 62% from 32,446 TEU in 1996 to
52,597 TEU in 1997.
2. The gross profit margin decreased from 6.8% on net sales in
1996 to 1.1% in 1997 primarily because of the downturn of the container
manufacturing industry in general, increased competition from local
manufacturers and the reduction in the selling price of both dry box containers
and reefers of 12% and 5%, respectively. However, the overall decrease in gross
margin was partially offset by the increase in gross margin of reefers due to
the reduction of fixed overhead and the reduction of material cost due to
increased purchasing from domestic suppliers.
3. Selling and administrative expenses increased by 5% from
US$6.6 million in 1996 to US$6.9 million in 1997 primarily as a result of
increased commission expenses that were in-line with the increase in sales and
the increase in legal expenses.
4. Financial expenses increased by 29.7% from US$3.7 million
in 1996 to US$4.8 million in 1997, which was primarily due to the increase in
US$ loan balances by US$7.4 million and RMB loan balances by US$11.5 million in
1997. The significant increase in the loan balances was due in part to the
increased working capital requirements of Tonglee and TY Container, particularly
for the production of containers on order by customers, as well as to finance
the construction of new production line and machinery of Tonglee.
5. The Company's share of net losses of associated companies
decreased by 25.2% from US$816,000 in 1996 to US$610,000 in 1997 primarily
because of the improved operating results of Beihai Tonghai containers Co., Ltd.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995:
1. Sales increased by 21.4% from US$80.3 million in 1995 to
US$97.5 million in 1996, and sales quantity decreased by 5.4% from 34,307 TEU in
1995 to 32,446 TEU in 1996. Calendar 1996 reflects the consolidation of the
results of Tonglee, which was acquired as at January 1, 1996. Tonglee's products
have a significantly higher per-unit sales price than the Company's other
containers.
2. The gross profit margin decreased from 15.1% on net sales
in 1995 to 6.8% in 1996 primarily because of a decrease in the average unit
sales price of dry box containers and reefers, respectively, while the overall
cost of raw materials remained unchanged. Over the course of 1996, prices
decreased by approximately 15% and 22% for dry box containers and reefers,
respectively. Although sales quantity was down in 1996, dry box container and
reefer capacity increased by approximately 100% and 250%, respectively, over
1995.
3. Selling and administrative expenses increased by 65% from
US$4.0 million in 1995 to US$6.6 million in 1996 primarily as a result of the
consolidation of the results of Tonglee.
23
<PAGE>
4. Financial expenses increased by 94.7% from US$1.9 million
in 1995 to US$3.7 million in 1996, which was primarily due to the increase in
US$ loan balances by US$31 million and RMB loan balances by US$1.6 million in
1996. The following factors contributed to the significant increase in the loan
balances:
(i) the consolidation of the results of Tonglee and the
additional US$2.75 million spent by Tonglee in
upgrading and modernizing its existing production
lines; and
(ii) an increase in TY Container Group's working capital
requirements as a result of filling the order from
the CRCT, based on eight year payment terms.
5. The Company's share of net losses of associated companies
decreased by 39% from US$1.3 million in 1995 to US$816,000 in 1996 primarily
because the losses incurred by Tonglee were no longer treated as a loss of an
associated company, as they had been in 1995, due to the consolidation of the
results of Tonglee in 1996.
Foreign Exchange
- ----------------
Historically, TY Container's books of account were maintained in RMB,
while the Company's consolidated financial statements were stated in US$.
Currency translations into US$ were made using the applicable rates of exchange
quoted by the Shanghai Foreign Exchange Adjustment Center prior to January 1,
1994 and by the People's Bank of China on or after January 1, 1994. All balance
sheet accounts were translated from RMB to US$ using the exchange rates in
effect at December 31 of the applicable balance sheet date. All income statement
amounts were been translated using the average exchange rate for the applicable
year. The Company has begun to restate its books of account using US$ as its
functional currency.
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 1995, 1996 and 1997.
1995 1996 1997
RMB equivalent of US$1:
At December 31, 8.32 8.30 8.30
High 8.44 8.34 8.30
Low 8.30 8.29 8.28
Average 8.35 8.31 8.30
Net sales in US$'000 80,277 97,445 123,505
Total TEU sold 34,307 32,446 52,597
Sales in US$ per TEU 2,340 3,003 2,348
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 the RMB in 1995 resulted in exchange
gains of US$657,000 primarily in respect of TY Container's net U.S. dollar
liabilities. In 1996, the Company
24
<PAGE>
had a US$119,000 exchange loss, primarily in respect of TY Container Group's net
RMB liabilities. In 1997, the Company had a US$119,000 exchange gain, primarily
as a result of the restatement of the Company's financial statement to use US$
as the functional currency.
As indicated in the above table, the average sales price per TEU
increased by 28% in 1996 and decreased by 21.8% in 1997. The sales volume
decreased by 5.4% in 1996 and increased by 62% in 1997. The increase in the
average sales price per TEU in 1996 is the result of the consolidation of
Tonglee, whose reefer containers have a higher per unit sales price than the
Company's other containers. The decrease in average sales price per TEU in 1997
was primarily because of the downturn of the container manufacturing industry in
general, increased competition from local manufacturers and the reduction in the
selling price of both dry box containers and reefers of 12% and 5%,
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. An increase in the value of the RMB, however, has the
effect of increasing RMB-denominated expenses, including significant raw
material costs and all productive labor costs.
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, 1997 are
accounts receivable, accounts payable and bank loans, which amounted to US$12.7
million, US$26.7 million and US$99.7 million, respectively.
FINANCIAL CONDITION
1. Inventories decreased by 14.5% from US$46.9 million as at December
31, 1996 to US$40.1 million as at December 31, 1997, primarily as a result of
allowances for mark to market of inventories as a result of decreases in the
selling price of containers.
2. Accounts payable increased by 84.9% from US$14.4 million as at
December 31, 1996 to US$26.7 million as at December 31, 1997, primarily as a
result of the increase in production volume in 1997 and the Company's tight cash
flow position.
3. Accrued liabilities and other payables increased by 55% from US$9.0
million as at December 31, 1996 to US$13.9 million as at December 31, 1997,
primarily as a result of the Company's decision to delay paying some expenses,
such as insurance and transportation, due to its tight cash flow position.
4. Cash and cash equivalents increased by 30.3% from US$2.9 million as
at December 31, 1996 to US$3.7 million as at December 31, 1997, primarily as a
result of the increase in receipts in accounts receivable in 1997 and the
increase in bank loan balances used to finance the Company's working capital.
LIQUIDITY AND CAPITAL RESOURCES
The PRC Subsidiaries' primary liquidity needs are to finance accounts
receivable, inventories, construction in progress, and the expansion of
business operations. Historically, the
25
<PAGE>
PRC 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$5.7 million),
(US$20.0 million) and US$13.5 million in the years 1995, 1996 and 1997,
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.
To finance its working capital, TY Container Group obtained US$60.5
million and US$1.2 million (denominated in RMB and valued as RMB 10 million) in
short term bank loans and overdraft facilities which are renewable in 1998. In
these facilities, one of the banks has committed to providing short term
revolving borrowing for a period of five years expiring in 2000 for an amount
not less than US$44 million. TY Container Group has also obtained, as required,
certain short term overdraft facilities to accommodate its additional financing
requirements in excess of the foregoing facilities.
The Company had outstanding bank loans and overdrafts, mainly with the
Bank of China, Yangzhou Branch, amounting to US$99.7 million as at December 31,
1997. As at December 31, 1997, the loans and overdraft facility bore interest at
average rates ranging from 7.53% (for US dollar loans) to 9.24% (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$50.9
million, guaranteed by TYG. As at December 31, 1997, bank borrowings of US$24.8
million and RMB 6 million (US$723,000) were overdue.
Tonglee has obtained US$18 million and US$1.2 million (denominated in
RMB and valued as RMB10 million) in short term bank loans and overdraft
facility, which is renewable in 1998. All bank loans of Tonglee are guaranteed
by TYG. As of December 31, 1997, Tonglee had outstanding bank loans amounting to
US$19.9 million and RMB 8 million (US$964,000).
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 1996, US$4.3 million of the PRC Subsidiaries' revenues consisted of
bill-and-hold transactions which were recognized as sales (1994: Nil, 1995:
US$9.0 million). The Company believes bill-and-hold transactions are required in
its business, as a practical matter, because containers are large in size and
often are not wanted on the customer's premises until needed for a shipment. The
PRC Subsidiaries' 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
the Operating Subsidiary'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 the Operating Subsidiary
are recovered from the customers. Under the Company's accounting practices, no
bill-and-hold transactions of the PRC Subsidiaries may be recognized as sales
unless done at the request of the customer.
26
<PAGE>
Normally, the PRC Subsidiaries would recognize sales upon delivery of
goods to customers. The Company recognized certain bill-and-hold transactions as
sales in 1996, 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. The PRC Subsidiaries 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.
In letters dated December 11, 1997, June 3, 1998 and December 14, 1998,
the Securities and Exchange Commission (the "SEC") inquired into the Company's
accounting for bill-and-hold sales. The SEC's view is that the contract terms of
the bill-and-hold sales recognized in 1995 and 1996 did not meet all the
criteria in AAER 108. The SEC believes that the contracted date of delivery plus
a free 180 day storage period does not meet the fixed delivery date criterion
and the fact that the Company is responsible for the arrangement of delivery,
after title and risk of the containers were passed to the buyer, does not meet
the criterion that the seller must not have retained any specific performance
obligation. While the Company believed that the recognition of bill-and-hold
sales was in accordance with generally accepted accounting principles, the
Company has agreed to adjust its accounting policy of recognizing revenue upon
delivery rather than on a bill-and-hold basis and amend its 1995 and 1996 Form
10-K filings. The financial statements in this report have been restated to
reflect the change in accounting as well as the adoption by the Company of the
US$ as its functional currency on its books of account.
Inflation
In 1997, approximately 80.1% of the Company's products were exported
(including to Hong Kong) and approximately 40% of its major components and raw
materials were imported. Virtually all of these transactions were 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 the Company's
employees, and on prices for domestic-sourced raw materials. 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 the Company'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
27
<PAGE>
expected to be disposed of. The Company adopted Statement No. 121 in the first
quarter of 1996 and found the effect of adoption to be immaterial.
Sales by Geographic Region
Approximately 31.1% of the Company's sales in 1997 were to customers
based in the United States; down from 78% in 1995 and up from 29.6% in 1996.
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. The Company
intends to aggressively compete for orders from all of the major containers
shipping and leasing companies, regardless of where they are based.
The Company also intends to compete for orders from PRC governmental
agencies and expects that domestic sales to PRC governmental agencies will
continue to constitute a material portion of its overall sales.
Modernization
In June 1997, the Company brought its new production facilities on-line
and shut down TY Container's old production line in early 1998. This new
production line significantly increased the Company's production capacity and
reduced the level of repairs and maintenance costs.
Land Use Rights Certificates
TYC's existing premises, which were either allocated by the government
to, or purchased by, TYC during 1989 to 1992, are situated in Yangzhou, Jiangsu
Province. Management is in the process of negotiating with The Provincial Land
Administration Bureau of Jiangsu Province (the "Land Bureau") for the issuance
to TYC of land use certificates for the above sites. Title to TYC's premises is
registered in the name of TYG. TYG has agreed to allow TYC to use those premises
at no further cost until 2005. TYG has also agreed to indemnify TYC for all
costs that TYC many incur if they are not allowed to occupy the present premises
and have to relocate to other premises as a result of the Land Bureau's denial
of TYC's application for land use certificates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by Regulation S-X appear on pages F-1
through F-31 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
28
<PAGE>
ITEM 10. 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 53 Chairman of the Board, Director, President
and Chief Executive Officer
Liu Jingxin 58 Director
Sung Hiu Ngan 47 Director
Ma Tieyi* 32 Secretary and Treasurer
- --------------------
*Mr. Ma Tieyi resigned as Secretary and Treasurer of the Company on October 10,
1998.
Cheung Sau Yung, age 53, 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 was General Manager of TY Container Group from
1989 through February 1997. 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, 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 over 30
years of experience in the transportation industry (see Item 13, "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS").
Liu Jingxin, age 58, 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 35 years' experience in the transportation
industry.
29
<PAGE>
Sung Hiu Ngan, age 47, 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
27 years' experience in the transportation industry and the investment business.
Ma Tieyi, age 32, served as Secretary and Treasurer of Holdings until
October 10, 1998. He was also Deputy Director of the Investment & Securities
Department at TY Container. Mr. Ma received his Master's 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 PRC Subsidiaries
In addition to Mr. Cheung, whose business experience is described
above, the executive officers and key managers of the PRC Subsidiaries are
identified below.
Dong Xiaojun, age 48, is a Director and General Manager of TY
Container. Mr. Dong has been employed by TY Container since 1989, holding
various managerial positions, including Deputy General Manager, Office Manager,
Head of Management, Head of Production, and Head of Trade. Mr. 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 20 years of experience in the transportation industry.
Ma Cungui, age 50, is a Director and the General Manager of Tonglee.
Mr. Ma has been employed by Tonglee since 1994. Mr. Ma began his career with the
Jiangyang Automobile Company in 1968, holding various managerial positions,
including Head of Management, Head of Production and Deputy Director, until
moving to TY Container in 1989 where he was employed as a Deputy General
Manager.
Wang Gongqing, age 47, 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 34 years of
experience in the transportation industry.
Ai Zhiyuan, age 47, is a Deputy General Manager of Tonglee. Mr. Ai has
been employed by Tonglee since 1996. 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
30
<PAGE>
1979 and rose to become the head of the Party Department, before moving to TY
Container in 1990 where he advanced to Vice General Manager in 1995. Mr. Ai
holds an Associate Degree and is an economist. Mr. Ai has been associated with
the transportation industry for 19 years.
Wu Zhenyu, age 54, 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 40 years of experience in
the transportation industry.
Li Haixing, age 49, is a Director and Deputy General Manager of
Tonglee. Mr. Li began working for Tonglee in 1996. 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 joined TY Container in 1989 as
Assistant Chief Engineer and became Principal Engineer of TY Container. Mr. Li
has 28 years of experience as an engineer in the transportation industry.
Sun Deyong, age 41, is a Vice General Manager of TY Container Group.
Mr. Sun has been employed by TY Container Group since 1990, holding various
managerial positions, including Head of Equipment Division, Vice Manager and
Head of Production. Mr. Sun began his career with the Jiangsu Automobile Company
in 1982 as a staff member in the Equipment Division and advanced to the position
of Vice Director of that Division. Mr. Sun holds a Bachelor's degree and has 16
years of experience in the transportation industry.
Yang Wenzhen, age 53, is a Vice General Manager of TY Container. Mr.
Yang has been employed by TY Container since 1997. Mr. Yang began his career
with the No. 636 Factory in Changchun. Since then he has worked at a number of
factories, including Piston Sleeve Factory in Yangzhou, Yangzhou Valve Factory
and Yangtze River Pharmaceutics. He worked at Tonglee as Vice General Manager
from 1994 through 1997. Mr. Yang holds a Bachelor's degree.
TY Container Directors
The Boards of Directors of TY Container and Tongsheng each currently
consist 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 and Tongsheng's
Articles of Association each provide the partners with the right to designate a
certain number of directors, based upon the amount of their interest in the
company. Prior to the Liquidation, they 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
Liquidation (as defined in Item 13), 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
31
<PAGE>
designated the same individual as director and such individual has two votes on
the Boards.) (See Item 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.")
Following the completion of the Liquidation, TY Container's and
Tongsheng's Articles of Association were amended to provide that CCHL-BVI shall
have the right to designate eight directors to each company's board. As a
result, at the next elections CCHL-BVI will have the right to designate eight of
the 11 directors, with eight of the 12 votes on the boards.
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. In October 1997, this
agreement was amended to apply to Tongsheng's board of directors as well.
Tonglee Directors
The Board of Directors of Tonglee currently consists of nine members,
each of which serves for a term of four years and until their successors are
duly qualified and elected. Tonglee'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, resulting in three directors
designated by TYC, two directors designated by TYG, three directors designated
by Singapore Nanlee and one director designated by Liuwei Village Municipal
Authority.
ITEM 11. EXECUTIVE COMPENSATION
Other than Mr. Ma Tieyi, Secretary and Treasurer of Holdings, whose
compensation is set forth below, none of the directors and executive officers of
Holdings received any compensation as such for the fiscal year ended in 1997.
The following table sets forth, in addition to Mr. Ma's compensation, the
compensation of the chief executive officer and the four most highly compensated
executive officers of TY Container and Tonglee for the last three fiscal years.
SUMMARY COMPENSATION TABLE
Name and Principal
Position Year Salary Bonus
- ------------------------------------------------------------------
Cheung Sau Yung
CEO (TY Container) 1997 US$4,293 US$413
1996 US$4,519 US$435
1995 US$5,445 US$448
Ma Cungui
CEO (Tonglee) 1997 US$2,772 US$0
1996 US$2,949 US$0
1995 US$3,242 US$0
32
<PAGE>
Li Haixin
Deputy General
Manager (Tonglee) 1997 US$5,889 US$376
1996 US$6,332 US$392
1995 US$4,900 US$403
Ai Zhiyuan
Deputy General
Manager (Tonglee) 1997 US$5,158 US$362
1996 US$5,487 US$394
1995 US$4,961 US$409
Dong Xiaojun
Deputy General
Manager
(TY Container) 1997 US$3,808 US$379
1996 US$4,095 US$395
1995 US$4,970 US$410
33
<PAGE>
Wu Zhenyu
Chief Economist
(TY Container) 1997 US$3,902 US$372
1996 US$4,108 US$396
1995 US$4,979 US$410
Ma Tieyi
Secretary/Treasurer
(Holdings) 1997 US$11,875 US$0
1996 US$12,500 US$0
1995 US$ 3,500 US$0
None of the directors of TY Container or Tonglee receive any compensation for
their services as such.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the number and percentage of the shares
of Holdings' common stock owned of record and beneficially by each person owning
more than 5 percent of such common stock, as reflected in the list of
shareholders provided to Holdings by its transfer agent dated as of December 31,
1998. Holdings' common stock is the only class of equity securities issued by
Holdings. None of Holdings' directors or executive officers, nor any of TY
Container's or Tonglee's directors or executive officers, beneficially own any
equity securities in Holdings, or in any of its parents or subsidiaries.
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' 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.
34
<PAGE>
ITEM 13. 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 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 Group and also owns a 100% interest in
Jiangyang Automobile (H.K.), which had owned 20% of TY Container Group directly
and currently owns 50% of Sinocity which owns 80.275% of Holdings, which
indirectly owns 80% of TY Container Group. Jiangsu Tongyun Group Trading Company
("TYG Trading Co.") and Jiangyang Automobile Company ("JAC") are wholly owned
subsidiaries of TYG. Mr. Li Haixing, a director of TY Container Group, is also
the General Manager of TYG Trading Co.
TY Container Group has executed an agreement with TYG Trading Co. under
which TYG Trading Co. agreed to provide certain services for TY Container Group
(see Item 1, "BUSINESS - Subsidiaries - Description of TY Container and
Tongsheng - 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
35
<PAGE>
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 its
agreement with TYG Trading Co., in 1995 TYG 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 agreement with TYG. TYG Trading Co. repaid the
loan in full during 1997.
In 1996, TY Container Group made a loan in the amount of US$801,000 to
TYG. This loan is unsecured and interest free. As of December 31, 1997, the
balance of such loan was US$6,437,000.
In 1996, TYG entered into an agreement (the "TYG Agreement") with the
China Railway Container Transportation Center ("CRCT"), pursuant to which TYG
agreed to supply CRCT with 25,000 TEU of containers. TYG then entered into an
agreement with TY Container Group whereby TY Container Group would supply 18,000
TEU to the CRCT, on the identical terms and conditions as those set forth in the
TYG Agreement, in exchange for a total purchase price of US$51,892,000, payable,
as in the TYG Agreement, in 32 quarterly installments.
In 1997, TYG guaranteed TY Container's obligations under its working
capital loan agreement with the Bank of China to the extent of US$51 million.
Additionally, up to 50% of one of the bank loans, in the principal amount of
US$12 million, is guaranteed by Yangzhou Tonghua Semi-Trailer Co., Ltd.
Additionally, TYG has guaranteed all of Tonglee's bank loans and
overdraft facilities agreements with the Bank of China of US$19.9 million and
RMB8 million.
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 former General
Manager of TY Container Group, 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.
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 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. In
October 1997, TYG assumed liability for such loans and agreed to repay them in
full. As at December 31, 1997, the aggregate amount due from Ocean Asia was
US$498,000.
36
<PAGE>
In 1996, TY Container Group purchased components used in the
manufacture of containers from Yangzhou Tongda Forging Ltd. ("Tongda") in the
amount of US$9,000,000. 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.
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. Mr. Liu, a director of Holdings and of TY Container, is also a
director and General Manager of Wide Shine.
In 1997, Wide Shine purchased containers from TY Container Group at
market prices and subject to normal trade credit terms. These purchases amounted
to US$4,817,000 (1996=US$28,899,000).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHINA CONTAINER HOLDINGS LIMITED
By: /s/ Cheung Sau Yung
---------------------------------------
Cheung Sau Yung
Chairman of the Board, Director, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Cheung Sau Yung Chairman of the Board, Director, March 24, 1999
- -------------------------- President and Chief Executive
Cheung Sau Yung Officer
/s/ Liu Jingxin Director March 24, 1999
- --------------------------
Liu Jingxin
/s/ Sung Hiu Ngan Director March 24, 1999
- --------------------------
Sung Hiu Ngan
38
<PAGE>
Consolidated Financial Statements
CHINA CONTAINER HOLDINGS LIMITED
December 31, 1995, 1996 and 1997
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of independent auditors F-1
Consolidated statements of operations F-2
Consolidated statements of changes in shareholders' equity F-3
Consolidated balance sheets F-4
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
China Container Holdings Limited
We have audited the accompanying consolidated balance sheets of China
Container Holdings Limited (the "Company") and its subsidiaries (the "Group")
as of December 31, 1996 and 1997, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
years ended December 31, 1995, 1996 and 1997. 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, 1996 and 1997, and the consolidated results of
its operations and its cash flows for each of the years ended December 31,
1995, 1996 and 1997 in conformity with accounting principles generally
accepted in the United States of America.
As explained in note 1 to the consolidated financial statements, the Group has
given retroactive effect to the change in accounting for bill-and-hold sales
and functional currency for the years ended December 31, 1995 and 1996.
The accompanying consolidated financial statements have been prepared assuming
that the Group will continue as a going concern. As more fully described in
note 2 to the financial statements, the Group has incurred recurring operating
losses for the years ended December 31, 1996 and 1997 and has a working
capital and asset deficiency. These conditions raise substantial doubt about
the Group's ability to continue as a going concern. Management's plans in
regard to these matters are also described in note 2 to the consolidated
financial statements. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Ernst & Young
- -----------------
ERNST & YOUNG
Hong Kong
January 22, 1999, except for
note 31, as to which the date is February 24, 1999
F-1
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except for share and per share data)
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------------
Notes 1995 1996 1997
US$ US$ US$
<S> <C> <C> <C> <C>
NET SALES
Related parties 12(iv) 959 43,665 25,364
Other parties 79,318 53,780 98,141
------- ------- -------
80,277 97,445 123,505
COST OF SALES (68,131) (90,775) (122,180)
SELLING AND ADMINISTRATIVE EXPENSES ( 3,970) ( 6,592) ( 6,880)
ALLOWANCE FOR DOUBTFUL ACCOUNTS
RECEIVABLES, OTHER RECEIVABLES,
AMOUNTS DUE FROM ASSOCIATED
AND RELATED COMPANIES,
AND OTHER ASSETS - ( 119) ( 4,996)
ALLOWANCE FOR MARK TO MARKET
OF INVENTORIES - ( 177) ( 4,752)
FINANCIAL EXPENSES, NET 6 ( 1,883) ( 3,638) ( 4,775)
OTHER INCOME/(EXPENSES), NET ( 212) 14 117
REORGANIZATION EXPENSES 7 ( 1,382) - -
INCOME TAXES 8 ( 831) ( 426) ( 15)
------- ------- -------
3,868 ( 4,268) (19,976)
SHARE OF NET LOSSES OF
ASSOCIATED COMPANIES ( 1,341) ( 816) ( 610)
MINORITY INTERESTS ( 755) 1,945 3,509
------- ------- --------
NET INCOME/(LOSS) 1,772 ( 3,139) ( 17,077)
======= ======= ========
EARNINGS/(LOSS) PER SHARE 5(l) 0.08 ( 0.13) ( 0.68)
======= ======= ========
</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
(Amounts in thousands, except for share and per share data)
<TABLE>
<CAPTION>
Number of
shares of Retained
common stock Additional earnings/ Currency
outstanding Paid-up paid-in (accumulated translation
Notes (Note 3) capital capital Reserves losses) adjustments Total
US$ US$ US$ US$ US$ US$
---------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 20,781,250 22 3,885 2,968 2,491 22 9,388
Net income - - - - 1,772 - 1,772
Transfer to reserves 29 - - - 2,911 ( 2,911) - -
Currency translation
adjustments - - - - - 123 123
Issue of shares for services
rendered in relation to
the Reorganization 7 1,093,750 1 207 - - - 208
Shares of common stock
owned by the then existing
shareholders of the
Company at the date of
Reverse Acquisition 7 1,250,273 1 236 - - - 237
Issue of shares for services
rendered in relation to
the Reverse Acquisition 7 1,875,000 1 355 - - - 356
---------- ------- ------- ------- -------- ------- -------
Balance at
December 31, 1995 25,000,273 25 4,683 5,879 1,352 145 12,084
---------- ------- ------- ------- -------- ------- -------
Net loss - - - - ( 3,139) - ( 3,139)
Transfer to reserves 29 - - - 1,724 ( 1,724) - -
Currency translation
adjustments - - - - - 5 5
---------- ------- ------- ------- -------- ------- -------
Balance at
December 31, 1996 25,000,273 25 4,683 7,603 ( 3,511) 150 8,950
Net loss - - - - ( 17,077) - (17,077)
Transfer to reserves 29 - - - 24 ( 24) - -
---------- ------- ------- ------- ------- ------- -------
Balance at
December 31, 1997 25,000,273 25 4,683 7,627 ( 20,612) 150 ( 8,127)
========== ======= ======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except for share and per share data)
<TABLE>
<CAPTION>
December 31
------------------------------
Notes 1996 1997
US$ US$
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents 2,873 3,744
Accounts receivable, net of allowance for doubtful
accounts of Nil in 1996 and US$2,738 in 1997 9 6,188 12,691
Deposits and other receivables, net of
allowance for doubtful accounts of
US$119 in 1996 and US$119 in 1997 10 7,544 2,938
Inventories, net of mark to market allowance
of US$177 in 1996 and US$4,929 in 1997 11 46,928 40,131
Amounts due from associated companies,
net of allowance for doubtful accounts
of Nil in 1996 and US$993 in 1997 12(ii) 908 -
Amounts due from related companies,
net of allowance for doubtful accounts
of Nil in 1996 and US$273 in 1997 12(i) 7,693 13,133
------- -------
TOTAL CURRENT ASSETS 72,134 72,637
INTANGIBLE ASSETS 14 2,918 2,625
FIXED ASSETS 15 24,561 23,587
CONSTRUCTION IN PROGRESS 16 747 2,967
INTERESTS IN ASSOCIATED COMPANIES 17 2,095 1,485
AMOUNTS DUE FROM RELATED COMPANIES 12(i) 14,271 30,692
OTHER ASSETS, net of allowance for doubtful
accounts of Nil in 1996 and US$992 in 1997 18 1,305 422
------- -------
TOTAL ASSETS 118,031 134,415
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in thousands, except for share and per share data)
<TABLE>
<CAPTION>
December 31
------------------------------
Notes 1996 1997
US$ US$
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES
Bank loans and overdrafts 19 80,758 99,674
Accounts payable 14,428 26,686
Accrued liabilities and other payables 8,938 13,923
Income taxes payable - 120
Deferred income taxes 8 105 -
Amount due to an associated company 12(ii) 320 1,147
Amount due to a related company 12(iii) 191 205
------- -------
TOTAL CURRENT LIABILITIES 104,785 141,755
MINORITY INTERESTS 4,296 787
------- -------
109,081 142,542
------- -------
CONTINGENCIES 23, 31
SHAREHOLDERS' EQUITY
Share capital - shares of
100,000,000 common stock of US$0.001 each and 5,000,000
preferred stock of US$0.01 each authorised; shares of
25,000,273 common stock of US$0.001 each outstanding 20 25 25
Additional paid-in capital 20 4,683 4,683
Reserves 29 7,603 7,627
Accumulated losses ( 3,511) ( 20,612)
Currency translation adjustments 150 150
------- -------
8,950 ( 8,127)
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 118,031 134,415
======= =======
</TABLE>
The accompanying notes are in integral part of these consolidated financial
statements.
F-5
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except for share and per share data)
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------------
1995 1996 1997
US$ US$ US$
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income/(loss) 1,772 ( 3,139) ( 17,077)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Minority interests 755 ( 1,945) ( 3,509)
Reorganization expenses 801 - -
Amortization of intangible assets 107 190 293
Depreciation of fixed assets 1,030 1,966 3,154
Allowance for doubtful
accounts receivables,
other receivables, amounts due from associated
and related companies, and other assets - 119 4,996
Allowance for mark to market
of inventories - 177 4,752
Loss on disposal of fixed assets 16 - -
Share of net losses of associated companies 1,341 816 610
Deferred income taxes ( 161) 350 ( 105)
Foreign exchange gain ( 453) ( 310) -
Decrease/(increase) in assets:
Accounts receivable ( 6,172) 1,907 ( 9,241)
Deposits and other receivables ( 15,148) 5,287 4,606
Inventories ( 343) ( 13,625) 2,045
Amounts due from associated companies ( 926) ( 127) ( 85)
Amounts due from related companies 29 ( 17,090) ( 22,134)
Increase/(decrease) in liabilities:
Accounts payable 1,814 10,065 12,258
Accrued liabilities and other payables 7,696 ( 1,605) 4,940
Income taxes payable ( 358) ( 273) 120
Amount due to an associated company ( 130) 320 827
Amount provided by/(due to) a related company 2,620 ( 3,059) 14
------- ------- -------
Net cash used in operating activities ( 5,710) ( 19,976) ( 13,536)
------- ------- -------
</TABLE>
F-6
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Amounts in thousands, except for share and per share data)
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------
Note 1995 1996 1997
US$ US$ US$
INVESTING ACTIVITIES
<S> <C> <C> <C> <C>
Purchases of fixed assets and
construction in progress ( 6,036) ( 6,037) ( 4,400)
Increase in investments in associated companies ( 1,060) - -
Proceeds from disposal of fixed assets 37 - -
Decrease/(increase) in other assets ( 592) ( 390) ( 109)
Purchase of additional interest in Tonglee
(net of cash acquired) 22 - 468 -
------- ------- --------
Net cash used in investing activities ( 7,651) ( 5,959) ( 4,509)
------- ------- --------
FINANCING ACTIVITIES
Dividends paid ( 2,692) - -
Dividends paid to minority interests ( 673) - -
Repayments of bank loans and overdrafts (14,045) (15,499) ( 97,327)
New bank loans and overdrafts 36,599 36,858 116,243
------- ------- --------
Net cash provided by financing activities 19,189 21,359 18,916
------- ------- --------
Exchange differences on cash and cash equivalents 25 18 -
------- ------- --------
NET INCREASE/(DECREASE) IN
CASH AND CASH EQUIVALENTS 5,853 ( 4,558) 871
Cash and cash equivalents, at beginning of year 1,578 7,431 2,873
------- ------- --------
Cash and cash equivalents, at end of year 7,431 2,873 3,744
======= ======= ========
</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 and per share data)
1. SECURITIES AND EXCHANGE COMMISSION INQUIRY
In letters dated December 11, 1997, June 3, 1998 and December 14, 1998,
the Securities and Exchange Commission (the "SEC") inquired into the
Company's accounting for bill-and-hold sales. The SEC's view is that
the contract terms of the bill-and-hold sales recognized in 1995 and
1996 did not meet all the criteria in AAER 108. The SEC believes that
the contracted date of delivery plus a free 180 day storage period does
not meet the fixed delivery date criterion and the fact that the
Company is responsible for the arrangement of delivery, after title and
risk of the containers were passed to the buyer, does not meet the
criterion that the seller must not have retained any specific
performance obligation. While the Company believed that the recognition
of bill-and-hold sales was in accordance with generally accepted
accounting principles, the Company has agreed to adjust its accounting
policy of recognizing revenue upon delivery rather than on a
bill-and-hold basis and amend its 1995 and 1996 Form 10-K filings.
In letters dated December 11, 1997 and June 3, 1998, the SEC inquired
into the Company's accounting for functional currency. The SEC's view
is that the functional currency of the Company is United Stated
dollars ("US$") under the criteria set out in FAS 52. The Company has
agreed to adjust its functional currency from Renminbi ("RMB") to US$
and amend its 1995 and 1996 Form 10-K filings.
The change in accounting for bill-and-hold sales and functional
currency resulted in a respective decrease in net income of US$998
for the year ended December 31, 1995 or US$0.04 per share, and an
increase in net income of US$1,535 for the year ended December 31,
1996 or US$0.06 per share.
2. FUNDAMENTAL ACCOUNTING CONCEPT
The consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As
shown in the consolidated financial statements, China Container
Holdings Limited ("China Container" or the "Company") incurred losses
of US$17,077 (1996: US$3,139) for the year ended December 31, 1997
and has working capital and asset deficiency. As at December 31,
1997, bank borrowings of US$25,528 were overdue. These factors among
other indicate that the Company may be unable to continue as a going
concern for a reasonable period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability of assets and classification of
liabilities that might be necessary should the Company be unable to
continue as a going concern.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis, to obtain additional financing or refinancing as may be
required, and ultimately to attain profitability.
F-8
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
2. FUNDAMENTAL ACCOUNTING CONCEPT (continued)
In light of the foregoing, the directors adopted the following
measures in 1998 to improve the financial position, cash flows,
profitability and operations of the Group:
(a) ceased operation of one of the production lines. The
remaining production line which started operation in early
1997 has sufficient production capacity in meeting the
present level of sales. This would reduce the level of
repairs and maintenance costs and other production costs for
maintaining the old production line;
(b) terminated the employment contracts of about 500 workers
during 1998 and reduced salaries of the remaining staff
members;
(c) reduced the level of administrative expenses;
(d) closed the office in New York and one of its offices in
Yangzhou; and
(e) increased the amount of materials purchased from local
suppliers.
In addition, the Group has reached agreements in 1998 with its major
banks in obtaining new financing or renewing existing financing
facilities:
(a) a revolving export loan facility of US$12,000 (RMB100,000)
was obtained, via TYG (defined hereinafter), which will
expire in April 1999;
(b) a revolving trade finance facility of US$6,000 was obtained in
1998 and expired in March 1999; and
(c) two working capital loan facilities of US$241 (RMB 2,000)
each were obtained in 1998. One working capital loan of
US$241 (RMB2,000) expired in November 1998 and was repaid in
December 1998. The other working capital loan of US$241
(RMB2,000) will expire in March 1999.
In 1996, a bank granted a guarantee for the renewal of short term
borrowings for a period of five years expiring in 2000 for an amount
not less than US$44,000. Further details are set out in note 19 to the
consolidated financial statements.
3. ORGANIZATION AND PRINCIPAL ACTIVITIES
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.
F-9
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
3. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
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")
dated December 30, 1994, which were completed in 1995, each of the 5
of the 8 original shareholders, holding an 80% interest in TYC in
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 then 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 then 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.
On June 24, 1996, the New Companies were liquidated and their
interests in TYC were distributed to CCHL(BVI) (the "Liquidation").
As a result of the Reorganization and the completion of the
Liquidation, CCHL(BVI) directly holds 80% of the paid-up capital of
TYC.
In the opinion of the directors of China Container, the above
Reorganization constitutes a reorganization under common control and
subsequent to which, the ultimate control of TYC remains
substantially the same as before the Reorganization.
Prior to the Reverse Acquisition (defined hereinafter), DAB had
4,474,658 shares of common stock, par value US$0.001 each, issued and
outstanding. In connection with the Reverse Acquisition and
immediately prior thereto, the following transactions occurred:
(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 then 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;
F-10
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
3. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
(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. The 270,667 shares were
retained by the then existing shareholders of DAB in
relation to the Reverse Acquisition; and
(v) the issuance of 979,606 shares of DAB's common stock, par
value US$0.001 each, 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
attributable to the original shareholders of CCHL(BVI) prior to the
Reorganization.
Subsequent to the Reverse Acquisition, China Container's principal
activity is the management of the business of its indirectly held
operating subsidiaries.
Yangzhou Tonglee Reefer Containers Company Limited ("Tonglee") was
established as a Sino-foreign joint venture company in the PRC on
December 31, 1993 with a tenure of 20 years with a total registered
and paid up capital of US$8,000. Tonglee's principal activity is the
manufacturing of reefer containers in the PRC. As at January 1, 1996.
TYC increased its shareholding in Tonglee from 50% to 51% for US$80.
The remaining 49% interest is held by TYG (19%), Singapore Namlee
Steel (Private) Limited (25%) and Han Jiang Liu Wei Agricultural
Industrial Commercial Company (5%). Due to the acquisition of control
by TYC, the results of Tonglee were consolidated into China Container
since January 1, 1996.
F-11
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
3. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
Yangzhou Tongsheng Container Company Limited ("Tongsheng") was
established by the Group (80%) and 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 and paid
up capital of 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.
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$10,000. Yingkou's principal activity is expected to be the
manufacturing of international standard commercial freight containers
in the PRC. CCHL(BVI) holds an 80% interest in Yingkou. The remaining
20% interest of Yingkou is equally held by 2 shareholders of the
Group. No capital has yet been paid by the shareholders and Yingkou
has not yet commenced operation.
4. BASIS OF PRESENTATION
The consolidated financial statements of the Group have been prepared
based on TYC's historical financial statements for the year ended
December 31, 1995 and to give effect to the Reorganization and the
Reverse Acquisition as set out in note 3 to these consolidated
financial statements as if they had been completed prior to January
1, 1995.
The consolidated financial statements of the Group are prepared in
accordance with accounting principles generally accepted in the
United States of America ("US GAAP"). This basis of accounting
differs from that used in the statutory financial statements of the
Group's subsidiaries in the PRC which are prepared in accordance with
the accounting principles and the relevant financial regulations
applicable to Sino-foreign joint venture companies in the PRC ("PRC
GAAP").
The principal adjustments made to conform the PRC GAAP statutory
financial statements of the Group's subsidiaries in the PRC to US
GAAP are the allowances for doubtful accounts, the allowances for
mark-to-market of inventories, the reclassification of the staff
bonus and welfare reserve appropriation from reserves to a charge to
income, the write off of pre-operating expenses, the basis of
providing depreciation of fixed assets and amortisation of intangible
assets, the different bases of recognizing sales, and the adoption of
RMB and US$ as the functional currency in preparing the PRC GAAP and
US GAAP financial statements, respectively.
F-12
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
5. PRINCIPAL ACCOUNTING POLICIES
(a) Principal of consolidation
The consolidated financial statements include the accounts
of the Company and its subsidiaries. Significant
inter-company balances and transactions have been eliminated
on consolidation.
(b) 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.
At December 31, 1996 and 1997, cash and cash equivalents
included RMB denominated deposits equivalent to US$1,167
(RMB9,689) and US$218 (RMB1,809), respectively.
(c) Inventories
Inventories are stated at the lower of cost or market. Cost
is determined on the weighted-average basis and in the case
of work in progress and finished goods, comprises direct
materials, direct labor and an appropriate proportion of
overheads.
(d) 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 the
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 on
a commercial basis.
(e) 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.
(f) Intangible assets
Intangible assets mainly represent rights to use sites and
the technical knowledge for the production of reefer
containers contributed as capital by a shareholder of
Tonglee. Amortisation is provided on the straight-line basis
over the remaining tenure of the joint venture.
F-13
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
5. PRINCIPAL ACCOUNTING POLICIES (continued)
(g) Associated companies
An associated company is a company, not being a subsidiary,
in which the Group owns 20% to 50% voting interests and
exercises significant influence but does not control over
its operating and financial decisions.
The Group's share of the associated companies'
post-acquisition results is included in the consolidated
statements of operations 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.
(h) Revenue recognition
Sales represent the invoiced value of goods sold, net of
returns. Revenue is recognised upon delivery of goods to
customers.
(i) Foreign currency translation
The functional currency of the Group is US$.
Foreign currency transactions are translated into US$ using
the applicable rates of exchange at the dates of
transactions. Monetary assets and liabilities denominated in
foreign currencies are translated into US$ at the applicable
rates of exchange at the respective balance sheet dates. The
resulting exchange gains or losses are credited or charged
to the Group's consolidated statements of operations.
The functional currency of the operations of the associated
companies in the PRC is RMB. The accounts of these
associated companies are prepared in RMB and are translated
into US$ using the closing rate method. Under the closing
rate method, the balance sheet of these associated companies
is translated using the rate of exchange quoted by the
People's Bank of China at the balance sheet date and the
statement of operations is translated at the average rate
for the year. Resulting translation adjustments are reported
as a separate components of equity.
The market risks associated with changes in exchange rates
and the restrictions over the convertibility of RMB into
foreign currencies are discussed in note 24 to the
consolidated financial statements.
(j) 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 realised.
(k) Retirement benefits
The contributions to the retirement plans for the existing
employees are charged to the consolidated statements of
operations as services are provided (note 25).
F-14
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
5. PRINCIPAL ACCOUNTING POLICIES (continued)
(l) Net income/(loss) per share
The calculation of net income/(loss) per share is based on
an aggregate of 25,000,273 (1996: 25,000,273, 1995:
23,497,607) weighted average number of shares of common
stocks outstanding as if the shares issued to the original
shareholders of CCHL(BVI) under the Reorganization had been
completed as at January 1, 1995 (note 20).
(m) Long-lived assets
Statement of Financial Accounting Standard No. 121,
"Accounting for Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of" ("FAS 121") requires
impairment losses be recognized for long-lived assets,
whether these assets are held for disposal or continue to be
used in operations, when indicators of impairment are
present and the fair value of these assets are estimated to
be less than their carrying amounts. The fair value of these
assets was based on the projected future cash flows
generated from these assets or their market values.
(n) Use of estimates
The preparation of consolidated financial statements in
conformity with US GAAP 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.
(o) FAS 131
In June 1997, FAS 131 "Disclosures about Segments of an
Enterprise and Related Information" was issued. FAS 131
requires that a public business enterprise reports a measure
of segment profit or loss, certain specific revenue and
expense items, and segment assets. It also requires
reconciliations of total segment revenues, total segment
profit or loss, total segment assets, and other amounts
disclosed for segments to corresponding amounts in the
enterprise's general-purpose financial statements.
This statement is effective for financial statements issued
for fiscal years ending after December 15, 1998.
The Company does not expect that the application of FAS 131
will affect net earnings.
(p) Emerging Issues Task Force-Issue 96-16
In July 1997, the Emerging Issues Task Force ("EITF")
reached a final consensus on Issue 96-16, "Investor's
Accounting for an Investee When the Investor Has a Majority
of the Voting Interest but the Minority Shareholder or
Shareholders Have Certain Approval or Veto Rights". This
issue addresses whether to consolidate a majority owned
investee when the rights of the minority make it unclear if
the majority owner actually has control, and establishes
criteria for making this decision.
F-15
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
5. PRINCIPAL ACCOUNTING POLICIES (continued)
(p) Emerging Issues Task Force-Issue 96-16 (continued)
FAS 94 "Consolidation of All Majority-Owned Subsidiaries"
provides that consolidation generally is appropriate when an
entity has a controlling financial interest in another
entity through a majority voting interest. However, the
majority owner's ability to control the operations or assets
of the investee are restricted in certain respects if
approval or veto rights have been granted to the minority
shareholder(s) (hereafter referred to as "minority rights").
Those minority rights may have little or no impact on the
ability of the majority owner to control the investee's
operations or assets. Alternatively, those minority rights
may be so restrictive as to call into question whether
control actually rests with the majority owner. FAS 94 does
not provide criteria for determining whether control rests
with the majority owner if specific minority rights are
granted to the minority shareholder(s). To assist companies
in making the judgment about the impact of minority rights
on the consolidation decision, the EITF developed a
consensus on this topic.
The consensus is effective for all new investment agreements
entered into after July 24, 1997. For existing investment
agreements, the guidance should be applied in financial
statements issued for fiscal years ending after December 15,
1998.
If the Group had applied EITF 96-16 in 1997 and 1996, total
assets and net sales of the Group would have been reduced by
US$12,427 (1996: US$11,277) and US$31,087 (1996: US$28,991),
respectively. The Company does not expect that the
application of EITF 96-16 will affect net earnings.
6. FINANCIAL EXPENSES, NET
Financial expenses, net represent:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------
1995 1996 1997
US$ US$ US$
<S> <C> <C> <C>
Bank loan interest (3,173) (4,879) (8,757)
Less: Interest capitalized
in construction in progress 258 389 274
----- ----- ------
(2,915) (4,490) (8,483)
Interest income:
On trade receivable from TYG (note 12(iv)(b)) - 745 3,521
Others 375 217 65
Foreign exchange gains/(losses), net 657 ( 110) 122
------ ------ ------
(1,883) (3,638) (4,775)
====== ====== ======
</TABLE>
F-16
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
7. REORGANIZATION EXPENSES
Concurrent with the Reorganization and the Reverse Acquisition set
out in note 3 to the consolidated 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$801 which
represented the fair value of (a) the 5% of the issued and
outstanding shares of CCHL-(BVI) received by a wholly-owned
subsidiary of Broadsino in connection with the Reorganization, and
(b) the 12.5% of the issued and outstanding shares of the common
stock of China Container held by the then existing shareholders of
DAB (7.5%) prior to the Reverse Acquisition and by certain other
parties (5%) who received restricted shares of common stock in
exchange for services rendered in connection with the Reverse
Acquisition. The amount of the expenses in (a) and (b) above were
determined based on the fair value of CCHL-(BVI)'s net assets as
determined by an appraisal performed by an independent PRC appraiser,
adjusted for factors affecting the transferability of the shares.
8. INCOME TAXES
Income taxes on profits, which were predominately from PRC
operations, for the years were as follows:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1995 1996 1997
US$ US$ US$
<S> <C> <C> <C>
Current 992 76 120
Deferred ( 161) 350 ( 105)
----- ---- -----
831 426 15
===== ==== =====
<CAPTION>
Deferred tax liabilities/(assets) are comprised of the following:
December 31
---------------------------
1996 1997
US$ US$
<S> <C> <C>
Different basis of recognizing sales 105 -
Others - ( 121)
----- -----
Gross deferred tax liabilities/(assets) 105 ( 121)
Valuation allowance - 121
----- -----
105 -
===== =====
</TABLE>
F-17
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
8. INCOME TAXES (continued)
It is management's intention to reinvest all the income, if any,
attributable to China Container earned by its operations outside the
United States as at December 31, 1997. Accordingly, no United States
corporate income taxes have been provided in these financial
statements.
Under the current British Virgin Islands' law, any dividends that the
Group will distribute in the future, and capital gains arising from
the Group's investments are not subject to income taxes in the
British Virgin Islands.
TYC, Tonglee and Tongsheng (collectively the "PRC Subsidiaries") are
Sino-foreign equity joint venture companies governed by the Income
Tax Law of the PRC 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, including
sales to Hong Kong, exceed 70% of its total sales.
Giving effect to the above tax concessions, the actual tax rate for
the three years ended December 31, 1995, 1996 and 1997 was 12% as the
export sales of TYC exceed 70% of its total sales in the respective
years.
The other PRC Subsidiaries and TYC's associated companies, which are
Sino-foreign equity joint venture companies, enjoy similar tax
exemptions as TYC. No provision for PRC income taxes has been made
for them as they either incurred a loss or were in their tax holiday
period during the relevant years.
The tax benefit to the PRC Subsidiaries as a result of the tax
holiday for the years ended December 31, 1995, 1996 and 1997 amounted
to US$563, Nil and Nil (China Container: US$450, Nil and Nil),
respectively. The effective tax benefit per share (based on an
aggregate of 25,000,273 (1996: 25,000,273, 1995: 23,497,607) shares
of common stocks outstanding as if the Reorganization had been
completed as at January 1, 1995 (notes 3 and 20)) for China Container
for each of the years ended December 31, 1995, 1996 and 1997 amounted
to US$0.02, Nil and Nil, respectively.
F-18
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
8. INCOME TAXES (continued)
A reconciliation of the effective income tax rates (excluding the
reorganization expenses) with the statutory income tax rate in the
PRC is as follows:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Statutory tax rate 24.0% ( 24.0%) (24.0%)
Tax holiday (12.0%) 20.3% 12.2%
Item which give rise to no tax benefit:
Net losses of China Container and CCHL(BVI) 1.7% 13.9% 11.8%
Other items - 0.9% 0.1%
------ ------- ------
Actual effective tax rate 13.7% 11.1% 0.1%
====== ======= ======
Deferred income tax relates primarily to temporary timing difference
in sales recognition under PRC GAAP and US GAAP.
9. ACCOUNTS RECEIVABLE
Accounts receivable comprise:
<CAPTION>
December 31
------------------------------
1996 1997
US$ US$
<S> <C> <C>
Accounts receivable 6,188 15,429
Allowance for doubtful accounts for the year
and balance at December 31 - ( 2,738)
------ ------
Accounts receivable, net 6,188 12,691
====== ======
</TABLE>
F-19
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
10. DEPOSITS AND OTHER RECEIVABLES
Deposits and other receivables comprise:
<TABLE>
<CAPTION>
December 31
------------------------------
1996 1997
US$ US$
<S> <C> <C>
Deposits and other receivables 7,663 3,057
------ ------
Allowance for doubtful accounts:
Balance at January 1 - ( 119)
Allowance for the year ( 119) -
------- -------
Balance at December 31 ( 119) ( 119)
------- -------
Deposits and other receivables, net 7,544 2,938
======= =======
<CAPTION>
11. INVENTORIES
Inventories comprise:
December 31
------------------------------
1996 1997
US$ US$
<S> <C> <C>
Raw materials 20,801 22,931
Work in progress 4,283 53
Finished goods 22,021 22,076
------ ------
47,105 45,060
------ ------
Allowance for mark to market of inventories:
Balance at January 1 - ( 177)
Provided during the year ( 177) ( 4,752)
------- -------
Balance at December 31 ( 177) ( 4,929)
------- -------
Inventories, net 46,928 40,131
======= =======
</TABLE>
F-20
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
12. RELATED PARTY BALANCES AND TRANSACTIONS
(i) The amounts due from related companies comprise:
<TABLE>
<CAPTION>
December 31
------------------------------
1996 1997
US$ US$
<S> <C> <C>
Trade receivable from Jiangsu Tongyun
Group Company (formerly known as
Jiangyang Automobile Company, "TYG") 15,885 34,928
Loan receivable from Jiangsu Tongyun
Group Company (formerly known as
Jiangyang Automobile Company, "TYG") 801 6,437
Loan receivable from Ocean Asia International
Ltd ("Ocean Asia") 2,489 498
Loan receivable from Jiangsu Tongyun Group
Trading Company ("TYG Trading") 312 219
Trade receivable from Wide Shine
Development Limited ("WSD") 2,477 2,016
Allowance for doubtful accounts for the
year and balance at December 31 - ( 273)
------- -------
21,964 43,825
======= =======
Due within one year 7,693 13,133
Due after more than one year 14,271 30,692
------- -------
21,964 43,825
======= =======
TYG is a direct 5% owner of TYC and a 50% shareholder of
Sinocity, the majority shareholder of China Container. Ocean
Asia is a wholly beneficially owned subsidiary of TYG in
which Mr. Cheung Sau Yung, a director of China Container, is
also a director of Ocean Asia. TYG Trading is a branch of
TYG. In addition, Mr. Cheung Sau Yung 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.
</TABLE>
F-21
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
12. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
The loan receivable from Ocean Asia included a loan of US$331
(1996: US$331) made to Ocean Asia to acquire a building in
Hong Kong in 1993. The loan receivable from Ocean Asia is
unsecured. The balance at December 31, 1997 is interest-free
and the balance at December 31, 1996 bore interest at weighted
average of 7.09% per annum. Interest income on the above loan
receivable from Ocean Asia amounted to US$271 and US$166 for
the years ended December 31, 1995 and 1996, respectively.
In October 1997, TYG concluded an agreement with TYC in
which TYG agreed to bear the outstanding amount as of
October 31, 1997 of US$3,980 due from Ocean Asia to TYC.
Apart from an amount of US$853 (1996: US$853) receivable
from WSD which is unsecured and bears interest at 4.75% per
annum and the loan receivable from TYG of US$3,947 (1996:
Nil) is unsecured and bears interest at market rates, the
loan receivable from Ocean Asia, the trade receivable from
WSD and the loans receivable from TYG Trading and TYG are
unsecured and interest-free. Interest income received from
WSD amounted to US$82, US$41 and US$41 for the years ended
December 31, 1995, 1996 and 1997, respectively.
A Renminbi export loan facility of US$12,000 was obtained by
TYG in July 1997 for the use by TYC. Interest rate was
10.08% per annum. This loan was guaranteed by TYC and a
state-owned investment and trust corporation in Yangzhou.
Subsequent to the balance sheet date, in March 1998, a
revolving Renminbi export loan facility of the same amount
was obtained by TYG for the use by TYC to replace the
above-mentioned facility. Interest rate is 7.65% per annum.
This loan is guaranteed by TYC and Yangzhou Tonghua (defined
hereinafter).
(ii) The balances with associated companies comprise:
<TABLE>
<CAPTION>
December 31
------------------------------
1996 1997
US$ US$
<S> <C> <C>
Amounts due from associated companies 908 993
Allowance for doubtful accounts for the
year and balance at December 31 - ( 993)
------ ------
Amounts due from associated companies, net 908 -
====== ======
Amounts due to associated companies 320 1,147
====== ======
</TABLE>
F-22
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
12. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
The amounts due from associated companies are unsecured,
bear interest at market rates (weighted average of 7.09% and
8.29% as at December 31, 1996 and 1997 per annum,
respectively) and are repayable on demand. Interest income
for the years are as follows:
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1995 1996 1997
US$ US$ US$
<S> <C> <C> <C>
Interest income - 189 42
====== ====== ======
</TABLE>
(iii) The amount due to a related company, Singapore Namlee Steel
(Private) Ltd, a direct 25% owner of Tonglee, is unsecured,
non-interest bearing and is repayable on demand.
(iv) Sale transactions with related parties are summarised as
follows:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------
1995 1996 1997
Notes US$ US$ US$
<S> <C> <C> <C> <C>
WSD (a) 959 28,899 4,817
China Railway Container
Transportation Center ("CRCT") (b) - 14,512 20,114
Jiangsu Tongyun Group
Trading Company ("TYG Trading") (c) - 254 433
------ ------ ------
959 43,665 25,364
====== ====== ======
</TABLE>
(a) The PRC subsidiaries sold containers to WSD, which
are subject to normal trade credit terms.
(b) On August 10, 1996, TYG entered into a sales
contract with CRCT to sell an agreed quantity of
containers to CRCT. The sales revenue is to be
settled by 32 equal quarterly instalments.
F-23
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
12. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
On August 18, 1996, TYG entered into an agreement
with TYC to allocate 18,000 containers of the
container supply contract to TYC, with the same
repayment terms as agreed with CRCT. During the
year ended December 31, 1997, 10,147 (1996: 7,853)
containers with a total sales value of US$20,114
(1996: US$14,512) were delivered to CRCT. The face
value of the related trade receivable from TYG,
before discounting for the implicit 8% interest
element, amounted to US$29,333 (1996: US$22,559).
The trade receivable from TYG is unsecured, and is
repayable by instalment on a quarterly basis
directly by CRCT to TYC pursuant to an irrevocable
payment instruction by TYG to CRCT.
Interest income recognised on these trade receivables
in the statements of operations amounted to US$3,521
for the year ended December 31, 1997 (1996: US$745;
1995: Nil).
(c) The PRC subsidiaries sold containers to TYG
Trading, a wholly owned subsidiary of TYG, which in
turn sold these containers to the customers at the
same sale value, i.e. with no mark-up.
(v) Other material transactions with related companies are
summarised as follows:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
1995 1996 1997
US$ US$ US$
<S> <C> <C> <C>
Purchases of raw materials
from Yangzhou Tongda ("defined
hereinafter") 667 9 2,439
Management fee paid to TYG - - 260
Sales commission paid to TYG Trading - - 200
===== ===== =====
</TABLE>
13. TRANSACTIONS WITH STATE-OWNED ENTITIES
A significant portion of the Group's transactions during the years
ended December 31, 1995, 1996 and 1997 were undertaken, directly or
indirectly, with State-owned enterprises in the PRC and on such
commercial terms as determined between the relevant PRC State-owned
enterprises and the Group.
F-24
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
14. INTANGIBLE ASSETS
Intangible assets comprise:
<TABLE>
<CAPTION>
December 31
-----------------------------
1996 1997
US$ US$
<S> <C> <C>
Cost:
Rights to use sites 2,135 2,135
Technical knowhow 1,000 1,000
Other 172 172
----- -----
3,307 3,307
----- -----
Accumulated amortization:
Rights to use sites 237 421
Technical knowhow 100 200
Other 52 61
----- -----
389 682
----- -----
Intangible assets, net 2,918 2,625
===== =====
</TABLE>
The PRC Subsidiaries are required to pay a premium upon obtaining
official certificates for the above rights to use sites. Further
details are set out in note 23 to the consolidated financial
statements.
The technical knowhow is in respect of the production of reefer
containers contributed as capital by a shareholder of Tonglee.
F-25
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
15. FIXED ASSETS
Fixed assets comprise:
<TABLE>
<CAPTION>
December 31
------------------------------
1996 1997
US$ US$
<S> <C> <C>
Cost:
Buildings 7,225 8,058
Plant, machinery and equipment 21,005 21,963
Motor vehicles 1,926 2,300
Office equipment 538 553
------ ------
30,694 32,874
------ ------
Accumulated depreciation:
Buildings 1,059 1,659
Plant, machinery and equipment 3,918 5,944
Motor vehicles 876 1,302
Office equipment 280 382
------ ------
6,133 9,287
------ ------
Net book value 24,561 23,587
====== ======
</TABLE>
Depreciation charge for the year ended December 31, 1997 amounted to
US$3,154 (1996: US$1,966; 1995: US$1,030).
16. CONSTRUCTION IN PROGRESS
Construction in progress comprises:
<TABLE>
<CAPTION>
December 31
------------------------------
1996 1997
US$ US$
<S> <C> <C>
Land use rights, plant and machinery, at cost 423 2,883
Interest capitalized 30 84
Others 294 -
------ -----
747 2,967
====== =====
</TABLE>
F-26
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
17. INTERESTS IN ASSOCIATED COMPANIES
Interests in associated companies comprise:
<TABLE>
<CAPTION>
December 31
-----------------------------
1996 1997
US$ US$
<S> <C> <C>
Unlisted shares, at cost 3,241 3,241
Share of post-acquisition profits less losses, net (1,146) (1,756)
----- -----
2,095 1,485
===== =====
</TABLE>
Particulars of the associated companies, all of which are
registered in the PRC, are summarised as follows:
<TABLE>
<CAPTION>
Equity holding
Registered attributed Tenure Commencement
Name of company capital to the Group (years) date
1996 1997
<S> <C> <C> <C> <C> <C>
Yangzhou Tongda US$1,050 35.57% 35.57% 15 March 11, 1993
Forging Co. Ltd.
Yangzhou Tongyang US$2,000 44% 44% 15 April 8, 1993
Machinery Co. Ltd.
("Yangzhou Tongyang")
Beihai Tonghai US$4,500 25% 25% 15 February 19,
Containers Co. Ltd. 1994
Yangzhou Universal RMB30,000 25% 25% # May 29, 1993
Commercial Building
Shareholdings
Co Ltd ("Yangzhou
Universal")
</TABLE>
# Yangzhou Universal is a company limited by shares with indefinite
tenure.
Other than Yangzhou Universal, the tenure of each of the other
associated companies can be extended by agreement with the joint
venture partners with the necessary approval from the relevant
government authorities.
F-27
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
17. INTERESTS IN ASSOCIATED COMPANIES (continued)
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 to Metchem for a
cash consideration of US$880. Mr. Cheung Sau Yung, a director of
China Container and TYC, is also a director of Metchem. On January
27, 1995, the Sale Agreement was duly approved by the PRC government
authorities. However, due to the change in the investment plans of
Metchem, Metchem decided to delay its investment in Yangzhou Tongyang
and the sale of TYC's interest in Yangzhou Tongyang has, therefore,
not been completed. In 1998, TYC verbally agreed with Metchem to
terminate the Sale Agreement.
18. OTHER ASSETS
Other assets comprise the Group's equity investments in some PRC
unlisted companies, and a loan to a third party. The Group exercises
no significant influence over the PRC companies. The Company's other
assets comprise:
<TABLE>
<CAPTION>
December 31
-----------------------------
1996 1997
US$ US$
<S> <C> <C>
Loan to a third party 602 769
Long term equity investments in the PRC, at cost 703 645
Provision for loan receivable - ( 739)
Provision for other than temporary diminution
in value of long term equity investments - ( 253)
------ ------
Other assets, net 1,305 422
====== ======
</TABLE>
The provision for other than temporary diminution in value was provided
in 1997 (1996 and 1995: Nil).
F-28
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
19. BANK LOANS AND OVERDRAFTS
The Company's bank loans and overdrafts comprise:
<TABLE>
<CAPTION>
December 31
Weighted ------------------------------
average 1996 1997
interest rates US$ US$
<S> <C> <C> <C>
Short term bank loans and overdrafts:
Denominated in US$ Floating -
(note (i)) 77,963 85,397
Denominated in RMB Floating -
(note (ii)) 2,795 14,277
------ ------
80,758 99,674
====== ======
</TABLE>
Notes:
(i) 7.09% and 7.53% at December 31, 1996 and 1997 per annum,
respectively.
(ii) 9.18% and 9.24% at December 31, 1996 and 1997 per annum,
respectively.
A bank has granted to TYC a US$60,500 and RMB10,000 (US$1,205) short
term bank loan and overdraft facility which is renewable in 1998. 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$44,000. 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. Two other banks have granted TYC short term
bank loans of US$7,840 and RMB103,000 (US$12,410). As at December 31,
1997, the extent of banking facilities utilized by TYC was US$65,473
and RMB110,500 (US$13,313).
The bank loans of TYC to the extent of US$26,000 (1996: US$26,000)
are collateralized by a floating charge over all of TYC's inventories
and fixed assets and to the extent of US$50,951 (1996: US$36,540) are
guaranteed by TYG. Moreover, one of the bank loans amounting to
US$12,048 is guaranteed to the extent of 50% of the loan balance by
Yangzhou Tonghua Semi-Trailer Co., Limited.
A bank has also granted to Tonglee a US$18,000 and RMB10,000
(US$1,205) short term bank loan and overdraft facility which is
renewable in 1998. All bank loans of Tonglee are guaranteed by TYG.
As at December 31, 1997, the extent of banking facilities utilized by
Tonglee was US$19,924 and RMB8,000 (US$964).
As at December 31, 1997, bank borrowings of US$24,805 and RMB6,000
(US$723) were overdue.
F-29
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
20. SHARE CAPITAL AND ADDITIONAL PAID-IN CAPITAL
As of May 10, 1995, after giving effect to the Reverse Acquisition
set out in note 3 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 each, issued and outstanding.
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, 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. No
shares of preferred stock have been issued.
Additional paid-in capital represents a transfer of US$1,581 from
retained earnings in the year 1993, and the notional difference
between the paid-up share capital of China Container over 80% of
TYC's paid-in capital and capital reserves, and the nominal value of
the Company's shares exchanged under the Reverse Acquisition and
Reorganization as set out in note 3 to the consolidated financial
statements.
21. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------
1995 1996 1997
US$ US$ US$
<S> <C> <C> <C>
Cash paid during the year for:
Interest paid 3,076 4,879 8,757
Income taxes paid 1,350 348 -
===== ===== =====
</TABLE>
F-30
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
22. PURCHASE OF YANGZHOU TONGLEE REEFER CONTAINERS COMPANY LIMITED
On January 1, 1996, China Container's 80% subsidiary, TYC increased
its shareholding in Tonglee from 50% to 51% for US$80. Due to the
acquisition of control by TYC, the results of Tonglee were
consolidated into China Container since January 1, 1996.
The pro forma consolidated results of operations of China Container
and its subsidiaries as if Tonglee had been acquired as of January 1,
1995, are as follows:
<TABLE>
<CAPTION>
Year ended
December 31
1995
(Pro forma)
US$
<S> <C>
Net sales 80,277
Cost of sales (68,131)
Selling and administrative expenses (3,970)
Financial expenses, net (1,883)
Other expenses, net (212)
Reorganization expenses (1,382)
Income taxes (831)
Share of net losses of associated companies (1,341)
Minority interests (755)
-------
Net income 1,772
=======
Pro forma earnings per share, based on 23,497,607 shares
of common stock outstanding (note 5(l)) 0.08
=======
</TABLE>
The pro forma results, which were based upon certain assumptions and
estimates, do not purport to be indicative of the results that
actually would have occurred had the acquisition occurred on January
1, 1995.
F-31
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
23. CONTINGENCIES
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. In 1998, the PRC Government issued new regulations
which include, inter alia, the transfer of land use rights from
Government-owned enterprises to non-Government owned
enterprises/enterprises partially owned by the Government. The
details of these new regulations have not yet been finalized.
Management is in the process of negotiation with the Provincial Land
Administration Bureau of Jiangsu Province 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. Title of TYC's premises is registered in the name of TYG.
TYG has agreed to allow TYC to use those premises at no further cost
until 2005. TYG also agreed to indemnify TYC for all costs that TYC
may incur if they are not allowed to occupy the present premises and
have to relocate to other premises as a result of the failure of
registration of title to the premises by TYC.
24. FOREIGN CURRENCY EXCHANGE
A significant portion of the business of the Group's PRC Subsidiaries
is undertaken in RMB, the national currency of the PRC, which is not
freely convertible into US$ or other foreign currencies.
With effect from January 1, 1994, the PRC government introduced a
single rate of exchange as quoted daily by the People's Bank of China
(the "Exchange Rate"). The 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 US$ 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 People's 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. As at December 31, 1997, China
Container's share of PRC Subsidiaries' reserves was US$139, which is
subjected to the foreign exchange control.
The Exchange Rates at December 31, 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
Year ended December 31
---------------------------------------
1995 1996 1997
US$ US$ US$
<S> <C> <C> <C>
RMB equivalent of US$1.00 8.32 8.30 8.30
===== ===== =====
</TABLE>
F-32
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
25. RETIREMENT PLAN
As stipulated by the regulations of the PRC government, the PRC
Subsidiaries are required to make an annual contribution equivalent
to 23% of the annual base salaries of their existing PRC employees to
an insurance company, which is responsible for providing pension
benefits to the PRC Subsidiaries' 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
operations amounted to US$564, US$469 and US$714 for each of the
years ended December 31, 1995, 1996 and 1997, respectively.
26. CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject the Group to a
concentration of credit risk principally consist of cash deposits,
accounts receivable and the accounts due from associated and related
companies.
The Group places its cash deposits with various PRC State-owned banks.
As of December 31, 1997, accounts receivable totalled US$15,429
(1996: US$6,188) comprised primarily of the PRC Subsidiaries' trade
receivables with customers who are mainly international shipping and
leasing companies. Generally, collateral is not required.
27. 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 many 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.
F-33
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
28. 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.
29. RESERVES AND DISTRIBUTION OF PROFITS
The movements in reserves during the years are as follows:
<TABLE>
<CAPTION>
Enterprise
General expansion
reserve reserve Total
US$ US$ US$
<S> <C> <C> <C>
Balance at January 1, 1995 999 1,969 2,968
Appropriation for the year 408 2,503 2,911
------ ------ ------
Balance at December 31, 1995 1,407 4,472 5,879
Appropriation for the year 34 1,690 1,724
------ ------ ------
Balance at December 31, 1996 1,441 6,162 7,603
Appropriation for the year 17 7 24
------ ------ ------
Balance at December 31, 1997 1,458 6,169 7,627
====== ====== ======
</TABLE>
Pursuant to the relevant laws and regulations for Sino-foreign joint
venture companies, earnings of the PRC Subsidiaries 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 the PRC Subsidiaries (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.
F-34
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
29. RESERVES AND DISTRIBUTION OF PROFITS (continued)
The appropriations to general reserve and enterprise expansion
reserve attributable to China Container totalling US$7,627 are
reflected as reserves in the consolidated balance sheet as at
December 31, 1997. Such amounts are non-distributable except for an
amount of US$5,483 included in the 1997 balance, being voluntarily
appropriated into the enterprise expansion reserve during 1995 and
1996 which is in addition to the statutorily required appropriation.
This amount is distributable upon approval by the board of directors
of TYC. In 1996 and 1997, TYC had operating profits under PRC
accounting rules and regulations, accordingly, appropriations to
general reserve and enterprise expansion reserve were made based on
the profits under the PRC regulations.
Staff bonus and welfare benefits are amounts set aside for the
provision of bonus and welfare benefits to the employees of the PRC
Subsidiaries. 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 the PRC Subsidiaries' retained earnings,
including share of results of associated companies, prepared under
USGAAP. In addition to the distributable reserve of US$5,483 as at
December 31, 1997, the amount of distributable retained earnings
under the PRC regulations as at December 31, 1996 and 1997 are
US$Nil.
F-35
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
30. 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
customer for the respective years is as follows:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------
1995 1996 1997
US$ US$ US$
<S> <C> <C> <C>
By geographic region of destination of sales:
United States of America 62,998 28,814 38,458
Hong Kong 14,125 50,848 46,641
People's Republic of China, except Hong Kong - 14,512 24,586
Germany - - 12,576
Others 3,154 3,271 1,244
------ ------ -------
80,277 97,445 123,505
====== ====== =======
By major customer:
A P Moller 2,339 - -
Capital Leasing GMBH - - 12,158
China Railway Container Transportation Center
(through TYG - see note 12(iv)) - 14,512 20,114
Gateway Container International Limited - - 13,047
Interpool Limited 12,407 2,147 2,827
Orient Overseas Container Line Ltd 13,632 19,999 38,824
Textainer Capital Corporation 14,380 8,310 4,472
Transamerica Leasing Inc 16,924 5,667 10,632
Triton Container International Limited 18,123 9,768 7,480
WSD (note 12(iv)) 959 28,899 4,817
South China W I Limited - - 3,329
Others 1,513 8,143 5,805
------ ------ -------
80,277 97,445 123,505
====== ====== =======
</TABLE>
F-36
<PAGE>
CHINA CONTAINER HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except for share and per share data)
31. LITIGATION
(i) On or about August 6, 1997, certain shareholders of China
Container, derivatively on behalf of the Company, and
individually and on behalf of a class of shareholders
similarly situated, sued in New York state court certain
directors and officers of China Container, Sinocity, a major
shareholder of China Container, and China Container, as a
nominal defendant. In such case, the plaintiffs seek
injunctive relief requiring the director defendants to cause
China Container to comply with applicable federal securities
laws and the Company's By-Laws and monetary damages arising
from defendants' purported breaches of fiduciary duty.
(ii) On or about March 11, 1998, a shareholder of China
Container, on behalf of himself and all others similarly
situated, sued China Container and certain directors and
officers of China Container and Sinocity in the United
States District Court for the Southern District of New York.
In such case, the plaintiff seeks an indeterminate amount of
damages from the individual defendants and China Container
arising from China Container's alleged misleading statements
and failure to disclose adverse financial information about
China Container in a press release dated January 27, 1997.
The parties agreed to settlements in principle to settle both of the
above-mentioned actions for the total cost of not more than US$450.
This amount has been provided for in the financial statements. The
settlements have not yet been finalized and await approval by the
respective courts. The settlement of each case is also contingent on
settlement of the other.
F-37
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,744
<SECURITIES> 0
<RECEIVABLES> 15,429
<ALLOWANCES> (2,738)
<INVENTORY> 40,131
<CURRENT-ASSETS> 72,637
<PP&E> 32,874
<DEPRECIATION> (4,287)
<TOTAL-ASSETS> 134,415
<CURRENT-LIABILITIES> 141,755
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> (8,152)
<TOTAL-LIABILITY-AND-EQUITY> 134,415
<SALES> 123,505
<TOTAL-REVENUES> 123,622
<CGS> 122,180
<TOTAL-COSTS> 122,180
<OTHER-EXPENSES> (11,528)
<LOSS-PROVISION> (9,748)
<INTEREST-EXPENSE> (8,483)
<INCOME-PRETAX> (19,961)
<INCOME-TAX> (15)
<INCOME-CONTINUING> (20,586)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,077)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
