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CHINA TECHNOLOGY GLOBAL CORP - 20-F - 20051116 - RESULTS_OF_OPERATIONS
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 2005 COMPARED WITH FISCAL YEAR ENDED MARCH 31, 2004
SALES AND GROSS PROFIT. Sales are derived from the procurement of hardware on
behalf of customers and professional services for system development, including
design, planning, consulting, and system integration, the system consultancy
services, and the monthly subscription fees for system services. System
development service income is recognized based on the percentage of completion
method. Revenues from customer contracts requiring significant production,
modifications, or customization of the software are recognized over the
installation and customization period. Labor hours and direct project expenses
are used to determine the stage of completion, except for revenues associated
with the procurement of hardware. Revenues from sales of hardware are recognized
upon delivery. System consultancy services are recognized when services are
rendered and obligations under related contracts are fulfilled. Subscription
fees for system services are recognized ratably over the contract period.
Our sales in fiscal 2005 were HK$17,573,000 (US$2,253,000) with gross profit of
HK$12,129,000 (US$1,555,000), approximately 69%.
OPERATING EXPENSES. Selling, general and administrative expenses for fiscal 2005
were HK$12,222,000 (US$1,567,000), as compared to HK$4,731,000 (US$606,500) for
fiscal 2004. The increase in expenses in fiscal 2005 was due to the
consolidation of the company's corporate and other expenses incurred during
fiscal 2005.
OTHER INCOME AND EXPENSES. We had net other income of HK$859,000 (US$110,000) in
fiscal 2005, which consisted primarily of interest income, interest expense,
provision of doubtful debts, and provision for obsolescence inventories.
NET INCOME FROM CONTINUING OPERATIONS BEFORE TAXES. After deducting other income
and expenses, net income from continuing operations before taxes for fiscal 2005
was HK$766,000 (US$98,000), compared to a loss of HK$4,731,000 for fiscal 2004.
DISCONTINUED OPERATIONS. We generated a net income of HK$921,000 (US$118,000)
from discontinued operations in fiscal 2005, as compared to a loss of
HK$30,116,000 (US$3,861,000) in fiscal 2004.
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We do not believe that inflation has had any significant impact on our results
of operations. Also, we do not believe that foreign currency fluctuations have
been material. Foreign currency transactions are translated into Hong Kong
dollars at the applicable rates of exchange ruling at the transaction dates.
Monetary assets and liabilities denominated in foreign currencies at the balance
sheet date are translated into Hong Kong dollars at the applicable rates of
exchange ruling at that date. Capital accounts in foreign currencies are
translated into Hong Kong dollars at their historical exchange rates when the
capital transaction occurred. Net gains and losses resulting from foreign
exchange translation are included in the statements of operations and
stockholders' equity as other comprehensive income (loss). No translation
differences were recorded for the three years ended March 31, 2005.
Some of our business is transacted in the Chinese Renminbi ("RMB"), which is not
freely convertible into foreign currencies. While the PRC government introduced
a single rate of exchange as quoted daily by the People's Bank of China, this
does not imply convertibility of RMB into United States dollars or other foreign
currencies. All foreign exchange transactions continue to take place either
through the Bank of China or other banks authorized to buy and sell foreign
currencies at the exchange rates quoted by the Bank of China. Approval of
foreign currency payments by the Bank of China or other institutions require
submitting a payment application form together with suppliers' invoices,
shipping documents and signed contracts.
FISCAL YEAR ENDED MARCH 31, 2004 COMPARED WITH THE FISCAL YEAR ENDED MARCH 31,
2003.
For the 2003 fiscal year we incurred a loss of HK$101,674,000, as compared to
HK$30,116,000 for fiscal 2004. While our operations improved in 2004, we had
determined to change our business focus.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had working capital of approximately HK$229,738,000
(US$29,452,000), as compared to HK$28,507,000 (US$3,655,000) at March 31, 2004.
Cash and cash equivalents at March 31, 2005 were HK$101,962,000 (US$13,072,000),
as compared to HK$16,059,000 (US$2,059,000) at March 31, 2004. The increase in
working capital and cash was due primarily to the profitable operations of
DiChain Software. We believe that our working capital is sufficient for our
present requirements for the next 12 months. After this time, we may need to
raise additional funds through public or private financing, which may include
the sale of equity securities.
Despite our profitable operations, we used cash of HK$261,175,000
(US$33,484,000) in fiscal 2005, as compared to HK$22,976,000 (US$2,946,000) in
fiscal 2004, for our operating activities. In fiscal 2005, we also used cash of
HK$489,669,000 (US$62,778,000) for our investing activities in fiscal 2005,
primarily for the acquisition of a subsidiary (HK$487,508,000).
In fiscal 2005, cash was provided by the new issue of common stock
(HK$642,875,000) and bank borrowings (HK$193,635,000). In fiscal 2004, cash was
primarily provided by the issue of common stock (HK$39,084,000).
Our bank borrowings bear interest at rates ranging from 4.779% per annum to
6.138% per annum, are secured by bank deposits and/or guarantees, and are
repayable within one year.
On March 31, 2005, the Company issued 13,328,624 shares of common stock to China
Merchants DiChain (Asia) Limited ("CMDA") to pay indebtedness owned to CMDA in
the amount of HK$9,357,000 (US$1,200,000).
RESEARCH AND DEVELOPMENT
Research and development expenses include payroll, employee benefits and other
employee-related costs associated with product development. Technological
feasibility for our software products is reached shortly before the products are
released to manufacturing. Costs incurred after technological feasibility is
established are not material, and accordingly, we expense all research and
development costs when incurred. We have not incurred any significant research
and development expenses during the past three years.
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EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that ". . . under some circumstances, items such as idle
facility expense excessive spoilage, double freight, and rehandling costs may be
so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
company.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152) The amendments made by Statement 152. This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005, with earlier application encouraged.
We do not anticipate that the implementation of this standard will have a
material impact on our financial position, results of operations or cash flows.
On December 16, 2004, the FASB published SFAS No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, we will implement the revised standard in the first quarter
of fiscal year 2006. Currently, we account for our share-based payment
transactions under the provisions of APB 25, which does not necessarily require
the recognition of compensation cost in the financial statements. Management
does not believe the adoption of this revised standard will have any immediate
materially impact on our financial position and results of operations or cash
flows.
On December 16, 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions (" SFAS 153"). This statement amends APB Opinion 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. Under SFAS 153, if a nonmonetary exchange of
similar productive assets meets a commercial-substance criterion and fair value
is determinable, the transaction must be accounted for at fair value resulting
in recognition of any gain or loss. SFAS 153 is effective for nonmonetary
transactions in fiscal periods that begin after June 15, 2005. We do not
anticipate that the implementation of this standard will have a material impact
on our financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. We are required to adopt the provisions
of FIN 47 no later than the second quarter of its fiscal 2006. We do not expect
the adoption of this Interpretation to have a material impact on our
consolidated financial position, results of operations or cash flows.
In May 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
154 requires retrospective application to prior periods' financial statements
for changes in accounting principle, unless it is impracticable to determine
either the period-specific effects
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or the cumulative effect of the change. SFAS 154 also requires that
retrospective application of a change in accounting principle be limited to the
direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of the
accounting change. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date this Statement is issued. We do
not expect the adoption of this SFAS to have a material impact on our
consolidated financial position, results of operations or cash flows.
TREND INFORMATION
The supply chain management and logistics software business in China is
generally seasonal in nature. Revenues in the first six months of each calendar
year are flat. Typically, the revenue of the last quarter of each calendar year
accounts for over 40% of the revenue for the entire year.
The supply chain management and logistics software business in China is
experiencing a period of rapid growth due to an increase in demand for
information management systems by manufacturing and distribution businesses to
improve such businesses operating efficiency and productivity. According to the
Industry Report of 2004 of the Ministry of Information and Technology of the
People's Republic of China, demand for information management systems by
small-to medium-sized companies has grown even faster than the industry average.
We believe this trend will positively influence our operating results in the
future.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
As of March 31, 2005, we had the following contractual obligations:
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Payments due by period (HK$'000)
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Contractual Obligations Less than More than 5
Total 1 year 1 - 3 years 3 - 5 years years
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Long-term debt obligations 45,283 - 45,283 - -
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Short-term debt obligations 148,352 148,352 - - -
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Operating lease obligations 1,044 1,044 - - -
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Purchase obligations - - - - -
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Other long-term liabilities - - - - -
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Total 194,679 149,396 45,283 - -
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OFF-BALANCE SHEET ARRANGEMENTS
We do currently do not have any off-balance sheet arrangements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
DIRECTORS AND SENIOR MANAGEMENT
Set forth below are the names, ages and terms of office of each of the
directors, executive officers and significant employees of the Company and a
description of the business experience of each.
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PERSON AGE OFFICE OFFICE HELD TERM OF
SINCE OFFICE (1)<F1>
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Dr. FAN Di 49 Chairman, Chief Executive Officer and April 2003 *
Executive Director
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ZHOU Li Yang 46 Chief Financial Officer and Executive February 2004 *
Director
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WANG Wei 39 Executive Director August 2004 *
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Dr. QI Mingyau 31 Executive Director March 2005 *
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YU Wai Kit 39 Corporate Secretary November 2004
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Dr. Robert FUNG Hing Piu 69 Independent Director April 2003 *
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Dr. Godwin WONG 55 Independent Director April 2003 *
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Iain F. 64 Independent Director February 2004 *
BRUCE
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Barry J. 60 Independent Director June 2004 *
BUTTIFANT
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Professor CHI Tianhe 44 Independent Director March 2005 *
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* Until the next annual general meeting
(1)<F1> A director is subject to earlier removal, with or without cause, by
the shareholders and with cause by the other directors. Officers are
subject to earlier removal, with or without cause, by the directors.
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There are no family relationships among any of our Executive Directors and
Independent Directors.
EXECUTIVE DIRECTORS
DR. FAN DI. Since April 2003, Dr. Fan has served as our Chairman, Chief
Executive Officer and an Executive Director. Dr. Fan is responsible for
overseeing our strategic development. Since April 2002, Dr. Fan has served as
the Chairman and Chief Executive Officer of China Merchants DiChain (Asia)
Limited, a company listed on the Stock Exchange of Hong Kong Limited. From
December 1999 to April 2002, he served as an Executive Director and Chief
Financial Officer of China Merchants Group. Dr. Fan is a director of China
Merchants DiChain (Asia) Limited and China Pharmaceuticals International
Corporation. Dr. Fan has substantial experience in financial management and
business management. He holds a Ph.D. in Business Administration from the
Southern University of California.
MR. ZHOU LI YANG. Since February 2004, Mr. Zhou has served one of our Executive
Directors of the Company and Mr. Zhou was appointed as the Company's Chief
Financial Officer in December 2004. Since February 2002, Mr. Zhou has worked for
China Merchants DiChain group, which is the ultimate controlling shareholder of
the Company. Since September 2004, Mr. Zhou has served as the Managing Director
of China Merchants DiChain (Asia) Limited, a company listed on the Stock
Exchange of Hong Kong, engaging in the business of logistics. He has been a
director, since October 2004, and the Chief Financial Officer, since August
2005, of China Pharmaceuticals International Corporation, a majority-owned
subsidiary of China Merchants DiChain Investment Holdings Limited, whose stock
trades on the OTC Bulletin Board. From May 2000 to August 2001, Mr. Zhou served
as the Investment Manager of Tianjin Development Holdings Ltd., a window company
of Tianjin government in Hong Kong listed on the Stock Exchange of Hong Kong
with businesses in manufacturing and selling winery and beverage products and
elevator and investment and operation of container terminal, highway and gas
supply in China. From February 1995 to October 1999, Mr. Zhou served as an
Assistant Manager to Ka Wah Capital Ltd., an investment banking arm of CITIC
Kawah Bank, which is a bank listed on the Stock Exchange of Hong Kong. Mr. Zhou
has substantial experience in management of listed companies, mergers and
acquisitions, direct investment and corporate finance. He obtained a Bachelor
degree in Physics from Central-South University, China and a Master of Science
degree in Business/Finance from the University of Baltimore in the United
States.
MR. WANG WEI. Dr. Wang has served as one of our Executive Directors since August
2004 and joined DiChain Software Systems in October 2000. Since November 2001,
Dr. Wang has served as a General Manager of DiChain Software. From August 1999
to October 2000, Dr. Wang served as the Senior Manager and Chief Technology
Officer of Yin Pai Technology (SZ) Co., Ltd. and Zhu Yang Technology (SZ) Co.,
Ltd., each of which is focused on developing information technologies. Dr. Wang
received his Ph.D. degrees in Industrial Engineering and Management from Hong
Kong Technology University and Central China University.
DR. QI MINGYAU. Dr. Qi was appointed one of our Executive Directors in March
2005 and is currently the General Manager of DiChain Intelligent Transportation
System Co., Ltd, a subsidiary of DiChain Group. Dr. Qi holds a Ph.D. in GIS
Studies, Institute of Geographic Science and Nature Resources Research, Chinese
Academy of Science and has over ten years' experience in GIS, GPS, LBS wireless
application and logistics in China.
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NON-EXECUTIVE DIRECTORS
DR. GODWIN WONG. Professor Wong has been on the faculty of the Haas School of
Business at the University of California, Berkeley for the past seventeen years.
He performs research and teaches doctoral, master's and baccalaureate programs
and executive training courses in the areas of Entrepreneurship, Information
Technology Management (IT/MIS), Strategic Planning, International Business
Negotiation, and Multicultural Management. He has been a management consultant
and specialist/strategist to various organizations including banks,
corporations, government agencies, other consulting firms and private business
enterprises. He has assisted multinational companies in the conduct and
negotiation of businesses with China and Asia, especially in mergers and
acquisitions. He has been involved in the turnaround and the purchase and sale
of troubled financial institutions. He has also served on the boards of
directors of several California banks and several high tech ventures in Silicon
Valley. He has headed his own management companies in real estate, consulting,
trading, and investment management. Dr. Wong obtained his Bachelor's degree from
the University of Wisconsin, his Master's degree from U.C.L.A., and Master's and
Doctorate degrees from Harvard University.
DR. ROBERT FUNG HING PIU. Dr. Fung is a non-executive director of China
Merchants DiChain (Asia) Limited, a company listed on the Stock Exchange of Hong
Kong Limited. Dr. Fung holds degrees from Harvard University in the United
States and McGill University in Canada. He is the founding chairman of the Hong
Kong Committee of UNICEF and a member of the Rotary Club of Hong Kong.
MR. IAIN F. BRUCE. Mr. Bruce has more than 40 years of international experience
in accounting and consulting. He joined KPMG Hong Kong in 1964 and was its
senior partner from 1991 to 1996. He is a member of the Institute of Chartered
Accountants of Scotland and the Hong Kong Institute of Certified Public
Accountants and serves on the boards of several publicly listed companies in
Hong Kong and overseas.
MR. BARRY J. BUTTIFANT. Mr. Buttifant has been appointed as the Managing
Director of Hsin Chong International Holdings Limited ("Hsin Chong"), and the
Alternate Director of Hsin Chong Construction Group Limited since December 2004
and became the Alternate Director of Synergis Holdings Limited in January 2005.
Before joining Hsin Chong, Mr. Buttifant was an Operating Partner of Barings
Private Equity Partners Asia Limited. He was also the Managing Director of Wo
Kee Hong (Holdings) Limited ("Wo Kee Hong") from 2001 to 2002 and was the
Adviser to the board of directors of Wo Kee Hong from 2002 to 2004. He was the
Managing Director of IDT International Limited for over 8 years and had worked
for Sime Darby Hong Kong Limited and Polly Peck Group for more than 11 years in
the capacity of Finance Director and Managing Director during the period. He is
also an independent non-executive director of Hong Kong public companies:
Giordano International Limited, Daiwa Associate Holdings Limited, MediaNation
Inc, and Alltronics Holdings Limited, one NASDAQ listed company China Technology
Global Corporation and a director of one NYSE public company Global-Tech
Appliances Inc. Mr. Buttifant is a fellow member of the Association of Chartered
Certified Accountants, the Hong Kong Institute of Certified Public Accountants,
the Chartered Management Institute, the Hong Kong Management Association and the
Hong Kong Institute of Directors.
PROFESSOR CHI TIANHE. Professor Chi is the director and professor of National
Engineering Research Centre for Geoinformatics, Institute of Remote Sensing
Applications and Chinese Academy of Sciences Leader of the Research for Remote
Sensing Application on Digital City. He is also the Co-Chair of the Committee of
Urban Information System, GIS Association of China and the Committee of
Categraphy and Geographic Information System, Geography Union of China.
EXECUTIVE OFFICER
MR. YU WAI KIT. Since November 2004, Mr. Yu has served as the Secretary. Mr. Yu
has also served as the secretary of China Pharmaceuticals International
Corporation since November 2004. Mr. Yu is currently the Secretary and Financial
Controller of China Merchants DiChain (Asia) Limited, a holding company listed
on the Stock Exchange of Hong Kong Limited. From July 2002 to August 2004, Mr.
Yu served as the Financial Controller and Company Secretary of Matsunichi
Communication Holdings Limited, an investment holding company listed on the
Stock Exchange of Hong Kong, Limited. From April 1997 to June 2002, Mr. Yu
served as the Group Chief Accountant of Continental Jewelry (MFG.) Limited, a
company listed on the Stock Exchange of Hong Kong, Limited. Mr. Yu is
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currently a member of Australian Society of Certified Practising Accountants and
a member of Hong Kong Institute of Certified Public Accountants.
COMPENSATION
During fiscal year 2005, except for the monthly fee of HK$200,000 (US$25,600)
payable to a related company as sharing of management fees on a cost basis, none
of our other directors or officers received any bonus and none of their
compensation was paid pursuant to a bonus or profit-sharing plan. In fiscal
2004, each of Robert Fung Hing Piu, Godwin Wong, Michael J. Reiser, Iain F.
Bruce and Barry J. Buttifant received 150,000 options, with an exercise price of
US$0.20 per share, under our 2002 Stock Option Plan. These options expire in
July 2013. There are no present plans, arrangements, or understandings
concerning any change in compensation for our directors and officers. The
Company has no pension, retirement or similar benefits for directors and
officers pursuant to a plan contributed to by the Company.
BOARD PRACTICES
SERVICE CONTRACTS
Neither the Company nor its subsidiaries have entered into any service
agreements with any of its executive directors or senior management.
COMMITTEES OF THE BOARD
We have an Executive Committee, an Audit Committee, a Human Resources (HR)
Committee and a Nominating Committee. The members of each are set forth below:
Executive Committee: Messrs. Fan Di (Chairman), Zhou Li Yang and Wang Wei, each
of whom is an executive board member.
Audit Committee: Messrs. Iain F. Bruce (Chairman), Godwin Wong and Barry J.
Buttifant, each of whom is an independent board member.
HR Committee (formerly called the Compensation Committee): Messrs. Godwin Wong
(Chairman), Iain F. Bruce and Robert Fung Hing Piu, each of whom is an
independent board member.
Nominating Committee: Messrs. Robert Fung Hing Piu (Chairman) and Barry J.
Buttifant, each of whom is an independent board member.
The Executive Committee meets as and when necessary and the other three
committees each meet once annually.
The Executive Committee is authorized during any interim period between meetings
of the full Board of Directors, to act for and in lieu of the full Board of
Directors and to approve of any transaction requiring Board approval.
The Audit Committee selects and engages, on our behalf, the independent public
accountants to audit our annual financial statements, and will review and
approve the planned scope of our annual audit. In addition, the Audit Committee
will have to review the terms of proposed transactions with related parties in
accordance with the terms of our Articles of Association. The Audit Committee
operates compliant with applicable rules and regulations of the SEC.
The HR Committee establishes remuneration levels for our officers, performs such
functions as provided under employee benefit programs and administers the 2002
Stock Option Plan.
The Nominating Committee identifies individuals qualified to become Board
members, recommends to the Board candidates to fill Board vacancies and
newly-created director positions, recommends whether incumbent directors should
be nominated for re-election to the Board upon the expiration of their terms,
and oversees the evaluation of the Board's performance. EMPLOYEES
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We had 80 full-time employees on March 31, 2005. Of those 80 employees, 2 were
in accounting and finance, 41 were in production, 22 were in sales and
marketing, 2 were in administration and 13 were in product development. We have
no relationships with labor unions. We employ no significant number of temporary
employees.
SHARE OWNERSHIP
The following table sets forth certain information regarding ownership of the
Company's common shares by the Company's officers and directors as of November
8, 2005.
SHARES AND RIGHTS BENEFICIALLY
TITLE OF CLASS NAME AND ADDRESS OF OWNER OWNED OR CONTROLLED (1)<F1> PERCENT OF CLASS (1)<F1>
Common Stock FAN Di (2)<F2> 161,793,674 61.3%
Common Stock ZHOU Li Yang 0 0%
Common Stock WANG Wei 0 0%
Common Stock QI Mingyau 0 0%
Common Stock YU Wai Kit 0 0%
Common Stock Dr. Robert FUNG Hing Piu (3)<F3> 150,000 0.057%
Common Stock Dr. Godwin WONG (3)<F3> 150,000 0.057%
Common Stock Iain F. BRUCE (3)<F3> 150,000 0.057%
Common Stock Barry J. BUTTIFANT (3)<F3> 150,000 0.057%
Common Stock Professor CHI Tianhe 0 0%
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(1)<F1> Where persons listed on this table have the right to obtain additional
shares of common stock through the exercise of outstanding options or
warrants within 60 days from November 8, 2005, these additional shares
are deemed to be outstanding for the purpose of computing the percentage
of common stock owned by such persons, but are not deemed to be
outstanding for the purpose of computing the percentage owned by any
other person. Based on 263,948,336 shares of common stock outstanding as
of November 8, 2005.
(2)<F2> Includes shares are held of record by DiChain Systems Limited and China
Merchants DiChain (Asia) Limited, both of which are subsidiaries of
DiChain Holdings Limited. Dr. Fan is deemed to be the beneficial owner
of these shares since he is a director of DiChain Holdings Limited.
(3)<F3> Includes shares issuable upon exercise of stock options.
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At the Company's annual meeting of shareholders held on July 18, 2003, our
shareholders approved and adopted our 2002 Stock Option Plan, which will expire
in July 2013. Options to purchase shares of common stock granted and held by
directors and senior management are as follows:
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NO. OF
NAME OPTIONS HELD EXERCISE PRICE EXPIRATION DATE
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Dr. FAN Di 0 -- --
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ZHOU Li Yang 0 -- --
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WANG Wei 0 -- --
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QI Mingyau 0 -- --
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YU Wai Kit 0 -- --
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Dr. Robert FUNG Hing Piu 150,000 $ 0.20 July 17, 2013
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Dr. Godwin WONG 150,000 $ 0.20 July 17, 2013
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Iain F. BRUCE 150,000 $ 0.20 July 17, 2013
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Barry J. BUTTIFANT 150,000 $ 0.20 July 17, 2013
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Professor CHI Tianhe
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On August 13, 2004, the Board granted options pursuant to the 2002 Stock Option
Plan, amounting to 750,000 shares at US$0.2 per share to the independent
directors.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
To the extent that the following information is known to the Company or can be
ascertained from public filings, the following sets forth information as of
November 8, 2005 with regard to the Company's shareholders that are the
beneficial owners of five percent or more of our common stock:
SHARES AND RIGHTS BENEFICIALLY
TITLE OF CLASS NAME AND ADDRESS OF OWNER OWNED OR CONTROLLED (1)<F1> PERCENT OF CLASS (1)<F1>
Common Stock Dr. Fan Di(2)<F2> 161,793,674 61.3%
Unit 3611, 36/F, West Tower, Shun Tak
Centre, 168-200 Connaught Road
Central, Hong Kong
Common Stock DiChain Systems Limited 118,679,400 45.0%
Unit 3611, 36/F, West Tower, Shun Tak
Centre, 168-200 Connaught Road
Central, Hong Kong
Common Stock Farsight Holdings Limited
Units 3611, 36/F, West Tower 29,669,850 11.2%
Shun Tak Centre
168-200 Connaught Road
Central, Hong Kong
Common Stock Squadram Limited 23,001,910 8.7%
The Chinese Bank Building
61 Des Voeux Road, 16/F
Central, Hong Kong
Common Stock Earnest Investments Services Limited 15,823,920 6.0%
The Chinese Bank Building
61 Des Voeux Road, 16/F
Central, Hong Kong
Common Stock China Merchants DiChain (Asia) Limited 13,328,624 5.0%
Unit 3611, 36/F, West Tower, Shun Tak
Centre, 168-200 Connaught Road
Central, Hong Kong
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(1)<F1> Where persons listed on this table have the right to obtain additional
shares of common stock through the exercise of outstanding options or
warrants within 60 days from November 8, 2005, these additional shares
are deemed to be outstanding for the purpose of computing the
percentage of common stock owned by such persons, but are not deemed to
be outstanding for the purpose of computing the percentage owned by any
other person. Based on 263,948,336 shares of common stock outstanding
as of November 8, 2005.
(2)<F2> Includes shares are held of record by DiChain Systems Limited and China
Merchants DiChain (Asia) Limited, both of which are subsidiaries of
DiChain Holdings Limited. Dr. Fan is deemed to be the beneficial owner
of these shares since he is a director of DiChain Holdings Limited.
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During the last three years, the following significant percentage changes in
shares held by major shareholders occurred:
25
On April 16, 2004, pursuant to the subscription agreement entered into between
Squadram Limited and the Company, Squadram paid the subscription money of US$2.1
million. The Company completed the transaction on April 20, 2004 and issued
5,200,000 shares of its common stock to Squadram.
On May 25, 2004, the Company has completed the acquisition of DICHAIN Software
by the acquiring the entire issued share capital of DICHAIN Software. The
acquisition was approved by shareholders at the shareholders' meeting held on
March 25, 2004. Prior to the acquisition, DiChain Software was affiliated with
the Company (i) through two directors, Dr. Fan Di, the Company's Chairman and
Chief Executive Officer and Aaron Zhu Xiaojun, the Company's then Chief
Financial Officer and an Executive Director, that were common to both entities
and (ii) through the direct or indirect ownership of shares of capital stock of
both entities by DiChain Holdings Limited. DiChain Holdings Limited, which is
affiliated with China Merchants Group, a large business conglomerate in China,
held approximately 2% of our common stock through its subsidiary DiChain Systems
Limited and approximately 68% of the common stock of DiChain Software prior to
the acquisition. After the acquisition, DiChain Systems Limited, Farsight
Holdings Limited, Squadram Limited and Earnest Investments Services Limited held
approximately 56.1%, 14.0%, 10.9% and 7.5%, respectively, of the issued and
outstanding shares of the Company's common stock.
On March 31, 2005, the Company issued 13,328,624 shares of common stock to China
Merchants DiChain (Asia) Limited to pay indebtedness owed to that company in the
amount of HK$9,357,000 (US$1,200,000).
The major shareholders have no different voting rights than other shareholders.
Of the 263,948,336 outstanding shares of the Company's common stock at November
8, 2005, 46,842,380 shares are held in the United States by approximately 1,027
record holders, and 209,947,551 shares are held in Hong Kong and China by
approximately 409 shareholders, one of whom, DiChain Systems Limited, a Hong
Kong corporation, is a subsidiary of DiChain Holdings Limited.
The Company is not directly or indirectly owned or controlled by any other
corporation, by any foreign government or by any other natural or legal person,
other than as set forth above with regard to the shareholdings of major
shareholders. The Company knows of no arrangements that may now or at a
subsequent date result in a change of control of the Company.
RELATED PARTY TRANSACTIONS
On May 1, 2003, Victorison Logistics Limited ("VLL"), a related company of the
Company, entered into an agreement with the Company whereby VLL agreed to
provide management services to the Group at a monthly fee of HK$200,000
(US$25,641). According to the management, these transactions were carried out at
the terms determined and agreed by the relevant parties. For the fiscal year
ended March 31, 2005, US$308,000 was paid to VLL for management services.
On March 30, 2005, the Company authorized the issuance of 13,328,624 shares of
its common stock in payment of debt in the amount of HK$9,357,000 (US$1,200,000)
owed to China Merchants DiChain (Asia) Limited. Dr. Fan is the Chairman and
Chief Executive Officer of China Merchants DiChain (Asia) Limited. Both DiChain
Systems Limited, the principal shareholders of the Company, and China Merchants
DiChain (Asia) Limited are subsidiaries of DiChain Holdings Limited.
During the years presented, the Group obtained bank loans and made fund
transfers to its related companies. The Group also obtained funds from its
related companies. Details are set out in the consolidated statements of cash
flows.
The Group received interest income from related companies for advances to them
amounting to approximately HK$0, HK$0 and HK$12,090,000 (US$1,550,000) during
the years ended March 31, 2003, 2004 and 2005, respectively.
INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
26
ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The information required by this section is included in "Item 18. Financial
Statements" in this annual report.
LEGAL PROCEEDINGS
We are involved in certain litigation and are exposed to some unasserted claims.
For a discussion of these matters, see "Item 18. Financial Statements - Notes to
Financial Statements - Note 15 - Commitments and Contingencies."
In May 2004, Mr. Horace Yao Yee Cheong, the former chairman and executive
director of the Company, sued the Company, seeking, among other things, unpaid
remuneration of HK$480,000 and a short term advance of HK$1,162,222, plus
interest and costs, and specific performance by the Company to allot to Mr. Yao
1,153,846 fully paid shares of common stock and 62,500 shares of common stock at
US$0.001 par value. Since Mr. Yao's claim falls within the agreement of Gumption
Trading to assume all the liabilities of the company, including contingency
liabilities, incurred prior to January 28, 2004, we have not made any provision
for the claimed amount in our financial statements.
ITEM 9. THE OFFER AND LISTING.
PRICE HISTORY
The common stock has been trading on the Over-The-Counter Bulletin Board
("OTCBB") since May 25, 2004 under the following symbols:
o DFCT - May 25, 2004 to December 31, 2004;
o DFCTF - December 31, 2004 to February 7, 2005; and
o CTGLF - since February 7, 2005.
There have been no trading suspensions imposed by the OTCBB or any other
regulatory authorities in the past three years.
The following table sets forth the market price ranges and the aggregate volume
of trading of the common shares of the Company on the OTCBB, and predecessor
exchanges, for the periods indicated:
STOCK TRADING ACTIVITY
SALES PRICE
YEAR ENDED HIGH LOW
March 31, 2005 $ 1.180 $ 0.0785
March 31, 2004 $ 2.290 $ 0.130
March 31, 2003 $ 0.400 $ 0.080
March 31, 2002 $ 0.625 $ 0.140
March 31, 2001 $ 4.375 $ 0.340
SALES PRICE
QUARTER ENDED HIGH LOW
September 30, 2005 $ 0.130 $ 0.075
June 30, 2005 $ 0.280 $ 0.090
March 31, 2005 $ 0.350 $ 0.0785
December 31, 2004 $ 0.350 $ 0.120
September 30, 2004 $ 0.570 $ 0.190
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27
SALES PRICE
QUARTER ENDED HIGH LOW
June 30, 2004 $ 1.180 $ 0.340
March 31, 2004 $ 1.850 $ 0.370
December 31, 2003 $ 1.050 $ 0.260
September 30, 2003 $ 2.290 $ 0.600
June 30, 2003 $ 2.040 $ 0.130
SALES PRICE
MONTH ENDED HIGH LOW
October 31, 2005 $ 0.100 $ 0.055
September 30, 2005 $ 0.108 $ 0.075
August 31, 2005 $ 0.120 $ 0.090
July 31, 2005 $ 0.130 $ 0.092
June 30, 2005 $ 0.135 $ 0.090
May 31, 2005 $ 0.280 $ 0.115
April 30, 2005 $ 0.190 $ 0.125
March 31, 2005 $ 0.230 $ 0.0785
February 28, 2005 $ 0.330 $ 0.200
January 31, 2005 $ 0.350 $ 0.160
December 31, 2004 $ 0.330 $ 0.160
November 30, 2004 $ 0.350 $ 0.120
October 31, 2004 $ 0.280 $ 0.160
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These above quotations reflect inter-dealer prices without retail mark-up,
markdown, or commissions and may not necessarily represent actual transactions.
MARKETS
All of the above market price information is given with respect to the market
price in the United States. The stock does not trade in Hong Kong or elsewhere
on any organized market. Our common stock is currently listed on the OTCBB.
ITEM 10. ADDITIONAL INFORMATION.
MEMORANDUM AND ARTICLES OF ASSOCIATION
The Company was incorporated in the Territory of the British Virgin Islands
under the International Business Companies Act, Cap. 291, IBC No. 189457. The
Company's objects and purposes, found in paragraph 4 of the Memorandum of
Association, are general in nature and permit the Company to engage in any
business, acts, or activities which are not prohibited under any law for the
time being in force in the British Virgin Islands.
There are no provisions in the Company's Articles of Association that limit a
director's power to vote on a matter in which he is materially interested, to
vote compensation to himself or any other director in the absence of an
independent quorum, or to vote on matters regarding borrowings by the Company.
There are no retirement age requirements, and there are no shareholding
requirements to qualify as a director.
The Company has only one class of stock: ordinary (or common) shares. The
holders of ordinary shares do not have dividend rights, are entitled to one vote
for each share held of record on all matters submitted to the stockholders, do
not have rights to share in the Company's profits, have rights to share in any
surplus in the event of liquidation, do not have redemption or sinking fund
provisions, are not liable to further capital calls by the Company, and are not
subject to any provisions discriminating against any existing or prospective
holder of such securities as a result of such shareholder owning a substantial
number of shares.
28
In order to change the rights of holders of any class of the Company's stock,
the Memorandum of Association must be amended by a majority vote of the
Company's shareholders and of the holders of any class of stock whose rights are
changed.
Annual or special meetings of the Company's shareholders are called by the
directors at any time or place of their choosing and must be called upon the
written request of shareholders holding ten percent (10%) or more of the
outstanding shares of the Company's common stock. At least seven days notice of
a shareholders' meeting must be given. A shareholder may be represented at a
meeting by a proxy who may speak and vote on behalf of the shareholder.
There are no limitations on the rights to own the Company's securities or the
rights of non-residents or foreign shareholders to hold or exercise voting
rights on the securities imposed by foreign law or the Company's constituent
documents.
There are no provisions in the Company's Memorandum or Articles of Association
that would have an effect on delaying, deferring or preventing a change in
control of the Company and that would operate only with respect to a merger,
acquisition or corporate restructuring involving the Company or any of its
subsidiaries.
There are no provisions in the Company's Articles of Association governing an
ownership threshold above which shareholder ownership must be disclosed.
With regard to the foregoing matters, the laws in the British Virgin Islands are
not significantly different than those in the United States.
There are no conditions in the Memorandum and Articles of Association governing
changes in the Company's capital or changes in the rights of holders of any
class of its stock that are more stringent than is required by law.
MATERIAL CONTRACTS
The following are material contracts entered into by the Company during the two
years preceding the date of this annual report:
1. On January 26, 2004, we entered into the Agreement with Gumption
Trading and Guangzhou Dransfield Paper Limited. Pursuant to the
Agreement, we sold to Gumption Trading (i) all of the shares of our
wholly owned subsidiaries DF Paper Guangdong Limited, Guangdong
Dransfield Paper Limited, DF Paper Jiangsu Limited and Jiangsu
Dransfield Paper Co. Limited, and (ii) all fixed assets of our
subsidiary in Conghua, Guangzhou Dransfield Paper Limited. Guangzhou
Dransfield Paper Limited agreed to lease back these assets from
Gumption Trading for its paper manufacturing operations at a rent of
HK$1.00 per year for a term of one year, renewable yearly thereafter
upon mutual agreement. For such purchase, Gumption Trading paid to us a
nominal aggregate amount of HK$5 and assumed all of our liabilities,
including liabilities related to such subsidiaries and assets, that we
incurred prior to January 28, 2004. We entered into this transaction
primarily to streamline our operations. This transaction was closed on
January 28, 2004. The Agreement has been filed as Exhibit 4.3 to this
Annual Report.
2. A Deed of Guarantee and Deed of Confirmation were also entered into in
connection with the transactions contemplated by the Agreement.
Pursuant to the Deed of Guarantee, dated January 28, 2004, Qindao
Haotian Investment Limited guaranteed to us and Guangzhou Dransfield
Paper Ltd. the obligations of Gumption Trading under the Agreement. The
Deed of Guarantee has been filed as Exhibit 4.4 to this Annual Report.
3. The Deed of Confirmation, dated September 20, 2004, was entered into
among us, Guangzhou Dransfield Paper Ltd. and Qindao Haotian Investment
Limited to clarify and define the liabilities of Gumption Trading under
the Agreement. Pursuant to the terms of the Deed of Confirmation,
Qindao Haotian Investment Limited confirmed the validity of the Deed of
Guarantee. The Deed of Confirmation has been filed as Exhibit 4.5 to
this Annual Report.
29
4. On February 13, 2004, we entered into an Agreement for the Exchange of
Common Stock with DiChain Systems Limited, a limited company
incorporated in Hong Kong, Farsight Holdings Limited, a limited company
incorporated in the British Virgin Islands, Squadram Limited, a limited
company incorporated in the British Virgin Islands, and Earnest
Investments Services Limited, a limited company incorporated in the
British Virgin Islands, pursuant to which DICHAIN Software became our
wholly owned subsidiary. The information technology business of DICHAIN
Software has now become our primary business. In connection with this
acquisition, we issued to DiChain Systems 197,799,000 shares of our
common stock. This transaction was closed on May 25, 2004. This
Agreement has been filed as Exhibit 4.6 to this Annual Report.
5. In February 2004, we completed a private placement of 21.5 million
shares of our stock at US$0.20 per share or an aggregate amount of
US$4.3 million. In connection with this private placement, we entered
into a letter agreement dated February 4, 2004 with Quam Securities
Company Limited ("Quam"), in which Quam agreed to be the placing agent.
On February 13, 2004, Quam and the investors entered into placing
letters and confirmations thereto in connection with the private
placement. The letter agreement is filed as Exhibit 4.7 to this Annual
Report on Form 20-F and the placing letters and related confirmations
are filed as Exhibits 4.8 through 4.14, respectively, to this Annual
Report on Form 20-F.
6. On April 5, 2004, we completed a private placement of 5.2 million
shares of our stock at US$0.4038 per share or an aggregate amount of
approximately US$2.1 million. In connection with this private
placement, we entered into a placing letter and related confirmation
with Squadram Limited. The subscription offer letter and related
confirmation is filed as Exhibit 4.15 to this Annual Report on Form
20-F.
7. On March 31, 2005, the Company issued 13,328,624 shares of common stock
to China Merchants DiChain (Asia) Limited ("CMDA") to pay indebtedness
owned to CMDA in the amount of HK$9,357,000 (US$1,200,000).
EXCHANGE CONTROLS
The Company's business is conducted in and from Hong Kong and the People'
Republic of China (the "PRC") in Hong Kong dollars and the PRC Renminbi.
Periodic reports made to U.S. shareholders are expressed in U.S. dollars using
the then-current exchange rates.
The PRC Government imposes foreign currency control in part through direct
regulation of the conversion of Renminbi into foreign exchange and through
foreign trade restrictions. The conversion of the Renminbi into U.S. dollars
must be based on the People's Bank of China ("PBOC") Rate. The PBOC Rate is set
based on the previous day's PRC interbank foreign exchange market rate and with
reference to current exchange rates on the world financial markets. In line with
the unification of the two exchange rates, the Renminbi was revalued at
HK$1.00=RMB1.12 and US$1.00=RMB8.70 on January 3, 1994. Since revaluation, the
exchange rate has fluctuated between a range of US$1.00 = RMB8.30 and US$1.00 =
RMB8.70.
The Hong Kong dollar is freely convertible into the U.S. dollar. Since October
17, 1983, the Hong Kong dollar has been pegged to the U.S. dollar at HK$7.80 to
US$1.00. The central element in the arrangements for the peg is an agreement
between the Hong Kong government and the three Hong Kong banknote issuing banks,
HSBC, Standard Chartered Bank and the Bank of China. Under the agreement,
certificates of indebtedness, which are issued by the Hong Kong Government
Exchange Fund to the banknote issuing bank to be held as cover for their
banknote issues, are issued and redeemed only against payment in U.S. dollars,
at the fixed exchange rate of US$1.00 = HK$7.80. When the bank notes are
withdrawn from circulation, the banknote issuing banks surrender the
certificates of indebtedness to the Hong Kong Government Exchange Fund and are
paid the equivalent of U.S. dollars at the fixed rate. Exchange rates between
the Hong Kong dollar and other currencies are influenced by the linked rate
between the U.S. dollar and the Hong Kong dollar.
The market exchange rate of the Hong Kong dollar against the U.S. dollar
continues to be determined by the forces of supply and demand in the foreign
exchange market. However, against the background of the fixed rate system which
applies to the issue of Hong Kong currency in the form of bank notes, as
described above, the market exchange rate has not deviated significantly from
HK$7.80 to US$1.00. See "Selected Financial Data" in Item 3 of this annual
report. The Hong Kong government has stated its intention to maintain the link
at that rate. The Hong Kong
30
government has stated that is has no intention of imposing exchange controls in
Hong Kong and that the Hong Kong dollar will remain freely convertible into
other currencies (including the U.S. dollar). The PRC and the United Kingdom
agreed in 1984 pursuant to the Joint Declaration of the Government of the United
Kingdom of Great Britain and Northern Ireland and the Government of the People's
Republic of China on the Question of Hong Kong ("the Joint Declaration") that,
after Hong Kong became a special administrative region of the PRC (the "SAR") on
July 1, 1997, the Hong Kong dollar will continue to circulate and remain freely
convertible. However, no assurance can be given that the SAR government will
maintain the peg at HK$7.80 to US$1.00, if at all.
TAXATION
There are no British Virgin Islands ("BVI") governmental laws, decrees or
regulations affecting the remittance of dividends or other payments to
nonresident holders of the Company's securities. U.S. holders of the Company's
securities are subject to no taxes or withholding provisions under existing BVI
laws and regulations. By reason of the fact that the Company conducts no
business within the BVI, there are no applicable reciprocal tax treaties between
the BVI and the U.S. that would affect the preceding statement that there are no
BVI taxes, including withholding provisions, to which U.S. security holders are
subject under existing laws and regulations of the BVI.
DOCUMENTS ON DISPLAY
The constituent documents concerning the Company may be inspected at the offices
of its U.S. counsel, Dill Dill Carr Stonbraker & Hutchings, P.C., 455 Sherman
Street, Suite 300, Denver, Colorado 80203, Attn.: Fay M. Matsukage, Esq.
The Company's documents publicly filed with the Securities and Exchange
Commission may also be viewed and inspected at the SEC's Public Reference Room
located at 100 F Street, N.E., Room 1580, Washington, DC 20549. Copies may also
be obtained from the SEC at prescribed rates.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not deal in market risk sensitive instruments such as derivative financial
instruments such as futures, forwards, swaps, and options, and derivative
commodity instruments. We have no market risks.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
There has been no material payment default of principal, interest, a sinking or
purchase fund installment, or any other material default not cured within 30
days, with respect to any indebtedness of the company or any of its significant
subsidiaries exceeding five percent of the total assets of the company and its
consolidated subsidiaries.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
Not applicable.
31
ITEM 15. CONTROLS AND PROCEDURES
We maintain "disclosure controls and procedures," as such term is defined under
Securities Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed in our Securities Exchange Act reports is
recorded, processed, summarized, and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures. In designing and evaluating the disclosure controls and procedures,
our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives and in reaching a reasonable level of assurance our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. We have carried
out an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of March 31, 2005. Based upon their evaluation and subject to the
foregoing, the Chief Executive Officer and Chief Financial Officer concluded
that as of March 31, 2005 our disclosure controls and procedures were effective
at the reasonable assurance level in ensuring that material information relating
to us, is made known to the Chief Executive Officer and Chief Financial Officer
by others within our company during the period in which this report was being
prepared.
There were no changes in our internal controls or in other factors during the
most recent quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
We believe that the delay in filing this report was due primarily to our
engaging a new auditing firm this year.
ITEM 16. [RESERVED]
Not applicable.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our Audit Committee consists of three directors: Iain F. Bruce (Chairman), Dr.
Godwin Wong and Barry J. Buttifant, each of whom meets the independence
requirements and standards currently established by the SEC. In addition, the
Board of Directors has determined that Messrs. Bruce and Buttifant are "audit
committee financial experts" defined under the relevant rules of the SEC.
ITEM 16B. CODE OF ETHICS
We adopted a code of ethics that applies to our Chief Executive Officer and
Chief Financial Officer, and other persons who perform similar functions. A copy
of our Code of Ethics is filed as an exhibit to this Annual Report on Form 20-F.
We also adopted a Code of Business Conduct and Ethics, which is filed as an
exhibit to this Annual Report on Form 20-F. Our Codes of Ethics are intended to
be a codification of the business and ethical principles which guide us, and to
deter wrongdoing, to promote honest and ethical conduct, to avoid conflicts of
interest, and to foster full, fair, accurate, timely and understandable
disclosures, compliance with applicable governmental laws, rules and
regulations, the prompt internal reporting of violations and accountability for
adherence to this Code.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
During the fiscal year ended March 31, 2005, our principal independent auditor
was Jimmy C.H. Cheung & Co. ("Cheung"). During fiscal year ended March 31, 2003
and 2004, our principal independent auditor was BDO McCabe Lo & Company ("BDO").
The following are the services provided and the amount billed.
32
AUDIT FEES
The aggregate fees billed by Cheung and BDO for professional services rendered
for the audit of the Company's annual financial statements were HK$507,000
(US$65,000) and HK$268,000 (US$34,359) for the fiscal years ended March 31, 2005
and 2004, respectively.
AUDIT RELATED FEES
Other than the fees described under the caption "Audit Fees" above, Cheung and
BDO did not bill any fees for services rendered to us during fiscal years 2005
and 2004 for assurance and related services in connection with the audit or
review of our consolidated financial statements.
TAX FEES
The aggregate fees billed by Cheung and BDO tax services during the fiscal years
ended March 31, 2005 and 2004 were Nil and HK$7,000, respectively.
ALL OTHER FEES
There were no fees billed by Cheung or BDO for other professional services
rendered during the fiscal years ended March 31, 2005 and 2004.
PRE-APPROVAL OF SERVICES
The Audit Committee pre-approves all services, including both audit and
non-audit services, provided by our independent accountants. For audit services,
each year the independent auditor provides the Audit Committee with an
engagement letter outlining the scope of the audit services proposed to be
performed during the year, which must be formally accepted by the Committee
before the audit commences. The independent auditor also submits an audit
services fee proposal, which also must be approved by the Committee before the
audit commences.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PERSONS.
Not applicable.
PART III
ITEM 17. FINANCIAL STATEMENTS.
Not applicable.
ITEM 18. FINANCIAL STATEMENTS.
See pages beginning with page F-1.
33
ITEM 19. EXHIBITS
The following exhibits are filed as a part of this annual report:
EXHIBIT NUMBER DOCUMENT
1.1 Certificate of Merger issued on February 26, 1997, by the
Registrar of Companies of the British Virgin Islands,
evidencing the merger between Dransfield China Paper
Corporation, as the surviving company, and Dransfield Paper
Holdings Limited, as the discontinuing company (1)
1.2 Memorandum of Association of Dransfield China Paper
Corporation (2)
1.3 Restated and Amended Articles of Association of Dransfield
China Paper Corporation (3)
1.4 Certificate of Incorporation, dated as of March 28, 2000,
changing the name of the corporation from Dransfield China
Paper Corporation to DF China Technology, Inc. (4)
4.1 1996 Share Option Scheme, as amended, adopted by Dransfield
China Paper Corporation (now known as DF China Technology,
Inc.) (5)
4.2 2002 Stock Option Plan (6)
4.3 Form of Agreement for the Sale and Purchase of Shares (the
"Share Purchase Agreement") in certain subsidiaries of DF
China Technology Inc. and Certain Assets in the PRC, dated as
of January 26, 2004 among DF China Technology Inc., Gumption
Trading Limited, a company incorporated in the British Virgin
Islands, and Guangzhou Dransfield Paper Ltd, a company
incorporated in the PRC (7)
4.4 Form of Deed of Guarantee, dated as of January 26, 2004, of
Qingdao Haotian Investment Limited, as Guarantor, in
connection with the Share Purchase Agreement (7)
4.5 Form of Deed of Confirmation, dated as of September 20, 2004,
among DF China Technology Inc., Gumption Trading Limited, a
company incorporated in the British Virgin Islands, and
Guangzhou Dransfield Paper Ltd, a company incorporated in the
PRC (7)
4.6 Agreement for the Exchange of Common Stock, dated as of
February 13, 2004, by and among DF China Technology Inc. and
DiChain Systems Limited, a limited company incorporated in
Hong Kong, Farsight Holdings Limited, a limited company
incorporated in the British Virgin Islands, Squadram Limited,
a limited company incorporated in the British Virgin Islands,
and Earnest Investments Services Limited, a limited company
incorporated in the British Virgin Islands (7)
4.7 Form of Letter Agreement, dated February 4, 2004, between DF
China Technology, Inc. and Quam Securities Company Limited, as
Placement Agent (7)
4.8 Form of Placing Letter of Quam Securities Company Limited, as
Placement Agent, to Asia Century Development Limited, as
Purchaser, dated February 13, 2004, and the related placing
confirmation, in connection with the purchase of 3,900,000
shares of DF China Technology Inc. (7)
4.9 Form of Placing Letter of Quam Securities Company Limited, as
Placement Agent, to Global China Enterprises Limited, as
Purchaser, dated February 13, 2004, and the related placing
confirmation, in connection with the purchase of 3,100,000
shares of DF China Technology Inc. (7)
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34
EXHIBIT NUMBER DOCUMENT
4.10 Form of Placing Letter of Quam Securities Company Limited, as
Placement Agent, to Poly Crown Limited, as Purchaser, dated
February 13, 2004, and the related placing confirmation, in
connection with the purchase of 3,200,000 shares of DF China
Technology Inc. (7)
4.11 Form of Placing Letter of Quam Securities Company Limited, as
Placement Agent, to Kinetic Point Limited, as Purchaser, dated
February 13, 2004, and the related placing confirmation, in
connection with the purchase of 3,500,000 shares of DF China
Technology Inc. (7)
4.12 Form of Placing Letter of Quam Securities Company Limited, as
Placement Agent, to Host Glory Limited, as Purchaser, dated
February 13, 2004, and the related placing confirmation, in
connection with the purchase of 3,000,000 shares of DF China
Technology Inc. (7)
4.13 Form of Placing Letter of Quam Securities Company Limited, as
Placement Agent, to Sino Castle Holdings Limited, as
Purchaser, dated February 13, 2004, and the related placing
confirmation, in connection with the purchase of 1,000,000
shares of DF China Technology Inc. (7)
4.14 Form of Placing Letter of Quam Securities Company Limited, as
Placement Agent, to Gush Intelligence Limited, as Purchaser,
dated February 13, 2004, and the related placing confirmation,
in connection with the purchase of 3,800,000 shares of DF
China Technology Inc. (7)
4.15 Form of Subscription Offer Letter of DF China Technology, Inc.
to Squadram Limited and the related subscription confirmation,
each dated April 5, 2004, in connection with the purchase by
Squadram Limited of 5,200,000 shares of DF China Technology
Inc. (7)
8.1 List of all subsidiaries of DF China Technology, Inc.
11.1 Code of Ethics for CEO and Senior Financial Officers (7)
11.2 Code of Business Conduct and Ethics (7)
12.1 Section 302 Certification of Chief Executive Officer
12.2 Section 302 Certification of Chief Financial Officer *
13.1 Section 906 Certification of the Chief Executive Officer
13.2 Section 906 Certification of the Chief Financial Officer *
------------------
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* Filed herewith.
(1) Incorporated by reference herein from DF China Technology, Inc.'s Form S-1
(SEC File No. 333-11637) filed with the SEC on September 9, 1996.
(2) Incorporated by reference herein from DF China Technology, Inc.'s Amendment
No. 1 to Form S-1 (SEC File No. 333-11637) filed with the SEC on December
30, 1996.
(3) Incorporated by reference herein from DF China Technology, Inc.'s Form 6-K
filed with the SEC on March 7, 1997; incorporated herein.
(4) Incorporated by reference herein from DF China Technology, Inc.'s Amendment
No. 2 on Form F-1 filed with the SEC on June 25, 1997.
(5) Incorporated by reference herein from DF China Technology, Inc.'s Annual
Report on Form 20-F for the fiscal year ended March 31, 2002, filed with
the SEC on October 15, 2002.
35
(6) Incorporated by reference herein from DF China Technology, Inc.'s Form 6-K
filed with the SEC on July 22, 2003.
(7) Incorporated by reference herein from the registrant's Annual Report on
Form 20-F for the fiscal year ended March 31, 2004, filed with the SEC on
November 18, 2004.
36
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
CHINA TECHNOLOGY GLOBAL CORPORATION
Dated: November 16, 2005 /s/ FAN DI
---------------------------------------------
FAN Di, Chief Executive Officer
|
37
JIMMY C.H. CHEUNG & CO Registered with the Public Company
CERTIFIED PUBLIC ACCOUNTANTS Accounting Oversight Board
(A MEMBER OF KRESTON INTERNATIONAL)
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
China Technology Global Corporation (Previously DF Technology Inc.)
(Incorporated in the British Virgin Islands with limited liability)
We have audited the accompanying consolidated balance sheets of China Technology
Global Corporation (previously DF China Technology Inc.) and subsidiaries
(hereinafter referred to as the "Group") as of March 31, 2004 and 2005 and the
related consolidated statements of operations, cash flows and stockholders'
equity for each of the three years ended March 31, 2005. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit 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 of March 31, 2004 and 2005, and the consolidated results of its
operations and cash flows for each of the three years ended March 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ JIMMY C.H. CHEUNG & CO.
JIMMY C.H. CHEUNG & CO
Certified Public Accountants
Hong Kong
Date: November 16, 2005
|
Suite 1607 Dominion Centre, 43 Queen's Road East, Wanchai, Hong Kong
Tel: (852) 25295500 Fax: (852) 28651067 Email: jchc@krestoninternational.com.hk
Website: http://www.jimmycheungco.com
F-1
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2004 AND 2005
MARCH 31,
2004 2005 2005
HK$'000 HK$'000 US$'000
CURRENT ASSETS
Cash and cash equivalents 16,059 101,962 13,072
Accounts receivable, net of allowances - 1,459 187
Inventories - 281 36
Other receivables 532 14,336 1,838
Due from related companies 18,843 246,495 31,602
Due from a stockholder - 18,073 2,317
--------------- --------------- --------------
Total Current Assets 35,434 382,606 49,052
PROPERTY AND EQUIPMENT, NET 15 1,622 208
INTEREST IN AFFILIATE 1 - -
GOODWILL - 487,508 62,501
DISCONTINUED OPERATIONS 1,326 296 38
--------------- --------------- --------------
TOTAL ASSETS 36,776 872,032 111,799
=============== =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - due within one year - 148,352 19,021
Accounts payable 81 31 4
Other payables and accrued liabilities 260 2,684 344
Due to a related company 2,356 608 78
Liabilities of discontinued operations 4,230 1,193 153
--------------- --------------- --------------
Total Current Liabilities 6,927 152,868 19,600
--------------- --------------- --------------
LONG-TERM LIABILITIES
Notes payable - due over one year - 45,283 5,804
--------------- --------------- --------------
Total Long-Term Liabilities - 45,283 5,804
--------------- --------------- --------------
COMMITMENTS AND CONTINGENCIES - - -
STOCKHOLDERS' EQUITY
Common stock, no par value, 300,000,000 and
400,000,000 shares authorized; 47,620,712
and 263,948,336 shares issued and outstanding
at March 31, 2004 and 2005 respectively 286,748 929,623 119,182
Preferred stock, no par value, nil and
100,000,000 shares authorized at March 31, 2004
and 2005 respectively, nil shares issued
and outstanding - - -
Contributed surplus 4,677 4,677 600
Accumulated deficit (261,576) (260,419) (33,387)
--------------- --------------- --------------
Total Stockholders' Equity 29,849 673,881 86,395
--------------- --------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 36,776 872,032 111,799
=============== =============== ==============
|
The accompanying notes are an integral part of these financial statements
F-2
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
FOR THE YEARS ENDED MARCH 31, 2003, 2004 AND 2005
YEAR ENDED MARCH 31,
2003 2004 2005 2005
HK$'000 HK$'000 HK$'000 US$'000
------- ------- ------- -------
NET SALES - - 17,573 2,253
COST OF SALES - - (5,444) (698)
------------- ------------- --------------- ---------------
GROSS PROFIT - - 12,129 1,555
------------- ------------- --------------- ---------------
OPERATING EXPENSES
Selling, general and distribution expenses
- third parties - (2,531) (9,266) (1,188)
- related parties - (2,200) (2,402) (308)
Depreciation - - (554) (71)
------------- ------------- --------------- ---------------
Total Operating Expenses - (4,731) (12,222) (1,567)
------------- ------------- --------------- ---------------
LOSS FROM OPERATIONS - (4,731) (93) (12)
OTHER INCOME (EXPENSES)
Interest expense - - (11,730) (1,504)
Interest income - - 14,516 1,861
Other income, net - - 226 29
Provision of doubtful debts - - (920) (118)
Provision for inventories obsolescence - - (1,232) (158)
Impairment loss on investment in affiliate - - (1) -
------------- ------------- --------------- ---------------
Total Other Income - - 859 110
------------- ------------- --------------- ---------------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES - (4,731) 766 98
INCOME TAX EXPENSE - - (530) (68)
------------- ------------- --------------- ---------------
NET (LOSS) INCOME FROM CONTINUING OPERATIONS - (4,731) 236 30
DISCONTINUED OPERATIONS
(Loss) income from discontinued operations (101,674) (30,116) 921 118
------------- ------------- --------------- ---------------
NET (LOSS) INCOME (101,674) (34,847) 1,157 148
============= ============= =============== ===============
NET (LOSS) INCOME PER SHARE - BASIC AND DILUTED HK$ HK$ HK$ US$%
(Loss) income per common stock from
continuing operations - (0.1784) 0.0011 0.0001
(Loss) income per common stock from
discontinued operations (5.1053) (1.1355) 0.0042 0.0005
------------- ------------- --------------- ---------------
Net (loss) income per common stock
- basic and diluted (5.1053) (1.3139) 0.0052 0.0007
------------- ------------- --------------- ---------------
Weighted average number of shares outstanding during the year
-basic and diluted 19,915,292 26,522,467 221,158,647 221,158,647
------------- ------------- --------------- ---------------
|
The accompanying notes are an Integral part of these financial statements
F-3
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2003, 2004 AND 2005
Common stock Contributed Accumulated
Shares Amount surplus deficit Total
HK$'000 HK$'000 HK$'000 HK$'000
Balance at March 31, 2002 19,915,292 241,920 4,677 (125,055) 121,542
Net loss for the year - - - (101,674) (101,674)
-------------- ------------ ------------ ------------ -----------
Balance at March 31, 2003 19,915,292 241,920 4,677 (226,729) 19,868
New issue of 3,201,513 shares on conversion
of debts on June 11, 2003 3,201,513 5,744 - - 5,744
New issue of 1,680,000 shares for the exercise
of options on August 1, 2003 1,680,000 3,014 - - 3,014
New issue of 100,310 shares for the exercise
of options on August 25, 2003 100,310 224 - - 224
New issue of 48,909 shares for settlement
of an employee's debt on September 30, 2003 48,909 401 - - 401
New issue of 30,000 shares for the exercise
of options on October 10, 2003 30,000 54 - - 54
New issue of 1,144,688 shares for private
placement on November 18, 2003 1,144,688 2,000 - - 2,000
New issue of 21,500,000 shares for
private placement on February 20, 2004 21,500,000 33,391 - - 33,391
Net loss for the year - - - - (34,847)
-------------- ------------ ------------ ------------ -----------
Balance at March 31, 2004 47,620,712 286,748 4,677 (261,576) 29,849
New issue of 5,200,000 shares for
private placement on April 20, 2004 5,200,000 16,386 - - 16,385
New issue of 197,799,000 shares for
the acquisition of a subsidiary on May 25, 2004 197,799,000 617,132 - - 617,132
New issue of 13,328,624 shares for
settlement of debts on March 30, 2005 13,328,624 9,357 - - 9,357
Net profit for the year - - - 1,157 1,157
-------------- ------------ ------------ ------------ -----------
Balance at March 31, 2005 263,948,336 929,623 4,677 (260,419) 673,881
============== ============ ============ ============ ===========
|
The accompanying notes are an integral part of these financial statements
F-4
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2003, 2004 AND 2005
YEAR ENDED MARCH, 31
2003 2004 2005 2005
HK$'000 HK$'000 HK$'000 US$'000
------- ------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income from continuing operations - (4,731) 236 30
Net loss from discontinued operations (101,674) (30,116) 921 118
------------- ----------- ------------- ------------
Total net (loss) income (101,674) (34,847) 1,157 148
Adjusted to reconcile net loss to net cash
used in operating activities:
Depreciation - - 554 71
Provision for doubtful debts - - 920 118
Provision for inventories obsolescence - - 1,232 158
Impairment loss on investment in affiliate - - 1 -
Discontinued operations, net 99,853 28,976 (718) (92)
Changes in operating assets and liabilities
(Increase) in:
Accounts receivable, net - - (1,459) (187)
Inventories, net (281) (36)
Other receivables - (530) (13,804) (1,770)
Due from related companies - (18,843) (227,652) (29,186)
Due from a stockholder - - (18,073) (2,317)
Increase (decrease) in:
Accounts payable - (9) (50) (6)
Other payables and accrued liabilities - 260 2,426 311
Due to a related company - 2,356 (1,748) (224)
Discontinued operations, net 1,034 (339) (3,680) (472)
------------- ----------- ------------- ------------
Net cash used in operating activities (787) (22,976) (261,175) (33,484)
------------- ----------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment - (15) (2,161) (277)
Acquisition of a subsidiary - - (487,508) (62,501)
Discontinued operations, net (3) (23) - -
------------- ----------- ------------- ------------
Net cash used in investing activities (3) (38) (489,669) (62,778)
------------- ----------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
New issue of common stock - 39,084 642,875 82,420
Bank loans borrowed - - 193,635 24,825
Discontinued operations, net 730 217 - -
------------- ----------- ------------- ------------
Net cash provided by financing activities 730 39,301 836,510 107,245
------------- ----------- ------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (60) 16,287 85,666 10,983
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 116 56 16,343 2,095
------------- ----------- ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR 56 16,343 102,009 13,078
------------- ----------- ------------- ------------
Continuing operations 14 16,059 101,962 13,072
Discontinued operations 42 284 47 6
------------- ----------- ------------- ------------
|
The accompanying notes are an integral part of these financial statements
F-5
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION
China Technology Global Corporation (formerly DF China Technology Inc.) (the
"Company") was incorporated in the British Virgin Islands (the "BVI") on June
24, 1996. Prior to June 30, 2000, Dransfield Holdings Limited ("DHL"), a company
incorporated in the Cayman Islands and the shares of which are listed for
trading on the main board of The Stock Exchange of Hong Kong Limited, was the
holding company of the Group. On June 30, 2000, 8,325,700 shares of the Company
were distributed in specie by DHL to its stockholders. During fiscal year 2002,
DHL sold 1,973,600 shares, which reduced its equity interest in the Company from
29.67% to 19.76%. On June 11, 2003, DHL increased its equity interest to 30.87%
by converting the debts owed to them into 3,201,513 shares. During the year,
DHL reduced its equity interest to 0.45%.
During the fiscal year 2002, DHL became the wholly-owned subsidiary of China
Merchants DiChain (Asia) Limited ("CMDA"), which replaced DHL to list on the
main board of The Stock Exchange of Hong Kong Limited.
The Company and its subsidiaries (hereinafter referred to as the ("Group") are
principally engaged in two industry segments of paper trading and paper
manufacturing before acquiring DiChain Software Systems (Shenzhen) Company
Limited ("DiChain Software") in May 2004. Paper trading is being operated in
Hong Kong, Macau and other parts of the People's Republic of China (the "PRC").
The manufacturing of hygienic paper is being operated in the PRC. After
acquiring DiChain Software, the Group is principally engaged in the design,
manufacture and sale of computer software and hardware products and systems
solutions for the supply chain management and logistics industry in the PRC.
Intercompany balances and transactions have been eliminated on consolidation.
On January 26, 2004, the Company entered into an agreement (the "Agreement")
with Gumption Trading Limited ("Gumption Trading"), a company incorporated in
the BVI, and Guangzhou Dransfield Paper Limited, a wholly owned subsidiary of
the Company. Pursuant to the Agreement, the Company sold to Gumption Trading (i)
all of the shares of its wholly owned subsidiaries DF Paper Guangdong Limited,
Guangdong Dransfield Paper Limited, DF Paper Jiangsu Limited and Jiangsu
Dransfield Paper Company Limited, and (ii) all fixed assets of its subsidiary in
Conghua, Guangzhou Dransfield Paper Limited. Guangzhou Dransfield Paper Limited
agreed to lease back assets from Gumption Trading for its paper manufacturing
operations at a rent of HK$1 per annum for a term of one year, renewable yearly
thereafter upon mutual agreement. For such purchase, Gumption Trading paid to
the Company a nominal
F-6
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
aggregate amount of HK$5 and assumed all of the Company's liabilities, including
liabilities related to such subsidiaries and assets, incurred by the Company
prior to January 28, 2004. The Company entered into this transaction primarily
to streamline its operations. This transaction closed on January 28, 2004.
The leased back assets are the basis for the operating revenue from paper
manufacturing business, which provides a solid platform for the paper
manufacturing business. On March 30, 2005, the Group ceased the paper
manufacturing operation and the leased assets were returned to the owner.
On May 25, 2004, the Company completed its acquisition of all the capital stock
of DiChain Software. The Company issued 197,799,000 shares of its common stock
to the six shareholders of DiChain Software in exchange for all the capital
stock of DiChain Software. DiChain Software is engaged in the design,
manufacture and sale of computer software and hardware products and systems
solutions for the supply chain management and logistics industry in the PRC. The
Group intends to expand the information technology business in the future by
increasing the sales network and enhancing the marketing team. Following the
acquisition of DiChain Software, the name of the Company was changed from DF
China Technology Inc. to China Technology Global Corporation on January 12, 2005
to reflect the new line of business and the new management team.
On May 24, 2004, the Company increased its authorized common stock from
300,000,000 shares to 400,000,000 shares and preferred stock from 0 share to
100,000,000 shares.
On May 25, 2004 the common stock of the Company was delisted by The Nasdaq
SmallCap Stock Market. One of the reasons for the delisting was that the
Company's shareholders' equity had fallen below Nasdaq's required minimum of
US$2,500,000. The application for the re-listing at Nasdaq SmallCap Stock Market
was dismissed after two hearings.
Effective from February 7, 2005, the common stock of the Company is traded under
the symbol "CTGLF" on the Over-The-Counter Bulletin Board ("OTCBB").
BASIS OF PRESENTATION
The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP").
The functional currency of the Group is Hong Kong Dollars except that of DiChain
Software, which is the Chinese Renminbi ("RMB"). However, the consolidated
financial statements have been prepared in Hong Kong dollars ("HK$"). For
presentation and convenience of the reader, the financial statements have been
F-7
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
translated into United States dollars ("US$") using the approximate rate of
exchange prevailing on March 31, 2005 which was US$1 = HK$7.8. No representation
is made that Hong Kong dollars amounts could have been, or could be, converted
into US$ at that rate or any other certain rate on March 31, 2005.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of the
Company and its greater-than-50%-owned subsidiaries. Investments in affiliates
in which the Company owns 20% to 50% and does not have a controlling interest
are accounted for using the equity method. Investments in companies owned less
than 20% are carried at cost. All significant intercompany accounts and
transactions have been eliminated on consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. These
estimates include, among others, allowances for doubtful accounts, net
realizable values on long-lived assets and deferred tax assets, certain accrued
expense accounts and revenue recognition. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Group considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS.
The Group records an allowance for doubtful accounts based on specifically
identified amounts that are considered to be uncollectible. The Group has a
limited number of customers with individually large amounts due at any given
balance sheet date. Any unanticipated change in one of those customers' credit
worthiness or other matters affecting the collectibility of amounts due from
such customers, could have a material affect on the results of operations of the
Group in the period in which such changes or events occur. After all attempts to
collect a receivable have failed, the receivable is written off against the
allowance.
F-8
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the assets'
estimated economic useful lives. The principal annual rates used are as follows:
Machinery and equipments 5%
Computer equipments 18%
Motor vehicles 18%
Furniture, fixtures and office equipments 18%
|
GOODWILL
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 141
"Business Combinations", the Group allocates the purchase prices of its
acquisitions to the tangible assets acquired based on their estimated fair
values. The excess purchase prices over those fair values are recorded as
goodwill. The fair values assigned to intangible assets acquired are based on
valuations negotiated at arms-length between the Company and the seller of the
acquired assets. In accordance with SFAS No. 142 "Goodwill and Other Intangible
Assets" and 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets". Goodwill arising on consolidation is not amortized, but will be
reviewed at least once a year at the third quarter of each financial year for
impairment or whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. For purposes of evaluating the
recoverability of the carrying amount of goodwill, when undiscounted future cash
flows will not be sufficient to recover the asset's carrying amount, the asset
is written down to its fair value. The Group believes that no impairment of
goodwill exists at March 31, 2005.
IMPAIRMENT OF LONG-LIVED ASSETS
The Group periodically evaluates the carrying value of long-lived assets to be
held and used when events and circumstances warrant such a review. The carrying
value of a long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable and is less
than its carrying value. In that event, a loss is recognized based on the amount
by which the carrying value exceeds the fair market value of the long-lived
asset. Fair market value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved. Losses on
long-lived assets to be disposed of are determined in a similar manner, except
that fair market values are reduced for the cost to dispose. The Group believes
that no impairment of property and equipment existed at March 31, 2005.
F-9
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVENTORIES
Inventories comprising goods held for resale, are stated at lower of cost, on a
first-in, first-out basis, or market value.
INCOME TAXES
Income taxes, if any, are accounted for under SFAS, No. 109, "Accounting for
income taxes", which requires the use of the liability method of accounting for
income taxes. The liability method measures deferred income taxes by applying
enacted statutory rates in effect at the balance sheet date to the differences
between the tax bases of assets and liabilities and their reported amounts in
the financial statements.
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions are translated into Hong Kong dollars at the
applicable rates of exchange ruling at the transaction dates. Monetary assets
and liabilities denominated in foreign currencies at the balance sheet date are
translated into Hong Kong dollars at the applicable rates of exchange ruling at
that date. Capital accounts in foreign currencies are translated into Hong Kong
dollars at their historical exchange rates when the capital transaction
occurred. Net gains and losses resulting from foreign exchange translation are
included in the statements of operations and stockholders' equity as other
comprehensive income (loss). No translation difference was recorded for the
three years ended March 31, 2005.
COMPREHENSIVE INCOME (LOSS)
The foreign currency translation gain or loss resulting from translation of the
financial statements expressed in RMB to HK$ is reported as other comprehensive
income (loss) in the statements of operations and stockholders' equity. No
translation difference was recorded for the three years ended March 31, 2005.
F-10
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPERATING LEASES
Leases where substantially all the rewards and risks of ownership of assets
remain with the leasing company are accounted for as operating leases. Rentals
applicable to such operating leases are charged to income on the straight-line
basis over the term of the leases.
REVENUE RECOGNITION
The Group generates two revenue streams during the year: paper manufacturing and
information technology development.
Paper manufacturing
Revenue from sales of goods is recognized on delivery to and upon acceptance by
customers, when collectibility of the sales price is reasonably assured.
Information technology development
The Group's revenue is also derived from the procurement of hardware on behalf
of customers, and professional services for system development, including
design, planning, consulting, and system integration, the system consultancy
services, and the monthly subscription fees for system services. System
development service income is recognized based on the percentage of completion
method. Revenues from customer contracts requiring significant production,
modifications, or customization of the software are recognized over the
installation and customization period. Labor hours and direct project expenses
are used to determine the stage of completion, except for revenues associated
with the procurement of hardware. Revenues from sales of hardware are recognized
upon delivery. Costs related to insignificant obligations for a period of up to
one year, which include telephone support, are accrued at the time the revenue
is recorded. System consultancy services are recognized when services are
rendered and obligations under related contracts are fulfilled. Subscription
fees for system services are recognized over the contract period.
Revisions in estimated contract profits are made in the period in which the
circumstances requiring the revision become known. Provisions, if any, are made
currently for anticipated losses on uncompleted contracts. Billings in excess of
revenues recognized are recorded as deferred revenue. Billings are rendered
based on agreed milestones included in the contracts with customers.
F-11
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVERTISING EXPENSES
Advertising expenses are charged to the statements of operations when incurred.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses include payroll, employee benefits and other
employee-related costs associated with product development. Technological
feasibility for the Group's software products is reached shortly before the
products are released to manufacturing. Costs incurred after technological
feasibility is established are not material, and accordingly, the Group expenses
all research and development costs when incurred.
EMPLOYEE STOCK PLANS
The Group has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25, the
excess of fair market value of the underlying stock on the date of grant over
the exercise price of employee stock options is expensed and is credited to
contributed surplus. For disclosure purposes, pro-forma information in
accordance with Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" has been included.
Pro-forma information regarding net income and earnings per share is required by
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") and has been determined as if the Group had accounted
for its stock options under the fair value method of that statement. No options
were granted in 2002. During 2005, a total of 750,000 stock options were granted
to certain members of the Company's management at an exercise price of US$0.2
per share. The weighted-average fair value of options granted in 2003, 2004 and
2005 estimated on the date of grant using a Black-Scholes option pricing model
was US$0.24, US$0.24 and US$0.33 respectively. The fair value for these options
was estimated at the respective dates of grant using the following
weighted-average assumptions for the respective dates of grant:
Options granted in
2003 2004 2005
Risk-free interest rate 2.5% 2.13% 3.42%
Dividend yield Nil Nil Nil
Volatility factor of the expected market price
of the common stock 100% 100% 100%
Weighted average expect life 9.125 years 9.292 years 8.93 years
|
F-12
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMON STOCK OPTIONS
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of trade options, and because changes in these subjective
input assumptions can materially affect the affect the fair value estimate, in
management's opinion, the existing models do not provide a reliable single
measure of the fair value of its employee stock options.
At March 31, 2005, the Company has one stock-based employee compensation plan,
which is described more fully in Note 23. The Company accounts for this plan
under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under this plan had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
2003 2004 2005 2005
HK$'000 HK$'000 HK$'000 US$'000
Net (loss) income, as reported (101,674) (34,847) 1,157 148
Deduct: total stock-based employee
compensation expenses determined under the
fair value based method for all awards,
net of related tax effects (251) - - -
Proforma net (loss) income (101,925) (34,847) 1,157 148
---------------------------------------------------
Basic and diluted net (loss) income per share
- As reported (5.1053) (1.3139) 0.0052 0.0007
- Proforma (5.1199) (1.3139) 0.0052 0.0007
===================================================
|
F-13
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing", to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that ". . . under some circumstances, items such as idle
facility expense excessive spoilage, double freight, and rehandling costs may be
so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal". In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the Group.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152) The amendments made by Statement 152 This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005, with earlier application encouraged.
The Group does not anticipate that the implementation of this standard will have
a material impact on its financial position, results of operations or cash
flows.
On December 16, 2004, the FASB published SFAS No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The provisions of SFAS
123R are effective as of the first interim period that begins after June 15,
2005. Accordingly, the Group will implement the revised standard in the first
quarter of fiscal year 2006. Currently, the Group accounts for its share-based
F-14
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payment transactions under the provisions of APB 25, which does not necessarily
require the recognition of compensation cost in the financial statements.
Management does not believe the adoption of this revised standard will have any
immediate materially impact on the Group's financial position and results of
operations or cash flows.
On December 16, 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions ("SFAS 153"). This statement amends APB Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets and replaces it
with a general exception for exchanges of nonmonetary assets that do not have
commercial substance. Under SFAS 153, if a nonmonetary exchange of similar
productive assets meets a commercial-substance criterion and fair value is
determinable, the transaction must be accounted for at fair value resulting in
recognition of any gain or loss. SFAS 153 is effective for nonmonetary
transactions in fiscal periods that begin after June 15, 2005. The Group does
not anticipate that the implementation of this standard will have a material
impact on its financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the second quarter of its fiscal 2006. The
Group does not expect the adoption of this Interpretation to have a material
impact on its consolidated financial position, results of operations or cash
flows.
In May 2005 the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
154 requires retrospective application to prior periods' financial statements
for changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. SFAS
154 also requires that retrospective application of a change in accounting
principle be limited to the direct effects of the change. Indirect effects of a
change in accounting principle, such as a change in non-discretionary
profit-sharing payments resulting from an accounting change, should be
recognized in the period of the accounting change. SFAS 154 also requires that a
change in depreciation, amortization, or depletion method for long-lived,
non-financial assets be accounted for as a change in accounting estimate
effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes
F-15
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Group does not expect the adoption of this SFAS to have
a material impact on its consolidated financial position, results of operations
or cash flows.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed using the weighted average number
of common shares outstanding during the periods. Diluted net income (loss) per
share is computed using the weighted average number of common and potentially
dilutive common shares during the periods, except those that are anti-dilutive.
The basic net income (loss) per share for the years ended March 31, 2003, 2004
and 2005 were computed by dividing net income (loss) applicable to common stock
by the weighted average number of 19,915,292, 26,522,467 and 221,158,647 shares
of common stock, respectively.
The amount of diluted net income (loss) per share for each of the years ended
March 31, 2003, 2004 and 2005 are the same as those of basic net income (loss)
per share, as the Company's stock options outstanding during each of these years
had anti-dilutive effect on the basic net income (loss) per share. The
outstanding stock options which had anti-dilutive effect on the basic net income
(loss) per share are 1,147,000, nil and 750,000 for each of the years ended
March 31, 2003, 2004 and 2005, respectively.
Year ended March 31,
2003 2004 2005 2005
HK$'000 HK$'000 HK$'000 US$'000
Numerator for basic and diluted
(loss) income per share:
Net (loss) income (101,674) (34,847) 1,157 148
==============================================================
Denominator for basic and diluted
(loss) income per share:
Weighted average number of shares 19,915,292 26,522,467 221,158,647 221,158,647
==============================================================
Basic and diluted (loss) income per share (5.1053) (1.3139) 0.0052 0.0007
==============================================================
|
F-16
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENTS
The Group operates in two reportable segments; paper trading and paper
manufacturing (both discontinued) and the information technology development.
The paper trading and paper manufacturing segments were held as discontinued
operations in 2003, 2004 and 2005. All information for this segment has been
omitted from segment presentation and therefore segment disclosure is not
presented.
RECLASSIFICATIONS
Where applicable, reclassifications have been adjusted to disclose them on the
same basis as current year figures.
ROUNDING UP OF AMOUNTS
Amounts in the consolidated financial statements have, unless otherwise
indicated, been rounded to the nearest thousand HK$ or US$.
NOTE 3 - BUSINESS COMBINATION
On May 25, 2004, pursuant to a Sale and Purchase Agreement ("the Agreement"),
the Company completed its acquisition of all the capital stock of DiChain
Software. The Company issued 197,799,000 shares of its common stock to the six
shareholders of DiChain Software in exchange for all the capital stock of
DiChain Software. The acquisition has been accounted for by the purchase method.
The purchase price was determined by the fair value of the consideration given
up, being US$79,120,000, was allocated to the assets acquired and liabilities
assumed based on the fair values on the date of acquisition in the following
table.
HK$'000 US$'000
Cash and cash equivalents 174,151 22,327
Accounts receivable 3,065 393
Inventories 577 74
Other current assets 185,749 23,814
Property and equipment 1,747 224
Goodwill 487,508 62,501
Accounts payable (156) (20)
Other payables and accrued liabilities (5,374) (689)
Notes payable (230,131) (29,504)
---------------------------------
Total 617,136 79,120
=================================
|
F-17
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The operating results of DiChain Software from May 27, 2004 to March 31, 2005
are included in the consolidated statements of operations. The following
proforma financial information is presented as if the DiChain acquisition had
been made on April 1, 2002, at the beginning of fiscal 2003. The unaudited
proforma information was derived from DiChain Software and they are not
necessarily indicative of the results that may be expected for future years, in
which the Group might realize revenue enhancements and/or costs savings.
Year ended March 31,
2003 2004 2005 2005
HK$'000 HK$'000 HK$'000 US$'000
Net sales 27,684 29,429 20,576 2,638
Net (loss) income (91,026) (25,935) 1,989 255
HK$ HK$ HK$ US$
Net (loss) income per share (4.571) (0.978) 0.009 0.001
|
NOTE 4 - DISCONTINUED OPERATIONS
On March 30, 2005, the Group discontinued the operations of paper trading and
paper manufacturing. The financial statements for the operations of paper
trading and paper manufacturing have been classified as discontinued operations
at March 31, 2004 and 2005. The amounts reported as assets and liabilities of
net assets held from discontinued operations at March 31, 2004 and 2005 are as
follows:
2004 2005 2005
HK$'000 HK$'000 US$'000
------------------------------------------------
Current assets 1,326 296 38
Property and equipment - - -
------------------------------------------------
Assets of discontinued operations 1,326 296 38
================================================
Current portion of liabilities of discontinued operations 4,230 1,193 153
================================================
|
F-18
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The operations of paper trading and paper manufacturing have been reclassified
as discontinued operations in the accompanying consolidated financial statements
of operations for the years ended March 31, 2003, 2004 and 2005 and are
summarized as follows:
Year ended March 31,
2003 2004 2005 2005
HK$'000 HK$'000 HK$'000 US$'000
Net sales 5,488 4,131 2,707 347
Cost of sales (4,139) (3,619) (1,801) (231)
Gross profit 1,349 512 906 116
Operating expenses (5,257) (3,270) (1,053) (135)
Other operating income 26 124 1,068 137
Net (loss) income from operation (3,882) (2,634) 921 118
Other losses
Loss on disposal of subsidiary - (7,979) - -
Loss on disposal of property and equipment - (19,500) - -
Impairment loss on property and equipment (97,792) - - -
Bank interest expenses - (3) - -
Net (loss) income (101,674) (3,116) 921 118
|
F-19
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - SUPPLEMENTARY INCOME STATEMENT INFORMATION
Year ended March, 31
2003 2004 2005 2005
HK$'000 HK$'000 HK$'000 US$'000
Administrative expenses
Depreciation 1,848 1,279 554 71
Advertising expenses - - 148 19
Operating lease rentals - - 1,053 135
Research expenses - - - -
================================================
|
NOTE 6 - SUPPLEMENTAL CASH FLOW INFORMATION
CASH PAID FOR INTEREST AND INCOME TAXES
Year ended March, 31
2003 2004 2005 2005
HK$'000 HK$'000 HK$'000 US$'000
Cash paid during the year
Interest - - 796 102
Income taxes - - 10,288 1,319
===============================================
|
NON-CASH FINANCING ACTIVITIES
On June 11, 2003, the Company issued a total of 3,201,513 shares of its common
stock at a market value of US$0.23 each to DHL to settle partially debts due to
DHL up to a total of HK$5,744,000 (US$736,000).
On May 25, 2004, the Company issued a total of 197,799,000 shares of its common
stock at US$0.4 each to the six shareholders of DiChain Software to acquire the
entire interests of DiChain Software of HK$617,133,000 (US$79,120,000).
On March 30, 2005, the Company issued a total of 13,328,624 shares of its common
stock at a market value of US$0.09 each to CMDA to settle partially debts due to
Victorison Logistics Limited ("VLL"), a wholly owned subsidiary of CMDA up to a
total of HK$9,357,000 (US$1,200,000).
F-20
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INCOME TAXES
The Company was incorporated in the British Virgin Islands and, under current
law of the British Virgin Islands, is not subject to tax on income or on capital
gains.
Grandom Dransfield (International) and Company Limited and Dransfield Paper (HK)
Trading Limited, wholly-owned subsidiaries of the Group, were incorporated in
Hong Kong and under the current Hong Kong tax law, any income arising in and
deriving from business carried on in Hong Kong is subject to Hong Kong tax. No
tax is charged on dividends received and capital gains earned.
Guangzhou Dransfield Paper Limited ("GDP"), a co-operative joint venture formed
in the PRC and DiChain Software, a wholly foreign owned enterprise formed in the
PRC, in which the Group has 100% interest (2004: GDP - 100%; DiChain Software -
0%) are subject to PRC income taxes at the applicable tax rate of 33% for
Sino-foreign joint venture enterprises and 15% for software technology
enterprises respectively. The companies are eligible for full exemption from PRC
income tax for the first two years starting from its first profitable year of
operations followed by a 50% deduction from the third to fifth year. Under the
Income Tax Law applicable to Sino-foreign joint ventures, no PRC income tax was
levied on GDP as it did not generate profits for each of the three years ended
March 31, 2005.
Total income tax expense differs from the amount computed by applying the Hong
Kong applicable statutory income tax rate of 2005: 17.5%, 2004: 17.5% and 2003:
16% to income before taxes as follows:
F-21
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year ended March 31,
2003 2004 2005 2005
HK$'000 HK$'000 HK$'000 US$'000
Computed expected income taxes (16,268) (6,450) 296 38
Non-deductible losses of the Company
and subsidiaries 16,103 6,682 1,076 138
Non-taxable income - (232) - -
Tax losses utilized - - (133) (17)
Difference in tax rate - - (179) (23)
Exemption granted - - (530) (68)
Change of tax rates - (221) - -
Valuation allowance 165 221 - -
----------------------------------------------------
Tax charge for the year - - 530 68
====================================================
Deferred tax asset is comprised
the following:
Tax losses carried forwad 2,360 2,581 2,200 282
Valuation allowance (2,360) (2,581) (2,200) (282)
----------------------------------------------------
- - - -
====================================================
|
Due to its history of losses for the companies subject to Hong Kong Profits Tax,
the Group does not believe that sufficient objective, positive evidence
currently exists to conclude that recoverability of its net deferred tax assets
is more likely than not. Consequently, the Group has provided a valuation
allowance covering 100% of its net deferred tax assets.
As at March 31, 2005, the Group has Hong Kong tax losses carry forward of
approximately HK$12,588,000 (US$1,614,000) (2004 and 2003: HK$14,747,000
(US$1,890,000) 2002: HK$13,718,000 (US$1,758,000) 2001: HK$12,379,000
(US$1,587,000)), which has not yet been confirmed by the Hong Kong Inland
Revenue Department ("IRD") as the IRD implemented an assessing program known as
"Assess First Audit Later". Currently, the Hong Kong tax losses as can be
carried forward indefinitely.
F-22
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - ACCOUNTS RECEIVABLE, NET
Year ended March 31,
2004 2005 2005
HK$'000 HK$'000 US$'000
Accounts receivable - trade - 1,459 187
Less: Allowance for doubtful debts - - -
------------------------------------
- 1,459 187
Discontinued operations 549 55 7
------------------------------------
549 1,514 194
====================================
Movement of allowance for doubtful debts
Balance as at April 1 - - -
Provided during the year - - -
------------------------------------
- - -
Discontinued operations 472 - -
------------------------------------
Balance as at March 31 472 - -
====================================
|
F-23
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INVENTORIES, NET
Year ended March 31,
2004 2005 2005
HK$'000 HK$'000 US$'000
Inventories - 1,513 194
Less: Allowance for obsolescence
and net realizable value - (1,232) (158)
-------------------------------------
- 281 36
Discontinued operations 273 - -
-------------------------------------
Inventories, net 273 281 36
=====================================
Movement of allowance for obsolescence
and net realizable value
Balance as at April 1 - - -
Provided during the year - 1,232 158
-------------------------------------
- 1,232 158
Discontinued operations 1,211 - -
-------------------------------------
Balance as at March 31 1,211 1,232 158
=====================================
|
NOTE 10 - PROPERTY AND EQUIPMENT
Year ended March 31,
2004 2005 2005
HK$'000 HK$'000 US$'000
Machinery and equipment 15 - -
Computer equipment - 2,005 257
Motor vehicles - 889 114
Furniture, fixtures and office equipment - 78 10
----------------------------------
15 2,972 381
Less: Accumulated depreciation - (1,350) (173)
----------------------------------
15 1,622 208
==================================
|
F-24
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 26, 2004, the Company entered into the Agreement with Gumption
Trading, a company incorporated in the BVI, and GDP. Pursuant to the Agreement,
the Company sold to Gumption Trading (i) all of the shares of its wholly owned
subsidiaries DF Paper Guangdong Ltd., Guangdong Dransfield Paper Ltd., DF Paper
Jiangsu Limited and Jiangsu Dransfield Paper Co. Ltd., and (ii) all fixed assets
of its subsidiary in Conghua, GDP. GDP agreed to lease back these assets from
Gumption Trading for its paper manufacturing operations at a rent of HK$1 per
annum for a term of one year, renewable yearly thereafter upon mutual agreement.
For such purchase, Gumption Trading paid to the Company a nominal aggregate
amount of HK$5 and assumed all of the Company's liabilities including
liabilities related to such subsidiaries and assets, incurred by the Company
prior to January 28, 2004. The Group recorded a loss of HK$19,500,000
(US$2,500,000) in last year resulting from the disposal of the fixed assets
described above.
On March 30, 2005, the management discontinued the paper manufacturing business
and terminated the lease back agreement.
NOTE 11 - INTEREST IN AN AFFILIATE
On August 8, 2000, the Group entered into an agreement with a third party
whereby the Group agreed to acquire 26% equity interest in Tianjin 3D Image
Technique Company Limited ("TJ3D") for a consideration of 1,560,000 shares of
the Company's common stock valued at HK$12,936,000 (US$1,658,000) based upon the
closing price of the Company's common stock on August 8, 2000.
TJ3D is engaged in production and distribution of three-dimensional visual
products, which were developed by Professor Li, an ex-executive director of the
Company and his team. Professor Li was appointed as a director of DFCT on August
16, 2000 subsequent to the acquisition of TJ3D.
The investment is accounted for using the equity method. The Group's
proportionate share of the affiliate's net loss in 2002 amounted to HK$1,332,000
(US$171,000). The affiliate did not achieve the profitability target established
prior to acquisition by a significant margin. Due to changes in market
conditions, the former management believed that the investment's impairment is
other than temporary based on an analysis of discounted cash flows. Accordingly,
impairment losses of HK$3,262,000 (US$418,000) and HK$1 (US$1) were recorded in
2002 and 2005 respectively. The impairment losses and the amortization of excess
of carrying value over equity in net assets are recorded in the statement of
operations in equity in loss of affiliate.
F-25
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - DUE FROM RELATED COMPANIES
On October 28, 2004, the Group received letters from three of the investors in
its February 2004 private placement stating their desire to rescind their
purchase of an aggregate of 11,200,000 shares in light of the Group's subsequent
receipt of a delisting notice from Nasdaq in March 2004. These letters confirmed
oral requests made by these investors earlier in 2004. In March 2004, the Group
established a fund of RMB20 million (US$2,417,000) for investment purposes with
Shenzhen International Trust Investment Company, a nationally owned investment
company. As a result of the requests from investors, and for the purpose of
repaying these investors in the event that the Company's board of directors
decided to take such action, the fund of RMB20 million (US$2,417,000) was set
aside into escrow (the "Escrow") pursuant to the terms of a loan agreement dated
March 26, 2004 between Shenzhen International Trust Investment Company and a
related company of the Group, China Merchants DiChain Investment Holdings
Limited ("China Investment Holdings"). Pursuant to the terms of the loan
agreement, the initial duration of the loan was for one year bearing interest of
4.8% per year. The Escrow was held by China Investment Holdings and is available
to the Group on demand. All interest earned on the Escrow remains with China
Investment Holdings. DiChain Holdings Ltd., the parent and owner of all of the
capital stock of China Investment Holdings, agreed to guarantee payment of the
Escrow to the Group should China Investment Holdings fail to repay the Escrow.
Based on the advice of counsel, the Group demanded repayment of the Escrow in
November 2004 and as at March 31, 2005, the Escrow was fully received by the
Group.
The amounts due from related companies as at March 31, 2005 represent expenses
paid by the Group on behalf of its related companies and the advances to the
related companies. The funds were obtained from bank loans borrowed by DiChain
Software before its acquisition by the Group and the loans were guaranteed by
certain directors of the Group and companies within the same group of the
related companies to the extent of HK$264,151,000 (US$33,858,000). The balances
of HK$186,942,000 (US$23,967,000) are unsecured, interest free and have no fixed
terms of repayments. The remaining balances are unsecured, bearing interest at
6.8% per annum and have no fixed terms of repayments.
NOTE 13 - DUE FROM A STOCKHOLDER
The balance due from a stockholder was deposit placed with the stockholder to
guarantee the specific performance by the Company to remain listing on any
United States exchange board. The deposit bore no interest and was fully repaid
in June 2005.
F-26
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - DUE TO A RELATED COMPANY
The balance due to a related company represents expenses paid by the related
company on behalf of the Group. The balance is unsecured, interest-free and has
no fixed terms of repayment.
On March 30, 2005, the Company issued a total of 13,328,624 shares of common
stock at a market value of US$0.09 per share to CMDA, the holding company of the
related company to partially settle the debts due to the related company up to a
total of HK$9,357,000 (US$1,200,000.)
On June 11, 2003, the Company issued a total of 3,201,513 shares of common stock
at a market value of US$0.23 per share to DHL to partially settle the debts due
to DHL up to a total of HK$5,744,000 (US$736,410).
F-27
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - NOTES PAYABLE
Year ended March 31,
2004 2005 2005
HK$'000 HK$'000 US$'000
Note payable to a bank, interest rate at 6.138% per annum,
US$5,000,000 secured by bank deposits and remaining
balance secured by guarantees from its affiliates at no cost
to the Group, due on November 18, 2005 - 75,465 9,675
Note payable to a bank, interest rate at 4.779% per annum,
US$6,000,000 secured by bank deposits, due on
June 23, 2005. - 45,283 5,804
Note payable to a bank, interest rate at 5.841% per annum,
secured by guarantees from its affiliates at no cost to the
Group, due on June 30, 2005. - 23,575 3,024
Note payable to a bank, interest rate at 5.76% per annum,
secured by guarantees from its affiliates at no cost to the
Group, due on June 16, 2005. - 5,660 726
Note payable to a bank, interest rate at 5.76% per annum,
secured by guarantees from its affiliates at no cost to the
Group, due on June 10, 2005 - 13,200 1,692
Note payable to a bank, interest rate at 5.31% per annum,
secured by guarantees from its affiliates at no cost to the
Group, due on May 27, 2005. - 28,291 3,627
Note payable to a bank, interest rate at 5.31% per annum,
secured by guarantee from a third party at no cost to the
Group, due on April 12, 2005. - 2,161 277
----------- ----------- ---------
- 193,635 24,825
Less current maturities - 148,352 19,021
----------- ----------- ---------
- 45,283 5,804
=========== =========== =========
|
The maturities of notes payable for the year ended March 31, 2006 and 2007 are
HK$148,352,000 and HK$45,283,000 respectively.
Interest paid for the years ended March 31, 2003, 2004 and 2005 was HK$0, HK$0
and HK$11,730,000 (US$1,504,000) respectively.
F-28
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
As of March 31, 2005, the Group had operating lease agreements principally for
its office premises in the PRC. Such leases have remaining terms of 9 months and
are renewable subject to negotiation. Rental expense for the year ended March
31, 2003, 2004 and 2005 was HK$0, HK$0 and HK$1,049,000 (US$135,000)
respectively.
Future minimum lease payments under the above non-cancellable operating lease
agreements as at March 31, 2005 are HK$1,044,000 (US$134,000), which are due in
the fiscal year 2006.
CONTINGENCIES
(a) On January 26, 2004, the Company, Gumption Trading Limited (the
"Purchaser") and Guangzhou Dransfield Paper Ltd. ("GDP") entered into the
Agreement wherein the Company disposed of a majority of its assets
primarily to streamline its paper operations. The Purchaser assumed all
the liabilities including contingency liabilities of the Company and its
subsidiaries incurred by the Company prior to January 28, 2004. By a
guarantee dated January 28, 2004 and by a deed of confirmation dated
September 20, 2004, the guarantor, an independent third party, guaranteed
to the Company and GDP the due payment by the Purchaser of all sums and
charges under the Agreement and due performance and observance by the
Purchaser of the terms and conditions of the Agreement.
As a result of the disposal of the subsidiaries and the guarantee provided
by the guarantor, the liabilities, including contingent liabilities of the
Company and its subsidiaries incurred prior to January 28, 2004, have been
fully assumed by the Purchaser.
Accordingly, as the liabilities of the Company and its subsidiaries in
relation to the pending litigations as mentioned in the last annual report
were incurred prior to the completion of the Agreement, the Purchaser has
assumed all the liabilities resulting from the said pending litigations.
(b) In May 2004, Mr. Horace Yao Yee Cheong ("Mr. Yao"), the former chairman
and executive director of the Company, sued the Company, seeking, inter
alia, the unpaid remuneration of HK$480,000 and a short term advance of
HK$1,162,222, plus interest and costs, and specific performance by the
Company to allot to Mr. Yao 1,153,846 fully paid shares of common stock
and 62,500 shares of common stock at US$0.001 par value. Mr. Yao's claim
falls within the ambit of the Agreement as
F-29
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
supplemented by the Guarantee and thus no provision in relation to the
claimed amount has been made in the financial statements.
(c) In connection with the preparation of this Annual Report on Form 20-F and
after consultation with its legal counsel in the BVI, the Group was
informed that it should have sought and received shareholder approval
under BVI law prior to entering into the Agreement due to the fact that
the combined assets being sold by the Group at such time exceeded fifty
percent (50%) of its total assets. The Group has engaged BVI counsel and
U.S. counsel to prepare the documents required to obtain the approval of
its shareholders at a special meeting to ratify the transaction into which
we entered with Gumption Trading. Pursuant to the laws of the BVI, upon
the Group receiving approval from a majority of its shareholders, the
transaction with Gumption Trading will be ratified and approved as if such
shareholder approval had been received prior to the execution of the
Agreement. Section 83 of the International Business Companies Act (Cap.
291) of the BVI provides dissenters rights for those of the Group's
shareholders who held their shares at the time of this transaction and
exercise their right to dissent from the transaction entitling them to
receive fair value for their shares. On November 8, 2004, we filed a
report on Form 6-K with the SEC in connection with the Agreement and the
required shareholder approval. In connection with the dissenters rights,
the Group is unable to quantify at this time the number of shareholders
who held their shares at the time of this transaction and who may exercise
their right to dissent from the transaction.
NOTE 17 - STOCKHOLDERS' EQUITY
STOCK ISSUANCES
(a) On June 11, 2003, the Company issued 3,201,513 shares of its common stock
at a market value of US$0.23 per share to a related company to pay
indebtedness owed to the related company in the amount of HK$5,744,000
(US$736,000).
(b) On August 1, 2003, the Company issued 1,680,000 shares of its common stock
at a fair value of US$0.23 per share for the exercise of options in the
amount of HK$3,014,000 (US$386,000).
(c) On August 25, 2003, the Company issued 100,310 shares of its common stock
at a fair value of US$0.29 per share for the exercise of options in the
amount of HK$224,000 (US$29,000).
(d) On September 30, 2003, the Company issued 48,909 shares of its common
stock at a fair value of US$1.05 per share for settlement of an employee's
debt in the amount of HK$401,000 (US$51,000).
F-30
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) On October 10, 2003, the Company issued 30,000 shares of its common stock
at a fair value of US$0.23 per share for the exercise of options in the
amount of HK$54,000 (US$7,000).
(f) On November 18, 2003, the Company issued 1,144,688 shares of its common
stock at a fair value of US$0.224 per share for private placement to an
investor in the amount of HK$2,000,000 (US$256,000).
(g) On February 20, 2004, the Company issued 21,500,000 shares of its common
stock at a fair value of US$0.2 per share for private placement to seven
investors in the amount of HK$33,391,000 (US$4,281,000).
(h) On April 20, 2005, the Company issued 5,200,000 shares of its common stock
at a fair value of US$0.404 per share for private placement to an investor
in the amount of HK$16,386,000 (US$2,101,000).
(i) On May 25, 2005, the Company issued 197,799,000 shares of its common stock
at a market value of US$0.4 per share to the shareholders of DiChain
Software to acquire the entire interests of DiChain Software of
HK$617,132,000 (US$79,120,000).
(j) On March 30, 2005, the Company issued 13,328,624 shares of its common
stock at a market value of US$0.09 per share to a related company to pay
indebtedness to a related company in the amount of HK$9,357,000
(US$1,200,000).
NOTE 18 - RELATED PARTY TRANSACTIONS AND ARRANGEMENTS
The major related party transactions are described in further detail below.
Management believes that the methods used in allocating costs are reasonable.
Storage and delivery charges
Storage and delivery services are provided to the Group by Dransfield Services
Limited which is a subsidiary of DHL. According to the management, these
transactions were carried out at the terms determined and agreed by the relevant
parties.
Storage and delivery charges paid to the related party for the years ended March
31, 2003, 2004 and 2005 was HK$725,000, HK$0 and HK$0 (US$0) respectively.
F-31
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management fee
On May 1, 2003, VLL, a related party of the Company, entered into an agreement
with the Company whereby VLL agreed to provide management services to the Group
at the monthly fee of HK$200,000 (US$26,000). According to the management, these
transactions were carried out at the terms determined and agreed by the relevant
parties.
Management fee paid to the related party for the years ended March 31, 2003,
2004 and 2005 was HK$0, HK$2,200,000 and HK$2,400,000 (US$308,000) respectively.
Fund Transfers
During the years presented, the Group obtained bank loans and made fund
transfers to its related companies. The Group also obtained funds from its
related companies. Details are set out in the consolidated statements of cash
flows.
Interest Income
The Group received interest income from related companies for advances to them
amounting to approximately HK$0, HK$0 and HK$12,090,000 (US$1,550,000) during
the years ended March 31 2003, 2004 and 2005 respectively.
Guarantees
The following related parties have given guarantees to banks in respect of
general banking facilities granted to the Group.
RMB'000 US$'000
Director 65,000 7,860
Related companies 215,000 25,998
-------- --------
280,000 33,858
======== ========
|
F-32
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Settlement of Debts
On June 11, 2003, the Company issued 3,201,513 shares of its common stock at a
market value of US$0.23 per share to a related company to pay indebtedness to
the related company in the amount of HK$5,744,000 (US$736,000).
On March 31, 2005, the Company issued 13,328,624 shares of its common stock at a
market value of US$0.09 per share to a related company to pay indebtedness owned
to the related company in the amount of HK$9,357,000 (US$1,200,000).
The issue prices were determined after arm's length negotiations between the
Company and the related companies.
NOTE 19 - LOSS ON DISPOSAL OF SUBSIDIARIES
2004 2005 2005
HK$'000 HK$'000 US$'000
Net assets disposed of:
Property, plant and equipment 12,835 - -
Cash at bank 16 - -
Prepayments and other receivables 179 - -
Accrued liabilities and other payables (1,860) - -
Construction payable (2,826) - -
Accrued rental payable (199) - -
Due to related companies (72) - -
--------------------------------------
8,073 - -
Satisfied by cash of HK$5 - - -
--------------------------------------
Loss on disposal of subsidiaries 8,073 - -
--------------------------------------
Cash at bank disposal of 16 - -
======================================
|
The subsidiaries disposed of in last year did not have any significant impact on
the Group's operating results and cash flows.
F-33
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended March 31, 2005, CS Paper Holdings (International) Limited,
a dormant subsidiary incorporated in the BVI, was struck off from the Register
of Companies of the BVI. The striking off of this subsidiary has no effect on
the Group's operating results and cash flows for 2005.
NOTE 20 - FINANCIAL INSTRUMENTS
The carrying amount of the Group's cash and cash equivalents approximate their
fair value because of the short maturity of those instruments. The carrying
amounts of the Group's borrowing approximate their fair value based on the
borrowing rates currently available for borrowings with similar terms and
average maturities, except for the loans from related parties, which, due to
their nature, the fair value was not determinable.
On January 26, 2004 pursuant to the Agreement with Gumption Trading, the Company
sold four subsidiaries namely DF Paper Guangdong Limited, Guangdong Dransfield
Paper Limited, DF Paper Jiangsu Limited and Jiangsu Dransfield Paper Company
Limited, and certain paper manufacturing assets at a total nominal consideration
of HK$5 to Gumption Trading. The Agreement required Gumption Trading to assume
all the liabilities related to such subsidiaries and assets prior to January 28,
2004. Under the Agreement, Gumption Trading also agreed to lease back part of
the paper manufacturing assets to the Group at a nominal rental of HK$1 per
annum.
NOTE 21 - PENSION PLAN
Prior to December 1, 2000, the Group was a member of a defined contribution
pension plan of DHL (the "Plan"). All the full time permanent staff in Hong
Kong, after the completion of one year's service, were eligible to join the
Plan. The participants contributed 5% of their basic monthly salaries to the
Plan while the Group contributed 5% to 6.5% of the basic monthly salaries of the
participants depending on the number of years of employment of individual
participants and such contributions were charged to the statement of operations
as they became payable in accordance with the rules of the Plan. When an
employee left the Plan prior to his/her interest in the Group employer
contributions vested fully, the ongoing contributions payable by the Group could
be reduced by the relevant amount of forfeited contributions.
On December 1, 2000, all of the members of the existing Plan were transferred to
a Mandatory Provident Fund (the "MPF Plan"). All of the underlying assets of the
existing Plan have been transferred to the MPF Plan. Contributions to the MPF
are made based on rates applicable to the respective employees' monthly salaries
and are charged to the profit and loss account as they become payable in
accordance with government regulations. The assets of the MPF Plan are held
separately
F-34
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
from those of the Group in an independently administered fund. The Group's
employer contributions to the MPF Plan vest fully with the employees when
contributed into the MPF Plan.
Employees in Mainland China are members of the Central Pension Plan operated by
the PRC government. These subsidiaries are required to contribute a certain
percentage of their covered payroll to the Central Pension Plan to fund the
benefits. The only obligation for the Group with respect to the Central Pension
Plan is the associated required contributions under the Central Pension Plan,
which are charged to the profit and loss account in the year to which they
related.
Pension plan expenses, net of forfeited contributions, were insignificant for
the three years ended March 31, 2005.
NOTE 22 - CONCENTRATIONS AND RISKS
MAJOR CUSTOMERS
During the fiscal years ended March 31, 2003, 2004 and 2005, 100% of the Group's
assets were located in the PRC (including Hong Kong and Macau Special
Administrative Regions) and 100% of the Group's revenues were derived from
customers in the PRC.
For the fiscal year ended March 31, 2003, three customers accounted for more
than 10% of the total net sales. Sales to these three customers were
HK$1,499,000 (US$192,000 or 27%), HK$948,000 (US$122,000 or 17%) and HK$553,000
(US$71,000 or 10.1%) respectively. For the fiscal year ended March 31, 2004,
five customers accounted for more than 10% of the total net sales. Sales to
these five customers were HK$1,306,000 (US$167,000 or 31.6%), HK$563,000
(US$72,000 or 13.6%), HK$529,000 (US$68,000 or 12.8%), HK$524,000 (US$67,000 or
12.7%) and HK$444,000 (US$57,000 or 10.7%) respectively. For the fiscal year
ended March 31, 2005, three customers accounted for more than 10% of the total
net sales. Sales to these three customers were HK$4,719,000 (US$605,000 or
26.8%), HK$4,415,000 (US$566,000 or 25.1%) and HK$3,853,000 (US$494,000 or
22.0%) respectively.
CONCENTRATION OF CREDIT RISK
The Group's principal activities are designing, manufacturing and selling
computer software and hardware products and systems solutions for the supply
chain management and logistics industry and manufacturing and the distribution
of paper products. The Group has long standing relationships with most of its
customers. The Group performs ongoing credit evaluation of its customers'
financial conditions and, generally does not require collateral.
F-35
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The allowance for doubtful accounts that the Group maintains is based upon the
expected collectibility of all accounts receivable.
CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
Some of the Group's business is transacted in RMB, which is not freely
convertible to other foreign currencies. On January 1, 1994, the PRC government
abolished the dual rate system and introduced a single rate of exchange as
quoted daily by the People's Bank of China. However, the unification of the
exchange rates does not imply convertibility of RMB into United States dollars
or other foreign currencies. All foreign exchange transactions continue to take
place either through the Bank of China or other banks authorized to buy and sell
foreign currencies at the exchange rates quoted by the Bank of China. Approval
of foreign currency payments by the Bank of China or other institutions require
submitting a payment application form together with suppliers' invoices,
shipping documents and signed contracts.
NOTE 23 - COMMON STOCK OPTIONS
On November 20, 1996, the then sole director of the Company adopted a stock
option plan (the "Plan 1") whereby nontransferable options could be granted by
the directors to employees and executive officers of the Company. The options
must be 4-year terms but are subject to earlier expiration on April 2, 2003
which is the last validity date of the Plan 1. All the options granted may not
be exercised during the first year of the grant. The exercise price for each
option shall be set by the directors but may not be less than 80% of the average
of closing prices of the Company's common stock during the five trading days
prior to the grant of the option. The total number of shares of common stock
which can be subject to the options at any time, both under the Plan and
otherwise, shall not exceed 10% of the number of shares of common stock than
outstanding. No person can be granted options which, if fully exercised, would
result in that person owning more than 25% of the outstanding shares of common
stock after such exercise.
On May 15, 2002, the then board of directors of the Company adopted a new stock
option plan (the "Plan 2") whereby nontransferable options could be granted by
the directors to employees and executive officers of the Company. Options
granted under the Plan 2 will be exercisable for a period of up to 10 years
commencing on the date of the grant.
The per share exercise price for the Shares to be issued pursuant to exercise of
an Option shall be such price as is determined by the Option Committee;
provided, however, that as to an Incentive Option:
(a) granted to an Employee who, at the time of the grant of such Incentive
Stock Option is subject to the United States' Internal Revenue Code and
also owns stock representing more than 10% of the
F-36
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(b) granted to any other Employee, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
The status of the Company's stock options as of March 31 is summarized below:
Number of Weighted average
options exercise price
US$
Outstanding at March 31, 2003 875,000 0.65
Granted 1,710,000 0.37
Exercised (1,755,000) 0.37
Cancelled (830,000) 0.37
------------------------------------
Outstanding at March 31, 2004 -
Granted 750,000 0.20
------------------------------------
Outstanding at March 31, 2005 750,000
====================================
Options exercisable at:
March 31, 2003 - -
March 31, 2004 - -
March 31, 2005 - -
====================================
Weighted average fair value of options granted during the year
ended
March 31, 2003 0.19
March 31, 2004 0.24
March 31, 2005 0.15
=============
|
On June 20, 2000, the board of directors invited the grantees of share options
issued between January through May 2000 to surrender their share options by June
30, 2000 in exchange for the same number of stock options at an exercise price
of US$1.75 per share, being the market closing price of the Company's share on
June 19, 2000. All stock options were surrendered and exchanged for new stock
options on June 30, 2000.
On March 1, 2001, the board of directors invited the grantees of all outstanding
share options in exchange for the same number of share options at an exercise
price of US$0.82 per share.
F-37
CHINA TECHNOLOGY GLOBAL CORPORATION
(PREVIOUSLY DF CHINA TECHNOLOGY INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 17, 2002, the board of directors resolved to grant a total of stock
options pursuant to Plan 2 amounting to 542,000 shares at an exercise price of
US$0.286 per share, being the average market closing price of the Company's
share in the last five trading days of the grant, to management and staff.
On April 2, 2003, all the stock option under Plan 2 as of March 31, 2003 had
lapsed.
On June 11, 2003, the board of directors granted to certain members of the
Company's management a total of 1,710,000 stock options pursuant to the 2002
Stock Option Plan, at an exercise price of US$ 0.23 per share, which exercise
price was the closing price of the Company's common stock on June 10, 2003. The
Group applies Accounting Principle Board Opinion No. 25, "Accounting for Stock
Issued to Employees" in accounting for the Plan. The compensation expense
represents the difference between the option exercise price and the fair market
value of the Company's common stock at the respective dates of grant and is
recognized over the vesting period. No compensation expense was recognized for
the years ended March 31, 2002, 2003 and 2004 as the exercise prices of the
outstanding options exceeded the fair market value of the Company's shares as of
March 31, 2002, 2003 and 2004.
NOTE 24- CONTRIBUTED SURPLUS
The amount represents a net compensation of HK$1,530,000 (US$196,000) from a
minority shareholder, which was accounted for as a capital transaction in 1998,
and accumulated stock compensation expense of HK$3,147,000 (US$403,000). No
stock compensation expense was recognized for the three years ended March 31,
2005.
F-38
EXHIBIT 12.1
RULE 13A-14(a) CERTIFICATION
I, FAN Di, certify that:
1. I have reviewed this annual report on Form 20-F of China Technology
Global Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, and cash flows
of the company as of, and for, the periods presented in this report;
4. The company's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the company and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the company's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the company's internal
control over financial reporting that occurred during the
period covered by the annual report that has materially
affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting; and
5. The company's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the company's auditors and the audit committee of the
company's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
company's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
company's internal control over financial reporting.
Date: November 16, 2005 /s/ FAN Di
-------------------------------------------
FAN Di
Chief Executive Officer
|
EXHIBIT 12.2
RULE 13A-14(a) CERTIFICATION
I, ZHOU Li Yang, certify that:
1. I have reviewed this annual report on Form 20-F of China Technology
Global Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations, and cash flows
of the company as of, and for, the periods presented in this report;
4. The company's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the company and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the company's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the company's internal
control over financial reporting that occurred during the
period covered by the annual report that has materially
affected, or is reasonably likely to materially affect, the
company's internal control over financial reporting; and
5. The company's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the company's auditors and the audit committee of the
company's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
company's ability to record, process, summarize and report
financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
company's internal control over financial reporting.
Date: November 16, 2005 /s/ ZHOU Li Yang
----------------------------------------------
ZHOU Li Yang
Chief Financial Officer
|
EXHIBIT 13.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of China Technology Global Corporation (the
"Company") on Form 20-F for the period ending March 31, 2005, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, FAN Di,
President (Chief Executive Officer) of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ FAN Di
-------------------------------------
FAN Di
President (Chief Executive Officer)
|
EXHIBIT 13.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of China Technology Global Corporation (the
"Company") on Form 20-F for the period ending March 31, 2005, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, ZHOU Li
Yang, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ ZHOU Li Yang
----------------------------------------------
ZHOU Li Yang
Chief Financial Officer
|
|
|
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